Court Opinion

ID: 6874066
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:05:17.790639+00
Date Added: 2024-06-11T16:05:27.728125
License: Public Domain

AUGUSTUS N. HAND, Circuit Judge.
It is evident from the foregoing statement of facts, and indeed is not disputed, that the collateral held under the 1944 indenture was, on November 2, 1937, of a value below 150% of the amount of the bonds of Alleghany then outstanding and remaine'd below until March 2, 1938. Closing quotations for sales of Chesapeake stock on the New York Stock Exchange showed a ratio of 151.75% on March 2, and 151.68% on March 3. The ratio, however, remained below 150% even on these two days unless the sales thereon be taken as fairly establishing these ratios of 151.-75% and 151.68% respectively in spite of the fact that no deduction was made in valuing the Terminal Notes for the suits by the trustees of the Missouri Pacific Railroad Company and by the Chicago, Burlington & Quincy Railroad involving underlying properties of the maker of the notes. There was admittedly an insufficiency of collateral at all times except on March 2 and March 3, 1938, between November 2, 1937, and April 4, 1938 — the date when the last proofs were submitted to the court below on the motion of Alleghany for a preliminary injunction.
An event of default occurred on December 2, 1937, because of the failure of Alleghany within thirty days after the receipt of the appraisal to restore the value of the collateral fixed by the appraisal of November 2, 1937, to 150% of the amount of the bonds outstanding under the 1944 indenture. On December 2, 1937, the ratio was less than 143%.
There are two reasons for holding that the event of default which occurred on December 2, 1937, has not been cured. The first is that the indenture of 1944 provided for fixing the value of the collateral by appraisal and there has been no appraisal showing a restoration of the ratio to 150%. It is true that the instrument does not in terms specify how an event of default may be cured but it seems evident that any restoration of the ratio if properly established will act as a cure and that an appraisal in the mode provided for quarter*371ly appraisals should he applied on other occasions where the value of the collateral is to he determined. Alleghany has offered no excuse for not obtaining an appraisal of the collateral as of March 2 and March 3, and indeed has dispensed with an appraisal by insisting upon its right to require proxies without an appraisal and by saying in its letter to Guaranty of March 18, 1938, which referred to the appraisal then being made, that Guaranty should “cause this appraisal to be abandoned forthwith.” The second reason for holding that the event of default has not been cured is that without an appraisal Alle-ghany can only cure an insufficiency of collateral that has once created an event of default either by showing that no fair appraisal as of March 2 or March 3, 1938, could have fixed the ratio of the collateral for the bonds at less than 150% or by showing that the proper ratio for those dates was at least 150%. The parties here selected an appraiser to fix values whereby the worth of the collateral was to be determined quarterly and under Section 2 of Article Three of the 1944 Indenture the appraiser was not bound to accept market quotations as conclusive proof and could not reasonably be expected to follow them if the general trend of the market or other pertinent evidence indicated lower values. The closing sales of Chesapeake stock always indicated an aggregate value for the collateral of less, often of far less, than 150% both for months before and for weeks after March 2 and 3, 1938. The rise of that stock on March 2 and 3 to a closing price of 48% on each day was preceded by earlier sales of the stock on March 2 at only 46 and on March 3, at 46%. At no time during the year 1938 were any sales made at more than 46%, a figure which would have left the value of the collateral insufficient. Fluctuations in sales of C. & O. stock which comprised the assets of Chesapeake would naturally be reflected in the sales of Chesapeake stock, yet C. & O. rose only % of a point on March 2 and 3 over its price on March 1, while Chesapeake rose on those days about 2% points. From February 1 to February 21, the spread between the two stocks was from 5% to 7% but it thereafter widened until on March 2 and 3 it amounted to 11% points. On March 2, the Dow-Jones average of rail stocks dropped .31 of a point, and on March 3 dropped .35. It is evident from this that the inexplicable rise of Chesapeake on these two days is no safe criterion on which to base an appraisal and would neither compel nor justify us in giving the stock a value sufficient to cure the existing default. Moreover, there should be some deduction from the value at which the Terminal Notes had been carried in prior appraisals and even if it be thought that the large reduction made by Callaway in the appraisal of March 22, 1938, was excessive, we cannot say that the estimate of this appraiser was not honest when he found with reference to the valuations by Alleghany of the collateral as of March 2 and 3, 1938, that: “A revaluation of the notes of Terminal Shares Inc. taking into account the effect thereon of the above mentioned suits would of itself (and without considering other factors) be sufficient to change the ratios * * * on each of these days from above 150% to below that figure”. (Record, pp. 292 and 293). Under the circumstances we think it is unreasonable to find that the ratio of 150% was restored. Where Alleghany has made no better showing than here, we hold that there is no proof that the default has been cured or that a preliminary injunction should be granted.
The event of default which occurred on December 2, 1938, at all times subsisted so that Guaranty as Trustee under the 1944 indenture was entitled by Section 4 of Article Three thereof to vote the Chesapeake stock.
Order affirmed.