In re Mifflinburg Body Co.
| Decision Date | 03 October 1941 |
| Docket Number | No. 10141.,10141. |
| Citation | 41 F. Supp. 9 |
| Parties | In re MIFFLINBURG BODY CO. |
| Court | U.S. District Court — Western District of Pennsylvania |
Samuel Handler and Gilbert Nurick, both of Harrisburg, Pa., for Mifflinburg Bank & Trust Co.
Harry S. Knight, of Sunbury, Pa., and Walter H. Compton, of Harrisburg, Pa., for trustee.
Miller A. Johnson, of Lewisburg, Pa., for creditors.
On August 31, 1940, the Mifflinburg Bank and Trust Company (hereinafter called the "Bank") filed proof of a secured claim for the sum of $150,000 as trustee under a mortgage given by the debtor as security for an issue of bonds. The proof of claim recites that bonds of the aggregate par value of $150,000 and secured by the mortgage had been issued. On February 1, 1941, the Bank filed a proof of claim as a secured creditor of the debtor in the amount of $93,328.60 with security consisting of bonds of the debtor of the aggregate par value of $113,200. On August 31, 1940, the Bank filed two petitions, one to determine the value of the security which it holds as trustee under the mortgage, and the second to determine the value of the security which it holds as collateral for the debt owed it by the debtor. Thereafter, the petitions were referred to a Special Master for hearing and report. On June 2, 1941, the Special Master filed his report and recommended inter alia that the entire claim of the Bank be classified as unsecured. On June 9, 1941, objections were filed to this report by the Bank. The Special Master's report and the objections thereto are now before the Court for disposition.
From the record of proceedings before the Special Master and from the facts as found by him, I find the facts to be as follows: On April 1, 1938, after proper corporate procedure, a mortgage was given by the debtor to the Bank as trustee to secure a bond issue of the debtor in the sum of $150,000. Of this bond issue, bonds of the par value of $36,800 were sold for cash. On October 20, 1938, the debtor pledged with the Bank as collateral security bonds of the aggregate par value of $95,000. The debt which the bonds were to secure had been incurred several years before the pledging of the bonds, and the debtor did not receive any additional money for these bonds. On April 23, 1940, bonds of the same issue of the aggregate par value of $18,200 were pledged with the Bank as additional security for the same indebtedness. Prior to the pledging of the bonds with the Bank, the Pennsylvania Department of Banking directed the Bank to obtain additional security for the indebtedness of the debtor or to cause the indebtedness to be reduced. The transactions consisting of the pledging of the debtor's bonds with the Bank were not induced or accomplished by reason of any fraud or collusion on the part of the officers or directors of the debtor and the Bank. On June 11, 1940, a creditors' petition under Chapter X of the Bankruptcy Act, 11 U.S. C.A. § 501 et seq., was filed against the debtor, and on June 24, 1940, the debtor filed an answer admitting the allegations of the petition and joining in the prayer for relief; on July 9, 1940, the creditors' petition was approved.
The Bank in its capacity as an indenture trustee under the mortgage has failed to comply with the provisions of Section 211 of Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 611, in that it has failed to file a statement under oath as to any matters required by that section. This failure on the part of the Bank makes it impossible for the Court to safeguard the interests of the bondholders as is contemplated by the provisions of Sections 212 and 213 of Chapter X, 11 U.S.C.A. §§ 612, 613. Furthermore, the proof of claim filed by the Bank as trustee and the petition now before the Court which was filed by the Bank as trustee fail to set forth, or refer to, the provisions of the mortgage which authorize the Bank to appear and represent the bondholders. Under these circumstances, the petition of the Bank as trustee under the mortgage should not have been considered by the Special Master. I am of the opinion that the petition of the Bank as trustee should be dismissed without prejudice to the right of the Bank to file a similar petition after having complied with the provisions of Section 211 if the Bank finds it necessary to do so.
In the petition of the Bank as a secured creditor, the principal question presented to the Court is whether or not bonds which have been pledged as collateral security for a pre-existing debt are invalid in the hands of the pledgee because issued in violation of the provisions of Article 16, Section 7 of the Constitution of Pennsylvania, P.S. which provides that: "No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void."
A careful search of the Pennsylvania authorities reveals that this question has never been ruled upon by the appellate courts of Pennsylvania. This situation complicates the task of this Court inasmuch as the validity of the bonds here under consideration must be determined in accordance with Pennsylvania law.
The Pennsylvania Courts have held that a mortgage given by a corporation to secure a pre-existing debt is valid, but the constitutional provision relative to the issuance of bonds was not involved. Manhattan Hardware Co. v. Phalen, 128 Pa. 110, 18 A. 428; Ahl v. Rhoads, 84 Pa. 319. Hence, the pledging of corporate property as security for a pre-existing indebtedness is not unlawful in Pennsylvania. Also, bonds given as payment for notes of the corporation were held to be valid in Wrightsville Hardware Co. v. McElroy, 254 Pa. 422, 98 A. 1052. And in Rahway National Bank v. Thompson, 3 Cir., 7 F.2d 419, it was decided that where bonds were given as collateral security for a pre-existing debt in accordance with an agreement to so issue them, entered into at the time the debt was incurred, the issuance related back to the agreement and the bonds were valid.
From these authorities it is clear that the bonds here under consideration are valid unless they were issued in violation of the constitutional provision above quoted.
The case of Miller v. Hellam Distilling Company, 57 Pa.Super. 183, 191, has been relied upon by both sides as supporting their respective positions as to the proper construction of the constitutional provision. The Bank has gone so far as to attempt to show that the record before the lower court in that case presented facts identical with those here under...
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