Dabney v. Chase Nat. Bank of City of New York

• Decision Date: 21 March 1951
• Parties: DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.
• Court: U.S. District Court — Southern District of New York

98 F. Supp. 807

DABNEY v. CHASE NAT. BANK OF CITY OF NEW YORK.

United States District Court S. D. New York.

March 21, 1951.

COPYRIGHT MATERIAL OMITTED

Lewis M. Dabney, Jr., New York City, for plaintiff. Lewis M. Dabney, John A. Anderson, New York City, of counsel.

Milbank, Tweed, Hope & Hadley, New York City, for defendant. A. Donald MacKinnon, New York City, of counsel.

CONGER, District Judge.

This suit was tried to the Court without a jury upon two claims for relief.

The second amended complaint originally contained five claims (designated therein as "counts"), all of which were dismissed upon motions before me (first, third and fifth counts) and the late Judge Caffey second and fourth counts). An appeal by the plaintiff to the Court of Appeals for this Circuit resulted in the reinstatement of the second and fourth counts.¹

It appears from the second amended complaint that on January 10, 1940, Associated Gas and Electric Company (hereinafter called "Ageco") filed its petition for reorganization under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., in the United States District Court for the Northern District of New York, which petition was duly approved. On January 30, 1940, the proceeding was transferred to this Court. On October 16, 1940, Stanley Clarke was appointed trustee of the debtor, the order providing, among other things, that Clarke, as such trustee, was vested with title to the property of the debtor, with the usual powers of such trustee. By order of this Court, dated November 15, 1940, it was provided that the trustee have and exercise such additional powers as a receiver in equity would have if appointed for the property of the debtor.

At all times in question Ageco was a public utility holding company with securities outstanding in the hands of the public. Its assets consisted of securities of other holding companies, chiefly Associated Gas and Electric Corporation (hereinafter called "Agecorp") and its predecessor companies, which in turn held securities of other holding companies, and so on down the line to operating companies. All were component parts of a vast network of utility companies, holding companies, sub-holding companies, service companies, generally known as the Associated System and dominated by Howard C. Hopson who, with his associate, John I. Mange, controlled the voting stock of Ageco. Hopson, pursuant to agreement with Mange, had full control of all financial, accounting, corporate and legal business of the System.

On the dates of the two transactions complained of herein, defendant, a national bank, was indenture trustee for two issues of Ageco debentures, the 4½% Convertible Gold Debentures due January 15, 1949 (4½s of '49) and the Gold Debenture Bonds Consolidated Refunding 4½% due 1958 (4½s of '58).

On October 16, 1931 defendant made a $4,000,000 unsecured loan to Ageco due six months from date.

The loan was paid off in four installments, the last being in the sum of $2,950,000 on May 11, 1932. It is the recovery of this sum of $4,000,000 which is sought in the second count of the second amended complaint.

On August 28, 1934, the defendant consummated an agreement for the exchange of securities with four wholly owned subsidiary companies of Ageco² by transferring certain securities held by it in return for securities owned by the subsidiaries. Plaintiff, in the fourth count of the second amended complaint, seeks recovery of the proceeds of this exchange alleging the transfer to be unfair to the subsidiary companies.

Both of these transactions occurred, according to the second amended complaint, while Ageco was insolvent, or in imminent danger of insolvency, to the knowledge of the defendant.

In the course of the trial the plaintiff adduced testimony and offered exhibits relating to certain facts embraced in those counts of the second amended complaint which had been dismissed by the Court of Appeals. I permitted much of this testimony and received many of these exhibits solely to the extent that they bore upon the issues present in the second and fourth counts such as the good faith of the defendant and its knowledge of the financial condition of Ageco and its subsidiaries. I, undoubtedly, was somewhat liberal in my reception of evidence, but I felt that the Court, without a jury, should have the whole picture. Also, the Court of Appeals, Clarke v. Chase National Bank of City of New York, supra, in discussing Chase's position as a general creditor or subrogee in the event of a recovery in the suit, remarked that "* * * perhaps its (Chase's) behavior may be found to preclude either subrogation or participation as a general creditor" in the reorganization. 137 F.2d at page 801. At the date of the trial it appeared to me that some of the evidence might be pertinent in adjudging this "behavior."

