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Home > Journals > Michigan Law Review > MLR > Volume 36 > Issue 1 (1937)

 

Abstract

It is well settled that when an undercapitalized subsidiary corporation is bankrupt, the claims for money loaned by the parent corporation which has dominated the subsidiary will be subordinated to the claims of other creditors. An analogous problem, which has seldom, if ever, been directly passed upon, is the priority between the claims of the nonvoting preferred stockholders of the subsidiary and those of the dominating corporation which owns all the common voting stock of the subsidiary. In spite of the fact that intercorporate loans are a common and approved method of financing subsidiaries, the question has heretofore been relatively academic, since generally there will be little or nothing left for the stockholders to fight over after the outside creditors have been satisfied in full. But with the advent of Section 77B of the Bankruptcy Act the problem would seem to become important, for now stockholders are allowed to participate in the reorganization even though they may actually have no equity in the debtor. So far, this exact question has not been presented in reorganization proceedings, although a few cases approach it. Of course, it cannot be predicted with certainty how the courts will hold when the case does come up. But, in spite of the relative paucity of authority in point, there is an extensive body of law on the general subject of intercorporate liability which will form a foundation for conjecture; and there is one case, that of Fryer v. Wiedemann, which, although it involves natural persons as controlling stockholders, is otherwise directly in point. In that case, the stockholder-creditors held $47,000 of common stock out of a total capitalization of $81,000, including both preferred and common. In receivership, claims presented amounted to $134,000, of which $77,449 were for money loaned by the common stockholders. The assets sold for $77,450, leaving nothing for the preferred stockholders if the common were allowed to prove their claim. On demurrer, the court allowed the common stockholders to recover as creditors, holding that a majority stockholder could validly loan funds to the corporation and, in the absence of fraud, could collect as a creditor.

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