Howard v. Maxwell Motor Co.

MAYER, District Judge. This exceedingly interesting case is, in some respects, one of first impression. The facts are carefully set forth in the clear and comprehensive opinion of the special master. It will not be necessary, therefore, to repeat them in detail, but merely to outline so much thereof as is requisite to explain the controversy. f 1 ] The suit is brought to enforce against assets of Maxwell Motor Company, Incorporated, a judgment obtained by plaintiffs in the New York Supreme Court against Maxwell-Briscoe Company as guarantor on a lease. On December 10, 1909, plaintiffs let to Maxwell-Briscoe Chicago Company, an Illinois corporation (whose name was subsequently changed to United States Motor Chicago Company), certain real estate in Chicago for a term of 20 years for a specified rental. The fulfillment of the conditions and requirements of this lease by the lessee w*as guaranteed by Maxwell-Briscoe Chicago Company through ownership of its capital stock. At the time it entered into the guaranty, Maxwell-Briscoe Motor Company was in good financial standing, and was doing a successful business in the manufacture and sale of automobiles. In 1910 it joined certain other companies in the organization of United States Motor Company. The last-named company was formed through the acquisition of practically all the capital stock of the various companies in exchange for capital stock of the new company. A system of business was then set up whereby the United States Motor Company directed the operations of the various subsidiary companies. In November, 1911, United States Motor Company became financially embarrassed by reason of the difficulty of meeting the interest on debenture bonds which it had issued in 1911 to the extent of $6,000,-000. A protective committee was formed, and in the fall of 1912 a reorganization was decided upon, and on September 12, 1912, Brown & Sharpe Manufacturing Company, of Rhode Island, filed a bill in equity in this court, alleging inability of the company to meet its current obligations and asking for the appointment of a receiver. Practically all of the subsidiary companies (including Maxwell-Briscoe Motor Company) were joined as parties defendant and filed answers, admitting the allegations of the bill and consenting to the appointment of a receiver. Receivers were thereupon appointed on September 12, 1912. On October 10. 1912, the reorganization committee issued a plan of reorganization. The plan contemplated the creation of a new company and the issue of first and second preferred stock and common stock. The plan provided only for unsecured creditors and stockholders, as there were not any secured creditors. Such creditors and stockholders as deposited under the plan were to be taken care of as follows: (1) Creditors of the subsidiary companies such as Maxwell-Briscoe Motor Company were to receive payment in full; (2) claimants against United States Motor Company were to receive 25 per cent, in cash and the remainder in stock; (3) the debenture bondholders were to receive stock for their bonds; and (4) holders of the preferred and common stock of United States Motor Company and Columbia Company (one of the subsidiaries), upon payment of $24 per share, were to receive new and preferred stock. — 302 — No provision whatever was made in the plan for contingent claims; i. e., for a claim such as that of plaintiff, which would arise only if the rent were not paid. The. reorganization plan, so far as it went, seems to have been entirely fair, and to have contemplated a just disposition of the claims of the respective classes of creditors covered by it, and so Judge Hough thought, as is evidenced by his opinion filed January 9, 1913. By order of court, the usual provision for filing claims was made, and the time therefore expired December 15, 1912. Appraisals of the property (1) as a going concern and (2) at auction values were made by well-known and expert appraisers. Experienced auditors also prepared a statement of the assets and liabilities of all the companies (1) as a going concern, and (2) at auction values. With these data before the court, and the usual problem as to whether business should be continued by the receivers or the property should be sold, the court, after several hearings, decided that the property should be sold, and accordingly .made and filed its decree of sale dated November 18, 1912, This decree provided, inter alia: ' “The purchaser or purchasers, his or their successors, assigns, or nominees, shall be allowed the period of 60 days from the date of delivery of possession to him or them by the receivers within which to elect whether or not to adopt or assume any lease, agreement, or other contract which may be included in the property sold, or which may constitute an incident or appurtenance thereof, and such purchaser or purchasers, his or their successors, assigns, or nominees, shall not be held to have accepted or assumed any such lease, agreement, or other contract which he, it, or they shall not so elect to accept or assume. Such election shall be made by an instrument in writing, subscribed by the purchaser or purchasers, his or their successors, assigns, or nominees, and filed in the office of the clerk of this court, and no conduct or use of rights by any purchaser or purchasers, his or their successors, assigns, or nominees, within said period of 60 days, unaccompanied by the filing of such written instrument, shall be deemed to conclude such purchaser or purchasers, his or their successors, assigns, or nominees, in respect of such election.” On December 12, 1912, the reorganization plan was declared effective. Agreeably therewith, a new company, called Standard Motor Company (whose name was afterward changed to Maxwell Motor Company, Incoporated), was organized January 2, 1913. At a meeting of the reorganization committee held January 6, 1913, a resolution was passed to the effect