169 Misc. 802 | N.Y. Sup. Ct. | 1938
Six separate applications relating to the proposed reorganization of Lawyers Mortgage Company, hereinafter at times termed “ the company,” have been consolidated into one proceeding. In order to understand the nature and scope of these applications, reference must be made to the previous proceedings affecting the company.
On August 2, 1933, the company was placed in rehabilitation by order of this court, on application of the Superintendent of Insurance, and the latter was appointed rehabilitator. The order, pursuant to section 402 of the Insurance Law, directed the Superintendent to take possession of the property of the company and to conduct the business thereof, and “ to take such steps toward the removal of the causes and conditions which have made such proceeding necessary ” as the court might direct. The Superintendent was specifically authorized to adopt a plan of rehabilitation outlined in his petition and, in accordance with said plan, he caused a separate corporation to be organized, known as Lawyers Mortgage Guarantee Corporation, for the purpose of taking over the servicing and other functions previously performed by the company. “ On May 11,1935, Charles J. Mylod, then Special Deputy Superintendent of Insurance in charge of the rehabilitation of Lawyers Mortgage Company, caused a letter to be sent to certain of the larger creditors inviting them to attend a meeting to be held on May 23, 1935, for the purpose of formulating a definite program for the reorganization of the company and considering a tentative plan of reorganization prepared on behalf of the Superintendent of Insurance, the skeleton features of which were referred to in the letter.” (Matter of Lawyers Mortgage Co. [No. 2], 158 Misc. 579, 580.) (Italics the court’s.) At the meeting of May 23, 1935, a committee of creditors was designated to formulate a plan for the reorganization of the company.
The court found that the proposed plan was fair and equitable to all concerned and that it met with the practically unanimous approval of all those who had indicated their views, including the Mortgage Commission. The referee’s report was accordingly confirmed in July, 1937, and the plan approved by the court. The plan provides (for a comprehensive summary of its most important provisions see Matter of Lawyers Mortgage Co., 163 Misc. 680) that when, in the opinion of the reorganization managers to be appointed thereunder, enough creditors and stockholders have assented thereto to make its consummation feasible, the reorganization managers shall apply to the court for an order declaring it effective. In no event, however, is such application to be made unless either the holders of two-thirds in amount of all outstanding guaranties or the holders of two-thirds in amount of the estimated allowable claims shall have assented to the plan.
While the motion to confirm the referee’s report and approve the plan was pending, Governor Lehman signed a bill enacted by the 1937 Legislature and known as the Pack Act, adding article VIII-A to the Mortgage Commission Act (Laws of 1935, chap. 19). The resulting statute (Laws of 1937, chap. 926) took effect on June 6, 1937. It provides that a plan of reorganization of a guaranty corporation in rehabilitation on the effective date of the act shall become operative (1) when consented to by creditors holding seventy-five per cent of the claims against the company or (2) if the holders of more than fifty per cent of the claims shall have affirmatively assented and holders of less than twenty-five per cent of the claims shall have dissented within a time fixed by the court for the filing of dissents.
It is important to note that the bill which, in amended form, became the Pack Act, was orig'nally prepared by counsel for the Mortgage Commission and was submitted by him, after it had been introduced in the Legislature, to the referee herein, before whom the hearings on various proposed plans of reorganization were being conducted, and to those attorneys who had been active in the present proceeding to reorganize Lawyers Mortgage Company. Amendments were made, one of which, prepared by counsel for the Mortgage Commission, recognized the court’s right to consider any plans pending before it without resort to and independently of the proposed statute. With these amendments the bill became law. That the Legislature had in mind the possibility that those seeking to reorganize Lawyers Mortgage Company might require or avail themselves of the statute is evident from the provision of section 22-b that “ The provisions of this act may upon order of the court be made applicable to any plan of reorganization or readjustment pending before the court or any referee appointed by it relating to any guaranty corporation which shall be in rehabilitation on the effective date of this act, or as to which an order of liquidation pursuant to article eleven of the Insurance Law shall thereafter be made pursuant to any plan of reorganization pending on the effective date of this act before the court or any referee appointed by it.” (Italics this court’s.) At that time the Lawyers Mortgage Company was in rehabilitation, and proceedings were pending for the adoption of a plan which provided for the entry of an order of liquidation as the first step in the reorganization. The referee had reported such a plan and the motion to confirm the same was pending before this court. It is, therefore, clear that section 22-b was deliberately phrased in language which would permit of no doubt as to its applicability to the present proceedings for the reorgani
The order approving the plan of reorganization contained a direction that the reorganization managers named therein “ examine into and consider the necessity for resorting to the provisions of Chapter 926 of the Laws of 1937 (commonly known as the Pack Act), for the purpose of achieving a successful reorganization herein, and to advise the Court thereof,” and the court expressly reserved the right “ to entertain any application that may hereafter be made to make the provisions of said Act applicable to the said plan and to make such order thereon as to the Court may seem just and proper.” In May, 1938, the reorganization managers decided that it was desirable, for the purpose of achieving a successful reorganization as rapidly as possible, that the provisions of the Pack Act be made applicable to the plan of reorganization. They accordingly requested the Mortgage Commission, which is one of those empowered by section 22-b of the act to make the motion, to move “ to make the provisions of said Act applicable to the plan of reorganization now pending before the court.”
