so surrender them in exchange for bonds secured by a subsequent mortgage that he will lose any right to the higher security, but whether such result is effected must be determined in each case from the facts of the particular transaction.39

§ 4911. Distribution of securities of new company. Where the trustee of a mortgage purchases at the foreclosure sale, and the bondholders, thereafter reorganize by creating a new company, all being done as provided for in the mortgage, the distribution of the stock of the new company, by an auditor appointed by the court, among the bond and coupon holders must be according to the reorganization plan and the terms of the mortgage.40

VII. COMMITTEE

§ 4912. General considerations. Where a reorganization is contemplated in connection with a purchase of the corporate property at a judicial or execution sale, the appointment of a committee to represent the bondholders, or the bondholders and others, is generally one of the first steps taken. Other committees are also often appointed to represent different interests. A committee may also be appointed where a reorganization is contemplated without any judi cial or execution sale, although not so frequently done as in the for

Sometimes there are several committees. Thus, one may represent the bondholders protected by the mortgage sought to be foreclosed, another may represent the stockholders, and still others may represent the second mortgage or inferior bondholders or unsecured creditors.

Generally a committee is self-appointed, which fact, however, is wholly immaterial, since it is impliedly consented to by those joining in the arrangement.42

It is necessary, in reading the decisions, to keep in mind that often the "trustees" appointed by the bondholders, as referred to, are not

39 Mowry v. Farmers' Loan & Trust Co., 76 Fed. 38.

40 Real Estate Trust Co. v. Pennsylvania Sugar Refining Co., 239 Pa. 456, 86 Atl. 1074.

41 As part of a reorganization plan, it is proper to create a special committee to operate the company until

VII Priv. Corp.-76

the claims of the creditors have been satisfied, and to impose the compensation of the committee upon the various companies interested. Ecker v. Kentucky Refining Co., 144 Ky. 264, 138 S. W. 264.

42 Cutter v. Iowa Water Co., 128 Fed. 505.

the trustees named in the mortgage but are in reality the reorganization committee.43

Committeemen, ordinarily, are not disqualified to act as such merely because they have disposed of all their stock and bonds in the new company.44 And of course a bondholder who agrees thereto cannot object that two of the three members of a committee acted without notice to the first member.45

§ 4913. Powers, rights and duties-In general. A reorganization committee are the agent of the bondholders or other promoters of the reorganization, and their powers depend, of course, upon the authority which has been expressly or impliedly conferred upon them. Their powers are defined and limited by the reorganization agreement.46 They have the authority expressly conferred upon them by such agreement together with such incidental powers as are necessary to enable them to carry out their express powers.47 Generally the powers conferred are very broad.48 But no "general powers are to be implied in their behalf, and express powers are not to be extended

43 See Dunning v. Bates, 186 Mass. 123, 71 N. E. 309.

44 Haines v. Kinderhook & H. Ry. Co., 23 N. Y. Misc. 605, 52 N. Y. Supp. 1061, aff'd 33 N. Y. App. Div. 154, 53 N. Y. Supp. 368.

45 Coppell v. Hollins, 91 Hun (N. Y.) 570, 36 N. Y. Supp. 500.

46 United Waterworks Co., Ltd. v. Stone, 127 Fed. 587; Central Trust Co. v. Carter, 78 Fed. 225; Bound v. South Carolina Ry. Co., 71 Fed. 53, 78 Fed. 49; Industrial & General Trust v. Tod, 170 N. Y. 233, 63 N. E. 285; Barnard v. Fitzgerald, 23 N. Y. Misc. 181, 50 N. Y. Supp. 309. See Titus v. United States Smelting, Refining & Mining Exploration Co., 240 Fed. 881, aff'g

231 Fed. 205.

The nature and extent of the powers of the committee are to be sought not in any statute or rule of the common law, but in the instrument under which they undertook to act on behalf of the bondholders. They must be held to be invested with all the powers enumerated in that instrument together with such incidental

powers as may be requisite to enable them to carry out those express powers. The agreement with the bondholders was both a definition and limitation of their powers."' Carter v. First Nat. Bank of Pocahontas, 128 Md. 581, 587, 98 Atl. 77.

ance

"While they [the committee] had a wide discretion as to all matters not specifically provided for, as to those matters they were bound to compliwith the stipulations of the agreement, which they could neither set aside nor disregard. They had no power to change that agreement with out the consent of the bondholders whose representatives they were. They could not recast it nor surrender rights which it expressly secured to the bondholders." Cox v. Stokes, 156 N. Y. 491, 508, 51 N. E. 316, and see § 4915, infra.

47 Carter v. First Nat. Bank of Pocahontas, 128 Md. 581, 587, 98 Atl.

77.