that bids for the properties of the United States Motor Company and the subsidiaries, including Maxwell-Briscoe Motor Company, should be made in the alternative; i. e., either cash for the property, or a per cent, to be paid on the amount of claims. The alternative bids authorized in respect of Maxwell-Briscoe Company were $1,400,000, or 60 per cent, on the amount of claims. The cash bid, known as bid No. 1, was regarded by Judge Hough as less desirable (for reasons set forth in his opinión of January 9, 1913) than the per cent, of claimp- bid, known as bid No. 2, and he authorized the acceptance of bid No. 2. After a careful analysis of the figures and a consideration of the whole situation,'Judge Hough said: “This bid No. 2 affords as much security as any person can have at any judicial sale, for it is admittedly made on behalf of a committee of creditors and shareholders who intend to form a ne wcompany, and who control by — 303 — assignment more than 90 per cent, of all the admitted liabilities of all the companies; so that in effect, under the plan of reorganization as a part of which this bid is made, nonassenting and contesting creditors have the security of all the property offered for sale to cover a very small proportion of the alleged liability. In my judgment bid No. 2 is the best bid made.” The decree accepting the bid. and confirming the sale thereunder, filed January 11, 1913, was intended inter alia—and properly so—to liquidate the claims of nonassenting creditors of Maxwell-Briscoe Motor Company at 60 cents on the dollar. In due course the property was transferred to the new company. The bid which was thus accepted read that the purchasers— “Will pay or cause to be paid to the holders of claims; heretofore filed in the above-entitled suits, * * * the following percentages of the amount of said claims as finally determined and allowed, * * * and after the same shall be finally adjudged * * * entitled to share in the distribution of the proceeds of sale. * * * ” On January 11, 1913, however, plaintiffs had not filed any claim, and could not file any claim, for the reason that rent due under plaintiffs’ lease had been paid quarterly in advance on September 10, 1912, and December 10, 1912. On March 10, 1913, the rent was again paid in advance, thus putting plaintiffs in a position where the next rent payment would not be due until June 10, 1913. On March 11, 1913, Maxwell Motor Company (the new company), pursuant to the power (quoted supra) given in the final decree of sale, filed in this court notice of intention not to assume MaxwellBriscoe Motor Company’s guaranty of the plaintiffs’ lease. In other words, although the rent was paid on March 10, 1913, the new company on March 11, 1913, the last of the 60 days allowed to it to disaffirm, did then disaffirm or decline to assume the obligation of the guaranty. Plaintiffs, of course, were helpless until June 10, 1913, the next rent day, and on that day the lessee defaulted in the payment of rent. On June 15, 1913, plaintiffs attempted to distrain for rent on the property of United Motor Chicago Company, the lessee; but on June 24, 1913, the lessee filed a voluntary petition in bankruptcy, and was adjudicated a bankrupt on June 27, 1913, and in due course was discharged ; only a small percentage of the claims against it having been made. After considerable litigation, plaintiffs on November 1, 1917, obtained a judgment against Maxwell-Briscoe Motor Company for $142,560, execution was thereafter issued and returned “No property found” on December 27, 1917, and this suit was begun on July 12, 1918. Prom the foregoing it will be seen that this was a stockholders’ reorganization, but that the case differs in two respects from Northern Pacific Co. v. Boyd, 228 U. S. 482, 33 Sup. Ct. 554, 57 L. Ed. 931, first, in that there were no secured creditors, and, secondly, in, that the claim had not accrued at the time of the decree of sale. The question to be decided is whether these differences, on the facts in this case, take it out of the principles laid down in the Boyd Case and followed in Kansas City Southern Railway Co. v. Guardian Trust Co., 240 U. S. 166, 36 Sup. Ct. 334, 60 L. Ed. 579. In the Boyd Case no provision whatever was made for creditors. — 304 — The procedure was the then familiar one, by which the creditor was barred out by mortgage foreclosure decree and the property came back to the stockholders, usually scaled down and after levying an assessment to enable it to continue as a going concern. In the Kansas City Southern Railway Case the court found that the provision made for creditors was wholly inadequate. In the case at bar, as there were no secured creditors, the reorganization ' was as much a creditors’ as a stockholders’ reorganization, -and the provisions for the creditors, both in the reorganization plan and in the decree of sale, were entirely fair as far as they went; but the difficulty is that no provision whatever was made for such a claim as that of plaintiffs, although the decree put it in the power of the purchaser, the new company, to destroy the security of the lease. In order that there may be no misunderstanding, it is well to restate that a so-called stockholders’ reorganization may be and often is an entirely feasible and desirable method of reconstructing a corporate enterprise, and of thereby saving for creditors and stockholders as a going concern a business which otherwise might be destroyed or disintegrated if knocked down at auction. As said by Judge Sanborn in St. Louis-San Francisco Railway Co. v. McElvain (D. C.) 253 Fed. 123, 133: “There is no moral turpitude, nor is there any illegality, in the making and performance of an agreement between the bondholders, secured by mortgages, the stockholders, and the unsecured creditors of an insolvent mortgagor, that there shall be a foreclosure and sale of the mortgaged property to or for the benefit of a new corporation, in