The first of the six motions now before the court is the application of the Mortgage Commission to bring the plan of reorganisation for Lawyers Mortgage Company under the Pack Act.
Recognizing that the adoption of this course would necessitate certain modifications of the plan of reorganization in its present form, the reorganization managers simultaneously moved for an order approving a number of proposed amendments to the plan. This is the second of the six motions previously referred to. In their petition the reorganization managers state that as of June 1, 1938, they have received assents to the plan from holders of mortgages and mortgage certificates, guaranteed by Lawyers Mortgage Company, in the total face amount of approximately $155,000,000. This represents about sixty per cent of $256,060,000, the approximate aggregate principal amount (according to the supplemental affidavit of the Special Deputy Superintendent of Insurance in charge of the liquidation of this company) of the outstanding unreleased guaranties. In order to obtain the assents of holders of two-thirds in amount of all outstanding guaranties, assents amounting to about $15,710,761 additional were still required as of June 1, 1938. Additional assents aggregating substantially more than this amount have been obtained and filed with the
The reorganization managers allege that they are informed that some fiduciaries, holding large amounts of outstanding guaranties, have not yet assented to the plan because of doubts entertained by them as to their legal right to do so. The managers believe that resort to the Pack Act is, therefore, advisable in order to expedite the receipt of assents from such fiduciaries. They point out that in preparing the amendments necessitated by the adoption of this procedure they have made as few changes as possible in the original plan, preserving “ in substance the provision in said Plan that no petition for an order declaring the Plan effective shall be filed unless the holders of two-thirds in amount of outstanding guaranties shall have assented to the Plan, such provision being modified only to the extent of providing that no such petition shall be filed until the holders of not less than two-thirds of the aggregate amount of all claims of creditors which have been duly filed with the Superintendent of Insurance as Liquidator, shall have assented to the Plan.” The provision of the original plan that only creditors and stockholders who affirmatively assent to the plan shall participate therein has been retained. An amendment insisted upon by the Superintendent of Insurance has been consented to by the reorganization managers and by the Mortgage Commission. It provides that creditors and stockholders who do not affirmatively assent shall retain their rights in the liquidation of the Lawyers Mortgage Company as conducted by the Superintendent of Insurance under aiticle XI of the Insurance Law even though they fail to dissent from the plan. In other words, non-assenters are not bound by the plan and retain the rights they would possess if no plan were adopted. In order to adapt the plan to the provisions of the Pack Act, an amendment is proposed which provides that in determining the amount of the claims for the purpose of ascertaining whether the proper amount of creditors has proposed or approved a plan, the amount of each claim shall be measured in the manner prescribed by subdivision 1 of section 22-d of that statute, viz., “ by
Some of the suggested amendments have no connection with the application to bring the reorganization under the Pack Act. One of them provides for an increase of the authorized capital stock of Lawyers Mortgage Guarantee Corporation from 340,000 shares, each of the par value of $5, to 840,000 shares of the same par value and for an increase in the amount of the capital and surplus to be paid in by assenting creditors from $1,000,000 to $2,200,000, to be represented by 400,000 shares at a price of $5.50 per share; $2,000,000 is to be capital and $200,000 is to be surplus. The reason for this amendment is that the reorganization managers are of the opinion that a capital of $1,000,000 would be inadequate for the successful operation of Lawyers Mortgage Guarantee Corporation. Although it was originally expected that stockholders
The third motion is an application by the Superintendent of Insurance for an order approving a proposed sale by him, pursuant to the plan of reorganization, to the reorganization managers of all the outstanding stock of Lawyers Mortgage Guarantee Corporation for $2,200,000, conditioned upon the approval by the court of the amendments to the plan agreed upon by the Superintendent of Insurance and the reorganization managers, and conditioned also upon the plan’s receiving sufficient assents to become operative and effective.
The fourth motion is made by the reorganization managers and seeks substantially the same relief as that which the Superintendent, of Insurance applies for in the third motion.
The last of the six motions, made by a stockholder of Lawyers Mortgage Company, seeks (a) to vacate the order confirming the referee’s report and approving the plan of reorganization recommended therein, and (b)' to dismiss the reorganization proceedings, on the ground that they are unauthorized and illegal in that they violate the statutory requirement that the Superintendent of Insurance himself, and he alone, liquidate insolvent insurance companies under his jurisdiction.
