Chemical Bank & Trust Co. v. Prudence-Bonds Corp.

• Decision Date: 20 August 1953
• Docket Number: No. 246,Docket 22635.,246
• Citation: 207 F.2d 67
• Parties: CHEMICAL BANK & TRUST CO. v. PRUDENCE-BONDS CORP. (NEW CORP.) et al.
• Court: U.S. Court of Appeals — Second Circuit

207 F.2d 67 (1953)

CHEMICAL BANK & TRUST CO. v. PRUDENCE-BONDS CORP. (NEW CORP.) et al.

No. 246, Docket 22635.

United States Court of Appeals Second Circuit.

Argued May 15, 1953.

Decided August 20, 1953.

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Charles M. McCarty, New York City (Geo. C. Wildermuth and Samuel Silbiger, Brooklyn, N. Y., and Nemerov & Shapiro and Koenig & Bachner, New York City, on the brief), for Prudence-Bonds Corp. (New Corp.) and others, objectors-appellants.

Lester Kissel, New York City (Shearman & Sterling & Wright, Philip A. Carroll, and Hans H. Angermueller, New York City, on the brief), for Chemical Bank & Trust Co., petitioner-appellee.

Before CHASE, CLARK and FRANK, Circuit Judges.

CLARK, Circuit Judge.

These appeals arise from the last of the accountings submitted, in connection with the reorganization under former § 77B of the Bankruptcy Act, 11 U.S.C. § 207, of the debtor Prudence-Bonds Corporation, by various banks serving as trustees of the trust funds established to secure the debtor's eighteen series of Prudence-Bonds. Several of the earlier accountings have been the subject of decision by this court.¹ The final accounting now before us is by the Chemical Bank & Trust Co., as successor Trustee of the fund securing Prudence-Bonds Fifteenth Series.² The Bank submitted its account, together with a petition for judicial settlement thereof, in September, 1938. Timely objections were thereupon filed by a bondholder, George E. Eddy, and these were later supplemented and joined in by Prudence-Bonds Corporation (New Corporation), the reorganized debtor, as well as by its reorganization trustee and several additional bondholders. The district court referred these objections — three in number — to the Special Master who had served in a like capacity in the earlier accountings, directing him to take testimony and report on the facts and applicable law.

After hearing fourteen witnesses and examining numerous exhibits, the Master on May 9, 1952, filed a thorough and comprehensive report, including 468 findings of fact and 52 conclusions of law, partially sustaining the first and third objections and fully sustaining the second. In sum, the Master concluded that the Bank had improperly released collateral from the trust fund (mostly in the form of cash) to the extent of $1,071,404.18, and recommended surcharging it for that amount, plus interest. Upon review of this report, the district court adopted most of the Master's findings; but on the basis of its modification of the others, the court dismissed the first objection in its entirety, partially sustained the second objection, and fully sustained the third, and consequently ordered the surcharge to be reduced to $159,216.66, plus interest. Both the Bank and the objectors appeal from the court's decree, the Bank contending that there should be no surcharge whatever, while the objectors assert that their objections should be sustained in full. In addition, the objectors make certain claims as to the allowance of interest, costs, and expenses which will be discussed below.

The Trust Agreement

The rights and obligations of the debtor Corporation and the Prudence Company, Inc. — an affiliate of the debtor which guaranteed performance of the debtor's commitments — on the one hand and of the Trustee on the other are set forth in a trust agreement executed on October 1, 1928, by the Corporation and the predecessor Bank as Trustee. Since the disposition of these appeals turns largely on our interpretation of the release provisions of this agreement, the principal section dealing with that subject, Article I, § 6, is here set out in full:

"Section 6. Substitution and Withdrawal of Securities, Etc. — The Corporation at any time and from time to time provided it is not in default in the payment of interest or principal on any of the bonds issued hereunder may withdraw any bond, note, mortgage, trust deed or other security or certificate of deposit or cash from the Trust Fund, as follows:

"(1) By substituting for the item or items withdrawn, any other security or other item enumerated in Section 1 of this Article, equal in amount or value as defined in Section 4 of this Article I, to the unpaid principal of the bonds, notes, mortgages, trust deeds or other securities or cash withdrawn.

"(2) By written application to the Trustee, for such withdrawal, at any time when the principal amount of the Trust Fund as defined in Section 4 of this Article I may exceed the par value of the Prudence-Bonds issued and outstanding hereunder, but only to the extent of such excess.

