HAZEL, District Judge.
On October 21, 1927, a suit was brought in this court by the American Steamship Company, a citizen of this state, against the Wickwire Spencer Steel Company, a citizen of the state of Delaware, engaged in the manufacture of a special form of steel wire and other wire products. The creditors' bill alleged that defendant was indebted to plaintiff in an amount due and owing, exceeding $4,000; that defendant was largely indebted to other parties who were insisting on payment of their claims; that there existed danger that creditors would bring suits resulting in attachments and execution levies which, considering defendant's maturing obligations, threatened the continuance of its business enterprises; also that defendant's indebtedness amounted to $22,000,000, while its assets, according to its books, were more than $29,000,000; that it had no ready money wherewith to meet its current obligations, was unable to pay the rent due on the Goddard plant
On July 8, 1929, the special master was appointed herein to hear, determine, and report the issues raised by the pleadings. The parties have been fully heard. A great amount of testimony has been taken and the special master has filed an exhaustive report wherein he at length stated the facts and law upon which were based his conclusions that the mortgages were valid and that no fraud or unlawful conspiracy existed.
The intervening stockholders' committee and the Guaranty Trust Company of New York have filed exceptions to his report. The exceptions of the stockholders' committee in the main attack the findings relating to defendant's insufficiency of funds to meet maturing obligations; to the findings that the receivership action was not collusively brought; that it was necessary for defendant's officers and directors to rearrange the capital structure under which the company operated; that failure so to do would have endangered the successful continuance of the business; to his findings relating to the average profits of defendant for the years 1925-1929, inclusive; that the trust mortgages and indentures were valid and in conformity with law; to his finding that defendant Wickwire Company is, and has been since October,
In analyzing the evidence it seems to me that we are principally concerned with facts as distinguished from suspicions and theories and asserted wrongful acts in the management of the corporation in concert with the trust mortgagees and voters' trust committee. The fair value of the collective properties, the special master found, does not exceed $18,000,000, while on August 31, 1929, the trust mortgage liens, bonds, class A and class B notes and interest thereon, together with unsecured indebtednesses of the consolidated companies and its receivers in continuing the business, far exceeded the value of the collective properties, totaling $22,103,325.03, divided as follows:
First Mortgage Bonds ........ $ 1,823,000 00
Prior Lien Bonds ............ 10,856,000 00
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$12,679,000 00
Accrued interest thereon .... 2,199,367 11 $14,878,367 11
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Class A Notes ............... 2,515,000 00
Accrued interest thereon .... 381,441 66 2,896,441 66
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Class B Notes ............... 3,639,340 00
Accrued interest thereon .... 473,114 20 4,112,454 20
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Unsecured trade creditors ... 194,650 51
Accrued interest thereon .... 21,411 55 216,062 06
______________ ______________
$22,103,325 03
These obligations and indebtednesses amount to $4,000,000 more than the maximum value of the property, and, assuming the finding of the special master to be correct, no equity remains for the stockholders, for it has frequently been decided that, where the value of the property incumbered is appreciably less than its fair value, a right exists of foreclosure of the first mortgage given to secure the bonds. In such case it is generally held that the amount realized on sale is first applied to its payment, assuming its validity; while the surplus is to be applied on junior liens and indebtednesses, the remaining amount, if any, to the stockholders.