Five of the six motions have been made by the Superintendent of Insurance, the Mortgage Commission and the reorganization managers. The only one made by any one else is the said application of a stockholder to vacate the order confirming the referee’s report and to dismiss the reorganization proceedings. In view of the fact that such application questions the jurisdiction of the court over this entire proceeding, this motion will be taken up first. It is made on behalf of “ Herman H. Stone, as trustee for Mildred S. Hilson, Mary E. Hilson and John S. Hilson.” In his moving affidavit, sworn to July 26, 1938, Stone states that as trustee for the three Hilsons be is the owner and holder of 14,000 shares of the capital stock of Lawyers Mortgage Company, in liquidation. The total number of shares of capital stock of the company is 600,000 (report of referee). Stone’s attorney, in response to questioning by counsel for the Superintendent of Insurance, stated
An affidavit submitted by the Special Deputy Superintendent of Insurance in charge of the liquidation of Lawyers Mortgage Company reveals that in the spring of 1937, some time between the date of the referee’s report in this proceeding (April 10, 1937) and the date of the court’s decision approving the report (July 7, 1937), one Haas, an analyst and statistician employed by said investment firm, told him he had been asked by his firm to secure such information about Lawyers Mortgage Company and its proposed plan of reorganization as was available. The Deputy Superintendent gave him a copy of the referee’s report and the statistical data he required. The Superintendent further states: “ Some time after June 18,1937, which was the date on which the Appellate Division, First Department, by a divided court, affirmed the decision of Mr. Justice Frankenthaler in the so-called Claims Formula case of the New York Title and Mortgage Company, Mr. Haas again called on me and stated that as a result of this decision and the dissenting opinions therein, Mr. Edward (sic) I. Hilson, one of the partners of Wertheim & Co., had become interested in the possibilities of the stock of Lawyers Mortgage Company and would like to discuss the matter with me.” Shortly after this court approved the plan of reorganization, Hilson met the Deputy Superintendent of Insurance and discussed with him the possibilities of future operations of Lawyers Mortgage Guarantee Corporation under the proposed plan of reorganization. In addition the Superintendent states that Mr. Haas attended the argument on the claims formula in the Court of Appeals. He adds: “ After the decision was rendered by that Court on January 25,1938, and I should say within a week or two thereafter, I again conferred with Mr. Hilson, Mr. Haas and other gentlemen of Wertheim & Co., or representing them. The topic of discussion was the opinion of the Court of Appeals.'1
The Superintendent goes on to state that during the period within which Hilson’s purchases were made the market price (oyer the counter) of the Lawyers Mortgage Company stock, of a par value of twenty dollars per share, varied from a high of one dollar and seventy-five cents per share and a low of one dollar per share in August, 1937, to a high of twenty-five cents per share and a low of ten cents per share in February, 1938. It appears from the record that if all the stock were purchased at the highest figure in each month it would have cost $21,218.75, and if at the lowest figure in each month $12,090. It is significant that, as indicated by the Superintendent’s evidence, all Hilson’s purchases were made after two justices of the Appellate Division, in a dissenting opinion (Matter of New York Title & Mortgage Co., 251 App. Div. 415, 424-437), had expressed the view that the “ real estate formula ” rather than the “ mortgage formula ” should be employed in evaluating claims against mortgage guaranty companies, and practically ail prior to the decision of the Court of Appeals on January 25, 193$ (277 N. Y. 66), which refused to adopt the theory of the dissenting justices that claims on mortgage guaranties should be fixed solely on the basis of the value of the underlying real estate and which approved the position taken by this court in the Additional Special Term and that of the majority opinion of the Appellate Division. Had the Court of Appeals approved the reasoning of the dissenting opinion in the Appellate Division the price of the stock of Lawyers Mortgage Company would probably have risen considerably, for the views expressed in that opinion would have benefited the stockholders in that a reduction of the claims of the creditors of the company would have resulted.
The general reaction of those at the hearings on the motion made on behalf of Hilson (or Stone) is expressed in the following statement made by Mr. G. C. Stephens, a certificate holder and chairman of the guarantee holders committee of Lawyers Mortgage Company: “ As to Mr. Weissman’s motion, your Honor, it seems a pity to me as a layman that anyone buying stock of the Lawyers Mortgage Company on the open market as late as this year, and only as far back as 1937, should come into court and cause all this expense to the creditors, all this unnecessary delay and expense. It seems to me it is a pity, aside from the law, your Honor, and you know I don’t know a thing about law, but I hope you will bear in mind when you are considering this motion of Mr. Weissman, should it be so unfortunate that you have to grant it, I hope you will issue a censure to Mr. Weissman and his client to deter any others from coming in on similar proceedings, which to my mind, as a lay person, is almost disgraceful. * * * As to Mr. Weissman’s motion, I hope your Honor will deny it on the ground that if you are business men sitting around this table, and here is a man who comes into court representing somebody that bought as a gamble, as a speculation, it is a shame that we creditors should have to pay the expense of such proceedings as this and the past hearing because people made a bad investment. They knew all about it. They knew the entire picture. They made a bad investment and they ought to
Except for an unsuccessful application by Fay Kane (Matter of Kane, App. Div. First Dept. N. Y. L. J. June 1, 1936, p. 2782), hereinafter referred to, not a single creditor has at any time during the proceedings expressed any objection to the validity of the reorganization proceedings and not a single stockholder other than Hilson (or his transferee, Stone) has indicated the slightest opposition. On the contrary, counsel for the protective committee of stockholders of Lawyers Mortgage Company expressly stated at one of the hearings: “ We do not favor Mr. Weissman’s motion because we believe that all the benefits of a strict liquidation are preserved to any stockholder in this plan as far as the assets which are not going into the operating company are concerned.” (Italics this court’s.)
