PW Brooks & Co. v. North Carolina Public Service Co., 70.

CourtUnited States District Courts. 4th Circuit. Middle District of North Carolina
Writing for the CourtHAYES
Citation32 F.2d 800
Decision Date16 May 1929
Docket NumberNo. 70.,70.

Hobgood & Vinson, of Greensboro, N. C., and Cook, Nathan & Lehman, of New York City (Chester Rohrlich, of New York City, of counsel), for plaintiff.

W. S. O'B. Robinson, of Charlotte, N. C., and Broadhurst & Robinson, of Greensboro, N. C., for defendant.

HAYES, District Judge.

The Piedmont Power & Light Company, a corporation of North Carolina with its principal place of business at Burlington, N. C., on May 1, 1919, executed a mortgage on its real estate and other property, including its franchises, to the Guaranty Trust & Safe Deposit Company, a corporation of the state of New York, as trustee, to secure the payment of $2,000,000 of 15-year gold bonds bearing 6 per cent. interest. The mortgage is in the usual form of corporate mortgages. In the event of a default in the payment of principal or interest or such other default as affects the bondholders as a class, it is necessary for one-third in amount of the bond holders to make demand on the trustee, and it is then required to proceed in accordance with the demand. It is further provided that this remedy shall not be exclusive of any other remedy or remedies and that "each and every such remedy shall be cumulative and shall be in addition to every other remedy now existing at law or in equity or by statute."

The company was unable to market its bonds and on March 25, 1921, by authority of its directors, it executed an "Additional Interest Indenture" whereby it authorized payment of 7 per cent. interest on these bonds and gave to the holders of the said 7 per cent. bonds the privilege of converting the bonds at any time before redemption into 6 per cent. bonds. It reserved the right to redeem the bonds on any interest-paying date prior to their maturity on May 1, 1934, on the publication of a notice of redemption for four successive weeks immediately preceding the date of redemption. The holders of the bonds were required to give 10 days' notice of their intention to convert and to deposit the bonds with the trustee, the Empire Trust Company, of New York City, designated in the "Additional Interest Indenture."

In 1924, the North Carolina Public Service Company absorbed the Piedmont Power & Light Company and assumed all of its obligations, including the mortgage, additional interest indenture, and bond issue thereunder above described.

On July 26, 1926, the North Carolina Public Service Company, through its directors, passed a resolution to redeem all of the bonds in question on November 1, 1926, the next interest-paying date, and caused to be deposited with the trustee, the Empire Trust Company, in New York City, funds sufficient to pay off all outstanding bonds with interest, according to the amount due on the bonds which were then outstanding. On July 31, 1926, it published a notice of its intention to redeem the bonds on November 1 next and continued to publish said notice each week until November 1. In this notice, it announced that the privilege of converting 7 per cent. bonds into 6 per cent. bonds expired on July 31, 1926.

On September 29, 1926, the plaintiff deposited with the trustee $25,000 of the 7 per cent. bonds and demanded their conversion into 6 per cent. bonds. The notice was in writing and notice also was given to the defendant. It refused to convert the bonds, taking the position that it had the right to terminate the conversion privilege when it deposited the money with the trustee and published its first notice to redeem on July 31, 1926. Later the plaintiff notified the trustee and the defendant that it had in its possession an additional $48,500 of bonds giving the serial numbers thereof, and demanded their conversion, expressing its readiness, ability, and willingness to tender the bonds if the company would permit their conversion. It pursued the same course with respect to an additional $13,500 of bonds, and all of this occurred more than 10 days prior to the 1st day of November, 1926. The defendant ignored these demands. The plaintiff then surrendered the three blocks of bonds for redemption to the trustee and accepted the payment of the principal and interest according to the amount due on the 7 per cent. bonds, but stated it did so without waiving its rights to damages for the refusal to convert the bonds and accepted the money to mitigate damages. The plaintiff now brings this action to recover the difference in value between the 7 per cent. bonds and the 6 per cent. bonds at the time of the demand, which amounted to $9,667.

It is a common practice for corporations, especially railroads, when executing mortgages to secure the payment of bonds, maturing over a course of several years, and in order to make the investment as attractive as possible to the buying public, to confer upon the holders of such bonds the privilege of converting them, prior to their maturity, into shares of the capital stock of such corporation. And the validity of such a provision has been recognized throughout this country to such an extent that it is needless to cite any authority to support this view.

When a corporation refuses to convert the bonds in accordance with the contract upon the election and demand of the bond holder, its refusal constitutes a breach of its contract for which the bond holder is entitled to sue for his damages. Chaffee v. Middlesex R. R. Co., 146 Mass. 224, 16 N. E. 34; Bratten v. Catawissa Ry. Co., 211 Pa. 21, 60 A. 319; John Hancock Mut. Life Ins. Co. v. Worcester R. R. Co., 149 Mass. 214, 21 N. E. 364; 33 Cyc. 453; 1 Cook on Corporations (Ed. 1908) p. 772.

The refusal of the corporation to make the conversion at the demand of a bondholder creates in its favor a right of action which does not affect the other bondholders as a class, and it is a right which it may assert without the necessity of resorting to the trustee as an intermediary. The usual requirement for the trustee to prosecute all actions clearly contemplates such actions as are in the interest of the bondholders as a class and is not intended to apply to a single cause of action which cannot affect the bondholders as a class. Pigeon River Ry. Co. v. Champion Fibre Co. (C. C. A.) 280 F. 557. It is true that the rule is well settled that in matters affecting the remedy the court will regard neither the place of making nor place of performance, but will be governed by the law of the state where the remedy is sought, and that in applying the lex fori the federal courts will adjudicate the rights of the parties as will the courts of the state. Pritchard v. Norton, 106 U. S. 124, 1 S. Ct. 102, 27 L. Ed. 104; Hogue-Kellogg Co. v. G. L. Webster Canning Co. (C. C. A.) 22 F.(2d) 384.

The defendant relies on the case of Jones v. Atlantic & Western R. R. Co., 193 N. C. 590, 137 S. E. 706, in support of its contention that the plaintiff has no right to maintain this action. An examination of this case discloses that the reasoning of the decision is based on the proposition that the complaint which asked that all of the property which was embraced in the mortgage be placed in the hands of a receiver and prayed for a winding up of the corporate affairs, taking them completely out of the hands of the trustee, could not be granted. That suit was against the property embraced in the mortgage, while the plaintiff's action here is only to recover a judgment for damages for breach of a...

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