Westinghouse Electric & Mfg. Co. v. Brooklyn Rapid Transit Co.

MAYER, Circuit Judge. This is a motion to confirm the report of the special master in respect of the foreclosure of the so-called first refunding mortgage of -Brooklyn Rapid Transit Company. The questions in controversy were fully and carefully presented to the special master, and in some respects have been even more fully argued before this court. If a reorganization shall he effected, many and perhaps all of the questions dealt' with by the special master and here argued will become academic for all practical purposes. Yet this and the other foreclosure suits in the B. R. T. System have presented some questions which are of importance wider than the particular rights here involved. It is desirable that, so far as practicable, these questions should, be decided; for such decisions, whether of the appellate courts or of this court, may be helpful to those hereafter confronted with problems of the same general character, just as the decisions of the Circuit Court of Appeals of the Second Circuit and of the District Court for the Southern District of New York in the Metropolitan Street Railway receiverships have been of service in this and other pending transit corporations receiverships. Indeed, although much complaint is made, and doubtless with good reason, of the growing volume of opinions, this court has found it helpful and sometimes necessary, from time to time, to resort to unreported master’s reports and to records in the-Metropolitan receiverships for procedure and precedent. [245] It will not be necessary to repeat at length the reasons and conclusions of the special master (former Judge Lacombe) in those respects in which the court agrees with his conclusions. It may be that, in some instances, the same result may be reached by a different course of reasoning but the situation is not one which calls for academic discussion. The thorough and able opinion of the learned special master (noted, with some details omitted, in the statement preceding this opinion) has served, not only to aid the court, but to abbreviate this opinion, and to confine it to the only subjects which seem to call for separate comment. 1. Collateral to Bank Loans — $7,079,000. The amendment of chapter 688 of Laws of 1892 by chapter 354 of Laws of 1901 has an overpowering significance. That legislation, so far as affects bonds, has remained undisturbed for now over 20 years. It is plain that the Legislature concluded that the former statute was not practicable, and substituted, in place thereof, what it deemed necessary for financial and business requirements. The obligation, therefore, to issue bonds at “the fair market value thereof” disappeared with the statute of 1901. This proposition is well developed in the special master’s opinion. The special master’s opinion sets forth reasons why the bonds in question are valid, but he felt constrained to hold otherwise because of the case of Progressive Wall Paper Corp., 229 Fed. 489, 143 C. C. A. 557, L. R. A. 1916E, 563. It is perhaps apparent that this conclusion was somewhat influenced by the special master’s delicacy because of his dissent in 229 Fed. at page 500, 143 C. C. A. 568. An analysis of the Progressive Case, supra, will demonstrate that it does not compel the special master’s conclusion of invalidity. Certainly, as applying to the collateral pledged when these loans were originally, made, the facts are quite different from those in the Progressive Case. In 1905, Progressive Wall Paper Corporation borrowed $10,000 from the bank and gave the bank its promissory note, with indorse-ments. The note was renewed from time to time, and partial payments were made. On January 22, 1912, $7,000 was still due, and the note was unsecured, except for indorsements, and on that date a renewal note for $7,OCX) was given, with the same indorsements as theretofore, except that of one Wing: In place of Wing’s indorsement, and as further security, the corporation delivered to the bank as collateral to the note seven second mortgage bonds, of $1,000 each, which were secured by a mortgage on the real estate and plant of the corporation. On November 2, 1911, the directors by resolution authorized, its treasurer to issue the bonds secured by the mortgage, supra, “to pay or to secure, as collateral, the payment of the notes of the Corporation, then outstanding or which might be given thereafter.” It was in pursuance of this resolution that the seven bonds were delivered to the bank as collateral security. It will be noted at once that these seven bonds were delivered in January, 1912, as collateral security for a pre-existing indebtedness. It is, of course, true that the renewal note for $7,000, dated January 22, Í912, differed from the old note which fell due that day, in that [246] Wing was no longer an indorser; . but the debt, from the corporation to the bank was the same, and the “renewal,” so far as concerned the bank, was for the same $7,000 which it then owed. On these facts, it is plain heyond question that the bonds were issued and delivered as collateral to secure the payment of a pre-existing debt. • The opinion in the Progressive, etc., Case, supra, concentrates on this one point. It.was the fundamental question with which the court