"In either such case, the Trustee shall deliver to the Corporation the bonds, notes, mortgages, trust deeds or other securities or cash, so withdrawn with any necessary assignments thereof, provided there shall remain in the Trust Fund after any such withdrawal, bonds, notes, mortgages, trust deeds, or other securities and/or cash in amount or value (as defined in Section 4 of this Article I) not less than the principal amount of Prudence-Bonds then issued and outstanding hereunder, provided, that if any securities deposited in the Trust Fund enumerated in paragraphs (a), (b) or (c) of Section 1 of this Article, shall be in default in the payment of principal for more than 60 days the Corporation shall be permitted to withdraw only such securities deposited under said paragraphs (a), (b) or (c) as shall be so in default, except that the Corporation may withdraw any of the items enumerated under paragraphs (a), (b) or (c) of Section 1 of this Article in connection with the redemption or final payment at maturity, of any such items upon substitution therefor of cash and/or securities enumerated in Section 1 of Article I. The Trustee may accept as conclusive the written statement of any officer of the Corporation as to whether or not any securities deposited in the Trust Fund are in default in the payment of principal or interest.

"Upon the delivery to the Trustee for cancellation of any or all of the Prudence-Bonds secured hereunder, with all unmatured coupons attached thereto, or cash equal to such coupons as are not delivered, or in lieu of such bonds and coupons or cash, a certificate by an officer of the Corporation approved by an officer of The Prudence Company, Inc. that certain of such bonds, with the coupons, if any, belonging thereto, matured at a date earlier than six years prior to the date of such certificate, and have not been presented for payment, the Corporation shall be entitled to withdraw from the Trust Fund, and the Trustee shall deliver to the Corporation, bonds, notes, mortgages, trust deeds or other securities, or cash, enumerated in Article I, equal in amount or value, as defined in Section 4 thereof, to the principal amount of Prudence-Bonds so delivered for cancellation, or represented by the certificate above mentioned."

Article I, § 4, referred to in the above section, provides:

"Section 4. Amount and Computation of Trust Fund. — The aggregate principal amount of the Trust Fund as herein created and determined shall at no time be less than the aggregate principal sum of Prudence-Bonds issued and outstanding.

"In determining and computing the aggregate principal amount of the Trust Fund at any time, there shall be included all securities deposited under paragraphs (a), (b) and (c), Section 1 of this Article, at their face principal amounts irrespective of whether any thereof are overdue or in default as to principal or interest (but less any payment shown to the Trustee to have been made on account of principal thereof), and there shall also be included all bonds and other securities and cash deposited under paragraphs (d) and (e) thereof at their cash market values as of the date of deposit."

Section 1 of Article I contains five subsections specifying the various types of collateral authorized by the agreement for the contents of the trust fund. Of these, subsecs. (a) to (c) defined certain types of mortgage bonds, while (d) and (e) referred to more liquid securities such as government bonds and cash. In fact the instant fund contained only bonds and mortgages on improved real estate, covered by subsec. (a), and cash, authorized by subsec. (e). The references in the above-quoted provisions to the securities enumerated in subsecs. (a) to (e) thus apply only to these two types of collateral for purposes of the present appeals.

Certain additional provisions of the trust agreement which bear upon the issues of this case will be quoted or referred to later in this opinion when their context will become clear. We discuss in order first the appeal of the objectors from the dismissal in whole or part of their objections and the refusal to make a larger surcharge against the Trustee as recommended by the Special Master, and second the appeal by the Trustee-Bank from the court's action in sustaining the objections in part and in making certain surcharges.

I. Objectors' Appeal

1. From Dismissal of the First Objection. The first objection is addressed to the action of the Bank on December 26, 1930, in releasing from the trust fund the Butterick Publishing Company mortgage, on which the principal then due was $887,500, and surrendering it to the debtor in return for this sum in cash. The objectors contend that since other collateral in the fund, namely, the Hillman Hotel Company, Inc., mortgage, was in default of principal for more than 60 days on the date of this transaction, the release of the Butterick mortgage while the defaulted security remained in the fund violated Article I, § 6, of the trust agreement. Pointing out that the Butterick mortgage was not due to mature until March 1, 1935, they assert that its release therefore did not fall within the third proviso of § 6 authorizing withdrawals "in connection with the redemption or final payment at maturity," even though other collateral may be in default of principal for more than 60 days. The Bank, on the other hand,...