At the beginning of 1932, the Associated System was faced with what has been described as a "pressing financial crisis." During the year 1932 the Associated System had maturities to meet of approximately $45,000,000 to $50,000,000 including $10,000,000 of Ageco loans. Revenues were decreasing while expenses were increasing. Credit was scarce. Negative pledge clauses in existing Ageco indentures precluded, or were intended to preclude, the issuance of debentures ranking ahead of those outstanding.

About this time Hopson conceived the idea of selling $40,000,000 of "Guaranteed 8s", which were to be Ageco debentures guaranteed by Associated Gas and Electric Corporation (Agecorp), a company to be formed by merger of Ageco's two direct subsidiaries, Associated Utilities Investing Corporation and Associated Properties, Inc. Agecorp's guaranty was intended to create the desired priority of the debentures, since System earnings had to pass through it before reaching Ageco. It was agreed that the Chase, Harris Forbes Corporation³ should assist in the marketing of these debentures and that defendant should be trustee under the indenture.

It was called to the attention of Love, one of the Vice Presidents of defendant and in charge of its Public Utility Department, that a large amount of debt was then owed to Ageco by its subsidiaries, Associated Utilities Investing Corporation and Associated Properties, Inc. Love's information was that as of December 31, 1932 the amounts were as follows: Notes Payable, about $665,000,000; Open Account Obligations, about $5,880,000.

Love then conveyed this information to Rushmore, Bisbee & Stern, attorneys for the prospective trustee, who were examining the proposed indenture. He expressed the thought of Aldrich, President of the defendant, that the lawyers should determine whether the proposed issue violated the indentures securing the Ageco debentures. The lawyers found that the issue did, in their opinion, violate negative pledge clauses in the existing indentures. Shortly thereafter and on March 11, 1932, the attorneys for Ageco were advised that Chase would not act as trustee of the Guaranteed 8s and would "take steps to obtain a judicial decree covering the question of a conflict between the provisions of the proposed 8% debenture issue and the covenants contained in the issues of which we are already trustee." The preparation of a complaint seeking such relief was commenced by defendant's attorneys.

On March 8, 1932, Ageco made a payment of $300,000 on its note to defendant, and made further payments of $300,000 and $450,000 on March 11th and March 14th respectively.

On March 15, 1932, a conference was held which was attended by Aldrich, Schley of the Bank, Mudge of Rushmore, Bisbee & Stern, Hopson and Proskauer, an attorney representing Associated. The recollection of Aldrich was that the conference was called to advise Ageco's representatives that defendant would take steps to prevent the issuance of the Associated Gas and Electric Company Guaranteed 8s because of the fact that they were guaranteed by the subsidiary company which fact Mudge had advised would be, in his opinion, a violation of the negative pledge clauses of the indenture under which defendant was trustee. This intention on the part of defendant had already been conveyed to Ageco's attorneys on March 11, 1932.

Beyond this recollection of Aldrich, the testimony is extremely vague as to what else took place at this conference. However, it was at least settled that the Guaranteed 8s would not be issued and there was some discussion of another type of indenture which could be legally issued. The evidence does not warrant a finding that at this conference it was decided to issue this new debenture, but shortly thereafter one was issued and sold to the public. This was a direct issue by Agecorp, known as the 8s of '40.

No objection was made to this issue by defendant. Aldrich testified that Mudge (the attorney for defendant) was of the opinion that any subsidiary corporation financing would not be prohibited by the terms of the indenture under which defendant was trustee.

The Chase, Harris Forbes Corporation did not take part in the sale of the 8s of '40 and the President, Addinsell, requested its representatives on the Ageco Board of Directors to resign.

By May 11, 1932, Ageco and Agecorp had received at least $4,000,000 in cash from sale of the 8s of '40. The plaintiff asserts that without the receipt of this cash, Ageco would have been unable to pay the balance due on the note, which it did on May 11, 1932 in the amount of $2,950,000.

It should be noted at this point that while certain exhibits put in evidence by plaintiff would seem to bear this out, yet no evidence before me would indicate that defendant's failure to object to the issuance of the 8s of '40 was in any way predicated on its desire to get its loan paid. It had objected to the issuance of the Guaranteed 8s on the advice of counsel. It consulted its attorneys as to the legality of the 8s of '40 and following their advice did nothing about the issuance of these debentures. It should...