In re Prudence-Bonds Corporation, 409.

• Decision Date: 06 May 1935
• Docket Number: No. 409.,409.
• Citation: 77 F.2d 328
• Parties: In re PRUDENCE-BONDS CORPORATION.
• Court: U.S. Court of Appeals — Second Circuit

77 F.2d 328 (1935)

In re PRUDENCE-BONDS CORPORATION.

No. 409.

Circuit Court of Appeals, Second Circuit.

May 6, 1935.

Carter, Ledyard & Milburn, of New York City (J. M. Richardson Lyeth and John P. Allee, both of New York City, of counsel), for president and directors of the Manhattan Co.

Cullen & Dykman, of Brooklyn, N. Y. (Ralph W. Crolly, of Brooklyn, N. Y., of counsel), for Brooklyn Trust Co.

Delafield, Thorne & Marsh, of New York City (George H. Porter, of New York City, of counsel), for City Bank Farmers' Trust Co.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (Tom Garrett and James A. Sweet, both of New York

City, of counsel), for Guaranty Trust Co. of N. Y.

Newman & Bisco, of New York City (Frank J. Gillis, of New York City, of counsel), for Manufacturers' Trust Co.

Milbank, Tweed, Hope & Webb, of New York City (Hugh L. M. Cole, of New York City, of counsel), for Chase National Bank of City of New York.

Sullivan & Cromwell, of New York City (Gordon Tweedy, of New York City, of counsel), for Marine Midland Trust Co. of New York.

Larkin, Rathbone & Perry, of New York City (Henry E. Kelley, of New York City, of counsel), for Central Hanover Bank & Trust Co.

Cotton, Franklin, Wright & Gordon, of New York City (Robert M. Becket and Paul W. Williams, both of New York City, of counsel), for Chemical Bank & Trust Co.

Powell & Ruch, of New York City, for Prudence-Bonds Corporation.

George C. Wildermuth, of Brooklyn, N. Y., for Charles H. Kelby and Clifford S. Kelsey, as trustees of Prudence-Bonds Corporation.

Archibald Palmer, of New York City (Archibald Palmer, Harry D. Glicksman, and Sydney Basil Levy, all of New York City, on the brief), for intervening creditors.

Before MANTON, L. HAND, and CHASE, Circuit Judges.

MANTON, Circuit Judge.

The debtor has outstanding eighteen separate bond issues aggregating in principal amount about $56,000,000, and 54 certificate issues aggregating in principal amount about $53,000,000. The order appealed from affects the appellants, acting as respective trustees, under sixteen of these eighteen bond issues. Each of the bond issues is secured by a separate indenture between the debtor and a trust company or bank, under which the debtor pledged first mortgages upon real estate. The sixteen indentures are substantially the same, and one, dated April 1, 1925, securing the Fifth Series of Prudence Bonds, under which the appellants president and directors of the Manhattan Company are trustees, may be taken as typical of all. Three separate plans of reorganization have been proposed by the debtor in the same proceedings under section 77B of the Bankruptcy Act (11 USCA § 207) and cover the debtor's Fifteenth Series Bond Issue, the Seneca Issue of Mortgage Participation Certificates, and its Westover Issue of Mortgage Participation Certificates.

Referring to the Fifth Series trust indenture, the debtor was given the right to service the collateral, including the right to make collections and to foreclose the pledged mortgages, until an event of default occurred, when, it was provided, the debtor, upon the request of the trustees, would surrender to the trustees the prosecution and maintenance of any foreclosure action which the debtor might have begun, and would deliver all papers in such action to the trustee (section 5, art. 1). Events of default included nonpayment of interest and nonpayment of principal, and are referred to in section 1, art. 4. Out of the moneys, resulting from the sale or foreclosure of the trust fund or any part thereof, or moneys collected or held by the trustee after an event of default, reasonable compensation, costs, and expenses of the trustee and its attorneys and taxes and liens were to be paid. The surplus was to be applied to the payment of the principal indebtedness of all the Prudence Bonds issued thereunder and outstanding, and the interest accrued thereon, prorated without priority of principal over interest or of interest over principal, or of one bond over another bond. Section 6, art. 4.

The order appealed from restrained the appellants from foreclosing, selling or encumbering the pledged mortgages, or from distributing the cash on hand to the bondholders or to the trustees or their agents or attorneys, except in each case upon application to the district court, which could then pass upon the wisdom or propriety of any such foreclosure, distribution, or payment, after the trustees of the debtor had been given opportunity to be heard.

Appellants' contention is that pending the consummation of the plan of reorganization they, as trustees, are permitted to exercise all the rights which they have under their trust indentures, as enforceable prior to the proceedings under section 77B. The appellees' contention is that the court, while entertaining and considering a plan of reorganization, has the power to grant a restraining order, as it did, in the interest of conserving the interest of all for the purpose of rendering effectual a plan of reorganization proposed or to be proposed. Appellees urged that such power is necessary to guard against the appellants exercising an unrestrained power to foreclose mortgages, destroy the res, the property to be reorganized, or to distribute the cash on hand to bondholders or others as they may wish in the absence of the guidance of the court which has taken possession of the property.

The mortgages, in the physical...