## Facts

- A corporation later known as Reichardt‑Abbott Co., Inc. repurchased 500 shares from its president and major shareholder, Arthur Wangemann, for $55,000.
- The repurchase was authorized by shareholders, but the corporation did not pay cash; it issued a promissory note due January 1, 1923, bearing 7% interest.
- At the time of the repurchase, the corporation was solvent and had cash surplus exceeding $55,000.
- The note was not paid when due; renewal notes were issued over time, and the principal was partially reduced.
- After subsequent renewals, the estate of Wangemann asserted a claim based on a $30,000 renewal note due January 1, 1933, plus four $500 interest notes and claimed interest.
- The corporation was later adjudicated bankrupt, and its assets were insufficient to pay general creditors in full.
- The bankruptcy referee allowed the estate’s claim; the district court affirmed; the trustee appealed.

## Issues

1. Whether, in bankruptcy, a former shareholder may prove as a general unsecured claim promissory notes issued by the corporation to repurchase the shareholder’s stock when the repurchase price was never actually paid from surplus and creditors will not be paid in full.
2. Whether corporate solvency and surplus at the time of the stock repurchase, without actual cash payment, makes the repurchase-note obligation enforceable against the bankruptcy estate on parity with outside creditors.

## Decision

- The Fifth Circuit reversed the order allowing the claim.
- The court held the notes issued for the corporation’s repurchase of its own stock were not enforceable as a general creditor claim against the bankruptcy estate under these circumstances.
- The executrix could not participate pari passu with general creditors in the distribution of the insolvent estate.

## Legal Principles

- A corporation’s obligation given to redeem or repurchase its own shares cannot be enforced in bankruptcy on equal footing with outside creditors when enforcement would operate as a return of capital that prejudices those creditors.
- Solvency and available surplus at the time of a stock repurchase does not, by itself, validate a later claim on repurchase notes where the corporation did not actually pay from surplus and later insolvency makes payment harmful to creditors.
- Transactions upheld in disputes solely between a corporation and a noteholder do not control when allowance of the note as a bankruptcy claim would reduce the recovery of outside creditors.

## Conclusion

The court disallowed a shareholder estate’s bankruptcy claim on corporate notes issued for a stock repurchase because the corporation never paid the repurchase price from surplus and, upon insolvency, enforcing the notes would improperly permit a former shareholder to compete with outside creditors for insufficient assets.


Robinson v. Wangemann, 75 F.2d 756 (5th Cir. 1935)