plan of reorganization, may exclude both the stockholders and other creditors from the benefit of such agreement.24 Stockholders cannot have a consent decree of foreclosure and sale set aside, where there is no fraud, where they have not been diligent in opposing the plan of reorganization or in attacking the decree, and they make no offer to do equity by paying the floating debt, and where, in fact, the indebtedness is so great the stockholders have no interest in the property.25 But where a foreclosure was instigated by the majority stockholder, and he bid in the property through a new company in which he took all the stock, it was held that an implied trust in the new stock arose in favor of minority stockholders to the extent of their interest in the old stock, notwithstanding the old stock was of little if any substantial value, where the bid was paid in bonds of the new company 26 So if the transfer to a new corporation is in fact fraudulent as to a minority stockholder of the old corporation, it is immaterial that the transfer was accomplished through the agency of valid mortgages and judicial sales thereunder.27 A minority stockholder cannot enjoin a plan of reorganization by the majority whose intention it is to acquire the corporate assets by purchase at a public sale from the trustees in bankruptcy of the insolvent company, where he has refused to participate in the reorganization.28 zation after a judicial or execution sale sometimes give stockholders the right to participate in the benefits of the reorganization upon compliance with certain conditions within a specified time. Vatable v. New York, L. E. & W. R. Co., 96 N. Y. 50. 24 Paton v. Northern Pac. R. Co., 85 Fed. 838, 842. 25 Carey v. Houston & T. C. Ry. Co., 52 Fed. 671. Stockholders of an insolvent corporation, who are unwilling to pay off the pressing debts of the company, ought not to, and will not, receive the favorable attention of the courts where they seek to prevent a reorganization plan agreed on by the creditors of the company, especially where the stockholders are permitted to share therein on a fair basis. See Carey v. Houston & T. C. Ry. Co., 52 Fed. 671, 45 Fed. 438. The foreclosure decree pursuant to a reorganization plan should not be set aside at the suit of a stockholder, where the creditors were agreed as to the decree rendered, and the company was not injured thereby, and the stockholders have been actually benefited thereby. Carey v. Houston & T. C. Ry. Co., 45 Fed. 438. 26 Cutting v. Baltimore & O. R. Co., 35 N. Y. Misc. 616, 72 N. Y. Supp. 27, aff'd 65 N. Y. App. Div. 414, 73 N. Y. Supp. 21. 27 Sparrow v. E. Bement & Sons, 142 Mich. 441, 10 L. R. A. (N. S.) 725, 105 N. W. 881, 12 Det. L. N. 798; Grace v. Noel Mill Co. (Tenn.), 63 S. W. 246. 28 Schuler v. Woodward, 169 Fed. 1012, holding, however, that the plan would be enjoined if the sale was to be a voluntary one by the majority, for stock in a new corporation. 4933. Rights of nonassenting stockholders where reorganization is not connected with judicial or execution sale. This matter has already been noted in preceding sections.29 The rights of dissenting stockholders to payment in cash is often provided for by statute.30 84934. Liability of stockholders for debts of old or new corporations. The liability of stockholders to creditors cannot be evaded by a reorganization.31 However, there is no implied liability on the part of a stockholder of the old company, to pay calls for the benefit of the reorganized company, to which reorganization he has not consented.32 In one case in Minnesota, where a bank was reorganized without foreclosure, but a number of stockholders in the old bank took no part in the reorganization proceedings and did not become stockholders in the new bank, and thereafter the reorganized bank became insolvent, it was held that the stockholders not joining in the new company were only secondarily liable for the debts of the old company, and that all remedies against the stockholders of the new company should first be exhausted.33 IX. RIGHTS OF BONDHOLDERS 4935. In general. There is no question but that bondholders. may foreclose, upon default, purchase at the sale, and reorganize the corporation, so as to cut off completely the rights of all inferior liens and those of unsecured creditors, as well as the rights of stockholders, and prevent them from sharing in any way in the reorganization or its benefits, provided there is nothing to the contrary in the mortgage or a statute or the foreclosure decree.34 However, this is rarely done except in cases of utter insolvency and where a reorganization would be impractical or of doubtful benefit, but on the contrary the reor 29 See §§ 4863-4867, supra. 