In the Matter of National Tile & Terrazzo Co., Inc., Bankrupt. Edward M. Walsh, Trustee v. Josephine Paterna

Appellant Paterna, on December 27, 1967 owned 600 shares of the common stock of National Tile and Terrazzo Co., Inc., a California corporation (hereafter National).

Appellant sold her shares to the Corporation receiving $3,000 in cash and a note for $36,000.00 payable at the rate of $500.00 per month and bearing interest at the rate of 4% per annum. The note was secured by a deed of trust upon National’s real property designated as 198 Mississippi Street, San Francisco, California. At the time of the transaction, the Corporation’s earned surplus exceeded the purchase price of $39,000 and was apparently sufficient to satisfy the requirements of California Corporations Code § 1708. 1

Payments were thereafter undertaken by the Corporation and made regularly until May 20, 1971.

On June 18, 1971 National filed a voluntary petition in bankruptcy. Adjudicated on the same date, the Corporation was then without earned surplus and was unable to pay its debts and obligations as they came due. Paterna was still owed $20,351.66, with interest from May 20, 1971. There were insufficient assets in the bankrupt’s estate to pay in full the claims of all creditors.

Appellant filed her…

(concurring):

I concur. I only add that in Goodman v. Global Industries, 80 Cal.App.2d 583 , 182 P.2d 300 and In re Mathews Construction Co., 120 F.Supp. 818 (S.D.Cal.1954), those courts were dealing with what they termed executory contracts.

California Civil Code § 1661 defines an executed contract as “one, the object of which is fully performed.” Here, the object of the contract — i. e., transfer of Appellant’s interest in the corporation — was fully performed. All that remained was the payment of money. This is the classic executed contract. Smith v. Allen, 68 Cal.2d 93 , 65 Cal.Rptr. 153 , 436 P.2d 65 (1968).

(dissenting):

I believe that we should affirm. In re Belmetals Mfg. Co., Inc., 299 F.Supp. 1290 (N.D.Cal.1969), affirmed sub nom. Eranosian v. England, 437 F.2d 1355 (9th Cir. 1970). The only part of the questioned transaction relevant here is the duty of the corporation to pay the installments on the note. This duty is executory. It is also unenforceable.

As a practical matter, when the trustee seeks to marshal the assets of the bankrupt estate he cannot sell the real property free of the lien. The lien can be satisfied only by having someone pay a debt that is no longer lawfully collectible in California. Trowbridge v. Love, 58 Cal.App.2d 746 , 137 P.2d 890 (1943), is at least consistent with my view that when such a debt is discharged the lien securing the debt becomes functus officio.

Further, I am not satisfied that the policy reasons given by the majority in favor of the lien holder in this case overcome equally valid policy reasons which may have commended themselves to the California legislature when it enacted Cal.Corp.Code § 1707. The majority here is creating a precedent that may frustrate present and future creditors of other small, closely held corporations. See…

537 F.2d 329 In the Matter of NATIONAL TILE & TERRAZZO CO., INC., Bankrupt. Edward M. WALSH, Trustee, Respondent, v. Josephine PATERNA, Appellant. No. 74-1549. United States Court of Appeals, Ninth Circuit. April 21, 1976. As Amended Aug. 3, 1976. Henry Gross (argued), San Francisco, Cal., for appellant. Harvey Hoffman (argued), of Hoffman & Kelly, San Francisco, Cal., for appellee. OPINION Before CHOY and GOODWIN, Circuit Judges, and REAL, * District Judge. CHOY, Circuit Judge: 1 Appellant Paterna, on December 27, 1967 owned 600 shares of the common stock of National Tile and Terrazzo Co., Inc., a California corporation (hereafter National). 2 Appellant sold her shares to the Corporation receiving $3,000 in cash and a note for $36,000.00 payable at the rate of $500.00 per month and bearing interest at the rate of 4% per annum. The note was secured by a deed of trust upon National's real property designated as 198 Mississippi Street, San Francisco, California. At the time of the transaction, the Corporation's earned surplus exceeded the purchase price of $39,000 and was apparently sufficient to satisfy the requirements of California Corporations Code § 1708. 1 3…