Opinion
No. 132.
January 2, 1945.
Appeals from the District Court of the United States for the Northern District of New York.
Proceeding in the matter of the reorganization under chapter 10 of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq., of the Onondaga Hotel Corporation. From orders of the United States District Court approving a plan proposed by T. Frank Dolan, Jr., the Mokava Corporation and another appeal.
Reversed and remanded.
These are appeals by creditors from orders entered in reorganization proceedings under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. relating to the debtor, The Onondaga Hotel Corporation begun on January 16, 1939. Claims against the debtor other than for taxes, consisted of the following: (1) A first mortgage to Onondaga County Savings Bank, on the so-called Main Building of debtor's hotel, in the principal amount of $364,000 with accrued interest in the amount of approximately $150,000. Appellee Dolan had purchased this mortgage, while the Chapter X proceedings were pending, on August 28, 1943, for $291,000. (2) A first mortgage to the First Trust and Deposit Company of Syracuse, on the so-called Annex, in the principal amount of $190,000 with much accrued interest ($78,850). (3) A second mortgage securing bonds on the Main Building in the aggregate principal amount of $233,000. (4) A contingent unsecured claim in the form of notes guaranteed or endorsed by the debtor for $4,603.85 held by the Merchandise Brokerage Corporation, for merchandise sold to the Onondaga Company, debtor's subsidiary.
On April 12, 1943, the court, in an order classifying the claims "for the purpose of the amended plan * * * proposed to be filed herein by" the "Trustee," put in a single class No. 7, the claims on the two first mortgages; in another Class, No. 8, the claims of holders of the second mortgage; and in another Class, No. 9, the Merchandise Brokerage Corporation.
The Court, having found on evidence at a hearing, that the debtor was insolvent, on March 18, 1944, entered an order approving a reorganization plan, presented by appellee Dolan, which provided (1) that the face of the first mortgage on the Annex should be paid cash for the amount of the principal and one-half the accrued interest, receiving preferred stock of the new reorganized company for the other half of such interest; (2) that the first mortgage on the Main Building should remain a first mortgage for the amount of its principal, and for its accrued interest should receive a controlling block of the common stock of the new company; (3) that the second mortgage bonds should receive fifty cents on the dollar in cash and nothing more; and (4) that the unsecured claim of the Merchandise Brokerage Corporation should be paid in full in cash. The order of March 18 also provided that acceptances of the plan should be filed with the trustee in bankruptcy (such filing to be deemed filing with the court), and fixing April 5, 1944 as "the last day" on which acceptances could be filed.
See Meyer v. Dolan, 2 Cir., 145 F.2d 880.
After the order of March 18, 1944, and on April 1, 1944, the debtor served on the First Trust a written demand, purporting to be made pursuant to § 275 of the Real Property Law of New York, Consol.Laws N.Y. c. 50, that it execute and deliver an assignment of the Annex mortgage to Meyer. At the same time the debtor and Meyer tendered the First Trust the sum of $268,850 in cash, that being the amount due on the principal ($190,000) and for interest ($78,750). Meyer, at that time, owned more than half of debtor's stock. The First Trust accepted the tendered cash and, on April 1, 1944, executed an assignment containing the following condition: "That the question of whether or not acceptance of such payment and the giving of this assignment is proper and legal under all the circumstances be presented for determination to the United States District Court for the Northern District of New York in the proceeding entitled `United States District Court, Northern District of New York, In the Matter of The Onondaga Hotel Corporation, Debtor, In Proceedings for the Reorganization of a Corporation, No. 27263,' on or before May 1, 1944, and this assignment shall be void and of no effect if the Court determines the giving thereof improper or unlawful by reason of violating rights of any participation holders or otherwise, in which event said sum of $268,850 shall be repaid without interest, and said Robert R. Meyer, his heirs or assigns, shall thereupon execute and deliver a reassignment of such mortgage to the undersigned or its assigns." On April 1, 1944, Meyer notified the trustee in bankruptcy of his "rejection" of the plan.
Another condition, not relevant here, was also attached.
