## Facts

- Henry Obre (plaintiff) and F. Stevens Nelson formed Annel Corporation (Annel) to operate a dirt-moving and road-building business.
- Obre and Nelson believed that $40,000 in capital was “entirely adequate for the foreseeable needs of the corporation.”
- Nelson contributed $10,000 in equipment and cash and received voting common stock with a par value of $10,000.
- Obre contributed $65,548.10 in equipment and cash.
- Because Obre and Nelson ultimately wanted equal ownership, Annel issued Obre: (1) voting common stock with a par value of $10,000, (2) non-voting preferred stock with a par value of $20,000, and (3) an unsecured promissory note for the remaining $35,548.10.
- The note was payable in five years and bore interest.
- Annel later became insolvent and executed a deed of trust for the benefit of creditors.
- The Circuit Court for Baltimore County exercised equity jurisdiction over administration of the deed of trust and distribution to creditors.
- Obre filed four claims as a general creditor based on the unsecured note.
- Other creditors, including Alban Tractor Co. (defendant), objected, arguing the note represented “risk capital” (an equity investment) rather than debt.
- The chancellor reasoned that the equipment Obre contributed was necessary to the business and that the five-year note showed the contribution was in substance a risk capital investment, and subordinated Obre’s claims to those of outside creditors on equitable grounds.
- Obre appealed to the Maryland Court of Appeals.

## Issues

1. Whether a principal stockholder’s unsecured five-year note issued for the excess value of property contributed to the corporation should be treated as bona fide debt or as a risk-capital (equity) contribution when the corporation becomes insolvent.
2. Whether a court supervising an insolvency distribution may subordinate such an insider note to other unsecured creditors absent proof of fraud or other inequitable conduct.

## Decision

- The Maryland Court of Appeals reversed the chancellor’s order subordinating Obre’s claims.
- The court treated the note as a valid corporate debt obligation rather than an equity contribution.
- The case was remanded for further proceedings consistent with recognizing Obre’s claim as a general unsecured debt.

## Legal Principles

- A promissory note issued by a corporation to a stockholder for value received is not automatically converted into equity merely because the corporation later becomes insolvent or because the corporation is closely held.
- Whether an advance is debt or equity depends on the substance of the transaction as shown by objective factors, including the parties’ intent at formation and the formal characteristics of the instrument (e.g., a stated principal amount, a maturity date, and interest).
- The fact that contributed property was necessary to start or operate the business does not, by itself, make the value represented by a note “risk capital” rather than debt.
- Equitable subordination of an insider’s claim requires a sufficient showing of inequitable conduct or unfairness; mere insider status, later business failure, or hindsight concerns about capitalization are not enough.

## Conclusion

Obre v. Alban Tractor Co. holds that Annel’s unsecured five-year promissory note to Obre—issued for the portion of his contributed equipment and cash exceeding the stock issued to him—was a bona fide corporate debt, and that subordinating the note to outside creditors was improper without a showing of inequitable conduct; accordingly, the Court of Appeals reversed and remanded so Obre could share as a general unsecured creditor.


Obre v. Alban Tractor Co., 179 A.2d 861 (1962)