In re New York, NH & HR Co.

• Decision Date: 25 February 1938
• Docket Number: No. 16562.,16562.
• Citation: 25 F. Supp. 874
• Court: U.S. District Court — District of Connecticut
• Parties: In re NEW YORK, N. H. & H. R. CO.

25 F. Supp. 874

In re NEW YORK, N. H. & H. R. CO.

No. 16562.

District Court, D. Connecticut.

February 25, 1938.

W. W. Meyer, of New Haven, Conn. (J. H. Gardner, Jr., of New Haven, Conn., of counsel), for trustees of the principal debtor.

Raymond E. Hackett, of Stamford, Conn., and Frederick S. Fisher and Winthrop H. Kellogg, both of New York City, for Reconstruction Finance Corporation.

White & Case, by Fitzhugh McGrew, and Carlos L. Israels, all of New York City, and Wiggin & Dana by John Q. Tilson, Jr., of New Haven, Conn., for Bankers Trust Co.

Davis, Polk, Wardwell, Gardiner & Reed by Malcolm Fooshee, of New York City, for insurance group.

Watrous, Hewitt, Gumbart & Corbin by Morris Tyler, of New Haven, Conn., for City Bank Farmers Trust Co.

HINCKS, District Judge.

Upon the issues as originally framed upon this petition, under date of June 16, 1937, I entered a Memorandum of Decision wherein I indicated my final ruling with respect to several items of the controversy therein involved. But with respect to the so-called "assignment of the Grand Central advances" I held only that this court had jurisdiction in summary proceedings to determine these issues. Feeling that these issues had not been properly raised by the original petition, I instructed the debtor's trustees to file an appropriate amendment to the petition. This was done. All the parties interested have pursuant to order of court filed their answers to the petition thus amended, and The Reconstruction Finance Corporation (hereinafter referred to as "Reconstruction"), reserving its objection and noting its exception to the ruling sustaining summary jurisdiction in the court, has replied to the answers thus filed. Thereafter the parties had opportunity to expand the record of fact and filed a stipulation to which all the parties pleading to the amended petition adhered.

Facts

On October 23, 1935 the New Haven filed its petition for reorganization in these proceedings. Long prior thereto the New Haven and the New York Central, which between them had complete control of much real estate in the Grand Central area in New York City, agreed to embark upon a joint enterprise for the improvement of said real estate for their joint advantage. In pursuance of this enterprise they entered into an agreement with a third party, hereinafter called the obligor, whereby the obligor agreed to develop and manage the property and the two railroads agreed in equal shares to advance certain capital to be used by the obligor either for the development of the property or for the amortization of the obligor's indebtedness incurred in such development; all under an arrangement whereby the obligor agreed to pay interest upon all such advances and to reimburse the railroads therefor, the reimbursement for advances used for development purposes to be made unconditionally according to stated schedules and the reimbursement for advances used for the amortization of the obligor's indebtedness to be made from income from the property in excess of certain stated carrying charges against the property.

Pursuant to these agreements, the New Haven made advances to the obligor both for development and amortization, for which as of September 30, 1934, it had a right to be reimbursed in the aggregate amount of $7,903,047.05, its said right with respect to advances for development being absolute and with respect to advances for amortization being conditioned upon the receipt of income to the obligor from specific property as aforesaid.

On October 1, 1934, the Interstate Commerce Commission, having found that the public interest did not then demand a financial reorganization of the debtor within the meaning of Sec. 15 of the Emergency Railroad Transportation Act of 1933, 49 U.S.C. A. § 265, approved a loan by Reconstruction to the debtor of $6,000,000 to be advanced in installments upon receipt of satisfactory collateral. When the debtor was unable to furnish satisfactory collateral whereby to obtain the final installment of said loan, it thereupon offered to assign as additional security all its right to be reimbursed for the Grand Central advances described above. This offer was accepted by Reconstruction and approved by the Interstate Commerce Commission. Accordingly, under date of December 22, 1934, the debtor executed and delivered to Reconstruction a written instrument under seal whereby it purported to assign to Reconstruction as additional security for the loan aforesaid all its right, title and interest pertaining to its said advances aggregating $7,903,047.05, it being "expressly understood and agreed by the corporation (i.e., Reconstruction) by the acceptance of this assignment, that so long as the New Haven Company shall not be in default in respect of said loans, the New Haven Company may collect, receive and retain all moneys due and to become due to it under said agreements." The New York Central and the obligor assented in writing to the foregoing assignment.

