John Costello, Trustee in Bankruptcy of Leonard Plumbing and Heating J. A. Fazio and Lawrence C. Ambrose v. J. A. Fazio and Lawrence C. Ambrose

Creditors’ claims against the bankrupt estate of Leonard Plumbing and Heating Supply, Inc., were filed by J. A. Fazio and Lawrence C. Ambrose. The trustee in bankruptcy objected to these claims, and moved for an order subordinating them to the claims of general unsecured creditors. The referee in bankruptcy denied the motion, and his action was sustained by the district court. The trustee appeals.

The following facts are not in dispute: A partnership known as “Leonard Plumbing and Heating Supply Co.” was organized in October, 1948. The three partners, Fazio, Ambrose, and B. T. Leonard, made initial capital contributions to the business aggregating $44,-806.40. The capital contributions of the three partners, as they were recorded on the company books in September 1952, totaled $51,620.78, distributed as follows: Fazio, $43,169.61; Ambrose, $6,-451.17; and Leonard, $2,000.

In the fall of that year, it was decided to incorporate the business. In contemplation of this step, Fazio and Ambrose, on September 15, 1952, withdrew all but $2,000 apiece of their capital contributions to the business. This was accomplished by the issuance to them, on that date, of partnership promissory…