.The motion to dismiss the reorganization proceedings is based upon the contention that “ the purpose of the so-called reorganization proceedings is to transfer the liquidation of the estate from the Superintendent of Insurance ” to those who are to manage the affairs of the “ Operating Company ” and the “ Realization Corporation ” under the plan. This, it is claimed, involves a violation of the Insurance Law which confers the power and authority to liquidate an insurer solely and exclusively upon the Superintendent of Insurance. In support of this position the movant cites the recent decision of the Appellate Division in Matter of Lawyers Title & Guaranty Co. (254 App. Div. 491), in which that court, two of the five justices dissenting, vacated an order appointing a referee in connection with a proposal to reorganize Lawyers Title and Guaranty Company. Leave to appeal to the Court of Appeals from this decision was granted by the Appellate Division on November 10, 1938 (255 App. Div. 1032; N. Y. L. J. Nov. 12, 1938, p. 1583). That case is, however, clearly distinguishable from the instant one. In the first place, a reading of the majority opinion reveals that the decision of the majority of the court was based upon the factual conclusion that the Superintendent of Insurance had opposed the reorganization. That opinion contains the statement (p. 494) that “ the Superintendent may not be compelled to surrender his trust created by statute.” (Italics this court’s.) It goes on to intimate, however, that the situation would have been different if the Superintendent, were participating in
The majority opinion must necessarily be read in the light of the factual premises upon which it proceeds. Had the majority of the court intended to hold that under no circumstances may a guaranty company be reorganized, it would have been entirely unnecessary to consider the attitude of the Superintendent of Insurance and to emphasize that he, as the majority believed or found, had opposed the court’s assumption of jurisdiction.
In the case at bar, however, as previously pointed out, the Superintendent has at all times favored and actively participated in the working out of a plan of reorganization. As stated at the very outset of this opinion, the original meeting for the purpose of formulating a program for the reorganization of the company was called on May 11,1935, by Charles J. Mylod, the then Special Deputy Superintendent of Insurance in charge of Lawyers Mortgage Company. Ever since that time the Superintendent has exerted every effort in the same direction. So that there might be no misunderstanding as to the Superintendent’s position in this case, the Superintendent’s counsel has stated on the record that the Superintendent’s position at all times during this proceeding has been “ that so long as the plan was in the main a consensual purchase of assets by creditors
It is clear from the foregoing that far from being compelled or forced to enter into the plan of reorganization, as the majority of the Appellate Division in Matter of Lawyers Title & Guaranty Co. (supra) stated, was the fact in that case, the Superintendent in the case at bar is himself asking that the reorganization and the sale thereunder be approved. Obviously, any provision in the plan for Lawyers Title and Guaranty Company which called for the Superintendent’s sale of assets against his will would constitute a violation of article XI of the Insurance Law. No such situation is involved here, however, for the Superintendent wishes and desires to sell certain of the assets at a fair price, approved by the court, to the group of creditors and stockholders which has been formed under the plan and which is continuing to receive assents from additional creditors and stockholders.
That the consent of the Superintendent of Insurance or of the Superintendent of Banks (as the case may be) is a necessary prerequisite to the validity of a non-statutory plan of reorganization of an insurer or bank in his hands as rehabilitator or liquidator, where the plan proposed interferes with the statutory duty of the Superintendent to liquidate, has always been recognized. Thus, in the matter of the liquidation of Guaranteed Mortgage Company, an application by creditors for leave to submit such a plan of reorganization and for the assumption of jurisdiction by the court was denied (Matter of Guaranteed Mort. Co., N. Y. L. J. Dec. 2, 1937, p. 1941), in view of the fact that the plan called for the taking of the liquidation of the company out of the hands of the Superintendent of Banks, who had taken over the company under the Banking Law, and the turning over of the liquidation to others. The Superintendent of Banks accordingly opposed the application, which sought to divest him, against his will, of his statutory right and duty to liquidate the company. A similar application by creditors of the State Title and Mortgage Company, looking toward the reorganization of that company, was withdrawn by the moving parties when upon the hearing the Superintendent of Insurance vigorously opposed the application. (See, also, to the same effect, Matter of Lawyers Title & Guaranty Co. [Lemberg], 165 Misc. 776, 780.)
That the majority opinion of the Appellate Division in Matter of Lawyers Title & Guaranty Co. (supra) has no application to the proceedings for the reorganization of Lawyers Mortgage Company
Apparently recognizing that the plan of reorganization for Lawyers Mortgage Company cannot possibly be regarded as compelling the Superintendent of Insurance to do anything he does not wish to do, or as substituting the court’s judgment for that of the Superintendent, or as interfering, contrary to the Superintendent’s own desires, with his statutory duty to administer and liquidate the company’s affairs, the movant argues that the plan is, nevertheless, illegal because “ the Superintendent may not even voluntarily surrender his trust.” The difficulty with this argument is that the plan of reorganization does not involve a surrender of his trust by the Superintendent. In the absence of any plan of reorganization, it is clear that no creditor or stockholder of Lawyers Mortgage Company would have any legal grievance or valid complaint if the Superintendent of Insurance, pursuant to section 421 of the Insurance Law, were to sell some or all of the assets of the company, including the stock of its subsidiary, Lawyers Mortgage Guarantee Corporation, at a price approved by the court as fair and reasonable. No one could successfully contend that such a sale would constitute a surrender by the'Superintendent of his statutory duty to liquidate the affairs of Lawyers Mortgage Company, for the principal, it not the only, method of liquidating the company is through the sale and disposal of its assets, other than collectible debts. Section 421 expressly recognizes that this is so, for it provides that “ The Superintendent may, subject to the approval of the court, (a) sell or otherwise dispose of the real or personal property, or any part thereof, of an insurer * * * and (b) sell * * * all doubtful or uncollectible debts or claims * * * owjng to such insurer.” The purchasers at such sale or sales, possessing, as they would, legal title to the purchased assets, could dispose of them as they might see fit without interference on the part of creditors