which all the members of the three classes shall be permitted, at the option of each of them, to take the bonds or stock of the new corporation in substantial proportion to the respective ranks anu equities of the classes. Indeed, a foreclosure and sale under such an agreement is the most practicable, equitable, and beneficial method of foreclosure and sale of vast railroad or other properties that has yet been devised.” But, where no provision is made for an unsecured creditor, then the doctrine of the Boyd Case is inescapable; for, said the court at page 504 of 228 U. S., at page 560 of 33 Sup. Ct. (57 L. Ed. 931): “If purposely or unintentionally a single creditor was not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the property transferred to the new company. They were in the position of insolvent debtors, who could not reserve an interest as against creditors. Their original contribution to the capital stock was subject to the payment of debts. The property was a trust fund charged primarily with the payment of corporate liabilities. Any device, whether by private contract or judicial salé under consent .decree, whereby stockholders were preferred before the creditor, was invalid. Being bound for the debts, the purchase of their property, by their new company, for their benefit, put the stockholders in the position of a mortgagor buying at his own sale.” Quoting again from Judge Sanborn in the St. Louis-San Francisco Railway Co. Case, supra: “The foreclosure decrees and sales which have been held fraudulent in law and voidable as against unsecured creditors in the Boyd Case, and the othe.r cases cited above, were those that had been made under agreements between the secured bondholders and the stockholders of the mortgagor, whereby the stockholders received beneficial interests, by means of stock, bonds, — 305 — or otherwise, in the purchasing corporation, without giving or offering any such beneficial interest whatever to the unsecured creditors, in violation of the trust under which an insolvent corporation holds its property, for, first, its secured creditors; second, its unsecured creditors; and, third, and last, its stockholders.” From all that has thus far been said, it is plain that the difficulty in the case at bar is that no provision was made for plaintiffs’ claim, and it is not unlikely that the necessity for such provision did not occur to the purchaser, in view of the fact that the Boyd Case was not decided until April 28, 1913, some weeks after the disaffirmance date of March 11, 1913, and its principles were not as well known and as firmly established as they are now. Plaintiffs, therefore, retained the right to subject the interest of the old stockholders in the property to the payment of their claim. If their interest is valueless, he gets nothing. If it be valuable, he merely subjects that which the law had originally and continuously made .liable for the payment of corporate liabilities. On the facts the special master has found that the property of Maxwell-Briscoe Motor Company, of which defendant Maxwell Motor Company, Incorporated, became the owner, was .amply sufficient to pay the claim here sought to be enforced, and with that conclusion I agree. [2] The remaining question is that which arises from the contingent nature of the claim. On this branch of the case it is desirable to limit the court’s decision to the particular facts here developed. It may well be that situations may develop where claims of a contingent character may have no standing in a court of equity. The status of contingent claims similar to that at bar is explained in People v. Metropolitan Surety Co., 205 N. Y. 135, 98 N. E. 412, Ann. Cas. 1913D, 1180, and the rules as to what claims are provable are set forth in Pennsylvania Steel Co. v. New York City Railroad Co., 198 Fed. 721, 117 C. C. A. 503. If, therefore, this estate had been wound up prior to March 11, 1913, without a stockholders’ reorganization, this claim would not have been provable, and would have been barred. In such cases there is a fund for distribution, and the necessity for ascertaining claims “at a time consistent with the expeditious settlement” of estates is the reason for holding as nonprovable those claims “which are so uncertain that their worth cannot be ascertained,” even if such claims be “highly meritorious.” But where, £s here, there is a stockholders’ reorganization, and the new company by its own act sets in motion the default which matures a contingent into an absolute liability, a court of equity cannot permit^ it to benefit by that act. If defendant Maxwell Motor Company, Incoporated, had let March 11, 1913, go by without filing its intention not to assume the lease, it' would have been liable to plaintiffs. When it became the owner of the property of Maxwell-Briscoe Motor Company, it knew or ought to have known the latter’s contingent liability in respect of this lease, and it would be strange if a court of equity would permit a creditor to be so positioned as to prevent him from proving his claim or participating in a reorganization, while at the same time leaving him remediless by virtue of the act of a corporation created as a part of the plan of — 306 — reorganization; for it must not be forgotten that the March rent was paid after the decree of sale and after the delivery of the property thereunder to Maxwell Motor Company, Incorporated. It is suggested that, if the conclusions of the special master be sustained, difficulties will arise in working out the plans of beneficial reorganizations ; but I think this is a needless fear. Equity usually succeeds in molding its decrees to the requirements of the situation with which it deals, and finds a way to practical as well as just results. Other points raised are fully covered by the special master’s report and do not require elaboration. Exceptions are overruled, and the special master’s report is sustained. Submit decree on notice.