The financial affairs of the Wickwire Spencer Steel Corporation, now the Wickwire Spencer Steel Company, became strained a few years after it acquired the capital stock of the American Wire Fabrics Corporation which was in September, 1922, and for which it paid in cash $777,500 and obligated itself by secured notes for the balance of the purchase price amounting to $1,775,000. Its sales for a few years increased and gross profits were realized, but its banking credit nevertheless became uncertain, and at times there was insufficient money to meet its current needs. In 1924 its future was considered precarious by its directors and its bankers. Its sustained losses impaired its liability. It had difficulty in obtaining further loans from the banks, and receivership was contemplated. A plan of reorganization, however, was adopted with the approval of the stockholders. Its name was changed to the Wickwire Spencer Steel Company, and the old corporation conveyed all its properties to the new company which assumed all the former's liabilities. The common stock was held by voting trustees, for a period of years, with the power of issuing voting trust certificates to common stockholders of the present company, and additional capital was raised amounting to $2,515,000. The specific manner in which this capital was acquired is set forth in the report. At the time the said capital was obtained, the fixed liabilities from first mortgage bonds, prior lien bonds, secured notes, class A and class B notes amounted to upwards of $21,000,000. Although the first mortgage bonds amount to $12,679,000, $10,856,000 thereof was pledged with the trustee of the prior lien mortgage as security for the prior lien bonds. In view of the conditions, the plan of reorganization was deemed reasonable by the special master, and indeed was consummated, he said, to avoid insolvency and receivership. The current assets at this time amounted to $8,505,413.78, deferred assets $23,504,029.64, carrying liabilities $1,088,376.78, and funded liabilities
The special master found that the claim advanced by the stockholders' committee that the trust bondholders, noteholders, bankers, and attorneys conspired to acquire the properties in question, and wrongfully designed to exclude the B noteholders and stockholders from any participation in the proposed reorganization, was not substantiated by the proofs, and, further, that there is no defense to the foreclosure of the trust mortgages; that in fact the Wickwire Company is insolvent, and that there is impelling necessity of reorganizing its capital structure; also that, after deduction of underlying obligations and indebtednesses of the receivers, the value of the various real and personal properties of the Wickwire Company, including its goodwill and ownership of the stock in the American Wire Fabrics Corporation and the Goddard Works and plant as of August 31, 1929, there remains available for distribution to the mortgagees for bondholders and noteholders and creditors the sum of $18,000,000, of which $8,436,046.12 constituted quick assets which were not subject to the liens of the mortgages, leaving $9,564,539 subject thereto; and that the real estate, plants, and machinery are valued at $8,175,073.80, and investments in stocks in other corporations are valued at $1,384,466.08. What has been outlined conveys a conception, I think, of the facts leading to the receivership, and for more detailed data recourse may be had to the report.
The motives of the officers and directors of the Wickwire Company in conjunction with the trustee of bondholders and voting trust committee are severely attacked, and on various grounds reinstatement of the trust mortgages under foreclosure is contended. These grounds have been carefully considered, and, in giving them consideration, the background of the Wickwire Company's business activities, its financial struggles from 1920, and its obvious inability to meet either its current or future obligations, cannot in fairness be ignored. Its debts, and the evident unwillingness of banks to extend further credit, presented insurmountable difficulties to a continuance of the industry without the intervention of a court of equity. The vast business enterprises conducted in different states obviously required protection. Its obligations due and shortly to become due aggregated $974,369.94. It had insufficient money to make payment of the semiannual interest on the Goddard lease already mentioned. It was unable to use its cash on hand for that purpose, for, if it had, as the evidence shows, no money would have been available to continue operations — not to mention large amounts falling due, including interest on mortgages, and aggregating nearly $1,500,000. The authorization of receiver's certificates would not have been helpful, since it was doubtful whether they would have been taken subject to prior existing incumbrances.
Criticism is made of the manner in which the receivers, at the instance of the directors, were appointed. It is true that a receiver is an officer of the court, and as Chief Justice
Under the principle announced in Pusey & Jones Co. v. Hansen, 261 U.S. 491, 43 S.Ct. 454, 67 L. Ed. 763, and In re Metropolitan Ry. Receivership, 208 U.S. 90, 28 S.Ct. 219, 52 L. Ed. 403, the answer interposed by defendant admitting the allegations of the bill and consenting to the appointment of receivers constituted a waiver of the claim now made that plaintiff was not a judgment creditor. The failure of a stockholder or the stockholders' committee to seasonably press the objections that the court was without jurisdiction to entertain the bill, and its denial that there was insufficient funds to meet current or future obligations, must, I think, be considered as waived. For, as said in Brown v. Lake Superior Iron Co., 134 U.S. 530, 10 S.Ct. 604, 33 L. Ed. 1021: "Good faith and early assertion of rights are as essential on the part of a defendant in equity as they are on the part of the complainant."
