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Page 37
42 F.2d 37 
ACKER
v.
GIRARD TRUST CO. et al.
No. 4335.
Circuit Court of Appeals, Third
Circuit.
June 30, 1930.
Appeal from the District Court of
the United States, for the Eastern District
of Pennsylvania; Oliver B. Dickinson, Judge.
Suit by Paul Sheafer against the
South Penn Collieries Company, for
appointment of a receiver, wherein the
Girard Trust Company, as trustee under a
second mortgage, filed a petition for leave
to intervene and to file a bill of
foreclosure. On leave granted, bill of
foreclosure was filed against defendant
named and R. H. Buchanan, receiver, and
another, and causes were consolidated. In
consolidated cause, Warren T. Acker filed
petition as creditor asking leave in effect
to defend against foreclosure of second
mortgage. From a decree dismissing
exceptions to master's report and confirming
report, Warren T. Acker appeals.
Affirmed.
Thomas F. Gain, of Philadelphia,
Pa., H. C. Reynolds, H. M. Streeter, John P.
Page 38
Kelly, and Reese H. Harris, all of
Scranton, Pa., and Francis Shunk Brown, of
Philadelphia, Pa., for appellant.
Thomas Reath Jr., and Dickson,
Beitler & McCouch, all of Philadelphia, Pa.,
for appellee Buchanan.
Charles Myers and Barnes Biddle &
Myers, all of Philadelphia, Pa., for
appellee Girard Trust Co.
Before BUFFINGTON and DAVIS,
Circuit Judges, and AVIS, District Judge.
BUFFINGTON, Circuit Judge.
On October 3, 1927, the court
below, on a bill filed that day, duly
appointed receivers for the South Penn
Collieries Company, an insolvent corporation
of the state of Delaware.
On the same day the Girard Trust
Company, trustee under a second mortgage of
said company, was, on its petition, allowed
to intervene.
On October 27, 1927, Franklin
Spencer Edmonds was appointed a master "to
take evidence and report the same with his
findings thereon, upon the following
matters; * * * (h) the amounts of the claims
of creditors of the defendant, South Penn
Collieries Company, other than the holders
of first and second mortgage bonds."
On January 23, 1928, Warren T.
Acker, the present appellant, filed a
petition which so far as here pertinent
represented that he owned all the stock of
the Von Storch Collieries Company, which had
valuable coal property in fee, and that he
had sold to the South Penn Collieries
Company all such capital stock, receiving in
pay therefor two millions in cash and
certain capital stock of the buying company.
He further stated that part of the
consideration was that the latter agreed to
employ him as manager for five years and
"that if at any time the company should
desire to retire him as manager, it should
pay to him the sum of $500,000, and your
petitioner was then to transfer to the
company his said five per cent. of the
common stock," to wit, $500,000 of stock. He
further averred that his contract with the
company "was a closed contract as to prior
liens which might dilute or jeopardize the
value of your petitioner's stock
representing the balance of the purchase
price for his said valuable properties." He
further alleged that the buying company had
later by "repeated and continued
interferences and violations of the said
contract and the usurpation of his rights
and powers was such as to deprive him of all
power and authority as general manager and,
in the language of the contract, to `retire'
him as general manager." He further alleged
that the buying company had, in violation of
its contract with petitioner, given to the
Girard Trust Company the second mortgage
upon its property for $2,000,000, which said
trustee was now seeking to foreclose, which
foreclosure "would result in wiping out your
petitioner's contract and the payment to him
of $500,000, the balance of the purchase
price for his said coal property and which
is owing to him because of violations of his
contract as aforesaid."
As here pertinent the petition
prayed:
"7. That the Special Master
appointed by the Court be authorized and
directed to hear and determine the various
rights and questions involved in the claim
of Warren T. Acker against the South Penn
Collieries Company arising from or affecting
his contracts with said company and any
violations thereof, and also any acts or
things showing any conspiracy or fraudulent
or unlawful confederacy or action on the
part of directors or officers of said
company affecting his rights under said
contracts, or to bring about the appointment
of a receiver, or the foreclosure of the
second mortgage on the property of said
company, and also to determine whether said
mortgage and bonds thereunder have priority,
and to what extent, if any, over the claim
of the said Warren T. Acker."
On February 7, 1928, the court
referred Acker's claim to the master already
appointed and directed him
"To hear evidence and report his
findings and conclusions to the Court upon
the following matters in addition to the
matters heretofore referred to him:
"1. What amount, if any, is due
and owing by the South Penn Collieries
Company to Warren T. Acker under or by
virtue of his contracts with said company,
and the lien of priority, if any, to which
such claim may be entitled.
"2. All relevant matters
affecting the validity, lien and priority of
the mortgage of $2,000,000 made by the South
Penn Collieries Company to the Girard Trust
Company, trustee, under date of January 1,
1926."
Much testimony was taken, and on
June 13, 1929, the master filed his report;
the pertinent findings of fact and
conclusions of law therein are later stated.
To such report Acker filed
exceptions which were heard by the court
below, and on
Page 39
August 21, 1929, were dismissed and the
report confirmed. Thereupon this appeal was
taken by him.
Without referring to the many
questions decided by the master, we limit
ourselves to stating and discussing the two
questions involved which are stated in
appellant's brief, namely:
"Whether the second mortgage
constituted a violation of the contract
between the defendant company and the
intervening creditor, and whether it may be
enforced as a valid lien against the
property of the Company in priority to the
amount due such creditor.
