213 F. 492 | E.D. Wis. | 1914
(after stating the facts as above).
The application for leave to file the intervening petition presents two grounds: (1) The partiality and consequent disqualification of the trustees, necessitating the admission of the bondholding petitioner Griffiths, as a party, to enable him to protect his interests. (2) That on February 25, 1908, a committee known as the “Wisconsin Committee” was constituted by an agreement between the members thereof, named in the petition, and such Wisconsin bondholders .(holding bonds secured by the mortgage now being foreclosed) who should deposit their bonds as in the agreement specified; that on October 10, 1908, a new agree
At the sales in each of the jurisdictions, this reorganization committee was the sole bidder and its bids came before each of the courts for acceptance and confirmation. The voluminous petition sets out in detail the various steps alleged to have been taken by bondholders of rhe respective corporations prior and leading up to the adoption of the plan of reorganization, the alleged conflict of interest and duty between the Wisconsin and Illinois interests in the perfection of such plan, the dual relation alleged to attend the membership of the five individuals named, in each of said committees, and hence their breach of trust in acting as members of the general reorganization committee and assenting to its plan, which is averred to be iniquitous and in effect to subordinate the interests of the Wisconsin to the interests of the Illinois bondholders.
The prayer is that the petition stand as presenting objections to the confirmation of the sale; that the acts of the Wisconsin committee be adjudged a breach of trust toward the petitioner; that such committee, and the reorganization committee, and their respective members, “be perpetually restrained and enjoined from further carrying into effect, * * * in whole or in part, said plan and agreement of reorganization; * * * ” that the Wisconsin committee and its members be restrained and enjoined from further acting as members of the reorganization committee, etc.; that, if a new sale be ordered, then Smith and Ford (who bid on behalf of the reorganization committee) and the reorganization committee and its members, be restrained and enjoined “from bidding upon the properties, rights and franchises of said Wisconsin corporation and said West line in the name, or on behalf of, said reorganization committee, under and by
In support of the first of the grounds mentioned—the disqualification of the trustees—these facts are urged':
(a) That one of the trustees, for some time prior to January 26, 1912 (the date of the general reorganization agreement), and at the date of the sale, was the “holder of 202 Wisconsin bonds secured by the mortgage,” which is the subject of foreclosure, and that since the sales, such trustee “has consented and agreed in writing to deposit, subject to procuring the order of this court giving it leave so to do, its said 202 Wisconsin bonds under said plan and agreement” of reorganization.
(b) That Joseph E. Otis, the president of the corporation trustee was, during the times mentioned, the “owner or in control of and interested in 25 of the Wisconsin bonds,” which bonds are said to have been deposited by him under the general reorganization plan.
(c) That Walling, one of the trustees, was at the date last above mentioned “head trust officer” of the corporation cotrustee, and a salaried officer thereof; and as such was not “acting independently of” the corporation cotrustee, but under its “directions and influenced by” its wishes.
(d) That both of the trustees appeared in the District Court in Illinois after the sales, and supported the motion in the proceedings therein, for confirmation of the sales (the facts concerning which sales are set forth in the petition, and are found in the reported case, 206 Fed. 488), and—
“actively participated, tlirougli their counsel, upon the hearing of certain objections to the confirmation of said sales, and continued to urge such confirmation, notwithstanding * * * such trustees, knew, or should have known, of the grossly inadequate prices bid by said proposed purchasers.”
In this connection it is further urged that the trustees likewise joined the purchasers in an application to confirm the sale in this court (Eastern District of Wisconsin).
(e) That connected with, and operated by, the receiver of the Illinois corporation railroad is a mile of railroad owned by the Waukegan, Fox Lake & Western Railway Company. Its capital stock is $100,-000, and its properties are subject to an outstanding mortgage bond issue of $50,000. Such stock and bonds are averred to be owned and controlled by Otis, president and director of the corporation trustee herein. It is claimed that Otis made an agreement, on August 1, 1912, to sell to the reorganization committee the stock and bonds specified at a price of $56,000, to be paid, as stated, when the reorganization was consummated; that such agreement was in force on September 25, 1912, when the sale herein was had.
