Opinion
No. 448.
September 12, 1932.
Appeal from the District Court of the United States for the Southern District of New York.
In Equity. Suit by the Niagara Share Corporation of Maryland against Albert Fried and others. From a decree adjudging complainant entitled to a stated sum and interest under a contract between defendants and the Niagara Share Corporation of Delaware, with a lien for such amount on 5,000 shares of complainant's stock, sale of such shares in foreclosure, application of proceeds to such indebtedness, and judgment against defendant Fried for any deficiency, the latter appeals.
Affirmed.
On July 24, 1929, the Lincoln Company contracted with Niagara of Delaware to sell to the latter its assets in exchange for 45,000 shares of stock of Niagara. In connection with the contract and on the same date, the defendants Fried, Braelow, and Tepper, who were stockholders in the Lincoln Company, entered into an agreement with Niagara whereby, in consideration of the promise of the latter to purchase the assets of Lincoln, they represented that certain securities to be transferred by Lincoln should realize at least the sum of $1,074,000 and that Niagara purposed to "sell or otherwise dispose of" these assets after acquisition "at such time as Niagara * * * shall deem advisable," and warranted that "if the sums realized" should not equal in the aggregate $1,074,000 they should "forthwith on demand at any time after the sale or other disposition of the last of said guaranteed assets * * * pay to Niagara * * * an amount equal to the difference between * * * $1,074,000 and the aggregate amount so realized." As security for the performance of their covenants, they pledged with Niagara certain collateral which was later exchanged into 5,000 shares of stock of Niagara Share Corporation of Maryland.
The contract of so-called "guaranty" concluded with the following provision: "The promises and agreements of the Guarantors set forth in this instrument of guaranty shall run to and inure to the benefit of Niagara Share Corporation and its successors and the assignee or assignees of all or substantially all its assets."
The stocks and securities (including the guaranteed assets) were delivered by Lincoln to Niagara of Delaware pursuant to the contract, and the stock of the latter was issued to Lincoln in exchange on or about August 16, 1929. From the guaranteed assets, Niagara of Delaware sold and collected in cash $621,881.67 prior to December 31, 1929. There remained undisposed of at that date the remaining guaranteed assets carried by Niagara of Delaware at the following valuations on its books:
Demand note, Goldsmith, Myer Lobdell .......................... $10,000.00 4,401 shares Lawyers' Title Guaranty Company of New Jersey ............ 22,005.00 7,000 shares Commercial Funding Corporation common ............... 700.00 1,387 shares Commercial Funding Corporation preferred ............ 138,700.00 Demand notes Commercial Funding Corporation ...................... 380,000.00 ___________ Total .......................... $551,405.00
After Niagara of Delaware had liquidated the guaranteed assets to the extent of $621,881.67, as above stated, the Niagara Share Corporation of Maryland, which was a large investment company, having substantially the same officers and directors as the Delaware company, took over the assets of Niagara of Delaware, including the remaining guaranteed assets and also its liabilities. This was done pursuant to an agreement between the two companies dated December 20, 1929, and afterwards approved by corporate action on January 10, 1930. In the contract of December 20, 1929, the parties recited that they "agreed upon the Plan of Reorganization" therein set forth, agreed to "adopt" such "Plan of Reorganization," and in furtherance thereof covenanted as follows:
The Maryland company agreed to cause its charter to be amended so as to increase its authorized capital stock from 4,000,000 shares of common stock of the par value of $10 per share, to 7,550,000 shares, consisting of 50,000 shares of preferred stock without par value, and 7,500,000 shares of common stock with a par value of $10 per share.
The Delaware company agreed to "cause all its property and assets to be sold, assigned, transferred, set over and delivered to the Maryland company as of the close of business December 31, 1929, and to dissolve," in consideration of which the Maryland company agreed to assume all the liabilities of the Delaware company "and to issue to the stockholders of, or to, the Delaware company" one share of preferred stock of the Maryland company for each share of the preferred stock of the Delaware company and one and one-half shares of the common stock of the Maryland company for each share of common stock of the Delaware company.
On January 10, 1930, the same day on which the contract providing for the plan of reorganization was authorized, the Delaware company executed an instrument of transfer in which it recited that it "does sell, assign, transfer and set over" to the Maryland company, "in consideration of the sum of one dollar * * * and of other good and valuable consideration paid by" Maryland company "all of the property and assets" of the Delaware company. In accordance with the instrument of transfer, the assets of the Delaware company were turned over to the Maryland company, the stock issued against them was delivered to the stockholders of the Delaware company, who in turn surrendered their stock in it to that company, which was at once dissolved. The Maryland company also paid all the debts of the Delaware company (amounting to $1,228,960.44) as agreed. They were but a very small percentage of Delaware's assets.
After the Maryland company had succeeded to the Delaware company's property, it proceeded to dispose of the guaranteed assets as best it could.
The first item of these assets which had not been disposed of by the Delaware company was the balance of $10,000 due on the Goldsmith, Myer Lobdell note. This was collected by the Maryland company in full.