It is next urged that the answer of the receivers to the foreclosure proceedings did not aver defenses which were subsequently interposed by the stockholders' committee, and that the personal properties illegally included could have been pledged to secure funds to pay installments of interest and other pressing indebtednesses. The answer of the receivers in the foreclosure suits raised a general issue as to the assets covered by the trust mortgages and indentures, whereas the answer of the interveners specifically challenged the validity of the mortgages and indentures as to so-called quick assets, including stock in the American Wire Fabrics Corporation and other effects. Counsel for the interveners are no doubt entitled to commendation for their earnest and capable services in this particular, but I fail to see how the receivers could have pledged such properties to pay the accrued debts in view of the asserted inclusion in the lien documents of all properties and assets, and perhaps the maintenance by the trustees that various classes of assets were subject to the collateral trust indenture and to the lien of the first mortgage. It was an open question for judicial determination, and the special master decided it adversely to the contention of the trustees.
It is pointed out, as bearing upon the bad faith of the receivers, that they failed to ask the court for instructions before allowing a default under the security mortgages and indentures. No doubt it would have been better practice to do so, but in all probability the financial conditions as they then were understood to be, together with the terms of the
It is represented that, because the receivers, soon after their appointment, without instructions from the court, notified the Guaranty Trust Company, transfer agent of the common stock voting trust certificates of the Wickwire Company, that they would no longer be responsible for the entailed transferring expenses, amounting to $6,000 per year, the stock was stricken from the list of the New York Stock Exchange, and in consequence there were no sales. Such action, however, it is fair to assume, was in good faith and in the belief that not many shares would be sold and no benefit accrue to the Wickwire Company. Indeed, there is evidence tending to show that, for the year prior to the receivership, few shares were sold, and only at a price of $1.87½ per share. In the circumstances I think cutting off the transfer expense was justified. In any event, remissness in this particular cannot be considered as just reason for deterring entry of a decree of foreclosure and sale, or as bearing upon the alleged conspiracy or collusive understanding. It is suggested that the stockholders' committee is prepared to pay an assessment of $6,000,000 and take in exchange preferred stock at 6 per cent. interest without sinking fund requirements, if given a fair right of participation in the reorganization, but this question will be reserved until the proposed plan of reorganization regularly comes before the court. I think the master rightly rejected the chart as evidence (Stockholders' Exhibit 72 for identification) offered with a view of inferentially showing mismanagement by the officials of the defendant company by making comparison of earnings and expenses with other steel companies, for such testimony could not be considered relevant as against the trustees of the mortgages. Certainly, without proof that the product of other industries was of the same class as that of the Wickwire Company, it would have no bearing whatever upon the issue of conspiracy and collusion. Although it was the duty of the receivers to conserve the assets of defendant company, and as representatives of the stockholders to preserve any interest they might have, yet, in view of the lack of funds to continue operations to enable competing with its competitors, and especially wherewith to avoid foreclosure and suits to recover on current debts and obligations, a condition was presented which the receivers, as I believe, were wholly unable to overcome. The fact that the Wickwire Company earned its fixed charges, plus depreciation charges for a year and a few months immediately following the receivership, was no test or measure of continuance. Indeed, the ensuing decrease of its earnings supports the view that borrowing on the strength of the brief profitable period would have been a shadowy effort to ward off the inevitable.
