AB & M. LIQUIDATION CORP. v. Pelham Hall Co.
| Decision Date | 06 October 1939 |
| Docket Number | 4506.,No. 4505,4505 |
| Citation | 28 F. Supp. 350 |
| Parties | A. B. & M. LIQUIDATION CORPORATION v. PELHAM HALL CO. et al. SAME v. MYLES STANDISH CO. et al. |
| Court | U.S. District Court — District of Massachusetts |
Choate, Hall & Stewart and Richard Wait, all of Boston, Mass., for plaintiff.
Barker, Davison & Shattuck (withdrawn), Robert H. Davison, Haussermann, Davison & Shattuck, and Lewis L. Wadsworth, Jr., all of Boston, Mass., for defendants.
The purpose of these bills of complaint is to obtain a judicial determination respecting the parity of bonds and coupons held by the plaintiff, and to establish the rights of the plaintiff to participate in the distribution of voting trust certificates, representing shares of common capital stock of the defendant Pelham Hall Co., in No. 4505, and of defendant Myles Standish Co., in No. 4506.
The suits were heard together and will be considered in one opinion.
The American Bond & Mortgage Company, Inc. (hereinafter referred to as the "Mortgage Co."), was a Maine corporation whose principal business was selling securities issued by other corporations, especially bonds secured by real estate mortgage. It also sold its own debentures. On September 5, 1931, it was adjudicated bankrupt in the District Court of the United States for the Northern District of Illinois. Substantially all of the assets of the bankrupt consisted of investments in securities which it had underwritten, or otherwise acquired. Pursuant to an order of the District Court, in which the bankruptcy proceedings were pending, the plaintiff was organized under the laws of Illinois and, in accordance with an offer of composition which had been confirmed by the Bankruptcy Court, the plaintiff acquired, for purposes of gradual liquidation, certain assets of the bankrupt corporation. Among the securities taken over from the Mortgage Co. were bonds and coupons issued by Pelham Hall, Inc., and by The Myles Standish, Inc., which are the subject matter of this controversy.
To secure these bonds, a trust mortgage was executed to the American Trust & Safe Deposit Co., as corporate trustee, and Harold A. Moore as individual trustee, conveying real estate situated in Brookline, Massachusetts.
Each bond recited that it was one of a series and provided that the "payment of all of which * * * is equally and ratably secured without preference or priority, regardless of maturity, time of delivery or negotiation of any bonds or interest coupon, above or before another of the entire issue, by a deed of trust." The bonds were subject to all the provisions of the trust mortgage. The following provisions are pertinent to the issues of this case: The indenture contained a provision to the effect that the property was conveyed in trust "for the equal and proportionate benefit and security from the date hereof of all present and future holders of said * * * bonds and coupons * * * without preference, priority or distinction as to lien or otherwise of one bond over another bond by reason of priority in time of issuance, negotiation, date of maturity * * * or otherwise * * *."
The mortgagor (hereinafter sometimes referred to as the "grantor") covenanted and agreed not only to pay the principal and interest in accordance with the terms of the bond but also certain Federal and State income taxes, and, as additional security, the grantor agreed to pay to the Mortgage Co. each month a sum equal to one-sixth of the principal of the bond next maturing and interest next to fall due upon all of the bonds secured, as evidenced by coupons. These monthly payments were to be deposited by the Mortgage Co. in designated banks in New York, or in Chicago, in an account separate from its general and other funds, and were to be held for the benefit of bondholders, and payments of principal and interest on bonds were to be drawn upon these deposits which could only be used for the payment of maturing bonds and coupons and payment, or reimbursement, of taxes which the grantor had covenanted to pay. The grantor was also to provide the Mortgage Co. sufficient funds to pay the income taxes required to be paid by the terms of the bond.
There were provisions in the trust instrument to the effect that all bonds or coupons, bought or redeemed by the grantor, or by anyone in its behalf, should not be re-issued but should be forthwith cancelled and thereafter should not participate in the security of the mortgage or deed of trust, provided, however, that the Mortgage Co. might, at its option and in its discretion, without any obligation so to do, purchase any bonds or coupons that have matured, for its individual account or that of anyone else other than the Company.
