Opinion
No. 272.
March 26, 1945.
Appeal from the District Court of the United States for the Eastern District of New York.
Proceeding in the matter of Prudence-Bonds Corporation, debtor. In the matter of the judicial settlement of the account of proceedings of Brooklyn Trust Company, as trustee of Prudence-Bonds, Eighth Series, under trust agreement dated March 1, 1927, with Prudence-Bonds Corporation. From a decree of the District Court, which, on a petition by Clifford S. Kelsey, trustee of debtor, and Prudence Bonds Corporation (new corporation), and others, authorized and approved a compromise and settlement of all objections to the account of the Brooklyn Trust Company as trustee, George E. Eddy appeals.
Affirmed.
This is an appeal from a decree of the district court authorizing and approving a settlement and compromise of all objections to the account of the Brooklyn Trust Company as trustee under an agreement securing the Eighth Series of Prudence Bonds. The objections to the account of the Bank by the trustee in bankruptcy and the new corporation were based on the ground that the Bank had violated the terms of the trust indenture by (1) permitting the withdrawals of mortgage collateral when the fund was in such condition that the withdrawals were not permissible; (2) permitting the withdrawals of cash collateral when the fund was in such condition that cash withdrawals were not permissible; (3) permitting the release of mortgage security in exchange for cancellation of outstanding bonds, thus giving a preference to the Prudence Company, Inc. (the parent of the debtor); (4) accepting improper securities as collateral instead of cash or proper securities; (5) accepting bonds for cancellation in lieu of cash, thus giving a preference to the Prudence Company, Inc.; (6) failing to secure the necessary guarantee from the Prudence Company, Inc.; (7) issuing authenticated bonds despite the fact that it had not secured the guarantee; (8) modifying and extending the time of payment of a mortgage without first obtaining a certificate of appraisal from the debtor. A further objection was filed by the trustee in bankruptcy and the new corporation on the ground that the Bank had made payment, in violation of a court order, to reimburse advances made by an affiliate of the Prudence Company. The appellant joined in several of these objections and another bondholder filed an objection on the theory that the Bank had accepted a mortgage which was not of the category authorized by the trust agreement. Should all of these objections have been sustained on the law and the facts, the Bank would have been surcharged for a sum well in excess of a million dollars, exclusive of the interest thereon.
The agreement was substantially the same as those described in President and Directors of the Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465.
This situation is discussed in Directors of the Manhattan Co. v. Kelby, supra.
Ibid.
At the time of the filing of the objections, the collateral was sufficient to reimburse the bondholders at the rate of 76.3% on the principal of the debt. But there was an additional amount of interest due on the $2,692,340 accruing since June, 1940, at 5½% per annum. Thus, the bondholders were about $1,275,000 short of full recovery.
The Bank offered $250,000 in cash as a full compromise of the objections. This would give the bondholders a total of 85.6% of their principal and about 69% of their claims for principal and interest. The trustee in bankruptcy and the new corporation agreed with the Bank, subject to the court's approval, to accept the compromise offer and petitioned the court for such approval and confirmation. One of the bondholders joined the trustee and new corporation in seeking the district court's confirmation.
The district court had been supervising the reorganization of the debtor for some ten years. Eighteen series of bonds and an accounting of the trustee in each series were involved. Eleven of the accountings had been settled with the approval of the district court. Three had been tried on the merits before a master. The trial judge had passed on the master's reports in two of them — the Fifth and the Ninth series. Appeals on these latter were pending at the time of the compromise with the Brooklyn Trust Company. In these two the district court had laid down a rule which, if the facts here alleged could have been proved, would have meant that the Brooklyn Trust Company was liable under objections one and two of the trustee in bankruptcy, supra. But the court had denied the right to interest on these surcharges.
After notice to all the bondholders, the district court authorized and approved the settlement. The court said, in reply to objections to the compromise by the appellant and one other bondholder: "I have examined the objections and the real reason behind same is the assertion that if the litigation is continued and the trustees of the debtor are hereafter successful in all respects both on the law and on the facts a larger sum might be recovered. * * * Nevertheless, it is plain that the compromise is substantial and that, as in all compromises, it has been occasioned by the desire to adjust differences which may or may not be hereafter upheld by the Court. * * * In my opinion, the settlement is fair and should be and is approved. I see no reason whatever for taking oral testimony or further delaying the matter in this or any other manner."
The decree authorizes and approves a settlement and compromise of all objections to the account and provides that, upon compliance with the conditions of the compromise, all objections to the Bank's account be dismissed, that the account be judicially settled, and that all persons be perpetually restrained from suing it with respect to its acts as trustee.
Samuel Silbiger, of Brooklyn, N.Y., for appellant.
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 Tillie Karasik.
Before SWAN, CHASE, and FRANK, Circuit Judges.
1. Appellant's first contention is that he was deprived of property without due process of law by the failure of the district court to afford him a trial to determine whether his objections were meritorious. We cannot accept this argument. The trial judge was well acquainted with the situation from which this compromise evolved. He carefully considered the objections of the appellant and found that they had no merit. The due process clause does not require a court in connection with a proposed compromise to give a hearing so that evidence may be adduced of which it is already fully cognizant.
2. Appellant also contends that the approval of the settlement was an abuse of discretion. We have already indicated that the judge had full knowledge of the underlying situation. The appellant seems to have desired little if anything less than a complete litigation of the issues of law and fact involved. As the trial judge indicated, the only real contention of the appellant is that the settlement should have been larger.
Our function in determining whether the trial judge abused his discretion in approving the settlement is not to substitute our judgment for his, but rather to determine whether, at the time of the approval, the approval was reasonable. We admit that the compromise price does seem small, especially in light of our decision in President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465. But the trial judge did not have the advantage of our hindsight, and the amount was substantial. He could not be at all sure that his decision in the Manhattan Company case would be affirmed in this court or by the Supreme Court. Litigation is notoriously uncertain; district courts are, at times, reversed, as this appellant knows or he would not have appealed in the instant case. We cannot say that the approval of the settlement was unreasonable.
Affirmed.