On April 6, 1944, the First Trust filed a petition in the Chapter X proceedings which, referring to the demand, tender and assignment of the Annex mortgage, asked the court to make "a determination of the matters and questions which such conditions provide shall be presented to and determined by" the court. An affidavit then filed by the First Trust showed that, on April 7, 1944, acceptances of the plan had been filed with the trustee in bankruptcy by holders of $146,547 face amount of certificates in the following form: "The acceptance by the undersigned of the plan of reorganization approved by Hon. Frederick H. Bryant, U.S. District Judge, on March 18, 1944, filed herewith, is filed for reasons and upon conditions as follows: 1. On April 1, 1944, First Trust Deposit Company, as holder individually of said mortgage, executed and delivered an assignment thereof, of which a copy is attached marked Exhibit `A.' Exhibit `B' attached is a copy of the written demand referred to in such assignment. 2. Such acceptance is filed to protect the rights of the undersigned in respect to such plan in case it should be determined that the sum of $268,850 paid for such assignment is not available for distribution to participation holders. But such filing is not to be deemed an indication that the undersigned (1) claims such assignment improper or unlawful, or (2) claims the right to vote for or against said plan if said sum of $268,850 is available for distribution to participation holders, or (3) wishes to take the compensation provided in such plan instead of what would be obtained if such assignment is upheld. The desire of the undersigned is to obtain the amount that would be secured if such assignment is held valid." An unconditional acceptance by appellee Dolan, as holder of approximately $30,000 of certificates, had been filed before April 10, 1944. Dolan's certificates contained the following provisions: "The Company, on the receipt of the interest and principal of said bond and mortgage, shall distribute the same among the persons entitled thereto except that partial payments of principal may be distributed at such times as the Company shall determine. * * * The Company may take up and cancel this certificate at any time on the payment of the amount of the principal and interest due hereon." Certain of the certificates held by the First Trust for divers trust estates did not contain such provisions, but for all the certificates which it thus held the First Trust filed, on April 7, merely the conditional acceptances (above described) of the plan.
So far as appears from the record, Dolan so filed after April 5, 1944.
On April 10, and April 29, 1944, at hearings on the petition of First Trust, the court said it regarded as a nullity the demand under § 275 of the Real Property Law but, addressing counsel for the First Trust, the court said: "Now, your Trust Company is a trustee without any legal right, or any pistol held at its head, saying that it must do this. I rather think I agree with your position. When the trustee was tendered that amount of money with six per cent interest, while it was a voluntary act, it might have been a disastrous act if it had refused to accept it. So I am not quarreling with the First Trust Company on that at all. The only thing I want clear in the order is that I do not recognize that the trustee, as a matter of law, had to sign. I am wholly in accord with the action it took because I believe it was the only thing a trustee could do and protect itself. * * * That is, if it refused to make the assignment under my holding, then, if I am right, the participation holders could not bring action to compel acceptance but, on the other hand, if you had not done it, they might be in a position where they could." Nevertheless, the court said that it would not permit Meyer to vote on the plan as holder of the Annex mortgage. The court did not then enter an order but, several weeks later, on May 10, it made the following order: "That the demand, dated April 1, 1944, signed by Francis E. Landers as Assistant Secretary and Treasurer of The Onondaga Hotel Corporation, Debtor, and served on the First Trust Deposit Company the same date, be and the same hereby is declared a nullity, and that this Court refuse to recognize the same as a basis for any action by said First Trust Deposit Company thereon. Second: That the First Trust Deposit Company was not obligated to comply therewith and that the assignment of the mortgage given by the above-named debtor, The Onondaga Hotel Corporation, dated December 21, 1928, and recorded in the Onondaga County Clerk's Office December 27, 1928, must be considered a voluntary sale and not one in compliance with the aforesaid demand. Third: That this Court, subject to the provisions in Paragraph `Fifth' hereof, makes no disapproval of the assignment of said mortgage as a voluntary act and, subject to the provisions in Paragraph `Fifth' hereof, consents hereto. Fourth: That the acceptance of all participation certificate holders — which have been filed prior to this hearing — be deemed to have been filed as of April 5, 1944. Fifth: That the approval given by this Court to said assignment as hereinbefore set forth does not and shall not deprive owners of participation certificates, who had not on April 10, 1944 been paid nor had payment tendered to them for their certificates with interest, of their right to vote upon or participate in the plan presented by T. Frank Dolan, Jr. under date of February 24, 1944, which plan is now before this Court for confirmation."
