Opinion
10-11-1904
IKELHEIMER et al. v. CONSOLIDATED TOBACCO CO. et al.
Allan L. Strong and Joseph Coult, for complainants. R. V. Lindabury, Charles L. Corbin, and Robert H. McCarter, for defendants.
Suit by Julius B. Ikelheimer and others against the Consolidated Tobacco Company and others. On rule to show cause.
Allan L. Strong and Joseph Coult, for complainants.
R. V. Lindabury, Charles L. Corbin, and Robert H. McCarter, for defendants.
PITNEY, V. C. (orally). I think I will dispose of this part of the case immediately. It has been very ably argued, and presented in the most admirable manner. It is now pretty fresh in my mind, and I think I can state the impression simply that is made on my mind by the argument better than to hold it for further consideration.
The complainants are holders of 119 of the bonds, of $1,000 each, of the Consolidated Tobacco Company. These bonds are secured, not by any mortgage on lands or any real, tangible property, but on certain shares of stock in other companies, by pledge of the certificates, with powers of transfer, I suppose, on the backs of them, pledged with the Morton Trust Company, and the pledge defined by an instrument in writing called a "mortgage." The stocks which are so pledged are stocks of the American and Continental Tobacco Companies, severally. The Consolidated, itself, as I understand the case, has no property, except these stocks of these companies which it bought, and its business is a holding company—for present purposes, at least, it is a holding company; and it held these sets of stocks the same as the Northern Securities Company was supposed to hold the stocks of the railroads it managed, and, I suppose, to prevent disastrous competition. Those stocks were issued by those companies under the provisions of our act of the Legislature which provided for merger of the stocks of two or more companies, and it is now proposed to consolidate those two companies. It is said to be a consolidation of the two—the American and the Continental and the old Consolidated—but I do not know, as I understand the case at present, that the Consolidated owns any property.
Mr. Lindabury: Oh, yes; It has $50,000,000 capital.
The Court: They may be manufacturing tobacco, for what I know.
Now, that merger is proposed of these three companies. A part of the provisions of the merger is the substantial cancellation and destruction of the two sets of stocks of the American and Continental, which are held by the trust company in pledge to secure complainants' bonds. Those stocks are to be wiped out, merged, destroyed. Now, the complainants say: "Here, we are bondholders, who are entitled to have those continued in existence for the security of our bonds, and we complain of that destruction. We want our security just as it is now." Now, in an ordinary case, and under ordinary circumstances, that claim is unanswerable, and the defendants very frankly so stated. A man cannot be deprived of any of his securities, which he has by contract, without his consent, either express or implied; and neither the Constitution of the state of New Jersey nor of the United States will permit anything of that kind. It is the taking of a man's property without his consent. The reorganizers, however, point to two clauses in the mortgage, I shall call it, by which they say they are authorized to do this thing, and they start out by saying, "We do not claim that the language of those clauses, though very strong, will permit us to do anything which is really a fraud or would really injure these complainants," and they proceed, at great length, to show that they will not injure them; that they are not, in substance, to be injured at all, but really improved, in their condition.
Now, let us look at those clauses on which the defendants rely. The first one is that found in article 2—the last part of article 2—which gives certain power to the trustee, the Morton Trust Company. It is this: "Upon request of the consolidated company, and upon further request of the holders of a majority in amount of the bonds outstanding hereunder"— And I must interpolate here that counsel argued from other clauses of this mortgage, with some force, that it was contemplated from the start that the bondholders were to be a sort of unorganized corporation, subject to the will of the majority, and the means were provided for calling them together at meetings, and all that sort of thing, and have a sort of corporate action—town-meeting action, if you so choose to term it. The clause then proceeds: "The trustee is bound to use, transfer, sell or dispose of [that is very strong language, that word "dispose"] all or any of the shares of stock deposited with it hereunder for any purpose or in any manner which in its judgment [appeals to the judgment of the corporation, of the trustee; and I suppose the trustee has already exercised that judgment. I understand it has] will preserve and protect the security of the bonds hereunder, or will substitute therefor new security of equivalent or greater value." Now, that is very strong and broad language. It is (I repeat it), "Will preserve and protect the security of the bonds hereunder, or will substitute therefor new security of equal or greater value." Now, something may depend upon the meaning of the word "security" there. Is it to be taken in its narrow sense? Is it used among mercantile men in its narrow sense of a particular pledge for the payment of those bonds? That is the construction which the complainants put upon it— that it means a pledge to be substituted for the other pledge.
