Opinion
No. 289.
July 3, 1929.
Appeal from the District Court of the United States for the Southern District of New York.
Claims in bankruptcy filed by Stone Co. in the sum of $1,880, and Weingarten, Toolan Co. in the sum of $9,600, were disallowed by the referee, but allowed by the District Judge upon petitions to review. From the order of the District Court, allowing the claims, the bankrupts Maxwell Civic and Carolyn Civic, individually and as copartners doing business as Civic Co., appeal. Reversed and remanded, with directions.
The bankrupts and claimants were engaged in business as dealers in unlisted securities. On March 27, 1928, an agreement for the consolidation of the Bank of America National Association, Bowery East River National Bank of New York, and the Commercial Exchange Bank in New York, under the title of the Bank of America National Association, was executed by the officers of the respective banks by order of their directors, to be submitted to the stockholders for approval on April 26, 1928. At that time the par value of the stock of each of the banks was $100. Under the plan of consolidation, shareholders were to exchange their $100 par value stock for $25 par value stock of the consolidated bank in the ratio of four shares of the net stock for one of the old, and, in addition, each shareholder was to receive a right to subscribe to part of the new issue of $25 par value stock at a price of $110 per share, to the extent of six-tenths of a share of such new stock for each share of $25 par stock to be received upon the surrender of the old $100 par stock. It was provided in the consolidation agreement that the plan should be submitted for approval of the shareholders of each of the three banks at a special meeting to be held on April 26, 1928. On March 27, 1928, the New York Times and the New York Tribune carried an announcement of this proposed consolidation and of the rights to be granted stockholders thereunder, setting forth a privilege to subscribe to 60 per cent. of their holdings at $110 per share. Upon the newspaper announcements, trading in rights to purchase the new stock commenced, and, from March 29, to March 31, 1928, the bankrupts sold to Weingarten, Toolan Co. 300 rights at prices ranging from $52 to $63 and to Stone Co. 100 rights at $59. The confirmation slips sent by the bankrupt firm to the claimants in connection with these sales were all marked "W.I.," letters which stood for the words "when issued."
On April 4, 1928, a supplemental plan between the consolidating banks and a committee of stockholders was executed, under which it was proposed to organize a so-called securities corporation, to be known as the Bankameric Corporation, in which shareholders of the consolidated bank should own a beneficial interest, viz. that for each share of stock held by them in the consolidated bank they should own a share of stock in the Bankameric Corporation. Under this last-mentioned plan it was also provided that the shareholders of the consolidating banks should have the right to subscribe to the stock of the Bankameric Corporation at $15 per share, on the basis of one share of Bankameric stock for each share of $25 par value stock of the consolidated bank. The original certificates of the Bankameric Corporation were to be held in a depository and transferred only in accordance with transfers made of the consolidated bank stock. The new plan contained a provision for the issuance of stock subscription warrants, just as in the plan referred to in the New York Times and the New York Tribune on March 27, 1928, except that the warrants called for the payment of $125 per share, instead of $110 per share, for which the subscriber was to receive one new share of the consolidated bank and one share of the Bankameric Corporation. The Bankameric Corporation was proposed, in order to obtain broader rights of investment than were accorded to national banks.
The New York Sun, on March 27, 1928, referred to the proposed consolidation of the banks and among other things said: "If approved by shareholders, the plan will go into effect April 26. A securities corporation is to be formed, with 1,000,000 shares, beneficial ownership in which is to be indorsed on each new share, $25 par, of the Bank of America. Upon completion of the exchange of stock the shareholders of the combined banks will be given the privilege of buying at $110 a share 372,000 shares of $25 par value new stock, in the ratio of six-tenths of a share to each stockholder."
The article in the Sun, therefore, seems to have substantially described the plan finally adopted (which was evidently already under way), except that the price of the new units of stock of the consolidated bank and the Bankameric Corporation as the plan was consummated cost $15 per unit more than in the original plan.
The formal promulgation of the proposal to have the rights include stock in the Bankameric Corporation, which was made by letter from the bank of America to its shareholders, dated April 4, at once resulted in an advance in the market for the rights.
The original agreement of consolidation between the three banks, which was executed by the officers of the various banks, subject to approval of their stockholders, provided only for the issuance of subscription rights for stock of the consolidated bank at $110 per share, and contained no mention of the Bankameric Corporation or, the additional subscription of $15 per share to cover that stock.
