In re Kettle Fried Chicken of America, Inc.

In March 1969, Kettle Fried Chicken of America, Inc. (Kettle), a Delaware corporation, repurchased 75,500 shares from certain shareholders (selling shareholders) (defendants) at 90 cents per share. Kettle had preliminary arrangements to resell the shares at the time, but the selling-shareholder transactions were not conditioned on the resales, and there was no contractual relationship between the selling shareholders and the potential buyers. Kettle ultimately sold 25,000 of the repurchased shares to Fishkin for $1.10 per share. Kettle also contracted with two other buyers for repurchased shares, but neither sale went through. One buyer (Flory) cancelled the deal pursuant to the sales contract. The other buyer (Luby) tried to rescind by stopping payment on his check. Kettle filed for Chapter 11 bankruptcy in October 1969. The Chapter 11 trustee (trustee) (plaintiff) sued the selling shareholders, alleging that the repurchases were fraudulent transfers under § 70(e) of the Bankruptcy Code and Title 8, § 160 of Delaware law, which together permitted a trustee to avoid as fraudulent a corporate purchase that was made while the company’s capital was impaired. Assessing Kettle’s assets at book value, the referee ruled that Kettle’s capital was impaired in March 1969 and awarded $45,450 in damages (which included a 90-cents-per-share credit for the shares Luby purchased) against the selling shareholders, despite the referee’s determination that the selling shareholders acted in good faith. The district court entered judgment against the selling shareholders based on the referee’s conclusions. The selling shareholders appealed, arguing that (1) the challenged transactions were not purchases within the meaning of § 160 because Fishkin, Flory, and Luby were the real purchasers and Kettle was merely an intermediary; (2) Kettle’s capital should be assessed by reference to the fair market value (FMV) of its assets as a package, not book value, and under an FMV test, Kettle’s capital was not impaired; (3) Kettle was not harmed by the challenged transactions because it had contracts to resell the shares at a profit and had a claim against Luby; and (4) § 160 did not permit recovery against innocent shareholders who sold their stock in good faith. The trustee responded that (1) Kettle was a purchaser because it transacted directly with the selling shareholders, who had no contractual relationship with Fishkin, Flory, or Luby; (2) the FMV of Kettle’s assets was irrelevant because Kettle was not allowed to use its assets to repurchase stock; (3) Kettle was harmed by the challenged transactions because Flory and Luby did not consummate their deals; and (4) the selling shareholders’ good faith was irrelevant.