Ball v. Hotel Markham, Inc.

HUTCHESON, Circuit Judge. Appellants are holders of certificates of deposit1 for a large part, and speak for a substantial majority of, the common stock and the ten-year gold debentures of Hotel Markham, Inc., issued respectively in October and November, 1930, pursuant to the sale and purchase of Gulfport Hotel Corporation Properties on behalf of its bondholders, by a Bondholders’ Protective Committee, acting under an agreement made July 1, 1930, for the protection of the holders of First Mortgage Gold Bonds of Gulf-port Hotel Corporation, issued September 1, 1926. Appellees are Delta National Bank, the present depository, Hotel Markham and the six individuals constituting at once, directors of the hotel and the protective committee. The suit brought by Ball as plaintiff and joined in by Stone, Weddington and others as intervenors, was; to restrain the defendants from causing the hotel to issue ten-year refunding debentures in exchange for, and from taking up, the outstanding debentures for which plaintiffs held certificates; to terminate the control of the individual defendants over the stock and debentures and over the hotel; and to require the delivery to plaintiffs and intervenors, upon surrender of their certificates, of the stocks and bonds called for therein. The claim was; that the objects and purposes of the protective agreement, under and in aid of which the certificates were issued had been fulfilled, the authority of the committee as trustees had come to an end, and plaintiffs were entitled to have and obtain full possession and control of their securities; that notwithstanding this, the members of the committee, for the purpose and with the effect of unreasonably renewing and extending its powers and control, were proposing over plaintiffs’ protest, to take up and refund plaintiffs’ bonds, and to continue to withhold from plaintiffs and the other holders of securities, their rightful control of their securities. What makes the disputed issue in the case is the fact that neither the certificates, the 1930 protective agreement, nor the declaration of trust, issued after the purchase of the Gulfport Properties, contained any time limit; and that unless the term of the debentures fixes such a limit, such powers as the defendants have are exercisable without time limit until, either the objects and pur [755] poses of their trust have been fulfilled, or more than a reasonable time for their fulfillment has elapsed and it would he unreasonable to extend their powers further. It was the position of the plaintiffs therefore, that the objects and purposes of the protective agreement and of the declaration of trust had been fulfilled by the formation of the Markham Hotel Company, the issuance of its stocks and debentures and of the certificates of ownership therein, and the discharge by the committee of all of the indebtedness which it had created, under the terms of llie agreement, and the declaration of trust, the better to execute its powers. It was the position of the defendants on the other hand that the purposes and objects of the protective agreement and the declaration of trust had not been fulfilled, that the broad and unlimited powers granted in the agreement and re-affirmed in the declaration of trust, authorized them to continue to hold and manage the properties until, in their discretion, they had effected a sale thereof for cash or other property, and that when this had been done and the proceeds distributed, and only then, would their power cease and authority terminate. Particular emphasis was laid in the answer of the defendants upon their belief that the purpose of the trust was to protect the small bondholders from the large ones and that should they permit the trust to end, small bondholders would be delivered to the mercy of large ones. Much oral testimony was taken upon the objects and purposes of the plaintiffs in trying to obtain control of their properties and upon the objects and purposes of the committee in holding on to them. At the end of it all, the district judge rightly rejected the theory of defendants that they represented a part, the holders of a minority as against the holders of a majority of the bonds. Excluding most of the oral testimony, he pitched his judgment on the broad terms of the protective agreement and in effect held that in the absence of agreement by all the holders of all of the securities that the trust should be terminated, it was for the committee, in its discretion, and if that discretion was not abused, to determine when its objects and purposes bad been fulfilled, or whether they were incapable of fulfillment. Viewing the whole history of the operation, he concluded that there was no abuse of discretion in the action of the committee, and dismissed the bill. What was established by the evidence was; that in the interest of the holders of the bonds of the Gulfport Hotel Corporation, a protective committee was formed, the agreement of July, 1930, was entered into and under and pursuant to that agreement, the Gulfport Hotel property was sold to and purchased by the committee. It thereupon, on August 7, 1930, issued a declaration of trust2 as to it, and on August 8th [756] wrote to the bondholders: “The committee is continuing the operation of the hotel for the account of bondholders- until