Obre v. Alban Tractor Company

179 A.2d 861 (1962)

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Nature of the Case

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Facts

In January 1959, P Nelson pooled certain equipment and cash for the purpose of forming the Annel corporation to engage in the dirt moving and road building business. P transferred to the corporation equipment independently appraised at $63,874.86, plus $1,673.24 cash, for a total of $65,548.10. Nelson's contribution was equipment valued at $8,495.00 and $ 1,505.00 in cash, totaling $10,000.00. P received $ 20,000.00 par value non-voting preferred stock and $10,000.00 par value voting common stock. In addition, he received the corporation's unsecured note for $35,548.10, dated January 2, 1959, which was the date of the incorporation. The note was made payable five years after date and carried interest at the rate of five percent per annum, though no interest was ever actually paid. Nelson received voting common stock of $10,000.00 par value. The corporation experienced financial difficulty almost immediately after beginning its operations. In April 1959, the corporation borrowed $27,079.20 from a bank, securing the loan with a chattel mortgage. P's note was listed as a debt of the corporation. Lack of success led to the execution of a deed of trust for the benefit of creditors on October 19, 1960, and the Circuit Court for Baltimore County assumed jurisdiction of the trust. P filed four separate claims in the case which were excepted to by Alban Tractor Co. and other trade creditors (D). The chancellor held that the equipment was necessary to the business and as such, the five-year note was merely evidence of risk capital. Thus, P’s claim on the note was subordinated to Ds’ claims. P appealed.