143 F.2d 503 (2nd Cir. 1944), 256, York v. Guaranty Trust Co. of New York

Docket Nº:256.
Citation:143 F.2d 503
Case Date:March 02, 1944
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

Page 503

143 F.2d 503 (2nd Cir. 1944)




No. 256.

United States Court of Appeals, Second Circuit.

March 2, 1944

Rehearing Denied and Opinion Revised May 25, 1944.

Page 504

Meyer Abrams, of Chicago, Ill., and Bennett I. Schlessel, of New York City (Shulman, Shulman and Abrams, of Chicago, Ill., of counsel), for appellant.

Davis Polk Wardwell Gardiner & Reed, of New York City (Ralph M. Carson and Francis W. Phillips, both of New York City, of counsel), for appellee.

Before L. HAND, AUGUSTUS N. HAND, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

AUGUSTUS N. HAND, Circuit Judge, dissenting.

Page 505

1. This case is here on appeal from a summary judgment, for the defendant, entered on the pleadings and affidavits. As a consequence some of the highly complicated facts are not entirely clear and the following statement of facts must be read with that in mind. Wherever in this opinion we refer to our conclusions 'on the facts now before us' or use similar locutions, it is to be understood that we are not now making any findings, but are merely deciding that the issues of fact should be decided after the trial court hears the evidence on a trial.

Two brothers named Van Sweringen owned 80% of the stock of The Vaness Company (which we shall call Vaness). That company owned all the stock of a Delaware corporation, Van Sweringen Corporation (which we shall call the debtor), and it, in turn, owned all the stock of the Cleveland Terminals Building Company (which we shall call the subsidiary). The record is silent concerning the previous history of these parties, but tells us that on May 1, 1930 (some months after the stock market debacle of 1929) the debtor issued $30, 000, 000 of notes payable in five years, bearing interest at 6% per annum payable semi-annually. At the time of their issuance, these notes were sold to the public by a syndicate, including the Guaranty Company of New York, a wholly-owned subsidiary of the defendant, Guaranty Trust Company of New York.

The notes were issued under an instrument executed by the debtor and the defendant which described the instrument as a 'Trust Indenture' and the defendant as 'the trustee.' The notes were not made a lien on any assets. The Indenture contained so-called 'negative pledge' clauses of a more or less conventional kind. It provided that the debtor would acquire, simultaneously with the issuance of the notes, 500, 000 shares of the common stock of Alleghany Corporation which at that time had a market value of $15, 000, 000 principal amount of the notes had been retired and cancelled, the debtor would not mortgage, pledge, sell, transfer or otherwise dispose of any of the segregated assets, 'except for cash, to be applied by the debtor only for the following purposes: (a) To be held as cash; (b) to retire the notes by purchase or redemption, all notes so retired to be cancelled; (c) to purchase common stock of said Alleghany Corporation; (d) to purchase United States Government obligations; or (e) to purchase and hold uncancelled in its treasury any of the notes. ' The Indenture provided that, whenever the aggregate value of the 'segregated assets' exceeded 50% of the

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principal amount of all notes outstanding, the amount of such excess should no longer be subject to such restrictions and might be used by the debtor for its general corporate purposes.

There then followed provisions about which it might be said that the present suit revolves: The Indenture stated that in accordance with an agreement simultaneously executed by the trustee and the Van Sweringen brothers, 1 they agreed that, whenever the value of the 'segregated assets' became less than 50% of the principal amount of all notes then outstanding, the Van Sweringens would repair such deficiency by assigning and delivering to the debtor readily marketable securities in an amount sufficient at their then market value to equal the amount of such deficiency. Such securities were referred to as 'assigned securities.' For the 'assigned securities' the debtor was to give the Van Sweringens a non-negotiable obligation which the Van Sweringens were to hold in trust for the benefit of the holders of out-standing notes to the extent that, in the event of a liquidation of the debtor and after full distribution to the holders of the notes, a deficiency in the full payment of the notes and accrued interest thereon might remain, the Van Sweringens would, to meet such deficiency, pay to the trustee for distribution to the noteholders all monies the Van Sweringens received in such liquidation on account of such non-negotiable obligation. Such 'assigned securities' (subject to withdrawal provisions described below) were to be available to the creditors of the debtor for application to the payment of the debtor's liabilities; as the defendant construes the instrument, those securities (until such withdrawal) were to be the property of the debtor. The instrument contained these unusual withdrawal provisions: When $15, 000, 000 of the notes were retired and cancelled, then all obligations of the Van Sweringens should terminate and they were to have the right to withdraw and to have reassigned and delivered to them by the debtor all 'assigned securities, ' on the surrender to the debtor of any obligation theretofore issued to the Van Sweringens therefor. Also, at any time before the debtor's liquidation, any excess in the 'assigned securities' was to be withdrawable by the Van Sweringens. [1A]