The sale which the Superintendent agrees to make of the stock of the subsidiary, Lawyers Mortgage Guarantee Corporation, is to be at a price approved by the court as fair. The sale or sales of other assets of Lawyers Mortgage Company by the Superintendent are likewise to be at a price and on terms satisfactory to him and approved by the court. The order of liquidation of Lawyers Mortgage Company, for which the Superintendent agreed, under the plan, to apply on request of the reorganization managers, could not be granted unless he established to the court’s satisfaction the existence of proper grounds for the entry of such an order under section 403 of the Insurance Law. What happens to the assets (whether capital stock of Lawyers Mortgage Guarantee Corporation or other assets) after they have been sold by the Superintendent at a price approved by the court as fair is no legitimate concern of the creditors and stockholders of Lawyers Mortgage Company, their only right in such event being their right to receive their distributive shares of the price obtained by the Superintendent. The identity of the persons who are to manage the corporation or corporations which are to administer the purchased assets after the sale is likewise something which does not properly concern the creditors or stockholders of Lawyers Mortgage Company. The mere fact that various creditors have entered into a consensual arrangement, open to all other creditors, to bid for assets in the possession of the Superintendent of Insurance and to apply their distributive shares on the claims against the company held by them, to the payment of the purchase price, instead of paying cash, does not alter the situation and make that illegal which otherwise would be perfectly valid. It is to be noted that the creditors who choose to participate in the purchase of stock of Lawyers Mortgage Guarantee Corporation from the Superintendent are required by
The court is accordingly unable to perceive how the plan of reorganization may be said to call for an unlawful surrender by the Superintendent of Insurance of his statutory duty to liquidate. The plan does provide for liquidation by the Superintendent of part of the assets in one sale and for the further liquidation by him of various assets from time to time as steps in the reorganization, if, as and when he elects to sell. It contemplates, however, that, instead of selling assets to strangers, he will sell them to the creditors and stockholders of the company in liquidation, at least to those creditors and stockholders who wish to become purchasers. It is not the purpose of the plan to give such creditors and stockholders a bargain by letting them acquire the assets for less than they are
It is not, however, necessary to the validity of the proceedings that every act and step contemplated or provided for therein be one which could legally be performed even in the absence of a reorganization. If a plan of reorganization of a domestic insurer is acceptable to the Superintendent of Insurance and appears to the court to be fair and equitable to all concerned, it may be approved in the exercise of the court’s inherent equity powers. Prior to the enactment in 1909 of section 63 of the Insurance Law (repealed by Laws of 1932, chap. 191, and re-enacted in art. XI of the same statute), the Supreme Court undoubtedly possessed the power of courts of equity generally to supervise and bring about the reorganization of corporations, including insurance companies, in proper cases. Unquestionably that power is still exercised by the court in
“ All the foregoing matters are outside the scope of an action in foreclosure, which in this State is controlled by specific statutory provisions. Among these is the express requirement that the sale be made to the highest bidder (Civ. Prac. Act, § 986). * * * If bondholders deem themselves aggrieved by a particular plan of reorganization, full relief may be obtained in an action in equity brought directly for that purpose.
“ To permit the injection of such collateral issues in a foreclosure action where the right to a decree is not in issue, would directly violate clearly defined contractual rights, would complicate and delay the progress of the foreclosure action to an extent impossible to measure, and in addition possibly burden the property with greatly increased charges and expenses,” it was evident that this was not the" opinion of the otherwise unanimous court as indicated by the following language in the majority opinion (p. 375 et seq.):
“ In the case of a strict foreclosure whereby the equity of the mortgagor is entirely wiped out, a comparatively simple problem is presented. Prior to 1899 it seemed to be the general impression that mortgage bondholders could combine with the stockholders of the corporation and readjust the entire property to suit themselves, to the extinction of all intermediary claimants and even to the injury of the mortgage bondholders themselves. Then came the leading case of Louisville Trust Co. v. Louisville, etc., Railway (174 U. S. 674, the Monon case). This decision of the United States Supreme Court held that with the large amount of the property involved or for other reasons, sales in foreclosure could not be expected to bring real competitive bidding, and that in such cases the foreclosure action was only a step in a reorganization of the corporation. * * *
“ In Clinton Trust Co. v. 142-144 Joralemon Street Corp. (237 App. Div. 789), Mr. Justice Scudder, writing for the Appellate Division, Second Department, on March 10, 1933, stated: ‘ The way is not unblazed if it be thought that we are pioneering in a new field. In the Federal jurisdiction it has been comparatively common for courts to take cognizance of reorganization plans in foreclosure and other suits, and to withhold judgment or confirmation of a sale until some fair and open plan of reorganization was presented and substantially agreed upon; and it has been said:
It has been common for the Federal courts to take cognizance of reorganization plans in foreclosure actions and in other actions and proceedings, and no valid reason exists for holding that our State courts may not exercise similar powers. As the Appellate Division in this department said in Chase Nat. Bank v. 10 East 40th St. Corp. (supra, at p. 376): “ Indeed, it seems to us absurd for the appellants to urge, as they do in this case, that the State courts are incapable of doing the same equity as have the Federal courts.” After the appointment of a receiver in an equity action or proceeding the assets of the corporation would be in custodia legis, and, if the plan of reorganization approved by the court called for the sale of some or all of the corporate assets, the decree would direct the receiver to make the sale in furtherance and effectuation of the plan. No valid reason exists for holding that a court of equity, though having the power to supervise and bring about the reorganization of financially embarrassed corporations generally, does not possess that power in the case of insurance companies or banks. Nothing contained in section 63 or in any subsequent legislation purports to extinguish and destroy the court’s previously existing power to approve plans of reorganization for insurance companies. Section 63 and article XI of the present statute, which took its place, as well as analogous provisions of the Banking Law, were not intended to make impossible the reorganization of delinquent or financially embarrassed domestic insurance companies and banks. There could be no sound reason for denying to insurance companies and banks the right to reorganize which all other classes of corporations, unaffected by the Insurance and Banking Laws, were concededly permitted to retain. The purpose of the amendments to the Insurance Law and the Banking Law which were adopted in 1909 and thereafter was merely to alter the theretofore existing methods for the liquidation of insurance companies and banks by substituting liquidation by the Insurance Department or the Banking Department, as the case might be, for liquidation by receivers appointed by the courts on the application of the Attorney-General. (See Report of Commission on Banks to Governor Hughes, submitted December 16, 1907; see, also, special message of Governor Hughes to the Legislature [Senate Doc. 132d Session, vol. 5, No. 26].) Analysis of the provisions of section 63 and of article XI discloses that it was not the legislative intent to substitute the Superintendent of Insurance for the courts in the handling of delinquent insurers.
