Providence Engineering Corporation v. Downey Shipbuilding Corporation

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation294 F. 641
Docket Number43.
PartiesPROVIDENCE ENGINEERING CORPORATION v. DOWNEY SHIPBUILDING CORPORATION. [1] CHASE NAT. BANK OF CITY OF NEW YORK v. UNITED STATES SHIPPING BOARD EMERGENCY FLEET CORPORATION et al.
Decision Date05 November 1923

On January 7, 1921, the Providence Engineering Corporation, a corporation existing under the laws of the state of Delaware filed in the District Court of the United States, for the Eastern District of New York, a creditor's bill against the Downey Shipbuilding Corporation, hereinafter called the Downey Corporation, in which it alleged the insolvency of the latter and prayed the appointment of receivers. Thereafter the Downey Corporation answered the bill and admitted the allegations thereof. Thereupon the court named William G. Coxe, J. Ernest Allen, and William F Purdy as receivers of the said Downey Corporation and of all its properties and assets within the Eastern District of New York, and authorized them to take possession of all such properties and assets, and also authorized them to have complete and exclusive control, possession, and custody thereof. And the receivers thereupon took possession of the property aforesaid.

Thereafter the Chase National Bank, a national banking association existing under the laws of the United States, and located in the city of New York, as trustee brought a foreclosure suit in the United States District Court for the Eastern District of New York against the Downey Corporation to foreclose two mortgages executed by the latter corporation. The first of these mortgages was for $1,500,000 and was dated December 15 1917. The second, designated as the supplemental indenture, was dated January 2, 1920. These causes were consolidated by an order entered on July 14, 1921, and the foreclosure action was brought to trial.

The first mortgage, that of December 15, 1917, was given to the Empire Trust Company as trustee. That company resigned its trusteeship on January 28, 1920, and on the same day the Chase National Bank was substituted as trustee under that mortgage. The second mortgage, that of January 2, 1920, was given to the Chase National Bank as trustee, the complainant herein.

After execution and recording of the mortgage of 1917, and before the execution of the supplemental indenture, the Downey Corporation executed and delivered to the Fleet Corporation three mortgages covering substantially the same property as was included in the 1917 mortgage, and the Fleet Corporation recorded them. These three mortgages were dated as follows: June 14, 1918, July 30, 1919, and October 16, 1919.

It appears that after the execution and recording of the first mortgage the Downey Corporation obtained from the Fleet Corporation a letter dated January 21, 1920, signed and acknowledged by John Barton Payne as president of the Fleet Corporation, to which was affixed its corporate seal attested by its assistant secretary, consenting to the issue of $1,500,000 of bonds by the Shipbuilding Corporation under the mortgage of 1917, as supplemented by said supplemental indenture then about to be executed, and agreeing, upon request of the Shipbuilding Corporation, to execute a formal consent to subordinate the liens of the defendant's said three mortgages to the lien of said mortgage of 1917 and of said supplemental indenture. This letter of subordination and the supplemental indenture were duly recorded and all of the bonds authorized thereby were subsequently issued and sold.

The Downey Corporation commenced operations in the spring of 1917, and prior to January 1, 1920, constructed under contracts with the Fleet Corporation ten steel ships of 7,814 tons dead weight capacity. The plant of this company was located on Staten Island, with frontage on deep water, and a large production capacity both in ships and marine engines. During the fall of 1919, before the completion of its contracts with the Fleet Corporation, the Downey Corporation found itself seriously embarrassed by reason of its inability to collect from the Fleet Corporation substantial sums of money which it claimed were due and owing to it on account of the ships which had been constructed and were about to be delivered to the Fleet Corporation. Creditors, who had furnished materials and supplies actually used in the construction of these ships, had not been paid, and the company was unable to pay these and other pressing bills. And the mortgage of December 15, 1917, which concededly was a lien prior to all of the Fleet Corporation's mortgages, was in default and no provisions had been made for the payment of these notes, amounting to $750,000. The interest of the Fleet Corporation, as the holder of junior mortgages, was seriously involved.

