Driscoll v. Fitch

• Citation: 52 F. Supp. 869
• Parties: DRISCOLL et al. v. FITCH et al.
• Decision Date: 06 April 1943
• Court: U.S. District Court — Southern District of New York

52 F. Supp. 869

DRISCOLL et al. v. FITCH et al.

District Court, S. D. New York.

April 6, 1943.

Ben A. Matthews, of New York City (Addison S. Pratt, Joseph H. Schnabel, and M. L. Allen, all of New York City, of counsel), for plaintiffs.

Moses & Singer, of New York City (Sam L. Cohen, Alfred W. Bressler, Henry Schneider, and Harry H. Wachtel, all of New York City, of counsel), for defendant Public Nat. Bank & Trust Co. of New York.

BRIGHT, District Judge.

The defendant, The Public National Bank & Trust Company of the City of New York, moves for summary judgment. The action is brought for and on behalf; and for the benefit, of plaintiffs and all the holders of certain unsecured indentures issued by Associated Gas & Electric Company (called Ageco), the parent corporation, and Associated Gas & Electric Corporation (called Agecorp), one of its subsidiaries, to recover from all of the defendants $10,579,700, with interest. Plaintiffs also seek a further recovery from the bank alone of $302,043.38, claimed to have been paid to it by Agecorp and plaintiffs for its services as trustee and otherwise. This latter claim has been reduced upon this motion to $14,662.40. The basis of the suit is plaintiffs' claim that $10,579,700 principal amount of 5½% Convertible Investment Certificates, previously issued by Ageco, which had been delivered to the escrow agents and by them deposited with the bank, were not presented by the defendants for payment on November 15, 1938, their due date, and in failing so to do, defendants acted in bad faith, were guilty of gross negligence, and breached their trusts.

The other defendants were "Escrow Agents" under an agreement dated May 15, 1933, between them, Ageco and Associated Gas & Electric Service Company, Inc. The bank was a depositary appointed pursuant to that agreement by the escrow agents on July 12, 1933. On November 15, 1938, the due date mentioned, the bank was also an indenture trustee so-called under seven indentures, five executed by Ageco, and two by Agecorp, under six of which some of the debentures referred to hereafter as "protected debt securities" had been issued and were then outstanding.

The bank's contentions, among others, are, that it is entitled to judgment (1) because it was not charged with any duty, either as depositary under the escrow agreement or as indenture trustee, to present the investment certificates for payment; and that it was expressly instructed by the escrow agents, who were the legal owners of the investment certificates, not to present them for payment; (2) that assuming that it had a duty to present them, it would not be liable since non-presentment did not constitute gross negligence or bad faith on its part, the only grounds upon which liability was imposed upon it by the express provisions of the escrow agreements and indentures under which it was acting; (3) that plaintiffs cannot maintain this action because at the time of the alleged wrongdoing, they were not and are not now holders of any of the securities for whose benefit the action is alleged to have been commenced, and this action cannot be maintained as a representative or class action; and (4) that the action is barred by the three-year statute of limitations of New York.

The facts, it is admitted, are not in dispute. Simultaneously with the making of the escrow agreement of May 15, 1933, Ageco addressed a letter to the holders of its debentures, calling attention to the possibility that it might not be able to continue to pay its interest charges because of the substantial decline in its earnings, higher taxes and reduction in rates; that receivership and forced reorganization must necessarily follow if fixed interest charges were not met; that readjustment of fixed interest charges was in accordance with the trend of the times; and that some of its debenture holders had urged the preparation of a plan for the exchange of present fixed interest debentures for income debentures. It proposed as such a plan, called the "Recap Plan" three different options for the exchange of outstanding debentures, and stated that the debentures turned in would be deposited in escrow under an agreement summarized on the back of the letter.

All of the defendants had full knowledge of the circular letter, the summary of the agreement, and the plan offered. The debentures then outstanding were called in the escrow agreement "old debentures" and included, among others, the 5½% Convertible Investment Certificates due 1938 above mentioned. The debentures to be issued in exchange under any of the three options were termed "new debentures". All of the old and new, together with all other debentures of Agecorp (consisting only of 8% bonds due 1940) were termed "protected debt securities". The old debentures exchanged for the new were termed in the agreement "escrow debentures".