Even in the case of the Superintendent of Banks, over whose activities the court is not given the same degree of control as it is in respect of the Superintendent of Insurance (See 66th Annual Report of Superintendent of Insurance to Legislature; Beha [N. Y. Legis. Doc. (1925), No. 21, part I], for example, the Superintendent of Banks may take over a delinquent bank “ forthwith ” without an order of the court whereas the Superintendent of Insurance must apply for a court order), the Court of Appeals has said (Isaac v. Marcus, 258 N. Y. 257, 268, 269): “ We have said that the Superintendent of Banks is in effect a statutory receiver, yet for some purposes the assets in his hands may be regarded as * in custodia legis ’ (Lafayette Trust Co. v. Beggs, 213 N. Y. 280). * * * There still remains a field within which the court is supreme. (See Matter of Casualty Co. of America [Rubin Claim], 244 N. Y. 443.) ”
If, despite the extensive powers vested in the Superintendent of Banks by the Legislature, the Court of Appeals nevertheless regarded the assets in his hands as being for some purposes “ in custodia legis," there is all the more reason for holding that the assets in the possession of the Superintendent of Insurance, whose powers and actions are subject to the constant supervision and direction of the court and less extensive than those of the Superintendent of Banks, are likewise in custodia legis.
That the purpose of article XI of the Insurance Law was not to prohibit reorganizations of delinquent insurers but, on the contrary, to encourage and promote such reorganizations, is confirmed by a report of former Superintendent of Insurance Van Schaick on “ The Administration of the Delinquent Title and Mortgage Guaranty Companies by the New York Insurance Department,” dated May 10, 1935, in which he states (at p. 4): “ Article XI of the Insurance Law, drafted by Howard C. Spencer, counsel to the Department, assisted by others of the Liquidation Bureau, was sponsored by the Department of Insurance and was duly passed by the Legislature, approved by the Governor, and became effective March 15, 1932, superseding § 63. That Article changed completely the approach to the problem of the delinquent insurer and emphasized rehabilitation and conservation, rather than liquidation, in the belief that thereby an opportunity would be afforded to study the possibilities of reorganization and to consider how the substantial income-producing portions of the business of the insurer might be preserved as a going business for the benefit of creditors. Rehabilitation provided the necessary breathing spell during which the status quo was preserved, all persons were enjoined from asserting claims and a definite effort was made to explore all the possibilities of reorganization.” (Italics this court’s.)
The enactment of section 63 and of its successor, article XI, although not intended or purporting to terminate the court’s power to reorganize insurance companies, did, however, affect and alter that power in a very important respect. Whereas previously a court of equity could direct the receiver which it had itself appointed to convey the assets of the company in his charge in effectuation of the reorganization, after 1909 the court no longer possessed such unrestricted power in regard to insurance companies or banks. It could not direct the Superintendent of Insurance or .the Superintendent of Banks to make a sale in furtherance of a plan of reorgani
“ One type of reorganization centers about the device of judicial sale. After outstanding claims have been determined cash distribution of company assets cannot occur for a considerable t,imp because many millions of dollars of these assets consist of mortgages and real estate which cannot be converted immediately into cash without substantial sacrifices. Under these circumstances perhaps when the time comes some form of mutualization of the companies to provide for a gradual, orderly liquidation may take place.”
In the annual reports of the present Superintendent of Insurance, submitted for the periods ending December 31,1935, and December 31, 1936, respectively, Superintendent Pink referred to the type of reorganization which requires no legislation to legalize it in the following language: “ One type [of reorganization] accompanies and is a natural incident to the liquidation of these companies. When the company is placed in liquidation claims are comparatively quickly determined. At this point rights against the assets become known. In many cases, however, because of the lack of a real estate market, it will be years before these assets can be reduced to cash. In lieu of an indefinite postponement of distribution which would require the service of the Superintendent for many years as a liquidating custodian of the assets it may be possible to devise some distribution in kind by creating a liquidating corporation and distributing the stock to those entitled to it. This
Although he took the position that he did not feel it incumbent upon himself to sponsor or propose such plans of reorganization generally on the ground that they were primarily the function of those who desired reorganization, he added: “ When the Department is convinced that any plan thus proposed is fair and equitable and is desired by a substantial majority of the parties affected by the plan, it will give its approval and support to the proposal.”