The application for confirmation of the sale being now withdrawn, that feature of the petition, and any response thereto, is eliminated because another sale will be ordered. With respect to the attack upon the reorganization plan and the prayer fdr injunctive relief against future bidding by the reorganization committee—which is pressed as an independent ground for intervention—the question is eliminated because, as will appear, that portion of the petition will be disposed of on .other grounds. Therefore it is necessary now to consider only whether the trustees should be heard upon the merits of the attack made by the petitioner in seeking to disqualify them from, continuing m the sole control of the foreclosure proceedings.
Respecting thfe contract alleged to have been made by Otis for the sale of the securities of the Waukegan, Fox Lake & Western Railway, the trustee offers to show that the proposition was conditioned upon approval by the Illinois court or its receiver.
It may be that where a person not already interested or represented in a suit seeks to intervene—where intervention proper is sought—the court should not first determine the cause of action set out in the bill or petition in order to determine the right to intervene. Thus where one seeks by intervention to lay claim to the subject-matter of a suit and obtain a decree which, in his absence, would go to another, the court cannot do otherwise than consider whether his petition, if proven, would entitle him to relief if a party. But, as suggested to counsel upon the argument, is this true where one, having an interest in the suit, excluded as a party under a rule of convenience and because represented by a trustee, seeks to displace his trustee, or to join him in active participation in the suit? He does not seek to assert any interest, or to obtain any relief, not already assertable or grantable on his behalf, if the trustee will but attend to it. His attack is directed at •his own representative to whom his interests in the suit have been committed, and who is the sole party under the rule adopted to enable the court to discharge its functions in this class of cases. The court, in this situation, is not concerned with the question whether a bondholder has' any interest in the suit, or any right which is entitled to protection. That is conceded. The only question is, Shall the rule be relaxed because the representative has become disqualified any longer to discharge his duty toward the several interests in the suit? and the question is to be determined, not merely upon charges which may be made, but upon the facts as they really exist at the time when the court is asked to admit the beneficiary into active participation in the suit. In this situation, the practice or procedure by which the court shall ascertain the fact is wholly discretionary. Undoubtedly the trustee could be required to take 'formal issue by answer to the petition, and a trial thereon had; so, too, a reference to a master might be made to inquire into the merits of the petition without answer thereto; and no reason is perceived why the court should not proceed directly to ascertain the facts in any manner deemed convenient or adequate in the particular situation presented. Inasmuch as the petition is presented for no purpose save that of displacing the trustee, or admitting the bondholder, the right to■ Me the petition need not be determined separately or apart from its merits; and the conclusion is reached that in the present case the court can, in its discretion, consider not only the matters appearing on the face of the petition, but also the facts relating
The question is therefpre, Do the facts respecting the corporation trustee’s relation to the railway corporation under the “collateral trust indenture,” Otis’ ownership of stock in another corporation, which owns certain of the bonds, secured by the mortgage under foreclosure (and which bonds have been deposited under the reorganization plan), Otis’ alleged contract respecting the Waukegan, Fox'Lake & Western Railway, put such trustee in such a position that its impartiality can be challenged ? Certainly under the collateral trust indenture, it acquired no junior or other conflicting interest in the property conveyed to it by the deed under foreclosure. It assumed no duty whose performance waá at variance with any imposed upon it by the latter. The most that can be said is that by the collateral trust indenture it obtained possession of certain of the bonds which might ripen into ownership, or, in certain contingencies, enable it to assert a control thereover—as, for example, to influence their use, in the present case, in assent to the reorganization plan. It is my judgment that a trustee ought not to so place itself. The efficient discharge of duty is likely to be endangered whether the trustee is upon debatable or upon forbidden ground. The trustee herein doubtless realized this when it gave assent to the deposit of the collateral trust bonds, subject to the approval of the court. That reservation, however, is quite persuasive in establishing its good faith and its design to subordinate every other obligation to its primary duty as trustee under the foreclosure proceedings; and the act of resigning the collateral trusteeship, even after the attack was made by the bondholder, ought to be accepted as in furtherance of its primary duty to be impartial and to avoid possible embarrassment, rather than as a confession of wrong consequent upon which such trustee must be deemed unfit any longer to be in sole control of the litigation. The facts, therefore, as shown by the petition and by the trustee respecting the latter’s relation to these 202 bonds do not support the claim of disqualification.