When the warrants were finally authorized and issued, Civic Co. never made delivery of them to the claimants. They took the position that the plan upon which the rights had been originally sold had been so far altered that they were relieved from performance, and, on April 20, wrote claimants to this effect.
After the petition in bankruptcy was filed against Civic Co., Weingarten, Toolan Co. and Stone Co. filed their proofs of claim for the difference between the price at which they had contracted for rights and the price ruling at about the time when Civic Co. had written the letter canceling the sales. The claims were rejected, and a hearing as to their validity was had before the referee in bankruptcy.
The referee held that the new plan was such a substantial departure from the terms on which the trading in rights prior to April 5th had been based that it had the effect of making the contract void, and disallowed the claims. The District Court having reached a contrary conclusion, reversed the referee and allowed the claims of Weingarten, Toolan Co. and Stone Co.
Maxwell Civic, one of the bankrupts, testified that the article in the Times and Tribune on March 27, 1928, brought to his attention the plan of an issue of rights by the consolidated bank, and that it was pursuant to the plan as thus published that Civic Co. made the contracts in question. It did not appear how Weingarten, Toolan Co. and Stone Co. obtained information about the rights they were purchasing. To be sure, the article in the Sun was put in evidence on behalf of Stone Co., but no proof was offered to show that it came to the attention of any of the parties prior to the purchases of the rights. The only plan that had been adopted or officially proposed prior to April 5, 1928, was the original plan for subscription to stock in the consolidated bank, and that plan involved no Bankameric Corporation.
The bankrupts contested the claims of Weingarten, Toolan Co. and Stone Co., for the purpose of reducing the amount of cash necessary to carry out a composition in bankruptcy, and from the order of the District Court allowing these claims bankrupts have taken this appeal.
David W. Kahn, of New York City, for appellants.
Francis J. McManamy, Jr., of New York City, for appellee Weingarten, Toolan Co.
Epstein Brothers, of New York City (A.J. Brothers, of New York City, of counsel), for appellee Stone Co.
Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
The question that meets us at the threshold is, What was the contract of the parties? There seems to have been no reason why they could not have made any agreement that they chose. If Civic Co. wished to sell, and the claimants wished to buy, any sort of rights which the consolidated bank might offer to its shareholders, either directly or through a stockholders' committee, irrespective of any modification which might be made in the original plan, there would seem to have been no legal difficulty. But such a contract would be unlikely, and, if the plan finally adopted was far enough from the plan originally proposed, it would be hard to imagine that the contracting parties had agreed to deal in rights which had so utterly changed since the contract was made.
Here was a plan that had been adopted by the bank directors on March 27, and was the only plan agreed upon prior to April 4 by any one in authority. It seems reasonable to believe that this plan was the basis for the sales of rights to the claimants on March 29, 30, and 31. It is not necessary to say that a change in the subscription price which would involve the payment of $125, instead of $110, per share for new stock of the consolidated bank, would be sufficient to avoid an agreement to purchase rights entered into under the broad terms of "if, as, and when issued." But the original plan, which was the only one definitely in existence when the contracts were made, contemplated nothing more than the purchase of additional stock in an established national bank. The new plan required the purchase of units, including not only the additional stock of the consolidated bank, but an equal number of shares of a new and presumably more speculative corporation.
The evidence shows that the seller was contracting with reference to the old plan, for the articles in the Times and Tribune seem to have been his only source of information. The buyers offered no testimony indicating that they had any other plan in mind when they made their purchases. An investigation by any of the parties would apparently have showed that at the time there was no other plan in existence having any authoritative sanction. We think it reasonable to suppose that both sides contracted with reference to the original plan, and that the words "as issued" related to rights to purchase stock of the consolidated bank, and did not include rights or obligations to purchase units which comprised shares of the consolidated bank and the Bankameric Corporation. Any other interpretation of the contract involves too fundamental a change in the subject-matter to have been within the contemplation of the parties. National Contracting Co. v. H.R.W.P. Co., 192 N.Y. 209, 84 N.E. 965. In Lorillard v. Clyde, 142 N.Y. 456, 37 N.E. 489, 491, 24 L.R.A. 113, it was said by Chief Judge Andrews that: "When performance depends on the continued existence of a * * * thing, and such continued existence was assumed as the basis of the agreement, * * * the destruction of the thing puts an end to the obligation." Here the rights purchased never issued, but something entirely different. In such circumstances, and because of the action of third parties in adopting a new and different plan, the contract had nothing upon which to operate and was consequently at an end.
The order is reversed, and the proceeding remanded, with directions to disallow both claims.