On the same day, May 10, 1944, the court entered an order confirming the plan, which order contained the following:
"The aggregate amount of filed and allowed claims in Class 7 is $554,000.00 exclusive of interest, and said Plan has been duly accepted in writing filed in Court on behalf of creditors of said Class with filed and allowed claims in the principal amount of $539,799.47 exclusive of interest, which claims are at least two-thirds in the amount of said filed and allowed claims of Class 7.
"7. It appearing from the evidence introduced in these proceedings for the determination of Debtor's solvency, and from the plans of reorganization filed by Robert R. Meyer and Mokava Corporation, dated Jan. 15, 1944 and prior and subsequent thereto, and Plans filed by the Bondholders' Protective Committee, and it appearing from the arrangement made Feb. 14, 1944, between the Bondholders' Protective Committee and Robert R. Meyer, as appears in Exhibit `C' annexed to the complaint in the action commenced by the Mokava Corporation in this court against the Bondholders' Protective Committee and the depositing bondholders that the First Consolidated Mortgage Bonds have a fair valuation of $50.00 per $100 of principal face value thereof, and counsel for said Bondholders' Protective Committee not objecting thereto, and it further appearing that less than two-thirds of the owners of such bonds, whose claims have been duly filed and allowed, have accepted said Plan, this Court hereby finds that the same is the fair valuation thereof. The New Company be and it hereby is directed to set aside a sum equivalent thereto and deposit the same with The Syracuse Trust Company for the benefit of said bondholders, or with such other depository as the Court may direct. Any bondholder may at any time upon presentation of his bond, or in the event that his bond has been deposited with the Bondholders' Protective Committee, upon presentation of his certificate of deposit thereof, receive said sum for the bonds owned by him. * * *
"18. It appearing that the First Trust Deposit Company has executed and delivered an assignment, subject to certain conditions, of the mortgage executed by Debtor to it, dated December 21, 1928, to Robert R. Meyer, and it appearing that said assignment does not affect the rights of participation certificateholders whose claims have been filed and allowed herein, it is further
"Ordered, Adjudged and Decreed, that the previous orders of this Court vesting in participation certificate holders the right to vote the full extent of participation certificates owned by them in said mortgage, be and the same are in all respects ratified and confirmed and their right to vote and participate in this Plan or this reorganization proceedings, is not abridged or affected in any way by such assignment.
"19. The Plan of Reorganization of Debtor approved by order of this Court dated March 18, 1944, be and the same hereby is confirmed."
Meyer and his wholly-owned corporation, Mokava Corporation, owner of some of the certificates representing an interest in the same mortgage on the Main Building, having objected to the two orders of May 10, 1944, appeal therefrom.
George A. Langan, of Syracuse, N.Y. (Hamilton C. Rickaby, of New York City, of counsel), for Robert R. Meyer.
Allen C. Bragaw, of New York City (Robert H. O'Brien, of New York City, of counsel), for Mokava Corporation.
Willis H. Michell, of Syracuse, N.Y., for T. Frank Dolan, Jr.
Before CHASE, CLARK, and FRANK, Circuit Judges.
1. The lumping together, in one class, No. 7, of the two first mortgages was erroneous. That order was entered when the present plan was not before the court. We need not, therefore, consider whether a failure to appeal from a classification order, entered when a plan is before the court, precludes a later appeal from the order approving a plan, challenging the fairness of that plan, which raises the validity of the classification order. The error here was aggravated when the court approved a plan according very substantially different treatment to the two mortgages.
Group of Institutional Investors v. Chicago, Milwaukee, St. P. P.R. Co., 318 U.S. 523, 562ff, 63 S.Ct. 727, 87 L. Ed. 959, Ecker v. Western Pacific R. Corporation, 318 U.S. 448, 482, 63 S.Ct. 692, 87 L.Ed. 892, Gerdes, Corporate Reorganizations, § 1045.