The ownership of stock in a corporation which owns certain of the bonds does, in a certain sense, give Otis, the president of the corporation trustee herein, an interest in the bonds, but he is in no sense the owner or possessed of any legal interest, and for that matter has no legal control ,thereover; and, until it appears that he has done some act which in fact commits the trustee herein to some policy or situation at variance, actually or potentially, with its duty as trustee, his remote and indirect interest thus held certainly cannot disqualify the trustee. So long as such corporation trustee appears free from any conflict of interest, the possible conflicting position of one of its officials, unaccompanied by any act of hostility which is chargeable to the corporation itself, will not justify a want of confidence in such trustee.
With reápect to the Waukegan, Fox Lake & Western Railway contract, charged to have been entered into by Otis, the contention is also made that by virtue thereof he has an interest in the success of the reorganization plan, which is, or may be, in conflict with his duty as the chief executive of the corporation trustee. This, if true, discloses a
The District Court in Illinois (206 Fed. 488), in denying the motion to confirm the sale, passed upon the single question whether the bid was inadequate as a result of chilling of suppression, whether the facts charged showed a suppression of competition. The Court of Appeals (212 Fed. 594, 129 C. C. A. 130) had before it these same questions. Whatever is contained in its opinion in reference to reorganization plans and the necessity of fair treatment of all security holders bears solely and directly upon the main proposition that courts must, to protect to the fullest extent nondepositing bondholders, clearly recognize the control over bidding situations which reorganization committees usually possess.
Judge Baker said:
“When a nondepositing bondholder objects to confirmation solely on the ground that the reorganization committee’s bid, though not grossly inadequate, was substantially short of the fair value, the answer is that his co-owners of the common mortgage and the common decree offered him the opportunity to deposit his bonds and to share equally with them the benefits of the purchase. But, in sales of this class, we never have observed of heard of a*503 case where the minority were turned away without having been given by the majority a fair opportunity to share equally with them the benefits of the purchase—where for example, 95 per cent, of the bondholders of a vast railroad or industrial enterprise have combined and then shut the door upon the scattered 5 per cent. And no just distinction can be drawn, we believe, whether the door be shut or unconscionable conditions of entrance be imposed.
“A reorganization plan is somewhat like an insurance policy or a bill of lading, against which there is no protection except through legislative control of the insurance and railroad companies’ offerings. The solitary and distant bondholders must accept the reorganization plan or let it alone, as it is written. When the unitary property of a single company of the kind in question is to be reorganized, the persons who assume or accept the committee-ship, realizing the equality of all bondholders and recognizing that no bondholder has any right to preferential treatment, usually offer a plan that will give the common owners of the mortgage equal benefits through the foreclosure, usually become nothing but the agency through which the bondholders act for their mutual protection. In such a reorganization, if the bondholder does not come through the foreclosure as well off as any other bondholder, it is his own fault. In the case at bar, the reorganization committee was not a mere agency for appellee and her fellow Illinois bondholders; under sweeping powers, to be exercised ‘at its sole discretion,’ it could buy bonds, take up claims of subordinate right, allow compensation to pre-existing committees and assume their contracts, and do anything and everything it saw fit to do, whether specified or not. Preferential treatment of Illinois bondholders. who were acting in the primary interest of their Wisconsin bonds, was accorded in many ways. - * * * Thus the Illinois property, which in equity belonged to the Illinois bondholders in equal right under the mortgage and under the foreclosure decree, would, in the hands of appellant, be loaded down with premiums, bonuses, services, expenses, etc., with which neither appellee nor any other Illinois bondholder as such had any concern. Therefore no inequity was chargeable tb appellee in asking the court to open a door of fair opportunity.
“No matter what the plan, it does not matter whether the committee bids much or little if all the bondholders are in. Here, some $160,000 of bonds were outstanding. And the temptation to use the monopoly of bidding for the purpose of recouping partially the outside expenses and losses of the majority at the expense of the minority seems to have been too strong.”
An order may be entered denying the petition for intervention, also an order directing a resale.