Section 3 of Article 2 reads as follows:
"If at any time the Company (grantor) or its assigns shall fail to pay any bond or coupon secured hereby as and when the same falls due, then American Bond & Mortgage Co. Inc., or any person, firm or corporation (when not acting for said company) may purchase and hold the same, and such bond or coupon shall not be subordinated to other outstanding bonds and coupons but shall be considered as past due obligations of the company for all purposes."
3. Simultaneously with the issue of these bonds Pelham Hall, Inc., entered into a brokerage agreement with the Mortgage Co. by which the Mortgage Co. was made the exclusive agent and broker of Pelham Hall, Inc., to sell and dispose of the entire issue of First Mortgage Bonds. This agreement also provided for the monthly payments of one-sixth of the principal and interest of the bonds falling due on the next succeeding semi-annual interest payment date, together with income taxes to be paid or reimbursed. It also provided for the deposit of these monthly payments in a separate account and to be withdrawn only for the payment of interest coupons and the payment of matured bonds. Any interest on these deposits was to be paid to the Mortgage Co. on account of services rendered.
This brokerage agreement contained a provision to the effect that the Mortgage Co. at its election might deduct from the proceeds of the sale of bonds the principal and/or interest that shall have accrued at any time or which shall mature upon said bonds during the first twelve months of construction of Pelham Hall or thereafter, and also deduct the normal income tax payable during said period or thereafter on said interest.
4. Pelham Hall, Inc., had also issued $400,000 principal amount of Second Mortgage Bonds, secured by mortgage to the Liberty Trust Company, as trustee. The bonds and all of the stock of Pelham Hall, Inc., were acquired by the American Mortgage & Loan Co., affiliated with the Mortgage Co., and wholly owned by it or by members of the Moore family. Later, the second mortgage was foreclosed, the real estate purchased by the American Mortgage & Loan Co., which transferred it to a new corporation, the Pelham Hall Corporation. All of the shares of this new corporation, with the exception of three qualifying shares held by directors, were issued to C. C. Moore and still stand in his name on the books of that corporation. Mr. Moore held these shares for the benefit of American Bond & Mortgage Company.
5. Sums sufficient to meet the interest due March 1, 1926, and September 1, 1926, on the First Mortgage Bonds were reserved from the proceeds of the sale of the bonds, and the coupons falling due on those dates were paid by the Mortgage Co. out of the funds thus set aside and were cancelled. The bonds falling due as to principal on September 1, 1927, and March 1, 1928, were extended and expressly subordinated to the balance of the outstanding bonds.
6. Neither Pelham Hall, Inc., nor Pelham Hall Corporation made any of the monthly payments which were to be made to the Mortgage Co. in accordance with the provisions of the mortgage indenture, and no account was opened in any bank or trust company, as provided in said indenture.
7. The Mortgage Co. advanced from its own funds the amount necessary to pay the coupons due March 1, 1927, and September 1, 1927, for which they were subsequently reimbursed by the Pelham Hall Corporation.
8. When the interest coupons due March 1, 1928, September 1, 1928, and March 1, 1929, and serial maturities of bonds due September 1, 1928, and March 1, 1929, became due, the Mortgage Co., upon receipt of such coupons and maturing bonds, distributed to the holders thereof the requisite amount from its own funds and not from any funds supplied to it by the Pelham Hall Corporation or by its predecessor. The Mortgage Co. acquired, before their respective maturities, from the holders thereof $2,400 of bonds, $6,545.50 of coupons and clipped $451.75 of coupons from the bonds owned by it, and it acquired at and after their respective maturities $28,500 of bonds and $107,258.47 of coupons.
9. It was not until August 22, 1929, that the holders of the First Mortgage Bonds had any notice that the Pelham Hall Corporation or its predecessor had failed to meet the requirements of the mortgage indenture relative to monthly payments, or that the money paid out to bondholders and coupon holders had been furnished by the Mortgage Co. On that date, the Mortgage Co. notified the bondholders that the principal due September 1, 1929, would not be paid, and that the individual trustee would be put in possession of the property on September 1, 1929, and, in the meantime, he would endeavor to work out a plan of reorganization which would best protect the interests of the bondholders. Accordingly, entry was made on August 31, 1929, for the...
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Pelham Hall Co. v. AB & M. LIQUIDATION CORPORATION, 3542
...but that "this intention was never communicated to, or shared by, the bondholder presenting his bonds and coupons for payment". 28 F. Supp. 350, 355. In such a situation the transaction can hardly be held to be a sale, unless an intention to sell can be implied from the circumstances; at le......