Thereafter the debtor and subsequently the trustees appointed upon its estate collected and received moneys due it from the obligor under the agreements aforesaid, using the same to its and their own purposes with the knowledge of Reconstruction, but without asking or receiving its approval or consent, until March 12, 1936, when Reconstruction notified the obligor and the New York Central of their liability for any further payments made on account of principal or interest on the assigned advances. Since that time all payments due from the obligor have been withheld pending the termination of this controversy.

Discussion

On the foregoing facts several groups of creditors and mortgage trustees who have pleaded to the petition herein contend that the assignment of December, 1934, is wholly void and ineffective under the doctrine of Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991. It is not disputed, however, that under the facts the applicable law is that of the State of New York. Nor is it disputed that the right assigned under the instrument of December 22, 1934 was in part conditional and in part absolute and wholly arose out of valid and enforceable contracts then in existence.

The right involved, i.e., the right to be reimbursed for the advances theretofore made, was conditional in that it depended in part upon the accrual of income to the obligor in excess of certain stated carrying charges. The right was also a future right in the sense that it was expected to mature in the future under a contract already in existence. But the right was not incapable of effective assignment because it was a future right or a conditional right. A.L.I. Restatement of the Law of Contracts, (hereinafter referred to as the "restatement") Secs. 150, 154 and 155; Field v. Mayor of New York, 6 N. Y. 179, 57 Am.Dec. 435; Hinkle Iron Co. v. Kohn, 229 N.Y. 179, 128 N.E. 113. And no one seems to question the validity of the assignment on this ground.

The assignment, as distinguished from the right assigned, was also conditional; indeed, it was subject to two independent conditions. In the first place, it was intended to have effect only as security for the principal indebtedness. But the presence of such a condition does not destroy the effectiveness of the assignment. Restatement, Sec. 150. Indeed, no one contends that the assignment here involved was invalid because designed for security only. See Niles v. Mathusa, 162 N.Y. 546, 57 N.E. 184.

But here the assignment is subject to a second condition, viz., the event of default upon the underlying principal obligation from the New Haven (the assignor) to Reconstruction (the assignee). For by the terms of the assignment, only in the event of such a default is the assignee entitled to collect from the obligor.

However, "an assignment is not ineffective because it is conditional." Restatement, Sec. 150. Indeed, normally in the assignment of an executory or bilateral contract the obligation of the obligor is conditioned upon the performance originally promised by the assignor. Yet the inherent presence of such a condition does not destroy the effectiveness of the assignment (Restatement, Sec. 161) in cases not falling within the exceptions noted in the Restatement, Sec. 160. Nor is the law of New York at variance with these broad principles. Duffield v. Johnson, 96 N.Y. 369; Prindle v. Caruthers, 15 N.Y. 425; Hooker v. Eagle Bank, 30 N.Y. 83, 86 Am. Dec. 351; Everson v. Gere, 122 N.Y. 290, 25 N.E. 492; Devlin v. Mayor, 63 N.Y. 8; Rochester Lantern Co. v. Stiles & Parker Press Co., 135 N.Y. 209, 31 N.E. 1018; Rosenthal P. Co. v. National Folding Box & Paper Co., 226 N.Y. 313, 123 N.E. 766; Grossi v. Rialto Security Corp., 273 N.Y. 403, 7 N.E.2d 836.

To be sure, most of the cases above cited happen not to frame a contest between an assignee and a bankrupt estate. But since, in the absence of actual fraud, an absolute assignment of an unilateral obligation (see Coates v. First National Bank, 91 N.Y. 20) and the assignment of an executory bilateral obligation with its inherent conditions are good as...