Indus. & Gen. Trust, Ltd. v. Tod

• Decision Date: 25 March 1902
• Citation: 63 N.E. 285,170 N.Y. 233
• Court: New York Court of Appeals Court of Appeals
• Parties: INDUSTRIAL & GENERAL TRUST, Limited, v. TOD et al.

170 N.Y. 233

63 N.E. 285

INDUSTRIAL & GENERAL TRUST, Limited,

v.TOD et al.

Court of Appeals of New York.

March 25, 1902.

Appeal from supreme court, appellate division, Second department.

Action by the Industrial & General Trust, Limited, against J. Kennedy Tod and others. From a judgment of the appellate division (64 N. Y. Supp. 1093), overruling defendants' exception, and directing judgment for plaintiff, and affirming an order denying a motion to grant a new trial, defendants appeal. Reversed.

The plaintiff instituted this action to recover damages of the defendants for the alleged conversion by them of 570 bonds of the Birmingham, Sheffield & Tennessee River Railway Company, a corporation of the state of Alabama. The plaintiff, an English corporation, had become the owner of the bonds, and, after that the trustee in the mortgage of the railway company securing the bonds, upon the company's default, in 1893, had commenced an action for its foreclosure, and a reorganization agreement between bondholders had been prepared, in 1895, it bonds were deposited with the Manhattan Trust Company, the depositary provided for in the agreement, by its agent in this country. He received, upon that deposit, a certificate, negotiable in form, which stated that the bonds were held by the trust company according to the terms of the reorganization agreement. This reorganization agreement recited the insolvency of the railway company, the pendency of the foreclosure proceedings, the appointment of a receiver, and the necessity for the bondholders to reorganize for the protection of their mutual interests. It provided, in its first article, that the bonds should be deposited with the Manhattan Trust Company, ‘subject to the order and full control of the committee, to be used for any purposes under this agreement. The deposit of such bonds shall transfer to the committee the full legal and equitable title thereto for all the purposes of this agreement.’ The second article constituted the defendants a reorganization committee, and in succeeding articles were set forth the powers of the committee. The fourth article provided, so far as material, that ‘the committee is hereby expressly authorized and empowered, and it shall be its special duty, to prepare and adopt a plan for the reorganization of the affairs of the railway company, with or without foreclosure. When the committee shall have adopted such plan, a copy thereof shall be lodged with the Manhattan Trust Company. Notice shall thereupon be given to the holders of the trust certificates issued hereunder, and such plan shall become binding upon all of the said holders who do not withdraw herefrom (in the manner hereinafter provided), unless the holders of a majority in interest of the said certificates shall, within twenty days after such notice, file with the Manhattan Trust Company their written dissent from the plan.’ The fifth article provided, so far as material, that ‘any holder of a trust certificate issued hereunder may, at any time within thirty days after the mailing to him of notice of the filing of a plan of reorganization, as hereinbefore provided, withdraw from this agreement, and recover back the bond or bonds deposited by him, upon payment of his pro rata share of the expenses theretofore incurred by the committee,’ etc. The sixth article provided that the committee, for the purpose of effecting a reorganization of the affairs of the railroad company, was authorized to take such steps as it might deem advisable for the formation of a new corporation, and for transferring to the new corporation all the assets of the railway company, and it was authorized to ‘use the deposited bonds for the purpose of paying for any essets or franchises purchased.’ The eleventh article provided, so far as material, that ‘the committee may supply any defects or omissions which it may deem necessary to be supplied to enable it to carry out the general purpose of this agreement. The committee is authorized to construe this agreement, and its construction shall be final.’ The twelfth article provided that no member of the committee shall be liable for ‘anything but his own willful misconduct.’ In July, 1895, following the execution by the bondholders of the reorganization agreement, a decree of sale was entered in the pending foreclosure suit, and on September 16, 1895, a sale of the railroad franchises and properties was had, at which they were bid in by the committee at the price of $500,000, which sum the decree had fixed as the lowest bid to be received. In October, a decree of confirmation of the sale was made. In November, the Northern Alabama Railroad Company was incorporated, to operate upon the same lines as the former company, and a deed was made by the commissioner of sale to the new railway company of all the property and franchises of the former Brimingham, Sheffield & Tennessee River Railway Company. Thereafter the bonds deposited under the reorganization agreement were produced before the commissioner of sale, who stamped upon each bond as follows: ‘New York, 29th November, 1895. $139.76 paid on this bond as part of the proceeds of the sale under foreclosure. J. Fred Johnson, Commissioner.’ The Northern Alabama Railway Company issued certain mortgage bonds, which, with its capital stock, were held by, or for, the reorganization committee. It further appeared in evidence that in July, 1895, before the foreclosure sale, the plaintiff's agent was advisedIn a letter from the chairman of the committee, that the mortgaged property was advertised for sale on September 16th, following; that no plan of reorganization had yet been adopted; and that no date could be given upon which a plan would be issued. Subsequent to the sale, there was some correspondence between the plaintiff's agent and the reorganization committee upon the subject of the formulation of a plan of reorganization. The committee continued to hold, or to control, all of the bonds and stock of the new railway company, until the reorganization was completed, in July, 1898; at which time a plan of reorganization was filed, and notice thereof was given to all the holders of certificates under the reorganization agreement. In October, 1898, as the result of certain negotiations and of an agreement of the Southern Railway Company, that company offered to purchase all the bonds and stock of the new railway company at a price of 80 for the bonds, which represented much more than twice the sum payable upon the bonds at the price paid for the railroad property upon the judicial sale in foreclosure. The plaintiff's bonds remained with the Manhattan Trust Company, and the plaintiff, or its agent, holds the certificates representing them. The defendants hold the new properties subject to the certificates of deposit. The trial judge, in submitting the case to the jury, held in his charge, as matter of law, that the acts of the defendants amounted to a conversion of the plaintiff's bonds; and he charged, at the express request of the plaintiff, to the effect that the failure of the defendants to prepare a plan of reorganization prior to the sale in foreclosure, and their use of the plaintiff's bonds in furtherance of the sale without the plaintiff's consent, were wrongful acts, subjecting them to a liability to the plaintiff for the value of its bonds. At the plaintiff's request he also charged that, if the defendants dealt with the bonds in a manner not authorized by the plaintiff, or by the terms of the reorganization agreement, they were liable as for a conversion, although there was no wrongful intent on their part. To the denial of a motion to dismiss the complaint on the ground that there was no conversion, and to the instructions to the jury, the defendants duly excepted. The jury returned a verdict for the plaintiff in an amount greatly in excess of the amount to which the bonds would be entitled upon the basis of the sum bid for the railroad property at the foreclosure sale, upon evidence showing the present value of the railway properties. The defendants' exceptions were ordered to be heard, in the first instance, at the appellate division, where the exceptions were overruled, the motion for a new trial was denied, and a judgment was directed in favor of the plaintiff upon the verdict. The defendants then appealed to this court.

CONVERSION-BREACH OF CONTRACT-REORGANIZATION OF RAILROAD.

The bondholders of an insolvent railway company, pending foreclosure, conferred on a reorganization committee title to the bonds, for the purpose of reorganizing the affairs of the railroad, and gave them power for that purpose, and required the committed to adopt a plan of reorganization, and give notice thereof, so that any of the bondholders who were not satisfied with the plan might withdraw from the agreement and recover back the bonds which he had deposited thereunder. The committed were authorized to form a new corporation and purchase any of the assets and franchises of the old company for the new corporation. The agreement further provided that the committee might construe its provisions, and that their construction should be final, and the committee should not be liable for anything but willful misconduct. Held, that an action of conversion will not lie against the members of the committee for using the bonds to pay the price of the railway company on a sale on foreclosure, without first making the plan of reorganization, and giving notice thereof, as such failure was a breach of contract, and not a conversion of the bonds.Stephen H. Olin and Austen G. Fox, for appellants.

Louis Marshall and Samuel Untermyer, for respondent.

GRAY, J. (after stating the facts).

The action was brought, and a recovery was had, upon the theory that the defendants, by their acts, were guilty of such unauthorized interference or intermeddling with the plaintiff's property as to constitute a conversion. In the language of ...