New York Trust Co. v. Palmer

• Decision Date: 09 January 1939
• Docket Number: No. 80.,80.
• Citation: 101 F.2d 1
• Parties: NEW YORK TRUST CO. v. PALMER et al.
• Court: U.S. Court of Appeals — Second Circuit

101 F.2d 1 (1939)

NEW YORK TRUST CO. v. PALMER et al.

No. 80.

Circuit Court of Appeals, Second Circuit.

January 9, 1939.

J. H. Gardner, Jr., of New Haven, Conn., for appellees.

Miller, Owen, Otis & Bailly, of New York City (Edward C. Bailly and Howard C. Wood, both of New York City, of counsel), for appellant.

C. M. Clay, Asst. Gen. Counsel, of Washington, D. C. (Claude E. Hamilton, Jr., Gen. Counsel, Reconstruction Finance Corporation, and Daniel Willard, Jr., Gen. Counsel, Railroad Credit Corporation, both of Washington, D. C., and Raymond E. Hackett, of Stamford, Conn., of counsel), for Reconstruction Finance Corporation.

Mudge, Stern, Williams & Tucker, of New York City (A. M. Williams, Paul D. Miller, and George E. Buchanan, all of New York City, of counsel), for Group of Banks Holding Collateral Notes of the New York, New Haven and Hartford Railroad Company.

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

L. HAND, Circuit Judge.

This is an appeal from an order in reörganization, under § 77 of the Bankruptcy Act, 11 U.S.C.A. § 205 of the New York, New Haven & Hartford Railroad, allowing a claim against the debtor of the New York Trust Company, as trustee-mortgagee under a mortgage of the Worcester & Connecticut Eastern Railway Company. The claim is for the principal and interest of certain bonds of that railway, issued under the mortgage, and assumed by the debtor through a merger between it and the mortgagor on May 31, 1907. Subsequently the debtor transferred substantially all the mortgaged assets to one of its subsidiaries — the Connecticut Company — of which it owned all the shares; and this company operated the road until October 29, 1925, when it obtained an order of the Public Utilities Commission of Connecticut authorizing it to stop. Later the debtor and the Connecticut Company dismantled the road and sold or absorbed most of the property, except for a few small parcels of realty. From these sales $95,000 was realized for which the debtor sent its cheque to the mortgagee on October 18, 1935, five days before petition filed in the reörganization proceeding. The Worcester & Connecticut Eastern Railway had issued $1,992,000 of bonds under the mortgage, of which $345,000 were outstanding in the hands of the public; $969,000 had been retired by the debtor, as required by a sinking fund provision, and had been delivered to, and were held by, the mortgagee as further security; $482,000 more had been bought by the debtor on the market and were also held by the mortgagee; and $196,000 had been pledged to the Railroad Credit Corporation and Reconstruction Finance Corporation. These last are not involved in this appeal; but the mortgagee sought to prove for the full amount of all the rest: i. e. those held by the public, and those pledged with it — $1,796,000 in all. The debtor's trustees objected, first, that it should be compelled to set off against the face of its claim the cheque received, $95,000, together with any other property remaining unsold; and second, that the claim should not include any of the bonds once redeemed or bought in, and thereafter pledged with the mortgagee. The judge sustained both these objections, and entered an order disallowing the pledged bonds, and allowing the set-off. (It will be remembered that $196,000 of bonds had been pledged to the Railroad Credit Corporation and Reconstruction Finance Corporation: these, added to those in the hands of the public, make $541,000). With this in mind the order first declared that the mortgagee had an interest in the proceeds from the sale of the mortgaged property in the proportion of 345 to 541, and concluded "that if and when the New York Trust Company shall establish in these proceedings that the 341/541 interest in the mortgaged property described in paragraph 2(a) above has a value less than $345,000, it may prove its claim against the general assets of the principal debtor for such deficiency as it shall establish".

The first question is whether the mortgagee must deduct from the face of its claim — whatever that may be — any amount realized from the mortgaged property originally owned by the Worcester & Connecticut Eastern Railway. Were the reörganization in equity, we shall assume arguendo that it would not need to; but that it might prove for the full face of the claim and reserve the security against any deficiency, after crediting all dividends received. Certainly it could not have done this under the original form of § 77, 11 U.S.C.A. § 205 note: on the contrary it would have been required to deduct from its claim the appraised value of the security; subdivision (g) of § 77, 11 U.S.C.A. § 205 (g) note, expressly so prescribed, the Interstate Commerce Commission being empowered to appraise the securities and to determine the value to be deducted. The amendment of 1935 struck out any mention of § 57h, 11 U.S.C.A. § 93(h), from § 77, and in its place directed that, whenever it became necessary to appraise any "property" in a reörganization, the commission should do it (subd. e, 11 U.S.C.A. § 205(e)). Subdivision (l), 11 U.S.C.A. § 205(l) note was an iteration of subdivision (n) of the Act of 1933, 11 U.S.C.A. § 205(n) note and provided generally that "the rights and liabilities of creditors * * * shall be the same" as though the railway had been adjudicated bankrupt on the day when the petition was filed. The mortgagee argues that the omission of any mention of § 57h, 11 U.S.C.A. § 93(h), in 1935 is evidence of a change of purpose, and a desire to reinstate the "equity" doctrine which had formerly applied to all corporate reörganizations. Verbally subdivision (l) is flatly to the contrary, for there is nothing in § 57h, 11 U.S.C.A. § 93h, inconsistent with any part of § 77, 11 U.S.C.A. § 205, except the method of appraisal, independently provided for in subdivision (e), 11 U.S.C.A. § 205(e). The argument must, therefore, rest upon inferences to be drawn from the changes in former subdivision (g). We do not think that these were enough to justify overriding the language of subdivision (l). The general purpose of the change seems to us plain: § 57h was not adapted to the appraisal of securities under a reörganization plan; it required them to be turned into money, which would usually defeat the plan. Indeed, the concluding language of former subdivision (g) itself contradicted this part of § 57h, for it provided that the commission should appraise the securities; and for this reason the subdivision in any event needed recasting. This was done in subdivision (e), 11 U.S.C.A. § 205(e), by omitting any reference to § 57h and directing the commission to value "property" whenever necessary. It must be owned that it seems a little curious to have left out any substitute for the words in former subdivision (g): "the value of the unpaid balance shall be appraised as an unsecured claim". Nevertheless we cannot believe that this omission was intended as an abandonment of the so-called "bankruptcy" doctrine. Section 77B(k), 11 U.S.C.A. §...