In re Mechanics Trust Co.

• Citation: 181 A. 423
• Parties: In re MECHANICS TRUST CO.
• Decision Date: 04 November 1935
• Court: New Jersey Court of Chancery

181 A. 423

In re MECHANICS TRUST CO.

Court of Chancery of New Jersey.

Nov. 4, 1935.

Syllabus by the Court.

1. Petitioner presented a plan of reorganization which 75% of its depositors, creditors, and mortgage participation certificate holders consented to in writing. Two-thirds of its stockholders of capital stock likewise consented to the plan. Dissenting depositors, creditors, and mortgage participation certificate holders objected in writing to the plan and questioned the constitutionality of the legislative acts (chapter 110, Laws 1933, and the acts amendatory thereto, viz., chapters 195, 287, Laws 1933 [N. J. St. Annual 1933, § 17—74 et seq.] chapter 407, Laws 1033 [N. J. St. Annual 1034, § 17—76], and chapter 221, Laws 1935 IN. J. St. Annual 1935, § 17—74 et seq.]) under which it was presented, claiming that such acts are in violation of paragraph 3, section 7. article 4, of the State Constitution, and article 1, section 10, of the Federal Constitution. Held, that such acts are not in conflict with either the State or Federal Constitutions.

2. While the United States Constitution prohibits a state from passing a law which will impair the obligation of contracts, the prohibition does not remove from state control the rights and properties which depend for their existence upon the enforcement of contracts as to relieve them from the operation of such general regulations for the good government of the state and the protection of the rights of individuals as may be deemed important.

3. Powers, the exercise of which can only be justified on the specific ground that they are police regulations, and which would otherwise be clearly prohibited by the Constitution, can be such only as are necessary to the safety, comfort, or well-being of society, or so imperatively required by the public necessity as to lead to the conclusion that the framers of the Constitution could not as men of ordinary prudence and foresight have intended to prohibit their exercise in the particular case, notwithstanding the language of the prohibition would otherwise include it.

4. The banking business is charged with the public interest, and it is subject to regulation under the police power of the state; consequently, the rights of all persons having a direct contact with that business may be altered and changed in a reasonable manner.

5. The police power is a permanent right of sovereignty, and its exercise is not dependent upon an emergency.

6. An emergency does not create or bestow legislative power not otherwise constitutionally existing, but it may furnish the occasion and necessity for the exercise of such power.

7. The exercise of the so-called reserve power must be reasonable under the conditions, and the legislation must have a substantial relation to its object and must not be arbitrary or discriminatory.

8. The plan of reorganization presented by the petitioner approved as fair and equitable.

Proceedings in the matter of plan of reorganization of the Mechanics Trust Company.

Plan approved.

John Milton, of Jersey City, and John H. Sheridan, of Union City, for petitioner.

Maurice C. Brigadier and Isadore Glauberman, both of Jersey City, John Joseph Foerst, of Bayonne, Edward A. Kaplan %%%of Jersey City, Samuel Kobren, of Bayonne, Nicholas J. Cafarelli, of Union City, Horace Roberson, of Bayonne, and Aaron A. Melniker, of Jersey City, for various certificate holders, creditors, and stockholders.

EGAN, Vice Chancellor.

A plan of reorganization has been submitted by the Mechanics Trust Company, which 75 per cent. of its depositors, creditors, and mortgage participation certificate holders have consented to in writing. Two-thirds of its stockholders of outstanding capital stock have likewise consented to the plan. The court's approval is sought.

This court issued an order directing the company's depositors, creditors, and certificate holders to show cause why the plan should not be approved as fair and equitable. The order also provided that those who did not consent in writing to the plan should file their dissent, and failing to do so, they would be deemed to have consented to it, and would be bound thereby.

