Ginty v. Ocean Shore Railroad

This action was brought to enforce a trust, and in enforcing it to have declared void the reorganization of the Ocean Shore Railway Company into the Ocean Shore Railroad Company, defendant. Added as defendants to the corporation are the members of the reorganization committee, the trustees who effectuated that reorganization; John Ginty, plaintiff, is or was a bondholder of the Ocean Shore Railway Company. • After the commencement of this action he was joined by other bondholders in seeking the relief indicated. The court in equity found against all of the

The Ocean Shore Railway Company was organized as a railroad corporation under the laws of the state of California. It purposed to construct, build, and operate a railroad extending along the Ocean Shore from San Francisco to Santa Cruz. It was capitalized for five million dollars, and all of its capital stock was subscribed, the stock owners having paid on their holdings approximately two million two hundred and fifty thousand dollars. It had also issued its bonds in the sum of five million dollars under a deed of trust executed to the Mercantile Trust Company of San Francisco. These bonds had been sold to and were owned by many persons. In November, 1909, the company defaulted in the payment of interest upon its bond coupons, and again defaulted on May 1, 1910. The Mercantile Trust Company, pursuant to the provisions of the deed of trust, then declared the principal and interest of the bonds to be due, and on June 7, 1910, gave notice of sale in accordance with the provisions of the trust deed empowering it so to do. Prior to this date (in December, 1909), a creditors’ bill was filed by the Baldwin Locomotive Works in the federal circuit court against the railway company. Answer thereto was filed and a receiver was appointed by the court. He took charge of the railroad property on that date. Following the notice of sale so given by the Mercantile Trust Company the stockholders and creditors of the company (other than the bondholders) caused the Mercantile Trust Company to be made a party to the action in the federal court. It obtained from that court authority to proceed with its sale under terms and conditions expressed in the court’s order. At this time the financial and physical condition of the railway company and of those interested in it was, roughly stated, as follows: At the time when the sale was effectuated there was chargeable against the property the comparatively small sum of one hundred and thirty-five thousand dollars, representing the expenditures of the receiver. The stockholders had paid in about two million two hundred and fifty thousand dollars upon their subscriptions of five million dollars capital stock.

Under the terms of the trust deed the bondholders were empowered to use their bonds on the sale of the properties in payment of the purchase price. The usual procedure in such cases followed. The bondholders were called together, to enable them in combination to use the purchasing power of their bonds effectively and to take steps looking to the reorganization of the road, in the event that the organized bondholders should become the purchasers. On July 22, 1910, at a meeting of the bondholders a committee of five was selected to represent the body. The members of that committee are the defendants in this case, saving that upon the original committee was A. C. Kains, whose place was later taken by Walter S. Martin.

On July 29, 1910, the committee approved the form of an agreement under which the bondholders of the railway company should be called upon to deposit their bonds with the committee. On August 1st following, this agreement was sent by the committee to every bondholder of the Ocean Shore Railway Company, with an explanatory letter. This agreement of July 29th, as it was called and may for convenience be called, is one of the important documents in the controversy, and therefore requires further exposition. Its importance arises from the facts that it was the first and only document signed by the depositing bondholders, and (standing alone), defines in full the powers and trusts upon which the committee acted for the bondholders. It declares its purpose to be the purchase of the properties of the railway company by and on behalf of the bondholders. Under it the depositing bondholders were to place their bonds with the Union Trust Company, “there to remain for a period of nine months from this date unless sooner withdrawn and used in

The sale sanctioned and ordered by the federal court fixed the minimum selling price at one million thirty-five thousand dollars, but required the payment upon the fall of the hammer of one hundred and sixty-six thousand dollars cash in payment of preferred liens under the receiver’s certificates. It was incumbent upon the committee, therefore, to be prepared to pay on the sale that amount of cash. Moreover, under the terms of the deed of trust, the bondholders who did not deposit would be entitled to be paid in cash, on their bonds, an amount equal to the amount credited upon the deposited bonds which were used in the purchase of the properties, and it was distinctly declared in the agreement of July 29th that only the bonds of the depositing bondholders should be liable for all necessary expenditures. It was important to the committee then to secure the deposit of as many bonds as possible, as every bond deposited decreased proportionately the amount which would have to be paid in money to the nondepositing bondholders. (This narrative must here be interrupted to direct attention to the fact that November 3, 1910, becomes a date of consequence in this consideration, because upon that date the committee adopted a plan of reorganization, which appellants contend absolutely concluded and bound them in all their future proceedings,

Besides the exigency of these matters to which we have adverted, and which were vital to the accomplishment of the

A sale was so had upon January 17, 1911. The properties were purchased by the committee for the amount fixed in the court’s order, the committee being the only bidder at the sale.

