Opinion ID: 1507907
Heading Depth: 1
Heading Rank: 11

Heading: COs and Scrip

Text: The Non-original COs and the holders of Scrip object to the compromise and plan because they have been given no participation in the assets. The Non-original COs contend that the subordination clauses of their bonds are void and unenforcible, because obtained through fraud and misrepresentation, and because no consideration was given by Ageco for the agreement to subordinate. But that Non-original COs are subordinate was decided by this court in Elias v. Clarke, 2 Cir., 143 F.2d 640, 644, 647, in which the issue was squarely presented. The contention of the Non-original COs that the court exceeded its jurisdiction and passed on matters not before it we find to be without merit. Original holders of COs received their bonds in exchange for CDCs, and are granted participation in the assets on the theory that they may have a claim for rescission or damages based on fraud or misrepresentation in connection with the exchange. The statement in the case of Elias v. Clarke that under the New York law a claim for fraud or misrepresentation in connection with an obligation evidencing a debt    does not pass merely with the transfer of the obligation itself, where there are lacking special words of assignment   , forecloses Non-original holders of COs, of whatever series, from asserting any such claim. The Non-original COs and Scrip also contend that they are entitled to participate even if the express language of subordination clauses governs. By this language, COs and Scrip are made subordinate to all other obligations of Ageco except obligations convertible into stock at the option of Ageco. (Other exceptions are not here relevant.) Certain obligations of Ageco, convertible into stock at Ageco's option, are allowed to participate in the assets. These obligations are not, by their terms, subordinated. It is the contention of the Non-original COs and holders of Scrip that COs and Scrip are on a parity with these convertible obligations which have been allowed participation, since COs and Scrip are subordinate to all obligations of Ageco except convertible obligations. Therefore, they reason, it is improper to allow participation to these convertible obligations and deny participation to COs and Scrip, with which the participating obligations are on a parity. This contention must also fail. COs and Scrip can be entitled to nothing whatsoever until all creditors to whom they are subordinated have been paid in full. The FIDs, to which the COs and Scrip are expressly subordinated, are not being paid in full. All that is received by the unsubordinated convertible obligations comes out of an estate to which COs and Scrip can have no claim, since creditors to which they are subordinated (FIDs, 73s, 78s and the 8s of 40) would exhaust the assets if paid in full. If the estate was valued at a sum in excess of the aggregated claims of creditors to which COs and Scrip are subordinate, the COs and Scrip might have a right to share in the assets of the estate in excess of the aggregate of the claims to which COs and Scrip are subordinated. That question we do not decide, for it is not before us. The assets of the estate do not exceed the aggregate of prior claims. The Non-original COs and Scrip have no right to participation, and what may have been allowed to creditors holding convertible obligations of Ageco is no concern of theirs. The Non-original COs and holders of Scrip maintain that the foregoing is not sufficient to deny them participation. They argue that exclusion is not compromise; that since they have been given nothing, their claims have not been compromised. They contend that the Recap Litigation, if pursued to judgment, might have resulted in the participation of subordinate creditors of Ageco and therefore, even if Non-original COs and Scrip are subordinate, they should be given something in recognition of their possible right to participate. This contention cannot be sustained. Under no possible outcome of the Recap Litigation would subordinate creditors of Ageco be entitled to participate. We have held that recovery in the Recap Litigation could not properly be based upon the theory that the transfers of assets to Agecorp prior to May 31, 1932, standing alone, were void or voidable. A recovery based upon a finding that Option 2 of the Recap Plan was still open, or that the Recap Plan was unfair to holders of FIDs who did not exchange, would benefit no one but the FIDs. A recovery based upon a finding that the restrictive covenants were violated would be for the sole benefit of those of the FIDs whose bonds contained the restrictive covenants. If the Recap Plan was an ineffective attempt to give 73s and 78s priority over holders of FIDS and other unsubordinated creditors of Ageco, that is no concern of the subordinated creditors. The claims of the 73s, 78s and FIDs are, in the aggregate, more than sufficient to exhaust the assets of the combined estates. Therefore, subordinate creditors are entitled to nothing if the corporate entities be ignored and Ageco and Agecorp be treated as one. If recovery in the Recap Litigation is based upon avoidance of the transaction by which Ageco's investment in Agecorp was changed from unsubordinated indebtedness to subordinated indebtedness or stock, and the transactions connected therewith, the transactions connected therewith must include the exchange of FIDs for 73s and 78s. The 73s and 78s will in that event revert to their FID status. Upon any of these possible theories, the 73s, 78s and FIDs must be paid in full before Ageco's subordinate creditors may be paid at all, and payment of 73s, 78s and FIDs will exhaust the assets. The Scrip Holders Protective Committee contends that original holders of Scrip should be allowed to participate on the same basis as original holders of COs. We do not agree with this contention. As we have said, Original COs are allowed to participate not on the strength of their securities, but because they may have a right of action based upon fraud or misrepresentation. This right of action could not be based upon the possession of Original Scrip. Scrip was issued in payment of interest on COs. There was no fraud in the issuance of the Scrip, whatever fraud there may have been in issuing the COs themselves. It is urged that a different result is required by the following language of the Elias case, 143 F.2d 640, at page 647:    It may be noted that the order below did not differentiate between original and transferee holders of the scrip; all are treated alike. This seems doubtful on the court's own theory. Since original holders of the converted bonds by assumed premise still retain whatever rights of action for misrepresentation they had, it would seem to follow that their rights of action also encompassed claims with reference to the scrip  a point of interest to those who still retained their bonds at least as to the amount of their claims, as well as to those who had parted with their bonds, but not their scrip, since presumably these latter are not barred from pressing their claims. It may be, however, that the proceedings below with reference to the compromise did take note of these distinctions. On the theory which we have followed, they become unimportant to the disposition of this appeal. As was there pointed out, the matters discussed in the words quoted were not necessary to the disposition of the Elias case. The validity of the distinctions there suggested was not decided. The court was merely directing the attention of those framing the compromise to matters which they should consider before reaching a final conclusion. The court did not direct that any weight be given these distinctions. It is quite evident that the court itself came to no final conclusion as to their validity, and merely wished to have the question brought out more fully in later proceedings. The District Court found that the proceedings below with reference to the compromise did take note of these distinctions, both before and after the Elias case. This would seem to be determinative of the matter.