Mr. Lindabury: Paper pledge.
The Court: Paper pledge; something which you can take hold of and handle and see; something which is marketable—can be put in the market and sold; something which is available as a pledge as a collateral. The word, I believe, used altogether now among mercantile people—certainly where this instrument had its origin—is the word "collateral," and I think it is a very goodword. Or does it mean something which will make the bonds better, safer, stronger, and more secure?
Now, that is the question which is presented to me here this afternoon, and it has been argued with a great deal of ability on the part of the complainants. It has not been argued on the part of the defendants. I have not called upon them to argue it, for my impression is, upon the whole, for the present purposes, and on the sudden emergency which now arises, that it means that it is used in its broader sense—something which will not affect the ultimate value, as securities, of those bonds; something which will make them better bonds or as good bonds. I may be wrong in that, and I do not mean to say that it is not a question which is debatable. "In a manner, which, in its judgment, will preserve and protect the bondholder, or will substitute therefor new security of equivalent or greater value."
Now, here comes in the defendants' plan of merger, and they have laid it out very elaborately and with great clearness to the court. Mr. McCarter has a very neat abstract of it, and so has Mr. Corbin. I do not say that Mr. Lindabury did not also make it clear enough, but he evidently relied upon them for that, for they had the figures by which they show that what they propose to substitute, if you will, for these bonds— the present bonds held by the complainants— is something a great deal better. They show that the present bonds are the debt of the company which does not own the property of the American Tobacco and the Consolidated Tobacco; it only owns their capital stock; and the security they have is only the stock in that company, and the personal security of the Consolidated, which has just been stated as forty millions of capital and surplus. But as to this little batch of bonds, amounting to $157,000,000, forty millions of capital do not amount to much. The personal security, in other words, of the Consolidated, is not so very great as to make the bonds to the extent of $157,000,000 very valuable. The bondholders relied on the common stock—not even the preferred stock —the common stock of the two other companies, American and Continental, which itself is subject to a priority of greater or less value in the shape of preferred stock issued, and of which they do not have the security.
Now the defendants show that the new company is to issue bonds which will be the first lien—in the absence of any mortgage, the first lien—on all the property of the three companies consolidated. Those, I believe, are 4 per cent. bonds of the same face value. They are to be the first lien, subject to something which I shall mention in a moment, on all the property of the new company which will combine the joint property of the American Tobacco Company and the Continental Tobacco Company. They are to be the first bonds, subject to the bonds to be issued to the extent of a little matter of fifty-six — something like that — millions to take up the preferred stock, which at present stands ahead of the common stock, which comprises the security of the complainants.
Now, right here, the only difficulty in this argumentation of the defendants is that they go somewhat on the basis that this preferred stock is a sort of preferred lien in advance of the common stock. Counsel for the complainants criticises that, and says that it is only in case of insolvency they come in first; they do not come in first on interest dividends, unless they are earned; they are non-accumulative; and all that But the bonds given for those preferred stocks are 6 per cent. bonds, which are put in such shape, and with an increased number, so as to make them equivalent to what the preferred stock is—8 and 7 per cent. stock. They are really a better security than the preferred stock. I think there is something in the complainants' argument on that point, but it is not enough, I think, to overthrow the substance of the argument made by the defendants on that part of the case. I think that the plan is a fair one, in plain English, and that the bonds to be issued by the new company to be substituted for the bonds held by the complainants are a great deal better than the complainants' present security. It is not necessary for me to go into details. I am convinced of it, and my learned friend, counsel for the complainants, was not able to get that notion out of my head, if I may use that expression—they are a better security; and while the complainants, as is said, cannot have sugar plums thrust down their throats, they are in a court of equity, and the court cannot shut its eyes to the fact that the defendants satisfy the court on this application that they are not about to abuse any of the powers given by that deed of trust to the bondholders and the trustee; that really they are not going to injure these complainants. Now, that is an important matter, because, as I think I said before (I intended to say it, if I did not say it), the court would not permit them to use the authority found in this deed or mortgage in such manner as to do an injury, manifest injury, to the bondholders. The majority cannot overrule the minority in that way. The power of the majority in that respect is always limited.
