(9th Cir. 1958)
- Before incorporating, partners withdrew most of their capital contributions from company, through issuance of promissory notes to them. The corporation went bankrupt, and the two partners brought claim against the estate for the promissory notes.
- The bankruptcy trustee asks that the notes be subordinated to the claims of general unsecured creditors.
- Corp was grossly undercapitalized (trial court’s contrary finding was clear error)
- Business was in a precarious position, despite this the partners withdrew the capital
- None of the 4 experts testified to the contrary
- The partners, in withdrawing the capital, acted for their own benefit, and to the detriment of the corporation and creditors
- Apparent that their actions would result in the failure of the business
- Fraud and mismanagement, although sometimes present with the undercapitalization are not required.
- Test: Whether the transaction can be justified within the bounds of reason and fairness
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