Nor are precedents lacking for the exercise by the court of the power to supervise the reorganization of domestic insurance companies, whether in rehabilitation or in liquidation Such reorganizations have taken place during the last few years in the case of Globe & Rutgers Fire Ins. Co. (148 Misc. 497; Id. 501; 149 id. 16; Id. 18); Matter of People [National Surety Co.] (239 App. Div. 490; affd., 264 N. Y. 473) and Matter of Union Guarantee & Mortgage Co. (158 Misc. 565; 161 id. 882; 164 id. 606). In connection with the reorganization of Globe & Rutgers Fire Ins. Co. (supra) a bulletin issued by the New York State Insurance Department and printed in the New York Law Journal of November 27, 1934, (p. 2033), stated: “ The rehabilitation provisions of Article XI of the Insurance Law, enacted in 1932, were resorted to rather than a liquidation proceeding in the hope that it might be possible to effect a reorganization. This hope has now been realized. * * * Throughout the rehabilitation proceedings the co-operation of the court has been of great assistance in enabling the Globe & Rutgers Fire Insurance Company to work out a reorganization plan.” (Italics the court’s.)
That the Legislature had no intention of prohibiting reorganization of insurance companies, that it did not intend to compel the liquidation of every insurance company which could not be rehabilitated (i. e., returned to its stockholders for the resumption of business), and that it recognized that insurers might be reorganized without express statutory authority, is evident from the language and provisions of various statutes. Thus an amendment to the Mortgage Commission Act, enacted in 1936, gives the Com
Unless the reorganization of a delinquent insurer was possible prior to the enactment of the Pack Act, this provision would be meaningless. As no statutory provisions for reorganization existed up to that time, the Legislature could have been referring only to non-statutory reorganizations.
These are not the only instances of legislative recognition that the reorganization of a guaranty company under the jurisdiction of the Superintendent of Insurance may be accomplished without resort to any statutory authority. Thus section 406-b of the Insurance Law, enacted a year prior to the Pack Act by chapter 232 of the Laws of 1936, indicates clearly that the Legislature realized that a domestic insurer could be validly reorganized, although there was no statute then in existence which purported to authorize such reorganization: “ In a proceeding for the rehabilitation, reorganization or liquidation of a domestic insurer begun in this State, claimants * * * shall file their claims in this State pursuant to the laws of this State.” (Italics the court’s.)
Section 406-a, enacted by the same chapter, declares it to be the legislative purpose “ to promote uniformity in the rehabilitation, reorganization or liquidation of insurers doing business in more than one State.” Even the preamble of the Pack Act contained in section 21 of article VIII-A, is worded in such a way as to indicate that the Legislature appreciated that domestic guaranty corporations “ in rehabilitation pursuant to the provisions of article eleven of the Insurance Law ” could be legally reorganized in non-statutory proceedings, for it states that “ there is no statutory procedure now in existence for dealing with the problem of the companies ” (italics this court’s), and not that there is no procedure. All
In support of the motion to dismiss the reorganization proceeding, Stone’s attorney has characterized the proposed sale of the stock of Lawyers Mortgage Guarantee Corporation as a pretended rather than an actual sale, claiming that there was no real negotiation and no exercise by the Superintendent of the discretion vested in him by statute. In answer to this contention, counsel for the Superintendent of Insurance pointed out that the sale was an actual sale which had been negotiated by the Superintendent in the exercise of his own free and independent judgment. He added: “ The buyer here will pay four per cent a year on the purchase price until fully paid" for, with dividends. The Superintendent is frank to say that he has not been earning four per cent a year, and nobody will be able to earn four per cent a year as long as this company is going to retain United States Treasury Bonds. The people buying this company will have to take risks to justify this purchase, to justify the payment of the Reorganization expenses which are a premium on the stock, and the payment of four per cent a year, which is more than this company has ever earned or is able to earn on its investments.”
Counsel for other creditors declared: “ and when Mr. Weissman complains about this sale as not being a bona fide sale, his argument is reduced to the effect that were it not for this plan, there could be no such sale.
“ That is granted. Granted that that is why there was a plan, just to make such a sale possible, if there had been no reorganization plan, there would have been no managers, and had there been no unified action, there would have been no purchaser, and if there would have been no purchase, the Superintendent never could have come into court with this application.
“ Does that prove that the application is in bad faith?
“ No, it proves it is not a sale to a stranger, it proves it is a sale to a group of creditors.
“Is it a fraud? Is the Superintendent not being paid? Is there any reasonable question about his security? Has there been an attack made upon the amount of the purchase price? Is anybody being hurt?
*834 1 “ Where are the elements that make it a fraudulent sale or anything but a perfectly bona fide sale to creditors who have finally succeeded in organizing themselves into a potential customer because they think they can get more out of it through that purchase than they could get through a purchase by someone else.”