But here comes the other little point which gives me some trouble, and that is the reason, in connection with the other matter which I mentioned, why I think this case should be put in shape to be reviewed by the Court of Errors and Appeals before anything is done. Counsel for the complainants contends that these new bonds, under the terms of the reorganization, which is set out at considerable length, will not be put in the hands of the trust company as securityat all; they cannot hold them as pledges, but they are only there for the purpose of being exchanged. Well, that may be the literal result of the thing, but they are put there and they are issued for that purpose, and they cannot be used for any other purpose. They stand there as an obligation of the new company, and, in a sense, an assumption by the new company of this part of the debt of the Consolidated. They are given for the same debt. They are placed in the hands of the trust company. There is nothing in the clause that says that the holders of the bonds that do not choose to come in, or that if they do not come in within one week or one month or one year or five years, shall lose all the benefit of those bonds, or that they can ever be withdrawn. They are put there, and put there irrevocably, for the very purpose of being substituted, bearing interest at the same rate, and all that, and being, in substance, the same bonds, so that these gentlemen who hold these complainants' bonds may have them or not, just as they like. Now, it seems to me that I am not straining matters in holding that, in equity, amounts to a substitution therefor of new security of equivalent or greater value. That is the language of the mortgage.
Now, there is another clause in the mortgage upon which the defendants rely, and that is the fifth article; and, while I decide as I do without relying upon that, I shall refer to it, because it is not without merit in this matter. It shows that the whole scheme was to put the control of this thing in the hands of a majority of the bondholders, and these gentlemen took their bonds with presumed notice of the fact. I stop here to say, however, that the complainants explain that these bonds were bought on the strength of a circular put out at the date of their issue in 1901—a circular issued and counted upon by the board of brokers, and upon the strength of which they were placed on the list to be called, and had a standing in the financial world, so to speak—and that this clause was not in that circular, and that the complainants never heard of it until it was found in the answer served on them. I do not understand counsel for complainants to say that he did not know of the other clause which I have been discussing, because the counsel called my attention to it when the bill was filed; and I saw right there something which I thought might make trouble for the counsel, and I think I mentioned it to him. He was very frank to me, as it troubled him. There is not any criticism of counsel in the manner in which he conducted this case or obtained the restraining order from me.
That fifth article is important, and it vests in a majority of the bondholders in amount of the bonds hereby secured, by their vote at a meeting of the bondholders as provided in section 2 of this article—which is a part of the scheme for acting in concert—the power: First. To assent to and authorize the release of any part of the property deposited with or held by the trustee under that indenture. Now, counsel says that does not mean all, does not include all. That is very good reasoning. But suppose they released 99/100. The whole includes every part, but not any one part includes the whole; but you can put several parts together, and it will include the whole. Second. To assent to and authorize any modification or compromise of the rights of the bondholders and trustees against the consolidated company. There the word "modification" is used. A very learned and satisfactory argument was made to me on the use of the word "modification," and counsel says it is all based on the continuance of the mortgage; that there is something to be mortgaged there. There is a great deal in that, too, but let us take a little further view of a point which struck me very soon after my learned friend Mr. Strong took the floor. The mortgage here is a paper shell. A paper pledge of the stocks is a mere shell. The substance is the security which these bondholders get by that mortgage, and that is a mere interest in certificates of stock which in turn show an interest—a joint interest—in an enterprise, subject to the payment of all its debts. That, in substance, is what it is. Now, what do the bondholders get under the new scheme? As very thoroughly argued by Mr. McCarter, they are advanced to the position of creditors who come in ahead of the stockholders—that is where they are—of the very companies in which they own mere stock. Now, in using the word "modification," looking at things in substance, and laying aside a view of the mere shell—as we equity judges always look at the substance, and not the shell—I might consider that as a mere modification which gives them a great deal better security than they had before. In other words, a man has a mortgage on a farm, subject to an equity of redemption; he gets rid of the equity of redemption, and gets possession of the thing itself; and that is less than what these people do here, in a sense.
I will therefore advise an order that the restraint should be discharged, but will continue it in force until the first day of the opening of the next term of the Court of Errors and Appeals. I hope the defendants will not feel that oppressive, because it is a very important matter, and because it is one which may be disposed of this way. The restraint continues until next Wednesday, and then the evidence as to the ownership of a majority of the bonds will be presented, and the order continuing the restraint will be signed then.