IN RE BRUNNER AIR COMPRESSOR CORP.
287 F.Supp. 256 (1968)
In the Matter of BRUNNER AIR COMPRESSOR CORP., Bankrupt.
United States District Court N. D. New York.
July 15, 1968.
Laurence F. Sovik, of Smith, Sovik, Terry, Kendrick, McAuliffe & Schwarzer, Syracuse, N. Y., for Trustee.
Bruce B. Roswig, of Costello, Cooney & Fearon, Syracuse, N. Y., for debenture holders H. S. Sheble, and others, Estate of J. H. Sheble and R. N. Sheble.
Richard Kehoe, of Ferris, Kehoe, Tenney & Murname, Utica, N. Y., for debenture holders Anthony J. Barrett, Ellen M. Cooney, Frank M. Dulan, William J. Hogenkamp, Gertrude F. Karl, John F. Karl, Robert Costello and Annamary Costello.
TIMBERS, District Judge.*QUESTION PRESENTED In this proceeding, pursuant to Section 39c of the Bankruptcy Act, 11 U.S.C.
§ 67(c) (1964), on petitions to review an order of Honorable David J. Goldstein, Referee in Bankruptcy, entered November 13, 1967, the question presented is whether the Referee erred in subordinating claims of certain debenture holders of the debtor, Brunner Air Compressor Corp., to claims of general unsecured creditors upon the ground that advances of the debenture holders were in reality capital contributions rather than loans.
The Court holds (1) that there was substantial evidence to support the Referee's finding that the debtor corporation was undercapitalized from June 13, 1963, the date of its organization, to the date of bankruptcy, and as to that finding the order of the Referee is affirmed; but (2) with respect to the Referee's conclusion that the claims of the debenture holders1 should be subordinated to the claims of general unsecured creditors, the order of the Referee is reversed and the case is remanded to the Referee with instructions (a) to dismiss the trustee's subordination petition of July 6, 1967 as to the claims of all debenture holders who at no time were officers or directors of the debtor, and (b) to hold a further hearing and make appropriate findings, conclusions and an order, not inconsistent with this opinion, with respect to those debenture holders who at any time were officers or directors of the debtor, for the purpose of determining the ability and intent of any such officers or directors, or combination thereof, to dominate the corporation to their advantage and to the detriment of creditors.FACTS
The debtor, Brunner Air Compressor Corp., was organized as a New York corporation on June 13, 1963, to manufacture and sell a line of air compressors. It opened a place of business in Chadwicks, New York, and began doing business in early 1964.
The board of directors at its first meeting on June 14, 1963 authorized the issuance and sale, through a private offering, of 20,000 shares of common stock, par value $1.00; it also authorized the issuance and sale in like manner of 6% subordinated debentures in units of $500, due December 31, 1968, in an aggregate principal amount of $300,000.