30 Schickler v. Washington Brewery Co., 33 App. Cas. (D. C.) 35, holding certain stockholders not dissenting stockholders so as to be entitled to relief. 31 Sprague v. Nat. Bank of America, 172 Ill. 149, 42 L. R. A. 606, 64 Am. St. Rep. 17, 50 N. E. 19. 32 Bank of China, Japan & The Straits v. Morse, 168 N. Y. 458, 480, 56 L. R. A. 139, 85 Am. St. Rep. 676, 61 N. E. 774. There is no implied agreement of a VII Priv. Corp.-77 subscriber to stock that he will pay his subscription for the benefit of a new corporation to which the original corporation transfers its assets under a reorganization scheme as provided by the English Companies Act. Bank of China, Japan & The Straits v. Morse, 168 N. Y. 458, 56 L. R. A. 139, 85 Am. St. Rep. 676, 61 N. E. 774. 33 Willius v. Mann, 91 Minn. 494, 98 N. W. 341, 867. 34 See Moss v. Geddes, 28 N. Y. Misc. 291, 59 N. Y. Supp. 867. ganization plan usually is thrown open to stockholders and often to inferior bondholders and unsecured creditors.35 In a federal case, Judge Hook, in commenting on this question, said that "there is no doubt but that bondholders have a right, upon default, to a strict foreclosure and sale according to the terms of their mortgages and the applicable statutes, and to leave the holders of junior securities, unsecured creditors, and stockholders to protect themselves as best they can. But in practice, on a large scale, and except in cases of utter insolvency, that is rarely done in these days. If the financial difficulties resulting in receivership are not mortal, but are mere embarrassments, which may be relieved by time and readjustment, the custom is a reorganization, embodying a recognition of all interestsbonds and other lien debts, general debts, and stocks-as far down the scale of preference as the value of the property and sound business judgment reasonably justify." 36 The purpose of giving interests to other creditors and stockholders has been said to be to "prevent delay and expenditure arising out of litigation between creditors, which are sometimes almost ruinous," and to "lessen the risk of redemptions." 37 In case of a reorganization independent of any foreclosure or other judicial or execution sale, the reorganization is often, if not usually, by agreement merely of the stockholders, although in many cases bondholders or other creditors join in the agreement, and sometimes the agreement is between bondholders and other creditors without the stockholders joining therein. The rights of bondholders to participate in the reorganization, as conferred by the reorganization agreement, is treated of in another subdivision,38 as is the question of what constitutes, and the effect of joinder in the reorganization agreement.39 § 4936. Right of one bondholder to exclude other bondholders from benefit of mortgage. When two or more persons have a common interest in a security, equity will not allow one of them to appropriate it exclusively to himself, or to impair its worth to the others. Community of interest involves mutual obligation. It has been held, 35 See Louisville Trust Co. v. Louisville, N. A. & C. R. Co., 174 U. S. 674, 43 L. Ed. 1130. However, the interests of unsecured creditors cannot be subordinated by giving stockholders of the old company a substantial interest in the new company. See § 4949, infra. 36 Guaranty Trust Co. of New York v. Missouri Pac. Ry. Co., 238 Fed. 812, 814. 37 Sage v. Central R. Co., 99 U. S. 334, 344, 25 L. Ed. 394. 