The next point urged (which, perhaps, is the most important) is that the Guaranty Trust Mortgage, dated January 1, 1920, and later the prior lien mortgage to the Chase National Bank, pledging a larger part of the bonds to the latter, are void ab initio in so far as the first mortgage covers the chattels and real estate of the mortgagor located in this state alone, and that the prior lien mortgage is also entirely void, since it was designed to preserve the void lien of the bonds secured by the former. This attack upon the mortgage liens was carefully considered by the special master, and the wealth of authorities cited in reliance on the claims of invalidity were analyzed and distinguished by him in his treatment of the assertions that there was actual or constructive fraud in making and delivering the first trust mortgage in question; and he reached the conclusion on the fact that there was no intent to defraud or to include in the liens the personal properties excluded by him. He limited the lien of the mortgages to property specifically enumerated and described, excluding inventory of materials, the so-called quick assets, the stock in trade, finished and unfinished products, cash on hand, and accounts receivable. He has dwelt upon the facts and law so thoroughly that I conceive it to be entirely unnecessary to at length restate his findings with relation to the particular matter under discussion, except as to certain phases and differences of opinion arising at the hearing before me regarding the decision by the Circuit Court of Appeals in Brown v. Leo (C. C. A.) 12 F.2d 350 and Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L. Ed. 991.
It is pointed out that the Wickwire Spencer Steel Corporation, which executed the first lien mortgage, did not, by any of the clauses embodied in the instrument, confer the right to possession or use upon the mortgagee. No right was given the mortgagee to deal in any shifting chattels, or in any of the enumerated materials or supplies for manufacture. The granting clause describes with care the property designed to be covered by the lien. The specific parcels of real estate included in the mortgage are located in this state and in the state of Massachusetts. The included fixtures, machinery, and equipment, appurtenances of the plants, furniture and other specific chattels, patents and licenses, leases, stock in various companies, mining rights, rents, and profits, etc., are also separately classified. Following the enumerations there is an omnibus provision, relating to all other property, real, personal, or mixed, now owned or acquired. Stock in trade, products finished or unfinished, are not mentioned in the granting clause; and, indeed, the trustee made no claim thereto and conceded that such articles and quick assets were not intended to be mortgaged and are not subject to the disputed liens. That such was not the intention may fairly be inferred from the fact that the articles were not specified in detail as were various other properties like equipment, tools, and other chattels that were regarded as pledged fixtures. That the clause "and all other property" following the specific description relates back to the classified properties is, I think, supported by Alabama v. Montague, 117 U.S. 602, 6 S.Ct. 911, 29 L. Ed. 1000, wherein the rule of ejusdem generis was applied. See, also, In re Henningsen (C. C. A.) 297 F. 821. A similar granting clause as here was considered in Mallory v. Maryland Glass Co. (C. C.) 131
It is a cardinal canon of construction that ambiguous or contradictory clauses in an agreement are governed by the intention of the parties, and the provisions that are free from uncertainty should be accepted and the other rejected. People v. Storms, 97 N.Y. 364. This rule of repugnancy in a mortgage, where both cannot prevail, requires that the later yield to the first. Pittsburg & Shawmut R. Co. v. Cent. Trust Co., 156 App. Div. 182, 141 N.Y.S. 66; Harper v. Hochstim (C. C. A.) 278 F. 102. In Benedict v. Ratner, supra, an assignment of present and future book accounts was made and the validity of the assignment challenged. The Supreme Court, Mr. Justice Brandeis writing the opinion, squarely held that, under the law of this state, an assignment of property to secure a debt, which reserves in the assignor the right to sell the property and keep the proceeds for his own use, is fraudulent and void. In Brown v. Leo, supra, this principle was applied to a mortgage covering both real and personal property, as already indicated. The rule, however, of section 35 of the Personal Property Law of this state (Consol. Laws, c. 41), under which I conceive the cases of Benedict v. Ratner and Brown v. Leo were decided, has been radically changed by the Uniform Fraudulent Conveyance Act of 1925, or article 10, of the Debtor and Creditor Law (Consol. Laws, c. 12), where it is provided as follows: "§ 276. Conveyance made with intent to defraud. Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors." And by section 270 the word "conveyance" is defined as: "every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or incumbrance." Under this act there is involved a rule of evidence and of law modifying the prior rule relating to imputable fraud, as distinguished from presumptive fraud, and it clearly puts upon the creditors the burden of proving that the conveyance or agreement was in fact actually tainted. Giving effect to this enactment, the special master found that neither the first mortgage nor the Chase prior lien mortgage was made with any fraudulent intent. The evidence, in my opinion, is insufficient to overthrow this finding and conclusion.