The Indenture described various 'events of default, ' including, among others, a default in the payment of any installment of interest continuing for thirty days; a default in the provisions as to the 'segregated assets' or in the negative pledge clauses;

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the appointment of a receiver of the debtor or of the major part of its property, or a judicial declaration that the debtor was bankrupt or insolvent. If any one or more of such events occurred, it was agreed that the trustee 'may, and upon the written request of the holders of at least 25% in principal amount of the notes then outstanding, shall, declare the principal of all the notes then outstanding to be due and payable immediately, and upon any such declaration the same shall become and be due and payable immediately, anything in this Indenture or in the notes contained to the contrary notwithstanding. ' Upon such an acceleration of the maturity of the notes, the debtor was to pay to the trustee the amount due thereon. If it did not do so, then 'the trustee, in its own name and as trustee of an express trust' was empowered to institute an action at law or in equity for the amount thus due and unpaid, to obtain a judgment in such proceedings, and to enforce any such judgment against the debtor. All rights of action under the Indenture or under any of the notes could be enforced by the trustee without possession of the notes. In the event of any insolvency or bankruptcy of the debtor, the trustee was given power to execute and file proofs of debt on behalf of, and as agent of, the noteholders. The trustee was also given power to institute such proceedings as it might deem necessary or expedient 'to prevent any impairment of its rights or the rights of the noteholders by any acts of the' debtor 'or of others in violation of the Indenture * * * or deemed by the trustee necessary or expedient to preserve and protect its rights and the rights of the noteholders. ' No noteholder was to have any right to institute any action under the Indenture or for any remedy thereunder unless the holders of at least 25% of the face amount of the notes then outstanding should first have requested the trustee to act and the trustee, after a reasonable time, failed to do so. It was provided that the trustee should not be liable for anything in connection with the trust 'except for its own wilful misconduct'; the Indenture contained other exculpatory clauses which we shall later discuss.

Not long after the issuance of the notes, because of a decline in the market price of Alleghany shares, the Van Sweringens delivered to the debtor, as 'assigned securities, ' 400, 000 shares of the Alleghany Corporation.

In October 1930, as the time approached for the payment of the first semi-annual installment on the debtor's notes, it faced serious difficulties. Neither the debtor nor its parent Vaness had funds available to pay that interest. Moreover, because of a further decline in the market value of the Alleghany stock, the value of the 900, 000 Alleghany shares, constituting the 'segregated assets' and 'assigned securities, ' threatened to sink below $15, 000, 000, i.e., the requisite 50% of the notes. In order to meet those difficulties and also because of grave financial problems confronting Vaness and the debtor's subsidiary, a group of banks (which we shall call the lending banks) headed by J. P. Morgan & Company (which we shall call Morgan) made two loans, one of $16, 000, 000 to Vaness [1B] and one of $23, 500, 000 to the debtor's subsidiary. The defendant, because of the interest of its subsidiary, Guaranty Company, as one of the important sellers of the debtor's notes, participated in these loans to the extent of $11, 000, 000. The loan to Vaness was secured by the pledge of various securities, including all the stock of the debtor, i.e., 1, 744, 800 shares. The loan to the debtor's subsidiary was secured by listed stocks owned by it, having a market value of $38, 000, 000. Part of the proceeds of the loan to Vaness was used by it to purchase $10, 000, 000 face amount of government bonds which were substituted for the 500, 000 Alleghany shares, the 'assigned securities, ' in this way: Vaness delivered those bonds to the Van Sweringens who delivered them as 'assigned securities' to the debtor in exchange for the Alleghany stock. The Van Sweringens, in turn, delivered to Vaness the...

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