48 See Van Sielen v. Bartol, 95 Fed. 793; Venner v. Fitzgerald, 91 Fed. 335, and also infra, this subdivision.

by construction." 49 In determining the validity of acts of such a committee, it is not a question of whether they acted in good or bad faith, but solely as to what powers were intrusted to them.50

The duties of the committee, being interwoven with their powers, must likewise be determined largely from the terms of the reorganization agreement. The committee are the agent of those joining in the reorganization agreement, and occupy a fiduciary trust relation towards those whose interests they represent.51 They are, in a broad sense, trustees for the benefit of those joining in the plan, and are bound to protect their interests in every reasonable way.52 And it has been said that the duties and obligations of such a committee are far more of a fiduciary nature than those of the directors of a corporation.53 Moreover, the reorganization agreement is often drawn up by the committee, in which case it is to be construed against them and most favorably in aid of the creditors or others who appointed them or whom they represent because they have joined in the agreement.54

It is the duty of the committee, in executing their trust, to treat all bondholders joining in the reorganization plan, equitably and ratably, giving to each a return exactly proportioned to the securit'es actually deposited by each.55 Where the committee are given authority to arrange the details of the reorganization, they may determine and provide how and when the bonds to be issued by the company shall be payable.56 And they may issue only a portion of the authorized stock, leaving the balance unissued, instead of issuing the whole.57 Where given full power to act for the corporation, the committee may execute a lease of property belonging to the company 58 And of course the committee have power to create such liens

49 Per Justice Werner in Industrial & General Trust v. Tod, 170 N. Y. 233, 257, 63 N. E. 285.

50 Carter V. First Nat. Bank of Pocahontas, 128 Md. 581, 590, 98 Atl. 77.

51 Cushman v. Bonfield, 139 Ill. 219, 28 N. E. 937, aff 'g 36 Ill. App. 436; Mawhinney v. Bliss, 117 N. Y. App. Div. 255, 102 N. Y. Supp. 279.

52 Cox v. Stokes, 156 N. Y. 491, 507, 51 N. E. 316.

53The duties and obligations of the members composing a bondholders' committee are perfectly clear. They are in the highest degree of a

fiduciary nature, far more so than the directors of a corporation." Carter v. First Nat. Bank of Pocahontas, 128 Md. 581, 590, 98 Atl. 77.

54 See § 4883, supra. 55 Fuller v. Venable, 108 Fed. 126, 129.

56 Lehigh Coal & Navigation Co. v. Central R. Co. of New Jersey, 34 N. J. Eq. 88, where it was held that they could provide that the bonds should be payable on or before maturity.

57 White v. Wood, 129 N. Y. 527, 29 N. E. 835, 142 N. Y. 656, 37 N. E. 108. 58 Sharpe v. Chartiers Oil Co., 232 Fed. 703.

as in their discretion they deem necessary to carry out the plan of organization, where expressly authorized so to do.59 The settlement of doubtful claims may be within the wide discretion conferred upon a committee.60

In making the purchase at foreclosure sale, the reorganization committee are governed to a large extent, as to their rights and liabilities, by the same rules applicable to other purchasers at foreclosure sales. For instance, if the sale is for cash and is confirmed, and the committee fail to make good their bid because the price is deemed too high, they must make good the difference, on a resale for a less price, provided the unsecured creditors will be benefitted thereby.61 If the purchaser is a bondholders' committee, the persons composing the committee are individually liable for the purchase price and can be sued therefor without making parties the bondholders whom they represent.

§ 4914. Fower to construe reorganization agreement. The committee cannot excuse themselves for a breach of the reorganization agreement by relying on a provision therein that they should have the right to construe the agreement and that their construction should be final, since the provision merely means that it shall be final only if the committee act in good faith.63

§ 4915. - Power to change or modify reorganization plan or agreement. The committee may be expressly authorized to modify a reorganization plan.64 But the committee have no power to change or modify the reorganization agreement unless those joining in the

59 Titus v. United States Smelting, Refining & Mining Exploration Co., 240 Fed. 881.

Co Where a reorganization committee is broadly authorized to procure the sale of a railroad, to compound claims against the company and pledge the bonds deposited with it, it has authority to agree with the holders of apparent claims against the company for an assignment thereof, and to pledge the bonds in its hands to secure the sums promised to be paid for such assignment, and the holders of the claims, if they are not paid as agreed, are entitled to be paid out of the proceeds of the foreclosure sale

applicable to the bonds. Central Trust Co. v. Carter, 78 Fed. 225.

61 Central Trust Co. of New York v. Cincinnati, J. & M. Ry. Co., 58 Fed. 500.

62 Middendorf v. Baltimore Refrigerating & Heating Co. of Baltimore City, 117 Md. 443, 84 Atl. 150.

63 The defendants [committee], with all their power, could not make a new contract, or subvert the agree ment by construing a vital provision into or out of it." Industrial & General Trust v. Tod, 180 N. Y. 215, 225, 73 N. E. 7.

64 See Lyman v. Kansas City & A. R. Co., 101 Fed. 636.

agreement consent thereto or such power is expressly conferred by the agreement.65 But if the committee are given the broad power to do anything they may deem to be for the best interests of the bondholders, they may, upon the failure of one plan of reorganization, substitute another plan.66 If the method by which the committee may modify the plan or agreement is specially designated, then of course it can be modified only in the manner prescribed.

§ 4916. Organization of new company in sister state. If the committee are given power to organize the new company in any state they choose, then a party to the plan cannot object that the new company was organized in another state, without regard to whether the law under which it was organized was the same as the laws of the state where the old company was created.67

§ 4917. Assessments. The committee are generally expressly authorized to levy and collect assessments, under certain conditions or otherwise; and additional assessments by the committee which are fairly within the scope of the agreement and plan for reorganization cannot be complained of by bondholders, although in excess of the fixed assessment provided for.

§ 4918. Receipt and distribution of securities. Generally the reorganization agreement provides that those joining therein shall deposit their bonds, stock or the like with the committee, within a