American Brake Shoe & F. Co. v. Interborough RT Co.
| Decision Date | 12 August 1941 |
| Docket Number | No. 317.,317. |
| Citation | 122 F.2d 454 |
| Court | U.S. Court of Appeals — Second Circuit |
| Parties | AMERICAN BRAKE SHOE & FOUNDRY CO. et al. v. INTERBOROUGH RAPID TRANSIT CO. et al. (two cases). CENTRAL HANOVER BANK & TRUST CO. v. MANHATTAN RY. CO. et al. MANHEIM et al. v. MERLE-SMITH et al. |
Simpson, Thacher & Bartlett, of New York City (Clifford P. Case and Walter E. Beer, Jr., both of New York City, of counsel), for appellant Manheim.
Milbank, Tweed & Hope, of New York City (Hugh L. M. Cole and Carl V. Venters, both of New York City, of counsel), for appellant Chase Nat. Bank of the City of New York.
Solomon G. Salomon, pro se, appellant.
William C. Chanler, Corp. Counsel, of New York City (William S. Gaud, Jr., of New York City, of counsel), Chester W. Cuthell, Sp. Counsel to Transit Commission, of New York City (Robert W. Maloney, Jr., of New York City, of counsel), Wright, Gordon, Zachry, Parlin & Cahill, of New York City (Boykin C. Wright, Clifton Murphy, and Daniel James, all of New York City, of counsel), for appellees.
Before SWAN, AUGUSTUS N. HAND, and CLARK, Circuit Judges.
Upon a creditor's bill filed August 26, 1932, receivers were appointed for the Interborough Rapid Transit Company and on September 6th the receivership was extended to the Manhattan Railway Company.1 The properties involved comprised the Subway Division, consisting of City owned lines, mainly underground, operated by Interborough under contracts with the City, and the Manhattan Division, consisting mainly of elevated lines owned by Manhattan and leased to Interborough in 1903 for a term of 999 years from 1875. Under the Manhattan lease Interborough was required to pay taxes, interest on all Manhattan bonds, a small annual sum for maintenance of Manhattan's corporate existence and 7 per cent. dividends per annum on Manhattan's capital stock. A guaranty by Interborough to pay such dividend rental was endorsed on each certificate of Manhattan stock. By a readjustment made in 1922 this guaranty was modified with respect to a great majority of the stock. As the receivership dragged on it became clear that the solution of many of the problems arising between Interborough and Manhattan and their respective security holders depended on a solution of the question of the right of Interborough's receiver to disaffirm the burdensome Manhattan lease. The question came before this court in Murray v. Roberts, 2 Cir., 103 F.2d 889, and on April 17, 1939, an opinion was handed down holding that because of certain franchise obligations to the City the lease could not be disaffirmed unless, as a result of negotiations with the City, these obligations could be performed by some means other than affirmance. This decision established the City's strategic position in the affairs of the companies and enabled it to prepare to press its unification objective. For many years both before and during the receivership the problem of improving rapid transit within the City by some plan of unification had been under consideration by the Transit Commission, a State agency, and by the City authorities. See N.Y. Law 1921, chap. 134, Public Service Commissions Law. On January 1, 1939, the Fertig Amendment to the State Constitution, art. 8, § 7a, became operative, having as its object the promotion of unification. It authorized the City to issue securities outside of its debt limit for the purpose of acquiring transit securities as well as transit facilities. Fortified by the Fertig Amendment and the decision in Murray v. Roberts, supra, the Transit Commission and the Mayor began negotiations with representatives of various classes of Interborough and Manhattan securities. These negotiations resulted in the summer of 1939 in the proposal by the Transit Commission and the City of a Plan of Unification which was accepted by a great majority of the security holders within the time specified in the Plan. The Transit Commission declared the Plan operative by resolution adopted November 22, 1939. It was consummated on June 12, 1940. By its terms the various classes of security holders of the two companies were offered Corporate Stock2 or cash (at the City's option) in amounts equal to stated percentages of the unpaid principal amount of their securities. The percentage payments they were offered and the percentage of the holders of each class of the securities who assented by depositing their securities appear in the following table:
Approximate
amount of Percentage Percentage
issue outstanding. Name of of principal deposited at
Security to be paid. Nov. 22/39 June 4/40 May 1/41
$97,000,000 Interb. First 5s 82½ 76.66 94.76 99.62
28,700,000 Interb. Sec. Notes 87½ 80.65 95.29 99.68
40,600,000 Manh. Cons. 4s 82½ 83.27 97.56 99.81
4,500,000 Manh. 2d M. 4s 50 83.27 84.98 88.42
43,500 Shs. Manh. 7% stock 35 27.55 82.14 96.26
556,500 Shs. Manh. Mod. stock 19 63.27 93.63 99.10
10,500,000 Interb. unsec. notes 35 10.74 29.19 98.79
350,000 Shs. Interb. stock 3 9.40 17.25 96.59
The above figures do not include interest adjustments to be made in the case of the first three issues. Also the amounts to be received were to be reduced somewhat by expenses and compensation of committees and certain other charges. Non-assenting security holders were to receive in cash their pro rata shares of the purchase price determined by foreclosure sales and of a settlement fund determined by compromise of numerous conflicting claims of Interborough, Manhattan, the City and various security holders, which were pending in the receivership suit.
