Court Opinion

ID: 5222712
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:37:43.208442+00
Date Added: 2024-06-11T08:27:32.373577
License: Public Domain

Laughlin, J.
(dissenting):
This is a representative action brought by the plaintiffs as second mortgage bondholders' of the appellant company, in behalf of themselves and all other bondholders of their class, for an accounting with respect to a fund of about $33,000 alleged to have been received by the defendant trust company as trustee under a second mortgage, given by appellant company to secure • the bonds, as the net proceeds of a sale of the mortgaged property, after payment of all prior hens, and delivered by the trustee to the appellant company, about $13,000 of *102which still remains in its treasury, and it is alleged that the balance, about $20,000, has been wrongfully, negligently and illegally and in violation of .the rights of said bondholders, paid out and disbursed to the general creditors of the appellant company by the individual defendants, who constitute its board of directors.
, The plaintiffs allege that bonds of the par value of. $428,9J2.39, ■of the class of bonds owned by them, were duly issued by the appellant company, certified by the defendant trust company and negotiated; that said bonds bore interest at the rate of four per cent per annum from the 1st* day of April, 1904, payable quarterly on the first days of January, April, July and October in each year; that prior to the commencement of the action the appellant company defaulted in the payments of interest due in the years 1908, 1909 and 1910, and on the 1st day of January, 1911, aggregating more than the fund in question, and about the sum of $50,000, and that by virtue of the provisions of said mortgage the bondholders were given a lien upon the mortgaged property to secure the payment of the interest to fall due on the bonds, and also the principal thereof. The appellant company is a domestic corporation, engaged in the business of dealing in real property in the borough of Manhattan, New York. The mortgage trust agreement recites that the appellant company has purchased from the “ Trustees of the Oass Realty Corporation in liquidation, and from said corporation,” three parcels of real estate therein described, together with the buildings thereon and their equipment, . including furniture and furnishings, and that the appellant company, as part of the consideration for the purchase of said property, has agreed to issue and deliver to said trustees “ its second mortgage bonds and preferred stock in such proportions of each as the said Trustees may elect, but to an amount not to exceed in the aggregate four hundred and thirty-three thousand six hundred and thirty-eight dollars and eighty-nine cents ($433,638.89) par value * * * dated April 1st, 1903, and to be retired or paid on or before April 1st, 1913, as is hereinafter provided, all of said bonds to bear interest at the rate of four per centum (i%) per annum upon the unpaid principal thereof, from and after April 1st, 1904, payable quarterly *103on the first days of January, April, July and October, both principal and interest to be payable in gold coin of the United States of the present standard of weight and fineness; the said series of bonds to be a lien upon and secured by a mortgage or pledge of all of the said properties, both real and personal, so by said party of the first part [appellant company] acquired from the Trustees of the Cass Realty Corporation, and from said corporation,” Each bond shows on its face that it is a “Second Mortgage Four Per Cent. 10-year Bond Payable in Gold ” on or before April 1, 1913, with interest at four per cent, payable quarterly from April 1, 1904, and contains, among other provisions, the following: “ This bond is one of a series of bonds of the same tenor and date, but of varying amounts, which bonds, together with all of the preferred stock of the obligor aggregate not more than Four Hundred and thirty-three thousand, six hundred and thirty-eight 89/100 Dollars.” It is recited in the bonds that they are secured by the mortgage, and then come provisions, important in the decision of ■ this appeal, as follows: “Said mortgage is a second mortgage upon each of the properties covered thereby and the lien of such mortgage and of the bonds secured thereby is subject to the parity of right of the said preferred stock as hereinafter set forth and as set forth in said mortgage. This bond is subject .to the terms and conditions of said mortgage.