it can work out some more advantageous disposition of the properties in your interest which the committee is diligently endeavoring to accomplish.” Thereafter, pursuant to the provisions of the declaration, it effected a reorganization by causing the Hotel Markham Corporation to be formed, with themselves as directors and stockholders, causing it to issue its debentures, and then arranging for the issuance of the depository certificates on which the suit is based. From that time until the present, the committee, as officers and directors of the corporation, have managed its affairs, have paid off the bonds they put on the property, over and above the amount of the original Gulfport bonds, and have paid a small amount of interest on the debentures called for in the certificates. The committee and the corporation are now proposing to take up and retire the certificate debentures and issue in lieu thereof, new ten-year debentures for the amount of the principal and interest thereof. It is not disputed, that the property is not now worth this amount and that there is no prospect of its becoming so. Indeed, it is conceded that it is not worth the principal amount of the certificate debentures. The claim on the part of the defendants is that this is not an opportune time to terminate the trust and that a better time will come. The sole question presented for decision here is whether the district judge was right in holding that the protective agreement entered into in May, 1930, for the purpose of protecting the Gulfport Corporation Bondholders, continues indefinitely so as to enable the committee to reform, extend, cancel or do what it pleases with the securities of Markham Incorporated, so long as it reasonably appears to the committee that what it is doing is in the interest of the certificate holders as a whole, or whether the agreement, applicable as it was, to the holders of Gulfport Corporation Bonds, has not been satisfied and become functus officio as to the Markham Company bonds and securities, when after ten years, the debentures held under the certificates, have matured, and all the debts and obligations created by the committee have been paid and discharged. The district judge thought that the protective agreement made with regard to Gulfport debentures, continued in force as to the Markham debentures, not indefinitely, but at least until it could be shown that the purposes had been fulfilled or the committee was abusing its discretion. He found, without stating just what these purposes were, that the purposes of the protective agreement had not been fulfilled and that no abuse of discretion had been shown. He therefore dismissed the bill as to the relief asked, both by way of restraint on the issuance of the ten-year refunding bonds, and by way of obtaining the bonds and securities upon surrender of the certificates. We think he was wrong in both particulars. The main theory of the defense was that if Ball and the other claimants were permitted to surrender their certificates and take their securities, they would proceed either, to foreclose upon their debentures or by use of their voting power, to take over the management of the corporation, and that either of these courses would result in injury to the smaller holders of debentures and certificates. But a reading of the protective agreement discloses no word or line in it with regard to protecting minority from majority holders, no word or line in it with regard to protecting the holders of debentures of or stock in the Markham [757] Company. It had to do entirely with the bonds of Gulfport and, in the formation of the Markham Company, the issuance of its debentures, and the covering certificates and the paying off of moneys borrowed by the company, there was a carrying out of that agreement. If the securities covered by plaintiffs’ certificates were those of Gulf-port Hotel Company or if the protective agreement had been by and for those holding stocks or securities of the Markham Hotel Company, it might be that notwithstanding the long time that has elapsed for the continuance of such committee, a court would be justified, in the absence of a showing of injury to those holders, in refusing to take cognizance of the petition. But the agreement under which the committee now seeks to perpetuate itself is an agreement for the benefit of holders of Gulfport Hotel bondholders, not of those of the Markham Hotel. The certificates plaintiffs hold cover Markham stock and debentures, and we think it clear, that the committee was without power, under it, to extend its authority and continue its control indefinitely over plaintiffs’ debentures and stock, by retiring plaintiffs’ Markham debentures and issuing new debentures in lieu thereof, to run for another ten years. Whatever then may be the correct view as to whether upon the proof offered, plaintiffs and intervenors established that the purposes of the trust were satisfied when the debts of the committee were paid off and the debentures of Markham Hotel were matured, so that plaintiffs and intervenors were entitled to the delivery of their securities and a surrender by the committee of its control, we think it clear that the committee gravely abused its discretion in undertaking to issue ten-year refunding debentures and thus perpetuate their control for an additional