President and Directors of Manhattan Co. v. Kelby
| Decision Date | 02 April 1945 |
| Docket Number | No. 91,92.,91 |
| Citation | 147 F.2d 465 |
| Parties | PRESIDENT AND DIRECTORS OF MANHATTAN CO. v. KELBY et al. (three cases). In re PRUDENCE BONDS CORPORATION (two cases). PRUDENCE REALIZATION CORPORATION v. PRESIDENT AND DIRECTORS OF MANHATTAN CO. (two cases). |
| Court | U.S. Court of Appeals — Second Circuit |
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Maclay, Lyeth & Williams, of New York City (J. M. Richardson Lyeth, Mark W. Maclay, and Robert L. Fay, all of New York City, of counsel), for President and Directors of the Manhattan Co.
George C. Wildermuth, of Brooklyn, N. Y., for Clifford S. Kelsey.
Charles M. McCarty, of New York City, for Prudence-Bonds Corporation (New Corporation).
Joseph Nemerov, of New York City, for Leopold Helfant, Sarah Helfant, Samuel Plasser and Hilda S. Reese.
Samuel Silbiger, of Brooklyn, for George B. Eddy.
Irving L. Schanzer, of New York City, for Prudence Realization Corporation.
Before SWAN, CLARK, and FRANK, Circuit Judges.
Writ of Certiorari Denied April 2, 1945. See 65 S.Ct. 916.
1. These appeals constitute another chapter in the prolonged litigation we described in Brooklyn Trust Company v. Kelby, 2 Cir., 134 F.2d 105. Many of the pertinent facts need not here be narrated as they are stated in the reports of the Special Master which, together with the opinion of the District Court approving those reports, will be found in 57 F.Supp. 839.
The decrees below, based on the Master's reports, held that the President and Directors of the Manhattan Company (which we shall call the Bank) must account in a substantial amount for violation of its obligations as trustee under two trust agreements, virtually identical in their provisions, securing respectively the so-called Fifth Series and Ninth Series of bonds issued by Prudence-Bonds Corporation (which we shall call the Corporation). These violations consisted of improperly permitting the Corporation to withdraw cash and securities from the trust funds in violation of the release clauses of the trust agreements. Except as hereafter noted, we agree with the Master and the trial court in their conclusions that such violations occurred and that the Bank must therefore account. Our reasons follow:
2. Article I, § 1 of each trust agreement provides that the Corporation's bonds issued thereunder and outstanding should be secured by a trust fund, held by the Bank, as trustee, consisting of any or all of the following five types of security: (a) Bonds secured by first mortgages on income-producing real estate, (b) bonds and notes forming all or part of a series of similar obligations secured by first mortgages or deeds of trust made to corporate trustees, (c) bonds of the Corporation of other series, (d) securities of a kind legal for investment for New York savings banks under New York statutes, (e) cash, certificates of deposit issued by banks or trust companies, United States bonds or United States Treasury certificates, and bonds of the City or State of New York.
Article I, § 6 () reads as follows:
Reading that clause in the light of the nature and purposes of the entire instrument, we think that it imposed on the bank as trustee the duty not to permit withdrawals of, or substitutions for, any part of the trust fund unless all the following conditions were satisfied:1
(A) There must exist "no event of default under which the trustee may take action" (as such an "event" is defined in Article IV which deals with that subject).
(B) After any withdrawal or substitution, the fund must be left in this state: There must be in the fund an amount of (a), (b) and (c) securities, taken at their principal amount, but not then in default as to principal in whole or part, which, when added to the cash and (d) and (e) securities, taken at their then market value, equals at least the principal of all the Corporation's bonds then outstanding. Among the securities just described, there must be an amount of (a), (b) and (c) securities, taken at their principal amount and similarly not in default, in whole or part, maturing during the six-months' period immediately preceding, or the three-months' period immediately following (and including the maturity date of then outstanding Corporation bonds) which, when added to cash and (d) and (e) securities, taken at their then market value, at least equals the principal of then outstanding Corporation bonds maturing within such period.
(C) If, after deducting the amounts of all securities which could properly be withdrawn under condition (B), there is no excess in the fund, and if the securities in the fund remaining after such deduction include any (a), (b) or (c) securities in default, then no securities which are not withdrawable under (B) can be withdrawn except only that (a), (b) or (c) securities in default may be withdrawn (but only on substitution of an equal amount of undefaulted securities of appropriate maturities or to permit collection of the securities so withdrawn, through foreclosure, etc., for the fund) and that (a), (b) or (c) securities not in default may be withdrawn only to permit the collection for the fund of such undefaulted (a), or (b) or (c) securities "in connection with their redemption or final payment at maturity." In this context, the word "excess" means the amount by which (a), (b) and (c) securities not in default, taken at their face value, plus cash and (d) and (e) securities, taken at their then market value, exceeds the principal amount of all then outstanding Corporation bonds. The Corporation can withdraw cash or (d) or (e) securities equal in value, or (a), (b) or (c) securities equal in principal amount, to the principal amount of its bonds presented to the trustee for cancellation, but only if the three foregoing conditions are satisfied; thus, inter alia, unless an excess exists, a withdrawal cannot be made, against the delivery of cancelled bonds, of securities (or their proceeds) withdrawn or withdrawable only for collection.2
Our reasons for this interpretation are as follows: Article I, § 2, provides that each bond and mortgage of type (a) delivered to the trustee as part of the trust fund must be accompanied by an affidavit of a corporation officer that it is not in default as to payment of principal or interest. Article II, § 2, relating to the authentication and issuance of corporation bonds, provides: ...
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