In these circumstances the Downey Corporation approached the Fleet Corporation with the request that the Fleet Corporation subordinate the lien of its mortgages to the lien of a consolidated mortgage for $1,500,000 to enable the Downey Corporation to refund its first mortgage notes, aggregating $750,000, which were then in default, and to pay creditors who were in a position to assert and enforce their statutory liens against the Fleet Corporation.

This situation was fully presented to the responsible officers of the Fleet Corporation. Upon the trial of this case the counsel for the Fleet Corporation expressly disclaimed any charge that any misrepresentation had been made by the Downey Corporation in connection with the negotiations. Finally, after the most careful consideration extending over several months, at a meeting attended by representatives of the Fleet Corporation, the Downey Corporation and the bankers who subsequently purchased the new bonds and resold them to the public, a decision was reached by the representatives of the Fleet Corporation to subordinate its liens so that this refinancing might be carried through. Thereafter and prior to the execution of the supplementary mortgage, there was executed and acknowledged by the president of the Fleet Corporation and duly recorded in the land records of Richmond county the following instrument:

'January 21, 1920.
'United States Shipping Board Emergency Fleet Corporation,
'(Seal.)

By John Barton Payne, President.

'Geoffrey Creyke, Assistant Secretary.'

This instrument was properly acknowledged before a notary.

In reliance upon it and the recording thereof, the entire new issue of $1,500,000 of bonds was purchased by Blodgett & Co., who surrendered the old issue of $750,000 of notes, which they had purchased from the prior holders thereof. In reselling these bonds the bankers represented by public advertisement, and in circulars issued to purchasers of the bonds, that these bonds were first mortgage bonds of the Downey Corporation, and further represented:

'This issue is a first, closed mortgage on land in New York City, conservatively valued by three experts at from 130 per cent. to 165 per cent. of the entire $1,500,000 bonds outstanding, while the property as a whole has been valued at over four times the amount of this bond issue.
'The mortgage securing these bonds is a first, closed lien on all the property of the corporation, now owned or hereafter acquired, described in said mortgage.'

The Downey Corporation found itself unable to pay interest upon these bonds and defaulted in the payment of interest on January 1, 1921. Thereafter plaintiff, as trustee for the first mortgage bondholders, commenced this suit for the foreclosure of said mortgages, that of December 15, 1917, and the supplemental indenture dated January 2, 1920, and joined as one of the parties defendant the Fleet Corporation as the holder of junior liens.

In order to defeat the foreclosure, counsel for the Fleet Corporation now claim that its subordination agreement was ultra vires and that the defendant is not estopped from now asserting the superiority of the liens of its said three mortgages to the mortgage of 1917 and the supplemental indenture.

Claims are also made that the United States government is the real party in interest under the Fleet Corporation mortgages and that the United States is an indispensable party to this suit.

Sullivan & Cromwell, of New York City (Harlan F. Stone, of New York City, Chauncey G. Parker, of Washington, D.C., and Henry M. Ward and Paul W. McQuillen, both of New York City, of counsel), for appellant.

Simpson, Thacher & Bartlett, of New York City (Thomas D. Thacher and Louis Connick, both of New York City, of counsel), for appellee.

Cadwalader, Wickersham & Taft, of New York City (Cornelius W. Wickersham and Kenneth E. Walser, both of New York City, of counsel), for receivers.

Before ROGERS, MANTON, and MAYER, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

The questions which are involved herein are three:

(1) Whether the United States is the real party in interest under the mortgages in the name of the Fleet Corporation.

(2) Whether the United States is an indispensable party to the suit.

(3) Whether the Fleet Corporation is estopped from asserting that the liens of the mortgages standing in its name are prior to the lien held by the plaintiff.

In considering these questions it becomes important to fix the status of the Fleet Corporation.

It appears that the Act of Congress of September 7, 1916, known as the Shipping Act of 1916 (Comp. St. Secs. 8146a-8146r) provided for the creation of the United States Shipping Board, to be composed of five commissioners appointed by the President. That act was amended by the Merchant Marine Act of 1920 (Comp. St. Ann. Supp. 1923, Sec. 8146b), which increased the number of commissioners to seven. The act of 1916, in section 11 (section 8146f), provided in part as...

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