Edward G. Reiner, Appellant, v. Washington Plate Glass Co., Inc, 711 F.2d 414 (D.C. Cir. 1983)

In 1977, appellee Washington Plate Glass Co., a D.C. corporation, repurchased the 50% stock interest held by appellant Edward Reiner. The company paid for the shares with a secured note for $350,000 payable over ten years, with interest at 6%. The company was solvent both before and after the repurchase and the transaction was not made in contemplation of bankruptcy.

Washington Plate Glass made monthly payments on Reiner's note until October 1980, when it ran into financial trouble. Shortly thereafter, the company became insolvent, and it was forced into bankruptcy in April 1981 by a petition from unsecured creditors. Reiner petitioned the bankruptcy court to collect some or all of the $222,000 that Washington Plate Glass still owed him from the company's remaining assets. The bankruptcy trustee opposed Reiner's petition, arguing in the alternative that the repurchase violated D.C.Code § 29-305 (1981) (which governs a D.C. corporation's power to purchase its own shares) and that a bankrupt corporation's debt arising from repurchase of its own shares should be subordinated to the claims of other creditors.

The bankruptcy court found that Washington Plate Glass was incorporated in 1953 and thus was governed by the 1901 D.C. Corporation Code, D.C.Code §§ 29-101 to -240 (1981) rather than the 1954 D.C. Business Corporation Act, D.C.Code §§ 29-301 to -399.50 (1981) (of which § 29-305, on which the trustee relied, is a part). The court held that the 1901 Code gave Washington Plate Glass the power both to purchase its own stock in 1977 and to pay for that stock in 1981 even though insolvent. However, the bankruptcy court found it "manifestly unfair to the general unsecured creditors" to permit a former stockholder's claim to take priority once the corporation [229 U.S.App.D.C. 138] goes bankrupt.¹  Applying the doctrine of equitable subordination, see 11 U.S.C. § 510(c) (1), the court subordinated Reiner's claim to those of other creditors. Reiner appealed to the district court, which affirmed the bankruptcy court's decision.² 

Reiner now appeals to this court, claiming that: (1) the 1901 D.C. Corporation Code allows an insolvent corporation to pay for shares purchased when it was solvent; and (2) equitable subordination is not appropriate because the transaction was fair when made and the creditors were on constructive notice (under the U.C.C. filing system) of Reiner's security interest. The bankruptcy trustee defends the bankruptcy court's use of equitable subordination and also claims that the record does not show that Washington Plate Glass was incorporated prior to 1954.

The parties have now disputed before three different courts whether Reiner has established that Washington Plate Glass was incorporated prior to the effective date of the 1954 D.C. Business Corporation Act. To lay the dispute to rest, we consulted the records of the District of Columbia Recorder of Deeds Office. Ten minutes of research showed that Washington Plate Glass was incorporated on August 19, 1953, but surrendered its prior charter and was reincorporated on December 6, 1976, under the 1954 Business Corporation Act.³  We take judicial notice of this information and hold that the 1954 Act controls this case.⁴  See Fed.R.Evid. 201(b) ("A judicially noticed fact must be ... capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned.").⁵ 

It remains to consider whether § 29-305 permits Washington Plate Glass to pay for the shares it repurchased from Reiner.⁶  That section provides:

A corporation ... shall not purchase, either directly or indirectly, its own shares when its net assets are less than the sum [229 U.S.App.D.C. 139] of its stated capital, its paid-in surplus, any surplus arising from unrealized appreciation in value or revaluation of its assets and any surplus arising from surrender to the corporation of any of its shares, or when by so doing its net assets would be reduced below such sum.

It is a factual question whether the 1977 repurchase violated § 29-305. We remand to the district court to remand to the bankruptcy court to make the necessary factual determination.⁷ 

If Washington Plate Glass has no power to pay for repurchased shares, it should make no difference that Reiner has perfected a security interest in the corporation's assets. The security interest falls with the underlying obligation. Any other result would permit evasion of the statutory rule restricting a corporation's power to repurchase its own shares. Accord In re Flying Mailmen Service, 539 F.2d 866, 870-72 (2d Cir. 1976) (Friendly, J.); In re Bell Tone Records, Inc., 86 F. Supp. 806, 810 (D.N.J. 1949).⁸ 

If the bankruptcy court decides that the repurchase was lawful in 1977, it will then need to consider whether § 29-305 nevertheless prohibits Washington Plate Glass from paying for those shares after it becomes insolvent. Section 29-305 does not expressly address that issue, there are no D.C. cases construing the section one way or the other, and we do not rule here on the proper interpretation. We note, however, that courts in a number of other jurisdictions have interpreted similarly phrased statutes to forbid an insolvent corporation from paying for repurchased shares. See, e.g., In re Trimble Co., 339 F.2d 838, 842-43 (3d Cir. 1964) (Pennsylvania statute); Mountain State Steel Foundries v. Commissioner, 284 F.2d 737, 742 (4th Cir. 1960) (West Virginia statute); In re Flying Mailmen Service, 539 F.2d 866, 869 (2d Cir. 1976) (New York law).

Only if the bankruptcy court rules in Reiner's favor on both of these issues will it need to consider the troublesome question whether equitable subordination of a former shareholder is appropriate even though local law permits the transaction and even though there was no fraud or overreaching. We do not decide that question here.

[229 U.S.App.D.C. 140] The case is remanded to the district court with instructions to remand to the bankruptcy court to determine whether § 29-305 permits Washington Plate Glass to make further payments to Reiner.