The next item was the 4,401 shares of stock of Lawyers' Title Guaranty Company of New Jersey which had been carried on Delaware's books at $22,005. This stock was transferred by the Maryland company to the Niagara Share Corporation of New York in exchange for stock of the New York company issued at $3 per share. This was a wholly owned subsidiary of the Delaware company prior to December 31, 1929, and thereafter of the Maryland company. The Lawyers' Title Guaranty stock was, by written consent of the defendants, exchanged for stock of National, Commercial Title Company. The last-named stock was sold at $20,080, which, with dividends amounting to $935 paid on it and on the Lawyers' Title Guaranty stock, equaled $21,015, and was credited to defendants on the indemnity agreement. This aggregate amounted to a value of nearly $5 per share on the original Lawyers' Title Guaranty stock.
The last three items of the guaranteed assets which came into the hands of the Maryland company were the shares and notes of the Commercial Funding Corporation. The principal business of that corporation was buying and selling second mortgages on real estate. It had at first attempted to liquidate its obligations gradually, and the Maryland company had loaned it $60,000 in order that pressing obligations might be met. Further assistance was sought both from the Maryland company and from the defendants without success. The defendants were in close touch with the business of Commercial Funding Corporation at all times. Fried had a personal representative who attended the meetings of its board of directors, and Braelow and Tepper were themselves directors. Whenever the corporation received an offer for any of its properties, the offer was submitted to the defendants or their representatives. At last when it became impossible for the Maryland company to realize anything satisfactory out of the stock and notes of the Commercial Funding Corporation through the operation of its business, the shares and notes were sold at auction in October, 1930, after due notice, and were purchased by the defendant Fried for $99,000.
The credits represented by the total realizations by the Delaware company and the Maryland company upon the various items of the guaranteed assets were less by $321,973.34 than the $1,074,000 which the defendants had warranted that these assets should realize. The complainant brought this suit to foreclose its lien upon the 5,000 shares of stock held to secure the agreement of indemnity and to recover a personal judgment against defendants for any deficiency. The issues were referred to John S. Sheppard, Esq., who found that the transfer of the assets of the Delaware company to the Maryland company did not involve a "realization" on the part of the Delaware company by way of "sale * * * or other disposition" of the guaranteed assets within the meaning of the contract of indemnity of July 24, 1929, but was a reorganization, as it was called in the contract between the two companies of December 20, 1929. He also found that under the assignment clause in the contract of indemnity the defendants had agreed that the Maryland company, as acquirer of all the assets of the Delaware corporation, should stand in the same position in respect to the "so-called contract of `guaranty' that the Delaware corporation occupied." He further found that, after crediting the defendants with the sums realized upon the guaranteed assets, there remained a difference of $321,973.34 between these sums and the guaranteed amount, which was due from the defendants to the complainant and was a lien on the $5,000 shares of stock held by it as security. The District Court entered a decree in accordance with the master's report for the foreclosure of the lien and for a judgment against the defendant Fried as to any deficiency.
Curtin Glynn, of New York City (John J. Curtin and Wesley S. Sawyer, both of New York City, of counsel), for appellant Fried.
Kenefick, Cooke, Mitchell, Bass Letchworth, of Buffalo, N.Y., and Porter R. Chandler, of New York City (Lyman M. Bass and Fritz Fernow, both of Buffalo, N.Y., of counsel), for appellee.
Before MANTON, SWAN, and AUGUSTUS N. HAND, Circuit Judges.
The question raised by this appeal is whether the complainant, Niagara Share Corporation of Maryland, transferee of all the assets of Niagara Share Corporation of Delaware, can enforce a contract made by the defendants with the latter corporation that certain specified securities purchased by it from Lincoln Interstate Holding Company should realize at least the sum of $1,074,000.
The contract of indemnity which the defendants made with the Delaware company warranted that, "if the sums realized" by that company "upon the sale" should not equal $1,074,000, the defendants would on demand, "after the sale or other disposition of the last of said guaranteed assets to be sold or disposed of," pay to the Delaware company the difference.
The appellant argues that the guaranteed assets disposed of after the transfer to the Maryland company had been valued on the books of the Delaware company and afterwards on the books of the Maryland company at a sufficient amount to equal that covered by the contract of indemnity, that they were transferred to the Maryland company for shares of its stock issued against corresponding values, and that there was accordingly a sale of the assets for corporate stock, and there could therefore be nothing to which the contract of indemnity would apply.
