Cox v. Stokes

• Citation: 156 N.Y. 491,51 N.E. 316
• Parties: COX et al. v. STOKES et al.
• Decision Date: 04 October 1898
• Court: New York Court of Appeals Court of Appeals

156 N.Y. 491

51 N.E. 316

COX et al.

v.STOKES et al.

Court of Appeals of New York.

Oct. 4, 1898.

Appeal from supreme court, general term, First department.

Action by Townsend Cox and others against Edward S. Stokes and others to enforce an agreement for the reorganization of the Bankers' & Merchants' Telegraph Company. Judgment for defendants at special term was affirmed at general term (29 N. Y. Supp. 141), and plaintiffs appeal. Reversed.

This is a representative action brought in behalf of the plaintiffs and all others similarly situated. Upon the trial it appeared that in the spring of 1885 the Bankers' & Merchants' Telegraph Company owned a large number of poles, and many miles of wire thereon; that it had also strung many miles of wire upon poles of the American Rapid Telegraph Company, under a lease, and was in possession and use of the same; that, through the ownership of a controlling interest in the ‘stocks' of a large number of small telegraph companies, it controlled their lines; and that all these wires, comprising in the aggregate over 45,000 miles, were blended into a single harmonious and extensive system of telegraph communication throughout many different states. Its property and franchises, however, were subject to two mortgages. The first, known as the ‘divisional mortgage,’ was executed July 2, 1883, to the Farmers' Loan & Trust Company, as trustee, to secure 300 bonds, of $1,000 each, all of the principal of which was unpaid, and there was a default in the payment of interest, with a suit pending to foreclose. The second mortgage, known as the ‘general mortgage,’ was given November 24, 1883, to the same trustee, to secure 10,000 bonds of $1,000 each, of which there had been issued over $7,000,000 in amount prior to April, 1885. This mortgage was a first lien upon the shares of stock issued by the subsidiary lines, and owned by the parent company. The plaintiffs, since July, 1884, have owned and represented general mortgage bonds to the amount of $731,000. The company had been embarrassed since July, 1884, by judgments obtained against it and levies made upon its property. In September of that year, an action was begun by one Day, a judgment creditor, with execution returned unsatisfied, to sequestrate its property; and on the 24th of that month receivers were appointed therein, but without notice to the trustee for the bondholders. On January 6, 1885, at the suit of one De Haven, the same persons were appointed receivers, in an action brought solely for that purpose, of all the property and assets of the company, and authorized to issue receiver's certificates to an amount not exceeding $1,500,000, which were declared a lien upon all the property, real and personal, prior and paramount to the general mortgage, but subject to the divisional mortgage. No certificates were issued under this judgment, but under separate orders, obtained ex parte, certificates were issued to the amount of $602,802.06, some for money borrowed in the Day suit, some to pay an old debt of the company to one Sully, and the others for various purposes, including the payment of money borrowed privately by the receivers without the authority of the court. Certificates amounting to $130,000 were issued in the Day suit, which were claimed to constitute a lien upon certain lines in Ohio, Pennsylvania, and Indiana. The defendant Stokes acquired those certificates and those issued to Mr. Sully and others, to the amount in all of about $600,000. The issue of these certificates had been questioned in many ways, and an appeal was pending from a determination sustaining their validity.

