Guaranty Trust Co. of New York v. International Steam Pump Co.

• Decision Date: 16 February 1916
• Docket Number: 218.
• Citation: 231 F. 594
• Parties: GUARANTY TRUST CO. OF NEW YORK v. INTERNATIONAL STEAM PUMP CO.
• Court: U.S. Court of Appeals — Second Circuit

231 F. 594

GUARANTY TRUST CO. OF NEW YORK v. INTERNATIONAL STEAM PUMP CO.

No. 218.

United States Court of Appeals, Second Circuit.

February 16, 1916

The following is the opinion of Mayer, District Judge confirming the report of the master It is unnecessary to add much to the literature of this proceeding, for the report of the special master, in whose conclusions I concur, is at once concise and comprehensive and the hearing before him was conducted along the lines of thorough inquiry which I had hoped for, when brushing aside for that purpose, all questions of laches and mere technique, I desired that the fullest opportunity should be opened to the objectors to prove the serious allegations of collusion and fraud, as well as the charge that the company was solvent on September 1, 1914, and thereafter, and able to pay the interest on the mortgage and the sinking fund installment which came due on that day.

While Receiver Collins is technically the party to this controversy who interposes an amended answer, the real attacking parties are certain stockholders and a committee of preferred stockholders who, among other things, insist that because of the unfairness of a proposed plan of reorganization the court should not make and enter a decree of foreclosure herein.

An earnest address is made by these stockholders, in effect, to the discretion of the court to prevent what they assert will be an unjust and unfair rearrangement of bond and stock holding interests under the new plan which is intended to be effective in due course if a sale under the decree of foreclosure takes place. I have said 'in effect to the discretion of the court' advisedly, because courts are not empowered to make contracts for parties in interest, nor can courts adjudge or decree the terms upon which a mortgagee may allow to junior lienors, or others, participation in his mortgaged property when failure to pay the debt due him brings that property under the hammer.

It is rare that any reorganization is satisfactory to all concerned; for, in the nature of things, when there is not on hand enough to satisfy every obligation in full, some, and perhaps all, must suffer more or less; but, in the absence of fraud in the inception or a fraudulent scheme to which court proceedings are necessary incidents, the field in which the battle for respective adjustments must be fought out is beyond the court room, for the court can only ask whether, without the aid of fraud or unlawful means, the debt is really and justly due.

It is clear, therefore, that the court cannot directly or indirectly rewrite this reorganization agreement and I should not state something so obvious, were it not for the fact that the argument, so urgently pressed, comes down to that. The charges of fraud and collusion are not only not sustained, but are affirmatively disproved, as the record abundantly shows.

To have a real understanding of a situation, we must put ourselves back to the time when the event occurred. I well remember when the application for the appointment of receivers was made. The European War had gravely disturbed financial conditions, and as a consequence credit was tightened to the straining point. There was a large measure of forbearance and calm good sense, but financial institutions, of necessity, were reluctant to lend money in those earlier days of that trying period, for no man was wise enough to see far ahead; and, on August 26, 1914, and September 1, 1914, that any banking institution would lend money to the overcapitalized and overloaded International Steam Pump Company, doing a hesitant business, was s proposition so unlikely as not to suggest serious discussion. General business conditions, perhaps, were slightly better on December 2, 1914, the date when the trustee declared the principal due, but the condition of the company was no better for the practical purpose of relieving the default.

I have no doubt that had the receivers applied to me for instructions, I would not have seen the way clear for the default to be relieved in view of the situation of the company and the then conditions of its business and of business at large. I regret that the receivers did not ask the court for instructions. Such a course might have averted the present controversy, and receivers are herewith informed that in all future cases they must apply for instructions; but there is no reason to believe that this omission was purposeful, for, in view of the petition for leave to issue receivers' certificates (Exhibit R) on or about September 18, 1914, they might naturally conclude that it would be an act of supererogation to ask what they should do in respect of the interest and the sinking fund installments in default when they had been authorized to raise a large fund because 'without adequate capital with which to carry on the business of defendant company so as to preserve and protect its property and assets.'