The difficulty with this argument is that the contract of indemnity contemplated more than a mere issue of stock against the guaranteed assets and related to sales for cash, or on credit, or by way of exchange. It speaks of "sums realized" (fol. 69), of "a sale or other disposition" (fol. 70), and concludes with an unusual clause which provides that the "promises" of the "guarantors * * * shall run to and inure to the benefit of" the Delaware company "and its successors and the assignee or assignees of all or substantially all its assets." Such a clause would be unnecessary in order to transfer amounts owing to the Delaware company under the agreement of indemnity. If "inure to the benefit of * * * its successors and the assignee * * * of all or substantially all its assets" meant no more than that the Delaware company might transfer any claim which it had under the agreement, the words were superfluous and useless. Defendants' counsel evidently realize this, and accordingly seek to give them some effect, but still to limit them to cases where the Delaware company should incorporate a new company to take over its assets, as was done in Halsted v. Globe Indemnity Co., 258 N.Y. 176, 179 N.E. 376, or where there should be a readjustment of stock interests that did not involve a transfer of assets by the Delaware company to an existing corporation, in exchange for an issue of the latter's stock.
It seems unlikely that the clause should on its face provide that the promises of the indemnitors should "inure to the benefit of" an assignee of substantially all the assets, if such limitations were intended. It is much easier to suppose that an assignee was to succeed to the rights of the Delaware company, except in cases where a sale for cash or on credit, or other like disposition of the guaranteed assets had been made, than it is to suppose that the assignment clause was to have no practical effect. If the obligations of the indemnitors were to "inure to the benefit of" an assignee, the latter must have had the right to perform the conditions which might result in liability. Such an interpretation harmonizes with the words "sums realized" in the contract of indemnity, already referred to. The transaction here closely resembled a consolidation or merger where rights and obligations otherwise unassignable pass under the statute to a successor corporation. New York Stock Corporation Law (Consol. Laws, c. 59), §§ 85 and 89; Matter of Bergdorf, 206 N.Y. 309, 99 N.E. 714.
The presence of Seely as Fried's representative at meetings of the board of directors of the Commercial Funding Corporation, as well as the practice of submitting to the defendants all offers to purchase its assets, indicated that the defendants regarded themselves as personally interested in the liquidation of its assets. Such conduct is hard to explain except upon the theory that all parties were treating the contract of indemnity as still effective after the transfer by the Delaware to the Maryland company.
Some difficulty exists as to the status of the 4,401 shares of stock of Lawyers' Title Guaranty Company transferred by the Delaware company to the Niagara Share Corporation of New York in exchange for its stock issued at $3 per share. But this again was nothing but a stock transaction and not a cash realization. The defendants consented to a substitution of stock of the National Commercial Title Company for the Lawyers' Title Guaranty shares without a murmur, and evidently upon the theory that their agreement of indemnity was not then extinguished. It is true that the New York company was not a transferee of substantially all of the assets of the Delaware or the Maryland company. Yet, as a wholly owned subsidiary, it came within the term "successor" in the clause quoted and within the spirit of the provision which was intended to keep alive the contract of indemnity until there was a realization of the guaranteed assets. A mere exchange of this guaranteed asset for stock of the subsidiary was neither a "sale" nor "other disposition" within the meaning of the contract of indemnity.
The contention of defendants' counsel that the transfers of the guaranteed assets to the Maryland company and to the New York subsidiary were in effect realizations for cash or exchanges of property, and not steps in what amounted to a reorganization, is based largely on the fact that the stock issued in exchange was issued upon a valuation of the assets. In the case of the transfer of the assets to the Maryland company, they had to be valued in order to close the books of the Delaware company (fols. 755, 756). They also had to be valued in order to adjust the rights of the other stockholders of the Maryland company. So far as the Delaware company was concerned, it received nothing, for the stock of the Maryland company issued for the assets transferred, passed directly to the Delaware's stockholders and not to it, and that company was dissolved and passed out of the picture. In the case of the assets transferred to the New York subsidiary company, some valuation was necessary as a basis for the stock issued against them. In each transaction, the transfer, whether technically a sale or not, was not the kind of disposition which the indemnity agreement contemplated for determining the balance due.
It is argued that the contract of indemnity lodged a discretion in the Delaware company which could not be delegated and that a liquidation of the guaranteed assets by it rather than by a successor was a condition of indemnity. But this argument gives no sufficient weight to the assignment clause already discussed, the terms of which seem to control the case. Assets Realization Co. v. Roth, 226 N.Y. 370, 123 N.E. 743. In Arkansas Smelting Co. v. Belden Co., 127 U.S. 379, 8 S. Ct. 1308, 32 L. Ed. 246, and New York Bank Note Co. v. Hamilton Bank Note Co., 180 N.Y. 280, 73 N.E. 48, the consideration of no such provisions as the contract of indemnity here contains was involved. The contention that the sale at auction was not proper or properly conducted is unfounded. The evidence established that the Commercial Funding Corporation was hard pressed, and no other method of realizing upon the precarious assets made up of its stock and notes seems to have been available. The defendants were given notice of the date of the auction long before it was held, and all the proceedings were those customary in such cases.
We have examined the other points raised by the appellant as to alleged errors in the admission and exclusion of evidence and the alleged failure of the complainant to account for the conduct of the business of the Commercial Funding Corporation, and can discover nothing prejudicial to the defendants' rights.
The decree is affirmed, with costs.
MANTON, Circuit Judge, dissents, without opinion.