## Facts

- Kettle Fried Chicken of America, Inc., a Delaware corporation, repurchased 75,500 shares of its own stock from certain shareholders in March 1969 for $0.90 per share (about $67,950 total).
- Kettle paid the selling shareholders directly and took title to the shares; the selling shareholders had no contractual relationship with proposed subsequent purchasers.
- Kettle had preliminary arrangements to resell some repurchased shares to other investors; one resale occurred, while other contemplated resales were canceled or failed.
- In October 1969, Kettle filed a Chapter XI bankruptcy petition.
- The Chapter XI trustee sought to avoid and recover the repurchase payments under § 70(e) of the Bankruptcy Act by invoking Delaware law barring stock repurchases when capital is impaired (8 Del. Code § 160).
- The bankruptcy referee found Kettle’s capital was impaired at the time of the repurchase and ordered the selling shareholders to refund payments (with certain credits), despite an express finding that the shareholders acted in good faith.
- The district court adopted the referee’s findings and entered judgment for the trustee; the selling shareholders appealed.

## Issues

1. Whether the March 1969 transactions were corporate “purchases” of Kettle’s own shares under 8 Del. Code § 160, despite planned resales to third parties.
2. Whether Kettle’s capital impairment under § 160 was properly determined on the valuation evidence accepted by the referee.
3. Whether contemplated or partially executed resales, or contingent claims arising from failed resales, negated corporate harm from the repurchase.
4. Whether Delaware law (as used through Bankruptcy Act § 70(e)) permits recovery from selling shareholders who received repurchase payments in good faith and without knowledge that capital was impaired.

## Decision

- The court affirmed the judgment requiring the selling shareholders to refund the unlawful repurchase payments to the trustee.
- The repurchases were purchases by Kettle within § 160 because Kettle contracted with, paid, and received the shares from the selling shareholders, and the transactions were not conditioned on resales.
- The finding of capital impairment at the time of repurchase was upheld; speculative future gains from resales did not justify using impaired capital for a stock repurchase.
- Corporate harm existed when the corporation with impaired capital paid out funds to redeem stock, diminishing the pool available to creditors.
- The trustee could recover from the selling shareholders even though they acted in good faith; shareholder lack of knowledge did not bar restitution of an unlawful distribution.

## Legal Principles

- A bankruptcy trustee may avoid and recover a prepetition transfer under Bankruptcy Act § 70(e) if an actual creditor could have avoided it under applicable state law.
- Under 8 Del. Code § 160, a Delaware corporation may not purchase or redeem its own shares when its capital is impaired or the transaction would impair capital.
- Planned or subsequent resales to third parties do not change the identity of the “purchaser” when the corporation pays the sellers and takes title to the shares.
- The legal injury addressed by capital-impairment limits occurs when corporate funds are transferred to shareholders in a prohibited repurchase, reducing assets available to creditors, even if later transactions might recoup some funds.
- Delaware’s director-liability provision (8 Del. Code § 174) does not foreclose a restitutionary claim to restore unlawful stock-repurchase payments from shareholders who received them, regardless of good faith or lack of knowledge.

## Conclusion

The court held that a trustee in bankruptcy may recover payments made in an unlawful Delaware stock repurchase executed while capital was impaired, and that the selling shareholders must return the payments to the estate even though they acted in good faith and anticipated third-party resales were contemplated or partially completed.


In re Kettle Fried Chicken of Am., Inc., 513 F.2d 807 (6th Cir. 1975)