It is claimed in opposition that the enactment is inapplicable to this controversy on the ground that the right of the creditors, i. e., the A and B noteholders, was a vested right; and, furthermore, that the stockholders had similar rights which accrued long before the statute became effective. I do not agree with the suggested limitation, and hold that substantive rights of creditors were not
It is further suggested that the stockholders' committee should be allowed to give rebutting evidence as to the value of properties owned by the Wickwire Company and its subsidiaries in support of the defense of conspiracy and bad faith. The findings of the special master, however, in my opinion, as to alleged conspiracy and collusion, are not predicated on values, though values obviously disclosed the financial conditions and prompted various remedial steps. Nor do I think it necessary to open the case to take additional testimony challenging the appraisers' values as bearing upon the proposed plan of reorganization. The common stockholders, to all intents and purposes, were the mortgagors; that is, the first mortgage and prior lien mortgage were executed and delivered with their approval. In anticipation of confirmation of the special master's report, the stockholders' committee has interposed objections to the form of decree heretofore submitted, and proposes additional clauses affording them a measure of protection. Upon default the bondholders have clearly the right of sale of the properties mortgaged, as provided by statute, and, as said in Guaranty Trust Co. v. Mo. Pac. R. Co. (D. C.) 238 F. 812, 814, to "leave the holders of junior securities, unsecured creditors, and stockholders to protect themselves as best they can." In Guaranty Trust Co. v. Int. Steam Pump Co., supra, Judge Mayer, on the objection of the stockholders to the unfairness of a proposed plan of reorganization, in refusing compliance, said: "Courts are not empowered to make contracts for parties in interest, nor can courts adjudge or decree the terms upon which a mortgagee may allow to junior lienors, or others, participation in his mortgaged property when failure to pay the debt due him brings that property under the hammer." In a per curiam opinion, the Circuit Court of Appeals confirmed Judge Mayer's announced views, and, without modification, allowed entry of the proposed decree of foreclosure. The suggested inclusion in the foreclosure decree would, it seems to me, create confusion and might deter the sales of the properties in question.
I find nothing in the Columbia Law Review articles, to which my attention is directed, to convince me that common stockholders have the equitable right to challenge the fairness of a reorganization plan proposed by bondholders, unless the bondholders and stockholders are allied by agreement to effect reorganization, and this applies, I take it, to the inclusion in the foreclosure decree of the paragraph submitted, additional to what is contained at folio 170. It is doubtful whether the common stockholders in this case are in a position to question the fairness of the decree or the proposed plan of reorganization, in view of the freedom from taint of the liens. It is discretionary with the court to fix an upset price, [Guaranty Trust Co. v. Chicago, M. & St. P. R. Co. (D. C.) 15 F.2d 434, and Palmer v. Bankers' Trust Co. (C. C. A.) 12 F.2d 747], but I can see no gain or advantage in doing so in this case, for ordinarily an upset price does not imply enforcement. In any event, the price is subject to the approval of the court. To exclude from the decree any legal right to sue the officers and directors of the Wickwire Company for alleged mismanagement, by which the stockholders sustained a loss, does not impair their right to enforce any right they may have; and, for the reasons stated, the requested inclusions are tentatively denied. The foreclosure decree, however, should contain adequate provision to bar the sale in the foreclosure proceeding of the quick assets excluded from the mortgage lien, and to reserve to the general creditors the proceeds of the sale of such assets.
Finally, counsel claims that, as a result of the defense interposed by the stockholders' committee, a compensating allowance should be embodied in the decree of foreclosure on the ground that, by the efforts of its counsel, it was decided that the quick assets, amounting to $8,435,460.12, were not subject to the first mortgage lien, and that by their services they established a fund for the benefit of the unsecured creditors, noteholders, and stockholders. This application, together with application providing generally for payment of compensation expenses and liabilities contained in article 20 of the lengthy decree, as well as various other provisions, are reserved for hearing and explanation, on notice to counsel for the stockholders' committee, before the foreclosure decree is signed.