“After payment of dividends upon the preferred and common stock as provided in said mortgage, the holder of this bond is entitled to a proportionate share in the surplus income, if any, remaining after such payments.” It is further provided in the bonds that in case of default for a period of sixty days in payment of interest on any of the bonds, all of the outstanding bonds may at the election of the owners of not less than seventy per cent par value thereof, become forthwith due and payable; that in case of the sale of any of the properties covered by the mortgage, the net proceeds of the sale, after paying the first mortgage, or adequately providing therefor, and paying or adequately providing for the payment of such other indebtedness assumed by the appellant company upon the transfer to it of said properties, exclusive of second mortgage bonds, “ shall be distributed ratably among the holders of second mortgage *104bonds and such holders of preferred stock as have elected to take preferred stock of the party of the first part in lieu of bonds to an amount not exceeding the par thereof; ” and that when notice of such distribution shall have been published as therein provided, interest upon the amount advertised as distributable shall cease, and that as to such amount “ the lien of this bond and of said mortgage shall cease. ” The mortgage trust agreement further shows that it is expressly provided in each bond that “ Upon the payment and surrender of this bond the holder hereof shall be entitled to receive a certificate ” from the appellant company entitling him to receive from it,“in common with holders of such preferred and common stock his distributive share of the net proceeds and income of any and all assets originally acquired by the Realty Securities Company from the trustees of the Cass Realty Corporation, or from said Corporation, which may remain after the payment of the first mortgages upon said properties and the payment in full of the second mortgage bonds, the payment in full at par of all of the capital stock of the Realty Securities Company, preferred and common, issued and delivered in the purchase of said properties * * * and the payment of all debts of said Cass Realty Corporation and its trustees, to the end that each former stockholder of the Cass Realty Corporation, or his assigns, may receive a like proportionate share of the net avails of said properties; ” that the appellant company shall be at liberty to sell the mortgaged property, and the defendant trustees shall not be liable to the bondholder for the proceeds of such sale, and that “when all of said properties so acquired from said trustees of the Cass Realty Corporation and from said Corporation, shall have been sold and the ratable proportion of the net proceeds thereof shall have been paid or provided to be paid to the holder hereof, then and thenceforth this bond and the lien of said mortgage shall forthwith cease and determine and this bond shall be surrendered for cancellation upon receiving the last of such distributive payments.” It will be observed that the parity of right of the preferred stock with the bonds is to be determined by considering the pro-, visions of the mortgage, as well as those of the bonds. A blank form of the bonds forms part of the mortgage trust agreement, *105and in that agreement immediately precedes the mortgage proper, which commences with the usual witness clause “Now, Therefore, This Indenture Witnesseth,” and then describes the property mortgaged, which it is recited is the same as that purchased by the appellant company from the trustees of the Cass Realty Corporation, and' that the conveyance to the trustees is in trust for the “benefit and security” of the bondholders. The mortgage then contains, among other things, a covenant on the part of the mortgagor to pay the interest on the bonds as it falls due, and further provides that in the event of a sale of any of the property, the net proceeds of such sale, after paying the first mortgage upon the parcel or parcels sold, or providing' for the payment thereof, and after paying or providing for the payment of the other indebtedness assumed by the appellant company upon the transfer to it of said properties, exclusive of second mortgage bonds, “ shall be distributed as follows, that is to say: Out of the net proceeds of any and every sale of property covered by this mortgage, whether such sale he made by the party of the first part or upon the foreclosure of this mortgage, there shall first be paid any unpaid interest upon said bonds, and the balance of such proceeds shall-be divided ratably among the holdersW^ of the bonds secured hereby and of the preferred stock hereinbefore referred to (including scrip), until the whole par value of such preferred stock and bonds shall have been paid in' full and the amount or amounts so distributable to bondholders are the net proceeds intended to be referred to in the above condition.” The mortgage further provided that if all of the property should not be sold on or before the 1st day of April, 1913, the appellant company would on that day pay any balance remaining unpaid on the principal of the bonds; that after dividends, not exceeding four per centum per annum, shall have been paid or provided to be paid on the preferred and common stock, “all other surplus income in any year available for dividends shall be equally and ratably paid as interest or dividends, as the case may be, to the holders of second mortgage bonds, preferred stock (including scrip) and common stock; ” and that in the event of a sale of any of the property, bondholders were at liberty to purchase, in which' *106event the bonds held by them, were to be received as part payment. The complaint contains no allegation that any preferred stock was issued, and, since the total issue of both bonds and preferred stock was to be only $433,638.89, and bonds to the extent of $428,9^2.39 were issued, preferred stock-could have been issued subject to the provisions of the mortgage trust agreement only to the extent of $4,666.50. It is further alleged that the appellant company is hopelessly insolvent and with no assets other than the fund in question.
The demurrers are all alike, and are interposed upon the grounds, (1) that the complaint fails to state facts sufficient to constitute a cause of action;. (2) that causes of action have been improperly united, in that a cause of action against' the appellant company for a breach of contract is united with one in tort against the individual defendants in failing to perform their duties as directors, and that the plaintiffs have united with these a separate cause of action against the appellant company and the individual defendants for an accounting; (3) that there is a defect of parties, in that the preferred stockholders of the appellant company are not joined; and (4) that causes of action have been improperly united, in that no cause of action affects all of the parties defendant.
. The complaint contains allegations appropriate to relief on theories on which it would be difficult to overrule the demurrer for misjoinder of causes of action; but I am of opinion that it can be sustained on the ground that it sets forth facts showing but a single cause of action for an accounting with respect to this fund on which, on the facts alleged, the bondholders have a lien and are entitled to have the fund applied in payment of the interest due on the bonds. The allegations of the complaint to which reference has -been made, and the provisions of the mortgage trust agreement stated and quoted, clearly show that the fund of about $33,000 constitutes “net proceeds” applicable to the payment of interest due on the bonds, and that question needs no further consideration. This is not an action by a general creditor of the corporation, who would be required to first reduce his claim to judgment, but it is. a bill in equity by and in behalf of bondholders, who are the cestuis que. trust under the mortgage trust agreement, for the application *107of the proceeds of* a sale of the mortgaged property, on which they have a lien, to the payment of the interest due on their bonds, and on the facts alleged they are the only parties in interest, for they are the equitable owners of the entire fund. (See Brockett v. Lewis, 144 Mich. 560; Farmers’ Loan & Trust Co. v. Westchester County W. W. Co., 143 App. Div. 78; Ettlinger v. P. R. & C. Co., 142 N. Y. 189, 193.) It is essential that the action affect all of the parties defendant, but it is not necessary that it affect them all alike (People v. Equitable Life Assurance Society, 124 App. Div. 714, 729), and the fact, therefore, that the individual defendants are only accountable for part of the fund' is no objection to joining them with the corporation. The appellant company received the proceeds of the sale of the mortgaged premises impressed with the trust for the benefit of the bondholders, and it became a trustee for them with respect thereto, and on the facts alleged the directors are accountable to the bondholders for that part of the fund which they have diverted.