ten-year term, and that the court erred in refusing to restrain that issue. We think it was further erroneous to dismiss their bill without giving fuller consideration to whether under all the facts plaintiffs should not have had the relief of delivery of their stock and surrender by defendants of their control at a time and under conditions to be fixed and determined by the court, or whether some other appropriate relief should not have been granted them. The judgment is reversed and the cause is remanded for further and not inconsistent proceedings. Reversed and remanded. Footnotes [1] Certificate of Deposit for Secured Six Per Cent Cumulative Interest Bearing Gold Debentures of Hotel Markham, Incorporated and Common No Par Stock of Hotel Markham, Inc. “This Certifies That Secured 6% Cumulative Interest Bearing Gold Debentures, Issued by Hotel Markham, Inc., bearing date the first day of November, 1930, to the principal amount of $....... Nos........ and......Shares of Common No Par Stock of Hotel Markham, Inc., have been deposited with ...... ...... under and pursuant to an agreement dated as of the first day of July, 1930, and amendments thereto, made for the protection of the holders of the First Mortgage Gold Bonds of Gulfport Hotel Corporation, Inc., and that......is the registered holder hereof and is entitled to share in the benefits of said agreement in respect to the debentures and stock so deposited, and that such debentures and stock are being held by the Committee in. the undersigned depository for the registered holder hereof. “This certificate is transferrable only on the books of the Depositories, ...... by the holder hereof in person or by attorneys upon the surrender of this certificate properly endorsed. “The depositories shall not be bound to take notice of or be affected by any trust respecting the title or ownership of this certificate or the debentures and stock represented thereby. “This the...... day of......, 1930. “Depository, “By.........., “Trust Officer. “Authenticated as correct: “Chairman Bondholders’ Protective Committee.” [2] This declaration, after referring to the July 1, 1930, bondholders protective agreement and its distribution to all the holders of Gulfport Hotel Corporation bonds, and that a letter was sent by the committee to each bondholder in which among other tilings it was stated: “ * * The Committee purposes to arrange for a speedy foreclosure of the mortgage, and its purchase for the account of tiie bondholders, if necessary, and to follow the matter up with such plan of reorganization or other disposition as it finds best for bondholders, treating all on an equal basis and hopes and believes that with your co-operation, the bondholders will eventually realize their claims in full. * * * Necessary proceedings will require some time, but it is the intention of the Committee diligently to push the matter to conclusion. It is, therefore, urgent that Bondholders deposit their bonds promptly as outlined above so that action may be taken immediately.”, recited that 556 of the 560 bonds outstanding had been deposited with the committee and that the property had been sold under the bondholders and bought in by the committee. It concluded with the declaration that: “The committee holds title to the property conveyed to them by such trustee as such committee, and to their successors in office as such committee, by such deed of August 4, 1930, in trust for the equal and proportionate benefit of the bondholders of such 556 of First Mortgage Bonds, described in Exhibits ‘O’ and ‘D’ hereto, and for their successors, legal representatives and assigns, and will bold, manage, control, operate, lease, sell and convey such properties, for the benefit of such bondholders, and pursuant to the agreement of July 1, 1930, and such amendments thereto as have been made therein, and as may bo made therein by such Committee in accordance with the authority thereof, and will account for and distribute ratably and proportionately to the holders and owners of such bonds, and the coupons maturing March 1, 1930, their successors, legal repre [756] sentatives and assigns, the net proceeds of the income of the operation of such properties and the net proceeds in monies, stocks, bonds, securities and other properties received by them on a sale and conveyance of such properties, and/or pursuant to any plan of reorganization effected by such Committee, after all obligations of such Committee and all lawful claims against such property, if any, have been fully paid; and will issue to each of such bondholders a certificate of participation * * * »_ The certificate of participation proposed in the declaration, gave each holder a corresponding proportionate interest in the properties and in the distribution and net income in monies, stock, bonds, securities or assets representing the net proceeds of the sale and conveyance of such properties or received pursuant to any plan of reorganization effected by such committee if all obligations of such committee and all lawful charges against such properties have been paid in full. This certificate was not issued because a reorganization was effected and the certificates, under which plaintiffs and intervenors hold an interest in the bonds, , not of Gulfport but of the Markham Corporation, were issued. (Italics supplied.)