Court Opinion

ID: 9640008
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:55:15.156685+00
Date Added: 2024-06-11T18:10:25.111229
License: Public Domain

L. HAND, Circuit Judge
(concurring).
Courts have very generally held it unjust to allow a corporation to claim in insolvency upon a parity with other creditors against another corporation, when the shareholders of both are the same. In In *320Re Watertown Paper Co.1 we held that this depended upon whether the creditor corporation was an “adjunct” or “agency or instrumentality” of the debtor; hut Taylor v. Standard Gas Co.2 repudiated this as a test, and said that the question was one of “fraud or injustice,” which left the matter wholly at large. Pepper v. Litton3 perhaps re-established the earlier statement by confining the doctrine to cases where the creditor corporation was “a part of the stockholder’s own enterprise.” I should not of course venture to challenge the last statement; but, taking it as it reads, it seems to me that it may be possible a little to sharpen it in application, if we can learn what reasons make it the right test, and I shall try to state what these seem to me to be.
Both the shareholders and the creditors in any enterprise assume some risk of its failure, but their risks are different. The shareholders stand to lose first, but in return they have all the winnings above the creditors’ interest, if the venture is successful; on the other hand the creditors have only their interest, but they come first in distribution of the assets. Beneficially considered, the same persons are both creditors and shareholders, when they have organized into two corporations under a single control. If in such a case they are allowed to prove in insolvency on a parity with other creditors, as shareholders of the debtor they can use their control to take all the winnings which may be made on their advances while the company is successful, yet they will expose themselves only to creditors’ risks, if it fails. That is unfair to other creditors regardless of whether they know that the shareholders of the debtor corporation have this power through their common ownership; for every creditor rightly assumes that his risk is measured by the collective claims of other creditors, and by creditors he understands those alone, who like him, have only a stipulated share in the profits. To compel him to divide the assets in insolvency with those who at their option have all along had power to take all the earnings, is to add to the risk which he accepted.
This reasoning only applies however to cases in which, as here, the shareholders are the same in both corporations, and in which the shares in each are divided so nearly alike that the majority in each can lawfully act for all in any dealings between the two. It may be asked why the same principle does not apply to a loan made by a single shareholder, at least to so much of any advance he may make as his shares represent of all the shares outstanding. My answer is that, unless he also controls the debtor corporation, he cannot decide whether his loan shall be paid, or whether it shall remain as a part of the capital of the debtor contributing to profits in which he will share as one of the debtor’s shareholders. Even to that limited extent he does not therefore enjoy the advantage of the ambivalent position of the shareholders collectively of two corporations under a common control. ’

 2 Cir., 169 F. 252.

 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669.

 308 U.S. 295, 60 S.Ct 238, 247, 84 L.Ed. 281.