On the 22d of April, 1885, the Farmers' Loan & Trust Company, at the request of many bondholders, including the plaintiffs, who alone deposited $1,500 to secure the trustees' costs and expenses, commenced an action to foreclose the general mortgage; and, in May following, John G. Farnsworth was appointed receiver therein, and directed to carry on the business of the company. This receivership was extended over all previous receiverships, without prejudice to the orders and proceedings in the Day and De Haven suits; and Gen. Farnsworth qualified as receiver in the three actions. In June, 1885, judgment of foreclosure and sale was entered in the action last named. At about this time it was discovered that all of the wires strung on poles of the American Rapid Telegraph Company were claimed by it as its absolute property, and that there were liens on the subsidiary lines in several states, including a judgment in the state of Illinois, for about $85,000. At about this time also a mortgage trustee commenced an action against the American Rapid Telegraph Company to foreclose a mortgage for $3,000,000 on its property, claiming that the title to the strung wires and to certain Western lines was in that company, and not in the Bankers' & Merchants'. In this state of confusion and danger, negotiations were commenced by the holders of the general mortgage bonds to protect their interests, the plaintiffs and their counsel taking the leading part. Mr. Stokes, who held receivers' certificates to a large amount and $500,000 in general mortgage bonds, was frequently interviewed by one of the plaintiffs with reference to such action as might be advisable to protect the interests of all concerned. On the 25th of May, 1885, the negotiations culminated in a contract known as the ‘reorganization agreement,’ which was signed by the plaintiffs and many other bondholders. This agreement, which was drawn at the express request of Mr. Stokes, recognized the receivers' certificates as valid, and provided that the holders thereof should advance the money needed for reorganization, and take in return therefor and for their certificates first mortgage bonds of a new company to be formed, dollar for dollar, and that the general mortgage bondholders should receive second mortgage bonds of said company at the rate of 50 per cent. on the principal of their old bonds. Both these issues of bonds were to be secured by mortgages upon all the property of the old company, including the ‘stocks' held by it in the subsidiary companies. A committee of four was appointed to carry out the agreement, and they were to purchase the property of the company under decree in foreclosure, cause a new company to be incorporated with a capital stock of $3,000,000, and convey all the property to it in consideration of a first mortgage upon the same property, executed by the successor company to secure an issue of not more than $1,200,000 of bonds, and a second mortgage on all the property to secure an issue of not more than $3,600,000 of bonds. The committee was authorized to dispose of the first mortgage bonds, by exchanging them for the purpose of discharging, dollar for dollar, the outstanding receivers' certificates, to raise money to carry out the plan of reorganization, and, if deemed expedient, to discharge the prior divisional mortgage. They were directed to deliver to the general mortgage bondholders, on the surrender of their bonds, one new second of $500 for an old general mortgage bond of $1,000. They were authorized to borrow money to carry out the plan, and to secure the loan by the delivery of first mortgage bonds and such a proportion of the capital stock of the successor company as they should deem meet. The stock of the new company was to be exchanged for the stock of the old company at the rate of one dollar of the new for four dollars of the old. Any of the first and second mortgage bonds, or shares of capital stock not thus used, the committee were authorized to sell or dispose of in such manner as they saw fit, and to turn the proceeds, after deducting expenses, over to the successor company for its use and benefit. The committee were constituted attorneys to execute, on behalf of the bondholders, any agreement to enable them to carry out their said trust, and were clothed with ‘whatever power it may be suitable for them to exercise in order to enable them to legally and efficiently execute their trust,’ and with full discretion as to all matters not specifically covered by the agreement. Mr. Stokes did not sign this instrument, but on the 3d of June, 1885, he promised the plaintiffs and other bondholders, as well as the committee (one of whom was his own nominee, and another the nominee of Mr. Sully), to carry it out, and to furnish and advance all the money necessary therefor, and accept in consideration thereof first mortgage bonds of the successor company for his receivers' certificates, dollar for dollar, and for the cash furnished, and $2,250,000 of the stock of the new company. This promise was made by Stockes on the condition that a majority of the general mortgage bondholders should execute the agreement, recognize the validity and prior lien of the receivers' certificates, and procure the same to be made valid in the decree of foreclosure. The attorneys for the plaintiff in the foreclosure suit refused to amend the decree in that respect until requested to do so on behalf of a majority of the bondholders. Prior to June 9, 1885, a majority of the general mortgage bondholders became parties to the reorganization agreement; and at about that date the committee, then representing a majority of the general mortgage bonds, requested the attorneys for the plaintiff in the foreclosure action to so amend the decree as to validate the receivers' certificates; and on the 12th of June the decree was amended by consent accordingly. Thereupon said attorneys withdrew the appeal taken from the decree in the De Haven suit at the request of the reorganization committee, the plaintiffs, and the general bondholders, and the litigation to test the validity of the receivers' certificates was wholly discontinued and terminated. Pursuant to this arrangement, Stokes agreed to buy the property at the foreclosure sale for the reorganization committee, and in accordance...