The total face amount of claims comprising this improper class was $554,000. The face amount of Dolan's first mortgage on the Main Building ($364,000), fell just short of two-thirds of $554,000. If, then, Meyer's purchase of the Annex mortgage enabled him to prevent holders of certificates in that mortgage from voting on the plan, Dolan could not obtain the necessary two-thirds vote of that class.
Meyer effectively acquired that mortgage through his purchase and the assignment thereof on April 1, 1944. We need not consider the validity of the demand under § 275 of the New York Real Property Law. For, as the court below said, the First Trust made a valid voluntary assignment; under the terms of the certificates, such an assignment at once divested most of the certificateholders, including Dolan, of any interest in the mortgage; and the conduct of the First Trust, as trustee under the divers trusts holding differently-worded certificates, operated as such an acquiescence in the assignment as to divest those trusts also of any interest in the mortgage. True, the assignment was conditional; but, since the court below correctly held that the condition was satisfied, it should have held the assignment effective as of April 1, 1944, the day it was executed.
The court below, however, seemed to believe that Meyer acted with grave impropriety in buying the Annex mortgage, because Meyer's purpose in so doing was obviously to frustrate acceptance of the plan. On the facts here we see no such impropriety. In any event, there can be no such impropriety sufficient to amount to lack of good faith under § 203 of the Bankruptcy Act, 11 U.S.C.A. § 603. For there can be no bad faith in buying up claims in order to frustrate the obtaining of acceptances from members of a class invalidly constituted. Moreover, the court could find lack of good faith under § 203 only after a "hearing upon notice," and no such hearing was held.
Here Meyer, in frustrating the acceptances by the certificateholders, other than Dolan, was doing them no harm: Through his purchase of the mortgage they obtained full payment in cash of principal and accrued interest, whereas under the plan they would have received substantially less cash (i.e., for one-half their accrued interest they would have received only preferred stock). As the lower court itself said, the struggle over the plan was merely a contest between Meyer and Dolan for "control of the hotel." The plan's treatment of the first mortgage on the Main Building would have given Dolan that control. There was nothing wrong in the fact that Meyer's purchase of the Annex mortgage (which gave Dolan cash in full for his certificates) prevented Dolan from getting control through an erroneous classification order.
Accordingly, the district court erred in its order allowing the acceptances of the certificateholders to be counted and in refusing to consider Meyer's vote against the plan.
2. The court below approved the plan without acceptances from the holders of second mortgage bonds on the ground that they would be paid fifty cents on the dollar in cash which the court found was all they were worth. In so holding, the court erred. For there was no hearing at which evidence was taken that supported that finding. The evidence taken at the hearing on the debtor's solvency did not serve that purpose, for the issue was not at all the same at the hearings in which that evidence was received.
Nor is it relevant that Meyer paid 50 or less for the second mortgage bonds he held. To reduce a creditor's participation in the plan to the amount he paid for his bonds (except in unusual circumstances not present here) would be harmfully to reduce the value of such bonds to those who previously owned them.
The logic of the lower court's ruling in this respect would compel a ruling that Dolan, as to the first mortgage on the Main Building, could participate only to the extent of $291,000, the amount he paid for that mortgage.
The lower court intimated that Meyer was in some way estopped because he had previously been ready to acquiesce in a plan allotting only 50 in cash to these bonds. Assuming, merely arguendo, that in proper circumstances such an estoppel could appropriately apply, those circumstances do not exist here. For the record indicates that Meyer had proposed a plan which would yield these bonds not only 50 in cash but a portion of that part of the new common stock which the Dolan plan allotted to Dolan as holder of the first mortgage on the Main Building.
3. The lower court erred in approving that part of the plan which provided for full payment in cash of the unsecured Merchandise Brokerage claim; such a provision, in a plan which did not provide full compensation, in some form, for the second mortgage bonds, was clearly wrong.
See, e.g., Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S. Ct. 1, 84 L.Ed. 110; Ecker v. Western Pacific R. Corporation, 318 U.S. 448, 483, 63 S.Ct. 692, 87 L.Ed. 892.
We see no reversible error in the order that the filing of claims with the trustee in bankruptcy should be regarded as a filing with the court.
Reversed and remanded.