On Motion by Stockholders' Committee to Include in Decree Reservation Relating to Plan of Reorganization, and on Settlement of the Decree of Foreclosure and Sale.
In the Habirshaw Case (C. C. A.) 296 F. 875, 879, 43 A. L. R. 1035, cited by counsel for the stockholders' committee, bondholders and creditors deposited their claims with the reorganization committee, and the holding of the court was that the agreement under which the claims were deposited was of binding effect, and that, on application of the creditors' committee, the claims so filed could not be withdrawn. No stockholders were involved, but the court, in speaking generally of the duty of the court in conservation actions, said that courts of equity "conserve the property in their custody until the time comes when its sale can justly be had as a step in reorganization. Sometimes such a sale takes place under foreclosure decree; other times as here, where there is no foreclosure decree."
The proposed reservation of the stockholders' committee in this case, relating to bidding and filing and publishing plans of reorganization, is a literal reproduction of a provision submitted by minority bondholders in the Guaranty Trust Co. v. Chicago, M. & St. P. Ry. Co. Case (D. C.) 15 F.2d 434, 436. There the plan of reorganization contained provision for the preferred and common stockholders of the old company by requiring payment of certain amounts on the respective shares of stock received in the new company; and the court held that the plan supplied protection to all stockholders and bondholders. In passing upon the application to intervene by Eisman, a stockholder, the court said that it was elementary that a stockholder had no personal or direct interest in the foreclosure suit. And "as a stockholder he has an interest in having the corporate rights asserted or protected; but, before he can be heard at all, he must be prepared to make a showing identical with that which would enable him, as a stockholder, to commence an independent suit to assert or protect a corporate right." Judge Wilkerson also said that it was not within his province "to redraw or modify or make suggestions concerning such voluntary business arrangements as reorganization plans," quoting from Judge Hough's decision in Conley v. Int. Pump Co. (D. C.) 237 F. 286. Although the petition for intervention alleged fraud, the court nevertheless declined to permit minority bondholders and stockholders to intervene. An appeal was taken by the minority bondholders' defense committee who objected to the plan of reorganization approved by the District Court (Jameson v. Guaranty Trust Co. of N. Y., 20 F.2d 808), but the Circuit Court of Appeals held that, since the minority bondholders had not been permitted to intervene, their rights having been reserved by the decree of foreclosure, they could, after the sale, assert objections to the plan. As I read the decision, the stockholders did not question the fairness of the plan on appeal, and their right, unconnected with the bondholders, was not considered.
I have been unable to find any case, though I have examined all the adjudications in Mr. Joseph's brief, wherein stockholders, unconnected with bondholders or creditors, have been permitted to question the fairness of the plan of reorganization and where, in all probability, there would be no surplus to apportion to them, and wherein defenses of fraud and connivance to bring about the sale of the properties to the injury of the stockholders were not substantiated. I have not overlooked the Steam Pump Company Case where stockholders and a committee of preferred stockholders objected to the plan of reorganization as unfair and argued to the court that they had a more equitable plan. But the court held it had not the power to make contracts for the parties in interest and could not decree the terms which the mortgagee may allow to junior lienors.
It would, therefore, be idle to let the stockholders offer a different plan from that of the bondholders, for the court would be powerless to adjust their differences.
I do not think that the consolidation of the mortgage foreclosure cases with the receivership takes from the mortgagees the right to strict foreclosure, for default in the mortgage occurred immediately on application for receivership, and the right to strict foreclosure under the laws of the state was available. Nor does it matter that the sale contemplates mortgaged and unmortgaged assets of the receivership estate, since the receivers, who represent the corporation and its stockholders, apparently have acquiesced in the joint sale.
Inasmuch as it has been decided that the stockholders have no equity in the assets
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