CORPORATIONS-RIGHT OF DIRECTORS TO ENFORCE AT FACE VALUE CLAIMS AGAINST THE CORPORATION PURCHASED AT A DISCOUNT DURING INSOLVENCY

Authors

Robert H. Frick S.Ed., University of Michigan Law SchoolFollow

Abstract

From 1942 to the initiation of bankruptcy proceedings the assets of the debtor corporation were insufficient to pay its liabilities, and, with the exception of 1945, it operated at a deficit. In 1946 the assets of the corporation were sold, and the debtor filed a petition under Chapter XI of the Bankruptcy Act Prior to the filing of the petition, but during the period of insolvency, the respondents, the sister, mother, and a personal friend of a director, acquired debenture bonds of the corporation, primarily from over-the-counter dealers, at 3% to 14% of face value, the aggregate cost being $10,000. The plan of arrangement under Chapter XI provided for a dividend to debenture holders of 43.6% of the face amount, which would return to the respondents a dividend of $64,000. A creditor, and trustee under the bond indenture objected to the respondents' claim on the grounds that the circumstances demanded limiting their claim to the amount paid for the bonds plus interest. The district court approved the arrangement and the circuit court of appeals affirmed, Judge Learned Hand dissenting. On certiorari from the court of appeals, held, affirmed. In the absence of overreaching or bad faith, directors may profit from the purchase of claims against an insolvent corporation where such purchases are made before proceedings for judicial relief of the debtor are expected or begun. Thus, there can be no objection to purchases by friends and relatives of a director. Manufacturers Trust Co. v. Becker, 338 U.S. 304, 70 S.Ct 127 (1949).

Recommended Citation

Robert H. Frick S.Ed., CORPORATIONS-RIGHT OF DIRECTORS TO ENFORCE AT FACE VALUE CLAIMS AGAINST THE CORPORATION PURCHASED AT A DISCOUNT DURING INSOLVENCY, 48 Mich. L. Rev. 1194 (1950).
Available at: https://repository.law.umich.edu/mlr/vol48/iss8/15