"Whether the amount found by the
Court to be owing to the intervening
creditor must be postponed in payment until
after the payment of all other creditors."
Referring first to the question
of the validity of the Girard Trust Company
mortgage and its priority over general
creditors, we note the master held: "That
the evidence clearly establishes the fact
that the second mortgage was created, and
that the bonds thereunder were issued, in
entire good faith. The circumstances
attending the creation of this mortgage and
the issuance of the bonds have been fully
set forth above. The defendant company was
badly in need of additional capital. Its
financial condition was such that it could
not procure loans from banks, and the
creation of the second mortgage and the
issuance of bonds thereunder was certainly
the most feasible, if not the only way by
which the defendant company could have
procured the needed capital." A study of the
proofs satisfies us the finding of the
master in this regard involved no error.
He further held the creation of
such mortgage was not a violation of the
buying company's contract with Acker, and we
agree with the court below that no error was
committed by the master in decreeing
priority of said mortgage over general
creditors.
We may here state that as to
Acker's allegation that he was wrongfully
retired by the buying company, the master
found as follows:
"On this question, the Special
Master is of the opinion that the conduct of
the defendant's officers and representatives
during the period from November 6, 1924 to
February 5, 1926, culminating in the removal
of Acker's offices from the collieries to
the Bowman Building in Scranton, some two
miles away, was such a usurpation and
diminution of Acker's duties, authority and
responsibility, as to constitute a
retirement of Acker as general manager of
the Von Storch and Legitts Creek properties
as of February 5, 1926, within the meaning
of the third section of the contract of
November 6, 1924."
In the event of such retirement,
the third section of the contract provided,
"And if the Vendee should retire
the said Warren T. Acker, as General Manager
of the combined Companies, within the period
of five years, all of said common stock
shall be assigned to the Vendee or its
nominee, whereupon the said Five Hundred
Thousand Dollars ($500,000) shall be paid to
the said Warren T. Acker by the Vendee for
all of the stock, to wit, one-twentieth
(1-20th) of the whole stock, and thereupon
assignment thereof as hereinabove provided
shall be made to the Vendee or its nominee."
On this branch of the case the
master reported as follows:
"As has been pointed out, it was
agreed in the third section of the contract
of November 6, 1924, that the defendant
company would employ Acker, who agreed to
serve, as general manager of the Von Storch
and Legitts Creek properties for a period of
five years. It was further provided that if
at any time during this period, the
defendant should desire to retire Acker as
such general manager, it should pay to
Acker, at his election, the sum of $500,000,
for his shares of stock in the defendant
company, whereupon Acker was to assign said
shares of stock to the defendant or its
nominee.
"Clearly this provision of the
contract did not require the defendant
company to retain Acker in its employment
for the period of five years. On the
contrary, its right to retire Acker was
conceded, subject only to the provision that
if it did retire him within the five year
period, then if Acker so elected, the
defendant company was required to pay him
$500,000 for his stock in the defendant
company.
"The Special Master is therefore
of the opinion that the defendant company
would have been guilty of no breach of
contract if it had definitely and directly
retired Acker by notifying him that his
services would be no longer required. If the
defendant company had done this, Acker's
only remedy would have been to insist, if he
so elected, that the defendant company pay
him $500,000 for his stock. Since his
retirement would not be a breach of
contract, Acker would have no claim for
damages on account thereof.
Page 40
"Nor has Acker any greater rights
because of the fact that he was retired
indirectly, as a result of the unfair
conduct of the defendant's officers and
representatives. Legally, this conduct,
however reprehensible, was just the
equivalent of an open, straightforward,
definite retirement, and gave Acker just the
same rights. The Special Master is of the
opinion, therefore, that Acker's only remedy
for his retirement, however accomplished,
was his right to insist that the defendant
company pay him $500,000, for his stock."
It remains to consider the
remaining question involved, namely,
whether, as provided in the decree below,
Acker's claim "is to be deferred to the
prior payment of the claims of all other
creditors of the defendant company."
We are of opinion no error was
committed in such decree. In reality the
relief Acker seeks is to compel the buying
company to buy its own stock at the expense
of its creditors. The company has no
surplus, and therefore, as a Delaware
corporation, its powers are fixed by the
laws of that state (Rev. Code Del. 1915, §
1933), which provide that:
"Every corporation organized
under this Chapter shall have the power to
purchase, hold, sell and transfer shares of
its own capital stock: Provided that no such
corporation shall use its funds or property
for the purchase of its own shares of
capital stock when such use would cause any
impairment of the capital of the
corporation."
Construing such statute, the
Court of Chancery of Delaware held,
in Re International Radiator Company, 10
Del. Ch. 358, 92 A. 255, such stock
purchases could only be made out of a
corporation's surplus.
Moreover, this court,
West Penn Chemical & Manufacturing Company
v. Prentice, 236 F. 891, 894, said:
"We think it our duty to follow
this decision upon the construction and
effect of the Delaware statute, and we find
it a controlling authority in the present
case."
Acker's contract for exchange
being unenforceable because he could not
withdraw assets from the treasury of the
company, it logically follows he cannot, by
indirection and making a claim for damages
for the breach of a nonenforceable contract,
withdraw assets in the hands of the court by
presenting his contract rights in the guise
of damages.
Finding no error in the case, the
decree below is affirmed.
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