The bank accepted its appointment as depositary, and, from time to time, there were delivered to it old debentures turned in for exchange, among which were $10,579,700 of the 5½% Convertible Investment Certificates, and that amount was in its custody on November 15, 1938, their due date. There were in addition on that date $1,140,600 principal amount of such investment certificates outstanding in the hands of the public. These were all of that class of certificates outstanding which became due on November 15, 1938.

Ageco had deposited sufficient funds to pay on their due date the $1,140,600 of debentures outstanding in the hands of the public. It had not the funds to pay the balance of the debentures then owned by the escrow agents and deposited with the bank, and had so advised the escrow agents, who, on November 14, 1938, adopted a resolution which recited the deposit with them of the 5½% investment certificates in the amount mentioned, that $1,140,560 (less than 10% of the amount then outstanding and due on November 15, 1938) were held by the public, that Ageco had ample funds to pay the principal amount of the certificates held by the public but had not funds to pay the principal of those held by the depositary for the account of the escrow agents, and concluded that the investment certificates held in escrow "shall not be presented for payment either on November 15, 1938, or at any time thereafter, unless and until a default shall be made in the payment of either principal or interest of any such protected debt security, and the period of grace, if any, shall have expired; that the depositary shall continue to hold said investment certificates under the escrow agreement and for the account of the Escrow Agents, and shall not present the same for payment unless and until instructed so to do by the Escrow Agents". A certified copy of that resolution in its entirety was delivered to the bank on November 15, 1938. The escrow certificates were not presented for payment, and plaintiff claims that thereby damage to the extent of their par value and interest was caused to the protected debt security holders.

The escrow agreement provided, among other things: full title to all of the old debentures as and when they should be exchanged for the new, should vest in the escrow agents subject to the covenants and conditions of the agreement, and they should be held and disposed of by the agents for the equal and ratable benefit and protection of all present and future holders of protected debt securities. All old debentures received under the plan should be forthwith delivered to the depositary. The escrow agents from time to time might request the depositary to take such action necessary to carry out any of the powers conferred upon the agents by the agreement, and the depositary should take such action and should be fully protected in acting upon such request. Until the retirement of all new debentures, the agents were to collect the interest payable on the escrowed debentures, and in the event of a failure of payment, the agents were entitled to enforce payment. Until all old debentures outstanding on the date of the agreement shall have been deposited in escrow or retired, the "Escrow Agents (a) shall collect the principal on any escrowed debentures that may become due, whether at maturity, redemption or otherwise", and apply such payments, ratably to the payment, redemption or retirement by purchase of protected debt securities in accordance with the principal amounts of the several issues at the time outstanding. In the event of the nonpayment of principal of any escrowed debentures when due, the escrow agents might, in their discretion (but need not unless requested in writing by holders of a majority of the principal amount of the protected debt securities) take any such action with respect to such default as any other holder or group of holders might be entitled to take. "Anything elsewhere in this agreement to the contrary notwithstanding, the Escrow Agents may * * * consent to the extension or renewal of the debentures of any issue held by the Escrow Agents (whether maturing by their terms or called for redemption) if at least 90% in principal amount of debentures of such issue shall have been deposited under this agreement".

It is not disputed that on November 15, 1938 more than 90% of the 5½% investment certificates becoming due on November 15, 1938 had been deposited with the agents.

The agreement further provided: the depositary appointed by a majority of the escrow agents might be removed at any time; and upon the appointment of a successor, the depositary was authorized to turn over and deliver to such successor, upon the written direction of the escrow agents, all escrowed debentures, property and money, if any, held by it. "The Escrow Agents and the depositary shall be deemed to have accepted respectively the duties and obligations imposed upon them, respectively, by this agreement, only upon the terms and conditions herein contained." Among these were provisions that the depositary might employ counsel,...