Marine Midland Trust Co. v. Alleghany Corporation
| Decision Date | 24 June 1939 |
| Parties | MARINE MIDLAND TRUST CO. OF NEW YORK v. ALLEGHANY CORPORATION. CONTINENTAL BANK & TRUST CO. OF NEW YORK v. SAME. |
| Court | U.S. District Court — Southern District of New York |
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Cook, Nathan, Lehman & Greenman, of New York City (Alfred A. Cook, Harold Nathan, Frederick F. Greenman, Daniel M. Sandomire and Henry Cohen, all of New York City, of counsel), for plaintiff, Marine Midland Trust Co. of New York.
Carl O. Hoffmann, of New York City (A. Zanger and I. Ratner, both of New York City, of counsel), for plaintiff Continental Bank & Trust Co. of New York.
Donovan, Leisure, Newton & Lumbard, of New York City (Carl E. Newton and David F. Rawson, both of New York City, of counsel), for defendant.
In each of these suits by a plaintiff Trust Company, as trustee for bondholders under one of the issues of the defendant, Alleghany Corporation, plaintiff seeks specific performance of defendant's covenant to maintain the collateral security at 150% of the principal amount of the outstanding bonds of such issue. On these two bond issues the collateral is now less than the stipulated 150%.
Upon the present application, plaintiff in each suit seeks a preliminary injunction restraining the defendant from disposing of certain unpledged assets, cash in the sum of $413,325.39, which by arrangement is being held on deposit subject to the determination of these motions. The said assets, it is claimed, are subject to the agreement to deposit collateral with the plaintiff trustees and should be used for that purpose. It is shown, on the part of the plaintiffs, that if these assets are disposed of or used for some other purpose by the defendant, a final decree of specific performance, if rendered after trial of the issues in these actions, will be an empty gesture for the reason that the defendant would then be without the means to comply with said decree.
The defendant resists the application for a temporary injunction upon two main grounds: First, that the defendant never made a binding promise to keep and maintain on deposit with the trustee collateral security in an amount not less than 150% of the principal amount of outstanding bonds; secondly, that the granting of a preliminary injunction would involve such hardship upon the defendant that a court of equity in its discretion should refuse the relief sought by the present applications.
The promise to deposit collateral in the 150% ratio had its origin in a letter signed by the then president of defendant, which formed part of the advertisement in the public press and of the offering circular, wherein the bankers announced in 1929 and 1930 that the bonds were open to public subscription. The letter recites: "The Indenture * * * is to contain provisions for the maintenance by the Corporation at all times on deposit with the Trustee of securities of an aggregate value (determined as provided in the Indenture) of at least 150% of the principal amount of the Bonds at the time outstanding."
Subsequently the respective indentures were prepared and executed by the trustee for bondholders and by the defendant. Not long thereafter, on November 19, 1930, supplemental indentures (so called) were prepared and duly executed by the defendant and the trustee for the bondholders. The bond issues involved on this present application are the 1949 and 1950 issues. The original and supplemental indentures have been filed with the New York Stock Exchange and the Securities and Exchange Commission.
The defendant argues that the proper construction of the original indenture, which unquestionably was intended to carry out the representation expressed in the president's letter, does not place upon the defendant any obligation to maintain the 150% ratio of collateral which can be enforced in this litigation and that for a failure to maintain the collateral, the original indenture provides only for penalties or restrictions. It may be that the defendant does not in the original indenture, in so many words, covenant to maintain the stated ratio of collateral with the trustee, but when the instrument is read as a whole and construed in the light of the president's letter, it is not unreasonable to conclude that the instrument did create an obligation upon defendant to maintain the stipulated ratio of collateral — an obligation which the trustee may properly seek to enforce in equity. In fact any other construction would be unjust both to the bondholders who invested their money relying on the representation and to those who officially executed the indenture in the honest belief that it was "designed to carry out the intent of the corporation" as expressed in the representation. We are not to assume that they intended to do less than they had promised. They evidently intended to meet the terms of the offering circular.
In the supplemental indenture, approved unanimously by defendant's Board of Directors, there is no question but that there was expressed a definite undertaking on the part of the defendant to maintain the stipulated ratio of collateral. It has been followed and never disaffirmed for over eight years. This the defendant does not deny, but seeks to avoid responsibility under the supplemental indenture on the ground of lack of consideration, and upon the further ground that it was entered into without the consent of 60% of the bondholders and without the consent of defendant's stockholders.
In my opinion every bond that was purchased by the public on the original representation in the newspaper advertisement and the offering circular was consideration for this supplemental indenture, which was prepared to eliminate any possibility of a doubt as to the defendant's covenant to maintain the collateral at the 150% ratio and as to the trustees' right to enforce that covenant by seeking a decree in equity. No consent of the bondholders to the execution of the supplemental indenture was necessary, either under the terms of the original indenture or under any rule of law. The supplemental indenture did not affect their rights adversely. Rather it clarified and stated more definitely, in the interest of the bondholders, an obligation which they had the right to assume from the president's letter would be adequately expressed in the original indenture. The representation made "prior to and in connection with the issue and sale of the bonds" is acknowledged and...
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