The proceedings are based upon chapter 116, Laws 1933, and the acts amendatory thereto, viz., chapters 195, 287, Laws 1933 (N. J. St. Annual 1933, § 17—74 et seq.), chapter 407, Laws 1933 (N. J. St. Annual 1934, § 17—76), and chapter 221, Laws 1935 (N. J. St. Annual 1935, § 17—74 et seq.). The statute provides that any bank, trust company, etc., which is insolvent, or the possession of its property or business has been taken by the Commissioner of Banking and Insurance, may be reorganized and permitted to resume its normal and usual business upon such terms and conditions as may be approved by the Commissioner of Banking and Insurance, and the Court of Chancery, after notice of the terms and provisions of the proposed reorganization plan and after a hearing by the court shall have been given to the depositors, creditors, and stockholders; and that upon such approval of the plan, it shall become effective and binding upon all the depositors, creditors, and stockholders if the court shall find, inter alia, that the plan is fair and equitable to the depositors, creditors, and stockholders.

The plan, briefly, provides that the depositors shall receive 40 per cent. of the deposits in cash and the balance of 60 per cent. in preferred B stock of the reorganized bank. The bank certificate of in corporation has been amended to permit the issuance of two classes of preferred stock, class A and class B. The first-named class, A, goes to the Reconstruction Finance Corporation in exchange for a loan of $100,000 made, or to be made, by it to the bank. The other class, B, is to be issued to the depositors and creditors who are not certificate holders. The certificate holders are required to surrender their certificates for which they receive new certificates evidencing their interest in the particular mortgages under which. the certificates were issued in connection with each series; the trust company having observed the plan of issuing mortgage certificates in series. In addition to the exchange of certificates, the trust company sets up a special fund of approximately $86,000 for the benefit of such certificate holders to secure them against loss. Some of the mortgage participation certificates are held by the trust company in its trust department; these, in effect, amount to a preference because the institution would be liable as a trustee and obliged to pay.

There is a reserve of $75,000 set up to secure the beneficiaries of the trusts against loss. It is estimated that the whole of this reserve fund will be available for the mortgage participation certificate holders generally, in addition to the reserve of $86,000.

The $86,000 trust fund is to consist of bonds secured by mortgages or other obligations secured by mortgages, which will include a note mortgage or a note and mortgage. Such bonds and obligations and mortgages must be held until all losses are determined, in order to insure fair distribution among those entitled. The amount of the second mortgages and obligations to be taken by the trust company are indicated on the mortgages and the properties underlying each series. As to what bonds and obligations and mortgages are to be set up in the trust fund, the selection is to be made by representatives of the certificate holders and of the reorganized trust company. The approval of the federal agencies is only to be had if they require it.

At the hearing, proof was submitted to sustain the plan as fair and equitable to all of the interests concerned. The depositors, creditors, and stockholders who have assented to the plan are far in excess of the percentage required by the statute; while the dissensions constitute but a very small minority of the aggregate depositors and mortgage participation certificate holders.

The objections urged by the dissenters may generally be classed as follows: (a) Denial of knowledge or information to form a belief as to whether or not the plan is fair and equitable; (b) that it is misleading, or inconsistent; (c) that the legislative acts under which the plan is presented are unconstitutional; (d) that they (the objectors) were depositors prior to the adoption of the 1935 act, in consequence of which that act or "prior statutes to which it is an amendment" are unconstitutional as violating paragraph 3, section 7, article 4, of the State Constitution, and article 1, section 10, of the Federal Constitution, providing against the impairment of contracts; (e) that the plan is indefinite in that it is subject to changes, additions, or amendments, material or otherwise, by government agencies without giving the defendants any voice in the proceedings, or opportunity to be heard with regard to their moneys, thus denying them their constitutional rights, depriving them of their property without due process of law; (f) that the reserve fund set up for the mortgage participation certificate holders is inadequate; (g) that the government agency (Reconstruction Finance Corporation) is given all preferences as against depositors.

Considering the objections to the fairness of the plan, paragraph 1 g thereof provides: "No dividends shall be declared, set aside, or paid to common stockholders until all of the Preferred Stock 'A' and Preferred Stock 'B' shall have been retired, nor until all mortgage participation certificate holders have been paid in full."

The objectors declare that this recited provision is inconsistent with the fourth paragraph of the plan. They do not specifically point out wherein it is; I fail to discover any such condition. The fourth paragraph of the plan provides that mortgage participation certificate holders are required to release the trust company from any and all liability arising out of the certificates held by them. That provision is not inconsistent...