The principal question presented by the appeal is whether the mortgage trust agreement, in so far as it purports to create a lien on corporate property in favor of the bondholders, is void, on the theory that the bonds are in effect preferred stock, and that it was not competent to give stockholders a preference over general creditors, which is a well-settled rule of law. (Cook Corp. [6th ed.] § 271; Warren v. King, 108 U. S. 389; Ellsworth v. Lyon, 181 Fed. Rep. 55; Field v. Lamson & Goodnow Mfg. Co., 162 Mass. 388; Chaffee v. R. R. Co., 55 Vt. 110. See, also, Stock Corp. Law [Gen. Laws, chap. 36; Laws of 1892, chap. 688], § 48, as amd. by Laws of 1901, chap. 354; Stock Corp. Law [Consol. Laws, chap. 59; Laws of 1909, chap. 61], § 66.)
The learned counsel for the respondents contends that the obligation of the appellant company to pay the principal as well as the interest on the bonds, for both of which the hen is given, is absolute, and that the right of the holders of the bonds to insist on payment and on their lien is not affected by the provision by which an attempt is made to give holders of preferred stock a right to share in the proceeds of the sale of the property or by the provision by which bondholders may *108acquire the right to share in the surplus -intiome and surplus ■ assets with the holders of the common and preferred stock. It was, I think, as contended, optional with the bondholders whether to surrender their bonds and participate in surplus assets or whether to participate in surplus income with common and preferred stockholders, and that required an election on their part, which, so far as appears, has not been made, and they were at liberty to abandon this valueless privilege.
(Hotchkiss v. Nat. Banks, 88 U. S. 354.) At any rate, we are not now concerned with the distribution either of surplus income or surplus assets of the appellant corporation, and as to those no. lien was given and no lien is claimed. The provisions with respect thereto are quite independent of and are capable of severance from the rights of the bondholders with respect to the payment of the interest and principal due on their bonds. Neither statutory law nor public policy forbids giving a lien on property purchased to secure the purchase price thereof, and in so far as the bonds were given -for . the purchase price of the assets of the Cass Realty Corporation, I am of opinion that the lien given to secure their payment was not rendered invalid hy the attempt in the same instrument to create a hen in favor of the preferred stockholders, which, if not authorized by law,' is void. I am of opinion that the lien is good for the principal of the bonds as well as for the interest, . but since the lien now asserted is only for the interest which was payable unconditionally, and with respect to which there was no attempt to create a right of parity between the stockholders and the bondholders it may not be essential for plaintiffs to sustain the lien as to the principal. The assets of the Cass Realty Corporation' were purchased at a stipulated price. I see no legal objection to an agreement between the vendor and vendee of property to the effect that a mortgage should be given on the property to secure the interest on the purchase price, payable periodically for a definite time, even though the principal was to be paid by the issuance of corporate stock of the.vendee. If a hen could not be given for the principal thus represented by stock, it could be given for the interest, and if an attempt were made to give a lien for both it could be sustained as to the interest. It may be said that it *109would not be competent to give a lien on the corporate stock for the payment of dividends, and that if these bonds are in effect preferred stock then the interest is in effect interest or dividends on the stock. The answer to such contention is that the bonds are not in effect preferred stock. There has been an attempt to give the. bondholders certain rights of stockholders in given contingencies which have not transpired; but a marked distinction is made between the bonds and stock and the rights of the holders of each. If it had been supposed or intended that the effect of each was the same, both would not have been provided for. Where the provisions of a contract, some of which are valid and some void, are severable, the valid provisions may be sustained and enforced. (Leavitt v. Palmer, 3 N. Y. 19; 9 Cyc. 564; Hotchkiss v. Nat. Banks, supra; Reed v. Helois, 64 N. J. Eq. 231.) It clearly appears that there is more due for unpaid interest on the bonds than the amount of this fund, and by the express terms of the mortgage trust agreement, on a sale of the premises, such as has been made, the interest on the bonds was to be paid before there could be any distribution to stockholders. I am of opinion that the lien of the bondholders, given by the mortgage upon the property and the proceeds of a sale for the payment of this interest was valid and should be enforced.
It follows, therefore, that the judgment and order should be affirmed, with ten dollars costs and disbursements, but with leave to appellants to withdraw their demurrers and plead over on payment of the costs in this court and at Special Term.
Order reversed, with ten dollars costs and disbursements and demurrer sustained, with ten dollars costs, with leave to plaintiffs to amend on payment of costs.