was dealing and that the court did not intend to go beyond the requirements of the facts presented .to it is made plain by this significant expression: “But in thiá case [referring to 79 Fed. 842] the debt secured was not an antecedent debt.' "That case decided — what will not be questioned, we take it — that the prohibition, under discussion .does not prevent the use of bonds as collateral when issued at the time the debt is incurred.” In the case at bar the issue and delivery of bonds were all part of a contemporaneous transaction whereby the banks, respectively, made the loans on the security of the collateral. It seems so clear on the facts that the. Progressive Case does not apply that further discussion seems unnecessary. . As pointed out by the special master, the note, now held by practically every bank and trust company concerned, is the last of a series, and the history was generally as illustrated by him in the case-of Brooklyn Trust Company. ' ; In making the notes, the printed forms of collateral notes in use by the respective .banks and trust companies were used, and, while they differed somewhat .in phraseology, they all obligated the borrower to furnish such additional collateral as might be required from time to time by any of the .officerg of the banks and trust companies, and the borrower agreed to furnish upon demand such additional security as might be so required. . Li 0] On first impression, it seemed that the additional collateral was controlled by the Progressive-Case. A more careful analysis, however, puts these bonds in the same legal position as the bonds originally issued and delivered as. collateral to the banks. If it be assumed, although not decided., that .the transaction typified in the Brooklyn Trust Company illustration was not .payment of the old note, but in effect a renewal, then the original agreement' must be' examined. The bank, loaned the money on the promise, inter alia, that B. R. T. would fur--nish additional collateral. When the additional collateral was furnished, the transaction did not speak as of that date, but as of the date of the original agreement or promise contained in the first collateral note. The promise to furnish additional collateral was a present consideration for an induced loan, and, indeed; as much so as the original collateral, and when, therefore, that promise was performed, the bonds were issued, not as security for an ’antecedent debt, but as part of the original-transaction, on the faith of which the corporation “actually received” money, qs required under section 55. In other words, the original promise by reason of which B. R. T. obtained loans from the banks and trust, companies cannot be split into two transactions. The promise was integral, although, from the nature of the transaction, collateral was furnished at different dates. It is obvious that [247] any other view would chill, and, perhaps destroy, the opportunity of corporations to obtain the aid of financial institutions, particularly at critical times, and would impair the objects sought to be attained by the amendment of 1901, and courts, whenever possible, should endeavor to hold valid legitimate transactions entered into in accordance with long settled business practice. While the foregoing seems to be the most satisfactory basis upon which to rest this branch of the case, it is not to be construed that the other arguments and reasons advanced are not well worthy of attention. It follows that the conclusions of the special master on this branch of the case are not sustained. 2. Collateral under Guaranty Trust Fund — $250,GOO. These bonds deposited in 1913 are not subject to attack by B. R. T., nor by the contract creditors, for the reasons stated by the special master under the heading “Note Agreement Collateral — $10,000,-000.” If attackable by the purchasers and holders of other refunding bonds, the question, although quite arguable, will probably become academic from a practical standpoint. Every consideration of business morality requires, if possible, the sustaining of the validity of these bonds, and in this court they will be held valid. 3. Bonds in Hands of B. R. T. — $5,092,000—When Receiver was Appointed. None of these are “free assets,” except the group making up the $20,000 referred to in the special, master’s report. It is contended that the conclusion of the special master as to the $20,000 of bonds and the decision of this court in respect of a similar question in American Brake Shoe & Foundry Co. v. New York Railways, 277 Fed. 261, 281, are unsound. The contention is interesting, but, for the present, the court, on the facts here existent, will agree with its previous view. 4. The status of the bonds pledged as collateral to the receiver’s certificates has been so frequently stated by the court that it is necessary only to repeat that no one should question validity for that purpose; but, in addition, as put by counsel for the noteholders’ committee, the point “has no practical importance, now that all of the B. R. T. certificates are secured by an equal amount of certificates of the Municipal and Consolidated certificates.” Except as indicated, supra, the report of the special master is sustained. Questions of detail may be presented on the settlement of the decree.