Nor is there any merit in the claim made on behalf of the movant, Stone, that it does not appear that the claims of assenting creditors will furnish adequate security for the purchase price to be paid to the Superintendent for the stock of Lawyers Mortgage Guarantee Corporation. Counsel for the protective committee of stockholders of Lawyers Mortgage Company expressly conceded that the claims of assenting creditors constituted ample security: “ If the purpose [of introducing certain documents] is simply to show that the Reorganization Committee has enough claims and that probably,— not only probably but they surely have enough claims to justify them in bidding for the stock of the Lawyers Mortgage Corporation, the $2,200,000, why that fact, on behalf of my stockholders, I concede.” This concession, it "was pointed out by counsel for the Superintendent of Insurance, was against the interest of stockholders’ counsel to make: “ Mr. Roberts, representing a large block of stockholders, concedes that the assenting creditors have more than ample security for $2,200,000, and it is not to his interest or the interest of his client so to concede it.” Quite apart from this concession, the evidence establishes clearly that the claims assigned to the reorganization managers by assenting creditors totaling more than $171,000,000 out of $256,000,000, the total aggregate principal amount of outstanding claims, furnish more than ample security that the Superintendent will be paid the purchase price for the stock of Lawyers Mortgage Guarantee Corporation which is to be sold to the reorganization managers. The assets in the hands of the liquidator exceed $14,500,000. The reorganization managers already hold more than two-thirds of the outstanding claims against the company. These claims will manifestly be entitled to receive a great deal more by way of dividends than the $2,200,000 to be paid for the stock, and the evidence of the Superintendent establishes this.
It follows that the motion to vacate the order confirming the referee’s report and to dismiss the reorganization proceedings must be denied.
We now turn to the motion to bring the plan -under the provisions of the Pack Act. The reorganization managers believe that the granting of this application would hasten the receipt of assents from fiduciaries holding large amounts of claims. The court is, however, of the opinion, as will now be pointed out, that there is an even better reason for granting the motion. If the plan is
The argument has been made that the plan may not validly be brought under the Pack Act in view of the fact that upon the Superintendent’s insistence it is to contain a provision that nonassenters shall not be bound and shall retain their right to share in the proceeds of the Superintendent’s liquidation. Merely because the Pack Act permits the promulgation and approval of a plan of reorganization which shall, if it receives the necessary number of assents or if insufficient dissents are filed, be “ binding upon all parties affected thereby ” (§ 22-a), it is contended that a plan to be valid under the Pack Act must bind dissenters and
Attack is also made upon the constitutionality of the Pack Act itself, it being charged that section 22-d prescribes an improper, arbitrary and unfair method of determining the amount of claims for the purpose of ascertaining whether a plan has received sufficient assents to enable it to be declared effective. If the plan in the case at bar were to bind non-assenters as well as assenters, it might perhaps be necessary to consider the merits of the criticism leveled at the provisions of section 22-d. The fact is, however, as repeatedly pointed out heretofore, that the plan of reorganization for Lawyers Mortgage Company does not bind non-assenters or affect their rights in the slightest and it follows that no constitutional or other right of non-assenters is invaded or infringed. In this connection
Granting the motion to bring the plan under the Pack Act would enable it to receive whatever added validity may accrue to it as the result of its being expressly authorized and sanctioned by a specific act of the Legislature, without impairing in the slightest its validity as a non-statutory reorganization. This is so by reason of the proposed amendment, agreed upon between the Superintendent of Insurance and the reorganization managers, which the court approves, that “ if chapter 926 of the Laws of 1937, known as article VIII-A of the Mortgage Commission Act, as amended, is not declared applicable to the plan or is declared inapplicable or invalid in any respect by the court, or any appellate court, this plan shall be and remain unaffected thereby.” In other words, there is nothing to lose and everything to gain by bringing the plan under the Pack Act with said amendment incorporated therein. In order to be held invalid the plan would have to be declared illegal both as a Pack Act plan and as a non-statutory plan not under the Pack Act.
For the reasons indicated the motion to bring the plan under the Pack Act is granted. The motion to amend the plan so as to adapt it to the provisions of the Pack Act and also in other - respects, some of which have been previously mentioned, is likewise granted.
The third motion, in which the Superintendent of Insurance seeks approval of the proposed sale by him to the reorganization managers of all the outstanding stock of Lawyers Mortgage
The fourth motion requires no discussion and is also granted.
The fifth motion for approval of the voting trust agreement is granted with such of the amendments proposed as have been consented to by the reorganization managers, except that the compensation of the voting trustees is not to be fixed by the operating company.
The court’s disposition of all the six motions upholds the position taken by the Superintendent of Insurance, the Mortgage Commission and the reorganization managers. Thus a stipulation filed October 25, 1938, states that “ The Mortgage Commission joins with the Superintendent of Insurance and the Reorganization Managers in requesting the Court to grant all of the pending applications of the Superintendent of Insurance and the Reorganization Managers, including the applications for approval of the agreement between the Superintendent of Insurance and the Reorganization Managers, and to make the Pack Act applicable to the Plan of Reorganization as so amended, and to deny the application of a stockholder to dismiss the reorganization proceedings. ’
The plan of reorganization has been approved by the court after extensive hearings before a referee; it has received the affirmative approval and co-operation of two State agencies, the Superintendent of Insurance and the Mortgage Commission; no appeal has been taken from the order approving the plan; it has been expressly approved and accepted by over 18,500 holders of guaranties aggregating more than $171,000,000; it meets with the approval of creditors’ and stockholders’ committees; the only opposition to the reorganization has come at this time from a single stockholder whose stock, as previously pointed out, was recently acquired, during the pendency of the reorganization proceedings and with full knowledge of the details thereof.
Settle order.