From this time forth the committee busied itself actively in the matter of reorganization. But the undisputed testimony is that all the overtures of the members of the committee looking to reorganization upon or along the lines of the plan of November 3d were utterly rejected by the financiers to whom they were submitted. They said, “Ridiculous; we cannot consider it at all.” No outside capital could be allured into the enterprise. And if confirmation be needed to the abundance of direct testimony establishing this, it is found in the fact that when the reorganization was effected by creating a corporation capitalized for five million dollars, the bondholders receiving stock in proportion to their bond holdings, an effort was made by this committee to place seven hundred thousand dollars bonds of this corporation—a corporation owning all of the property of the road, free from debt—and the committee with its best efforts was able to secure subscriptions for only about one-quarter of the proposed issue. Having earnestly and unsuccessfully attempted to effect the reorganization in accordance with the plan of November 3d, the committee then endeavored to sell the property. But all efforts to this end were equally unsuccessful. These efforts continued through the spring and summer of 1911. By September, 1911, the committee had become convinced that no inducements which they could offer would secure the investment of capital in the reorganization and rehabilitation of the road, and thereupon the members were confronted with a new situation fraught with danger to the interests which they represented. The indebtedness to the Union Trust Company, to which reference has been made, which was secured by the Underwriter’s Agreement, by the pledge of the bonds and by a deed of trust covering all the purchased properties, fell due on September 17th. The trust company had positively declined to grant further extensions of time. There was urgent need of work upon the road itself to prevent damage from the approaching winter storms, and to keep it up even to its imperfect condition of service. Indebtedness for necessary equipment had been incurred by the

Something bad to be done, and the committee then proceeded with the organization of the Ocean Shore Railroad Company, the defendant in this suit. It was capitalized for five million dollars, divided into fifty thousand shares of the par value of one hundred dollars each. The committee conveyed all the property of the old railway company to the new corporation, receiving in return the agreement of the new corporation to issue its stock to those whom the committee might name. The committee directed the issuance of this stock to the old bondholders in amounts identical with the face value of their bond holdings. This was in December, 1911. On December 29th the committee executed a power of attorney to J.. W. Crosby, authorizing him on behalf of the depositing bondholders to accept the shares of stock in the new corporation which were apportioned to these bondholders. Before doing this, in November, the committee passed a resolution declaring that it had found the plan of November 3d to be -impracticable, and that it was the sense of the committee that it “should proceed to effect the most practicable and expeditious reorganization at the present time.” The organization which we have last outlined is the organization which the members of the committee insist Avas not only the most practicable and expeditious reorganization, but absolutely the. only reorganization which would preserve the bondholders’ rights, and this by reason of the fact that the bondholders in purchasing the property through their committee had become the real owners of it, holding title (saving for the trusteeship in the committee) in the awkward. and unmanageable condition of ownership in common. As such

Again the committee had failed, and was still confronted with the danger of foreclosure by the Union Trust Company or by the underwriters, and on January 18, 1912, the new corporation levied an assessment of ten dollars per share upon its stock. The assessment became delinquent on February 26, 1912. The sale day was March 18, 1912. Meetings of the depositing bondholders were held from time to time, when all of these matters were fully discussed and all the difficulties laid before them. Such meetings were held on December 1, 1911, February 23,1912, and March 12, 1912. At none of these meetings did any bondholder raise any objection to this reorganization. Discussion was had as to the practicability of raising the money by a new bond issue substituted for the assessment. Discussion was had as to whether the assessment might not be reduced to five dollars per share. The minutes declare that “the sense of the meeting was practically unanimous that the assessment should stand. ’ ’

On March 16, 1912, two days before the sale day of the delinquent stock of the new corporation, this action was brought, the principal contention of plaintiffs being, as heretofore outlined, that the agreement of July 29th is to be construed with the approved proposed plan of November 3d, and that the duties of the committee were therefore limited to an effort to put the plan of November 3d in operation, that the trust so declared became fixed and irrevocable, and if, for any reason, the trust could not be performed, it became the duty of the trustees either to surrender their trust to the bondholders, or go into a court of equity and obtain their discharge.