In pointing out the course to be pursued by receivers hereafter, I am not to be understood as criticizing counsel for the receivers (upon whose advice, in such a matter, receivers are entitled to rely); for his labors have been marked by unceasing effort and a high sense and practice of devotion. The suggestion now made that the default may be cured at this time is highly impracticable, even if it were possible as a matter of law. The corporation has been declared dissolved and its charter forfeited by a decree of a court of competent jurisdiction. I know of no means to bring it to life. It cannot be that the Court of Chancery of New Jersey would vacate its own decree on a state of facts which cannot be changed, and in any event I cannot speculate on the ultimate result of further litigation along that line.

Other suggestions as to the sale of the plant and the borrowing by the receivers of money with which to pay the interest and sinking fund installments, are likewise impracticable. This court must keep faith with its own certificate holders and has always done so, and, after all, business is not an abstraction, but a real thing, and even if only $1,300,000, and not $10,200,000, were required, there is only one way, in justice to this property, to produce it and that is to produce it. To theorize about it may be interesting but is not convincing.

To conclude: The trustee was fully within its rights, there is no suggestion that its conduct was in any way open to question, and there was no fraud or fraudulent collusion to which the bondholders were parties. There are several reasons, as the master has pointed out, why the plaintiff must prevail; but, in confirming his conclusions, I think it desirable to add that the record satisfies me that the directors acted in good faith when they concluded that a receivership was inevitable and that this course was determined upon, not to injure the company, nor to gain advantage for any particular class of security holders, but to save the business and plant as a going proposition.

I think I understand the point of view of the complaining preferred stockholders and their criticisms of the reorganization agreement, and it is but natural that they should endeavor to obtain what they may consider would be a just participation in the proposed reorganization; but, on examination of this extensive record, there is no escape from the conclusion that both the receivership and the foreclosure were justified on the facts as they existed on and from August 26th and up to December 2d.

Finally, I am of opinion that the court had jurisdiction in the suit in which the receivers were appointed, and unquestionably had jurisdiction in the foreclosure suit. I have examined the cases cited, and I find no case which authorizes the court to withhold its foreclosure decree where fraud, in some form, is not shown.

The case of Bogert v. Southern Pacific Company (D.C.) 226 F. 500, called to my attention since the argument, deals with a situation which, in my opinion, is entirely different from the case at bar, both on the facts and in respect of the principles involved. For the reasons outlined, the special master's report will be confirmed, and the decree will pass.

As the amended answer was interposed in good faith and the trial before the master will, in my opinion, be a benefit in the long run, because all the facts have thus become of record and the doubt which always exists in the absence of a full inquiry has been removed, costs (by which is meant disbursements) will not be imposed. If, however, an appeal is taken, then the objectors acting through Receiver Collins will be taking their chances as litigants on facts which they now know, and, in the event of an affirmance, costs of this trial will be taxed against them in this court.

Settle decree on two days' notice.

The following is the opinion of Special Master Gilbert in the court below:

This cause was originally referred to me by order of this court dated August 19, 1915, to hear and determine the issues of law and fact arising in said cause and to report: (1) The amount due on the first lien 5 per cent. 20-year sinking fund gold bonds of the International Steam Pump Company for principal and interest; (2) the nature, extent, and character of the property mortgaged and pledged by the first mortgage and deed of trust and the mortgage supplemental thereto of the International Steam Pump Company; and (3) the nature, extent, and character of the property of said International Steam Pump Company not subject to said first mortgage and deed of trust and the mortgage supplemental thereto. Subsequently, and by order dated October 19, 1915, Gilbert Collins, receiver of the International Steam Pump Company appointed by the Chancery Court of New Jersey in an action to dissolve the...