In connection with the carrying out of the Plan the district court made various orders which these appeals bring up for review. The matters involved are (a) acquisition by the Merle-Smith Committee for Manhattan Consolidated Mortgage Bonds, through foreclosure and receivership sales, of title to Manhattan properties and the transfer thereof to the City, (b) determination of the amount and the distribution of the Settlement Fund, and (c) adjudication of the Plan as fair, equitable and feasible. There are three appellants: Paul E. Manheim, who represents $484,000 principal amount of Manhattan Second Mortgage bonds, of which he owns personally $31,000; The Chase National Bank, as trustee under said mortgage; and Solomon G. Salomon who apparently owns Manhattan securities consisting of $47,000 Consolidated Mortgage bonds, $11,000 Second Mortgage bonds and 560 shares of Guaranteed 7% stock. The Chase Bank, however, is only a nominal appellant, having taken its appeal at the demand of Manheim and only in order to enable him to obtain consideration by the court of arguments advanced by him against certain orders to which he was not a party. No independent contentions are presented by the Bank and its appeal requires no discussion independent of that devoted to Manheim's appeal, to which we now turn.
The scope of Manheim's appeal is restricted to those provisions of the court's orders which limit him as a non-assenting bondholder to the recovery of $394.68 per thousand dollar bond. He asserts no wish to upset the transfer of the properties to the City or to change the participation of assenting security holders, but he asks for an order directing that the bonds he owns or represents be paid in full, or, in the alternative, that a new hearing be granted to determine what amount in excess of $394.68 he is entitled to receive, or at least that he be given an amount equal to what he would have received had he assented to the Plan. The burden of his argument is that no proceedings were had which validly determined the cash distributive shares to which holders of Manhattan Second Mortgage bonds were legally entitled; that the foreclosure sale and the judicial determination of the settlement fund upon which the respondents rely to support the valuation of $394.68 per bond, were merely devices used to coerce a reluctant minority into acceptance of the Plan; and that in fact his bonds were entitled to be paid in full.
All of the physical properties of Manhattan were subject to the prior lien of the Consolidated Mortgage which was foreclosed in December, 1939, upon a complaint originally filed in March, 1934. The principal of the mortgage debt was approximately $40,670,000, interest was in default to the amount of some $2,250,000 and defaulted taxes added nearly $2,000,000 more. The Consolidated Mortgage trustee had some $6,000,000 of cash in hand, but it is apparent that the physical properties would have to be worth more than $39,000,000 to leave any value whatever for the Second Mortgage lien. After lengthy hearings the district court fixed the upset price at $17,000,000. Little would be gained by reviewing the evidence; it supports the findings, in our opinion. A few observations, however, may pertinently be made. On the basis of earnings the Manhattan properties had nothing to recommend them. The operating results, without payment of taxes, interest or rentals showed mounting deficits: $445,330 for 1938, $1,141,727 for 1939, and an estimated deficit of $1,800,000 for 1940. An expert witness, Mr. Burpee, testified that a fair price for the property would be from $15,000,000 to $20,000,000, although he would not advise any purchaser other than the City to pay that price. Complaint as to the upset price of $17,000,000 is not justified.
By an order dated March 15, 1940, the settlement fund was established at $18,000,000 and apportioned between the four classes of Manhattan security holders: $7,666,666.67 for the Consolidated Mortgage bonds; $1,785,133.73 for the Second Mortgage bonds; $1,202,073.40...
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