Barbano v. Central-Hudson Steamboat Co.

• Decision Date: 12 January 1931
• Docket Number: No. 152.,152.
• Parties: BARBANO v. CENTRAL-HUDSON STEAMBOAT CO. CHASE NAT. BANK OF CITY OF NEW YORK v. CENTRAL-HUDSON STEAMBOAT CO. et al. (two cases).
• Court: U.S. Court of Appeals — Second Circuit

47 F.2d 160 (1931)

BARBANO v. CENTRAL-HUDSON STEAMBOAT CO.

CHASE NAT. BANK OF CITY OF NEW YORK v. CENTRAL-HUDSON STEAMBOAT CO. et al. (two cases).

No. 152.

Circuit Court of Appeals, Second Circuit.

January 12, 1931.

Greenbaum, Wolff & Ernst, of New York City (Edward S. Greenbaum, of New York City, and Allen S. Reynolds, of Poughkeepsie, N. Y., of counsel), for appellants.

Murray, Aldrich & Webb, of New York City (Hugh L. M. Cole, of New York City, of counsel), for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

SWAN, Circuit Judge.

Central-Hudson Steamboat Company, a New York corporation, in 1899 executed a first mortgage upon all its property to secure 500 5 per cent. bearer bonds of $1,000 each, maturing May 1, 1919. For convenience, this will be referred to as the first mortgage. In 1913 the steamboat company executed another mortgage upon all its property, also designated as a "first mortgage," although expressly made subject to the lien of the 1899 mortgage. The 1913 mortgage will hereinafter be called the refunding mortgage. The refunding mortgage was to secure 750 5 per cent. bearer bonds of $1,000 each, maturing April 1, 1933. The purposes of the mortgagor, as stated in its resolution of authorization as well as in the refunding mortgage itself, were to refund the 500 bonds outstanding under the first mortgage and to raise additional capital to the extent of $250,000. Neither purpose was fully carried out. Only $93,000 of refunding mortgage bonds were issued for cash, and less than half of the first mortgage bonds were exchanged for refunding mortgage bonds. A total of $297,000 of the first mortgage bonds remained outstanding and nonexchanged. On behalf of the holders of these outstanding bonds, a suit to foreclose the first mortgage was brought by the trustee thereunder and has produced a fund insufficient to pay the principal amount of such bonds.

The appellants were holders of first mortgage bonds who exchanged them for refunding mortgage bonds. Mrs. Morschauser's exchange of bonds, six in number, occurred on June 27, 1916, and has been selected as a test case. Her first mortgage bonds were delivered to the trustee under the refunding mortgage who thereupon delivered to her in exchange a like number of refunding bonds. Her first mortgage bonds stamped "Canceled" are in the possession of the trustee. Precisely when they were so stamped does not appear. Notwithstanding this exchange, Mrs. Morschauser claims to be entitled to share in the fund produced by foreclosure pari passu with the first mortgage bondholders who did not exchange. Her contention is (1) that the exchange did not extinguish her rights as a first mortgage bondholder; and (2) that, if it did, the exchange was induced by fraud, giving her a right to rescind it and to have her rights as a holder of first mortgage bonds restored A statement of the facts upon which fraud is predicated will be postponed until that contention is under consideration.

It is not denied that, if the first mortgage bonds which were exchanged were thereby extinguished, then the nonexchanged bonds are entitled to the whole of the security provided by the first mortgage. The dispute is whether they were so extinguished. That issue must be determined by the terms of the mortgagor's proposal for exchange, because the bondholders who make the exchange thereby accept that proposal. See N. Y. Security & T. Co. v. Louisville, E. & St. L. Consol. R. Co., 102 F. 382, 398, et seq. (C. C. Ind.), and cases there cited; 3 Thompson, Corporations (3d Ed.) § 2403. Cf. Anthony v. Campbell, 112 F. 212 (C. C. A. 8), Sanborn, J., dissenting. The mortgagor's proposal is to be found in the provisions of the refunding mortgage. The twenty-fourth paragraph, set out in full in the margin,¹ provides that $500,000 of the refunding bonds shall be deposited with the trustee to be applied for "taking up or paying" a like amount of outstanding first mortgage bonds. The trustee is to deliver the deposited bonds, or "so many thereof as may from time to time be necessary," in exchange for first mortgage bonds, "bond for bond," or, in case such exchange cannot be made, the trustee is, at maturity of the first mortgage bonds, to sell the deposited bonds, or so many as may be necessary, for cash and apply the proceeds to pay the outstanding first mortgage bonds, and "the said outstanding bonds, when paid or exchanged as aforesaid, shall be stamped upon the face by said trustee `Canceled,' and shall be held and retained by said Trustee." We construe this to mean, as did the special master and the court below, that the first mortgage bonds were to be canceled as exchanged from time to time, rather than, as the appellants contend, to be canceled in gross and only on condition that all the outstanding bonds were exchanged or paid. So construed, the surrender of first mortgage bonds in exchange for refunding bonds was for cancellation, and was cancellation. See Union Trust Co. v. Ill. Midland Ry. Co., 117 U. S. 434, 474, 6 S. Ct. 809, 29 L. Ed. 963. As was said by Judge Woods in the New York Security & Trust Co. Case above cited, page 399 of 102 F.:

"The question is one of contract or intention and little aid is to be derived from the cited cases, since in every instance they have turned upon the construction or force to be given to a writing or contract quite different from the articles of consolidation by which the present dispute must be determined."

No authority construing a precisely similar provision has been adduced, but we find nothing in the cases to throw doubt upon the correctness of the interpretation we have given the terms of the refunding mortgage. The conduct of the parties...