We are now nearly, but not quite, in a position to discuss this main contention. Certain matters preliminary to the main consideration must first be treated and disposed of. At the outset it is to be noted that the only rights involved in this case are the rights of the plaintiff bondholders, who alone are concerned in this litigation. Thus, assuming for the moment that appellants’ construction of the written instrument is the true one, we are here in no way concerned with the rights of the stockholders or general or preferred

Thus we come again to the principal question in the case— the construction of those powers as between the complaining bondholders and their committee. No question arises, nor can arise, over the right of assenting bondholders to confer upon such reorganization committee substantially unlimited powers with unlimited discretion in the exercise of them. The bondholder “may go further and agree in advance that his bonds shall be subjected to any plan of reorganization which the committee may adopt.” (Colonial Trust Co. v. Wallace, 183 Fed. 897 .) This is precisely what was done by the declaration of July 29th, which constituted the one and sole written authority to the committee signed by the bondholders themselves. Appellants contend that the agreement of July 29th must be construed with the approval of the proposed plan of November 3d, and to the doing of this there cannot be the slightest objection. But when appellants seek by their construction of the two agreements read together to have it said that the trust imposed in the committee became fixed, inelastic, and unchangeable, they do violence to the language as well as to the spirit expressed in the agreement of July 29th. That agreement was drawn, as appears from the face of it, and from the evidence touching its execution, with the design to confer upon the committee plenary powers, the bondholders recognizing the magnitude of the difficulties, and being more than willing to trust to the business ability and good faith of the members of the committee. Taking the two instruments together, what do they not mean ? They do not mean, as appellants contend, that all of the important provisions of the agreement of July 29th touching the committee’s rights and powers have been stricken out and eliminated, and that the committee was thus limited to the single effort of endeavoring to carry out the agreement of

So the learned judge of the lower court construed this agreement, and in so construing it we think he was wholly right. There ceases to be, therefore, the slightest occasion for the review of the authorities, which, nevertheless, have been duly considered by this court. This is not the case of an agreement between bondholders and stockholders to the attempted exclusion of the rights of creditors who must be recognized if the stockholders are to be recognized. The bondholders have the unquestioned right, without regard to any of the equities of the stockholders or creditors, to foreclose their lien and bid in the properties. (Miller v. Dodge, 28 Misc. Rep. 640 , [ 59 N. Y. Supp. 1074 ] ; Farmers’ Loan & Trust Co. v. Green Bay & M. R. R. Co., 6 Fed. 110 .) Moreover, as we have said before, neither the stockholders nor the creditors are here complaining. Nor yet is a reorganization whereby the old bondholders become the stockholders of the new railroad at all unusual. Indeed it is declared by the supreme court of the United States to be the best way of effecting such reorganization, “that is to say, reorganize the enterprise on the basis of existing mortgages as stock, or something which is equivalent, and by a new mortgage with a lien superior to the old, raise the money which is required. ’ ’ (Shaw v. Little Rock etc. R. R. Co., 100 U. S. 612 , [ 25 L. Ed. 757 ]; see, also, White v. Wood, 59 Hun, 619 , [ 13 N. Y. Supp. 631 ]; Gates v. Boston & N. Y. Airline Ry. Co., 53 Conn. 333 , [ 5 Atl. 695 ]; Somerset Ry. v. Pierce, 88 Me. 86 , [ 33 Atl. 773 ].) The cases cited and relied upon by appellants are quite unimpeachable in logic and law, but they are cases which deal with the rights of creditors when the bondholders

What has been said concludes our review of the principal case. One further matter, however, remains to be considered. Clara B. L. Folger was a party to the amended complaint, which alleged ownership by her of bonds of the face value of seventy-six thousand dollars. Mrs. Folger had not deposited any bonds or signed any agreement. They were deposited by her husband, who is not a party to this proceeding, and the agreement of July 29th was signed by him. It was asserted that on August 28, 1912, Mrs. Folger purchased at the pledgee’s sale five hundred bonds which had been held in pledge by the Wells Fargo' Nevada National Bank of San Francisco. These bonds had been deposited with the committee by that bank pursuant to the agreement of July 29th, and to a special agreement entered into between the bank and the committee. During the trial Mrs. Folger asked leave to amend and set up the purchase of these bonds. At the conclusion of the trial the court denied the motion. Mrs. Folger’s proposed amendment did not allege that the five hundred bonds referred to had ever been deposited by the bank or by Mrs. Folger with the committee.' This, in itself, justified the court’s refusal in permitting the amendment. But moreover, if it be contended that Mrs. Folger in purchasing at the pledgee’s sale acquired the alleged rights growing out of a special agreement of the committee with the bank, then it is manifest that the cause of action upon which Mrs. Folger relies is not the cause of action set forth by the plaintiffs, and that Mrs. Folger’s sole redress would be by her own independent action; that she is not “a party similarly situated” with the other plaintiffs, within the meaning

The judgment appealed from is affirmed.

Shaw, J., Melvin, J., Sloss, J., Lawlor, J., and Angellotti, C. J., concurred.

Rehearing denied.