In re Central Funding Corporation

• Decision Date: 11 February 1935
• Docket Number: No. 257.,257.
• Citation: 75 F.2d 256
• Parties: In re CENTRAL FUNDING CORPORATION. UNION TRUST CO. OF MARYLAND v. WAGNER et al.
• Court: U.S. Court of Appeals — Second Circuit

75 F.2d 256 (1935)

In re CENTRAL FUNDING CORPORATION UNION TRUST CO. OF MARYLAND v. WAGNER et al.

No. 257.

Circuit Court of Appeals, Second Circuit.

February 11, 1935.

Niles, Barton, Morrow & Yost, of Baltimore, Md., and Kaye, Scholer, Fierman & Hays, of New York City (Carlyle Barton and George S. Yost, both of Baltimore, Md., and Jacob Scholer, of New York City, of counsel), for appellant Union Trust Co. of Maryland.

Hays, Wolf, Kaufman & Schwabacher, of New York City, and Emory, Beeuwkes, Skeen & Oppenheimer, of Baltimore, Md. (Ralph Wolf and Edwin D. Hayes, both of New York City, and Reuben Oppenheimer, of Baltimore, Md., of counsel), for appellees reorganization managers, creditors, Abraham P. Wagner, as trustee, and others.

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

AUGUSTUS N. HAND, Circuit Judge.

This is an appeal from an order confirming a plan of reorganization of Central Funding Corporation which was proposed in the above proceeding instituted under section 77B of the Bankruptcy Act (11 US CA § 207). The proceeding was a step in a general plan of reorganization of real estate securities guaranteed by the National Surety Company. The only person appealing from the order of confirmation is Union Trust Company of Maryland, which is not a creditor, but a trustee under a trust indenture that Central Funding Corporation had made in order to facilitate the issue of its bonds and the deposit of the security therefor. The general plan not only dealt with the securities of the Central Funding Corporation but with those of other similar companies, the obligations of which were guaranteed by the National Surety Company. The National Surety Company was, among other things, engaged in the business of guaranteeing mortgage bonds, notes, and other real estate securities, or the underlying collateral, issued by approximately twenty-two mortgage companies. It was finally taken over by the New York superintendent of insurance for rehabilitation at a time when about $45,000,000 face value of such securities were in the hands of the public. The superintendent prepared and promulgated a general plan for its reorganization that provided for the reorganization of all the companies the bonds or collateral of which the surety company had guaranteed. This plan was approved by the New York Supreme Court.

When the various mortgage companies that had issued guaranteed securities became involved in financial difficulties, the Central Funding Corporation was formed by the National Surety Company, in order to extend the maturities of bonds which the latter had guaranteed and in general to facilitate refunding operations. The surety company subscribed for all the capital stock of the funding corporation, paying more than $1,000,000 in cash therefor, and was its sole stockholder. The proceeds of these cash subscriptions to the stock were invested in bonds, mortgages, and real estate. The bonds of the Central Funding Corporation itself were issued under the trust indenture of which the Union Trust Company of Maryland was trustee. They were secured by bonds and mortgages of the other mortgage companies which were assigned to the trust company, as the funding corporation took up guaranteed obligations that the surety company became obliged to meet. The surety company guaranteed both the bonds and the collateral of the Central Funding Corporation. While the face value of its bonds in the hands of the public was upwards of $8,400,000, the collateral held by the trust company at the time the present plan of reorganization was proposed had, owing to shrinkage in real estate values, become worth about $1,400,000 less than this amount. In other words, the Central Funding Corporation had become insolvent.

The present proceeding for a reorganization under section 77B of the Bankruptcy Act was filed by certain creditors of the Central Funding Corporation and by a committee of reorganization managers after that section became a law. The Union Trust Company of Maryland, as trustee under the trust indenture, intervened in order to protest against the proposed plan and filed objections thereto which were overruled. The plan was confirmed in the District Court shortly after the general plan for the reorganization of the surety company had been approved by the New York Supreme Court.

The petition in the present proceeding prayed that the proposed plan of reorganization of the Central Funding Corporation be approved. It set forth that the latter corporation was insolvent and unable to meet its obligations; that chancery receivers had been appointed in the chancery court of the state of Delaware where the debtor was incorporated; that its bonds and certain collateral thereto, which the National Surety Company had guaranteed, were in default; and that the surety company was unable to make good its guaranties.

The order of confirmation decreed that the debtor was insolvent; that the bondholders deliver their bonds to the National Bondholders' Corporation, which had been organized to carry out the general plan for the reorganization of the surety company; that the trustee in this proceeding transfer to the Bondholders' Corporation the assets of the debtor in his hands; and that the Union Trust Company of Maryland, as trustee under the trust indenture, transfer to the Bondholders' Corporation (subject to a lien securing the payment of its expenses) the collateral in its possession.

Under the plan for reorganizing the Central Funding Corporation, the holders of its bonds are to receive in exchange for their securities participation certificates in the National Bondholders' Corporation entitling them to share in the proceeds of the particular assets that are allocable to their respective bonds, with interest at a rate of 1 per cent. less than that reserved in the original bonds. Distributions are to be made by the Bondholders' Corporation to the holders of participation certificates as funds become available; each certificate holder is to receive the net proceeds of the collateral that secured his original bonds, and the liquidation is to be completed within five years, but that time may be extended by the Bondholders' Corporation, in its discretion, to ten years. The plan is a part of the general plan for the reorganization of the surety company, and is calculated to secure unified management of the shrunken assets of the many mortgage companies involved in the situation.

The participation certificates, issued by the Bondholders' Corporation and exchanged for the original bonds, are not fixed obligations, but are securities entitling each holder to share in the particular assets applicable to his claim as and when liquidated. The general plan and the plan for liquidating the assets of the debtor avoid the expense, delay, and hardship of instituting suits to foreclose thousands of small mortgages on real estate in some thirty-five states of the Union held by trustees under trust mortgages as security for bonds in the hands of the public.

The plan under consideration by us was accepted by 94 per cent. of the face amount of issues outstanding and was objected to in the court below by only one creditor, who has, however, taken no appeal from the order of confirmation. The Union Trust Company of Maryland as trustee under the trust indenture has raised two objections to the order, and contends that:

(1) Section 77B does not extend to property conveyed by a debtor to and in the possession of a trustee under a deed of trust in cases where the debtor is insolvent and has no real interest in the property conveyed, but it embraces only reorganizations in aid of embarrassed debtors and not a mere liquidation of assets such as is designed by the plan in question.

(2) The court may not, in derogation of the rights of nonassenting creditors, cause possession and title to be taken from the trustee under the trust mortgage, or order the collateral to be transferred to a new corporation on terms substantially at variance with those under which it was originally deposited.

The appellant, Union Trust Company of Maryland, in no way challenges the fairness or equity of the plan, but takes the position that "no matter how laudable may be the objects sought to be accomplished * * * it is doubtful * * * whether they can be accomplished through the proposed plan of reorganization." It wishes to preserve its own business as trustee under the trust mortgage and also to protect itself from claims that may be asserted by bondholders who have not assented to the plan if it shall surrender to National Bondholders' Corporation the collateral securing their bonds, as directed by the District Court.

The appellant earnestly contends that the plan is not a reorganization within the meaning of section 77B. We cannot, however, doubt that it is within the general meaning of the term "reorganization." In common parlance that term is not limited to cases where the rights of all persons interested in a corporation, whether lienors, general creditors, or stockholders, are made to survive under some new corporate arrangement. Not infrequently the rights of some of these classes have become so worthless that they deserve and receive no recognition in the reorganization. Judge Baker recognized...