38 See § 4896, supra. therefore, that when a corporation has issued bonds secured by a mortgage of its property, one of the bondholders, although he may have a right to make use of the mortgage to enforce payment of the bonds which he holds, has no right to employ it as an instrument by which he may become the owner of the property mortgaged at the lowest price at which it can be obtained, leaving the bonds of the other holders unpaid. His duty, if he makes use of the mortgage at all, is to make it productive of the most that can be obtained for all who are interested in it; and if he seeks to make a profit out of it at the expense of those whose rights in it are the same as his own, he is guilty of a fraud.40 This principle does not apply, however, where there is no attempt to take an unfair advantage of other bondholders, particularly when all are given an opportunity to come into the reorganization arrangement on equal terms. Those who refuse to come in cannot complain that the others who have purchased at a foreclosure sale under the mortgage have made a large profit, or claim any share therein.41 § 4937. Right to purchase at judicial sale either singly or by combination-In general. In the absence of statutory restrictions, any person may purchase the property of a corporation at a foreclosure sale, provided his relation to the parties in interest and the circumstances attending the purchase are not such as to make the purchase a breach of trust. There is nothing to prevent the bondholders, or a part of them, from purchasing, provided there is no fraud upon the others.42 And stockholders and bondholders may unite to bid on and buy in the property.43 Bondholders may appoint 40 Jackson v. Ludeling, 21 Wall. (U. S.) 616, 22 L. Ed. 492, and see explanation of this case in Bound v. South Carolina Ry. Co., 71 Fed. 53. See also State of Florida v. Anderson, 90 U. S. 667, 23 L. Ed. 290; Sahlgard v. Kennedy, 2 Fed. 295; Duncan v. Mobile & O. R. Co., 3 Woods 597, Fed. Cas. No. 4,139 (where, prior to a foreclosure sale, the court ordered, on application of minority bondhold ers, that they be permitted to participate in the reorganization). Any special agreement with a part of the bondholders to give them an advantage over the others is a fraud upon the latter, and is therefore ille gal and void. Bliss v. Matteson, 45 N. Y. 22. 41 Bound v. South Carolina R. Co., 78 Fed. 49, aff'g 71 Fed. 53, and distinguishing Jackson v. Ludeling, 21 Wall. (U. S.) 616, 22 L. Ed. 492; Wetmore v. St. Paul & P. R. Co., 1 McCrary 466, 3 Fed. 177. See also § 4946, infra. 43 The enormous value of corporate property often makes it impossible for one, or a score, or a hundred bondholders to purchase, and equally so for stockholders to protect their interests. A combination is necessary to secure a bidder and to prevent a a person or committee to purchase for them, and this is the usual course. The attorney for the corporation may purchase for the bondholders, if authorized by them.5 § 4938. Right of bondholders or creditors to combine to purchase. The following propositions are too well settled to admit of argument. 1. Bondholders, all or part, or bondholders and other creditors, may combine to purchase the corporate property at foreclosure sale and to reorganize,46 where not for the purpose of preventing competition or inducing a sacrifice of the property 47 or to obtain any unfair advantage.48 2. Such bondholders and creditors, however, cannot prevent other bondholders and creditors, of the same class, from joining therein if they so desire.49 3. The combination must give notice of the terms of the agreement and an opportunity to participate to all creditors or other persons whose rights are the same as those of the persons creating the combination.50 4. Bondholders and creditors who are invited to participate in the reorganization are barred of all rights to have the benefits of the reorganization unless they assent thereto and perform the conditions provided for in the reorganization agreement, within the time specified in such agreement.51 sacrifice. Co-operation being essential, there is no reason why the stockholders should not unite with the bondholders to buy in the property." Northern Pac. R. Co. v. Boyd, 228 U. S. 482, 504, 57 L. Ed. 931. 44 Zebley v. Farmers' Loan & Trust Co., 139 N. Y. 461, 34 N. E. 1067; Allen v. Gillette, 127 U. S. 589, 32 L. Ed. 271; Pacific R. Co. v. Ketchum, 101 U. S. 289, 25 L. Ed. 932; James v. Cowing, 82 N. Y. 449. Powers of committee, see §§ 49134922, supra. 45 Pacific R. Co. v. Ketchum, 101 U. S. 289, 25 L. Ed. 932. 46 Investment Registry, Ltd. v. Chicago & M. Elec. R. Co., 212 Fed. 594, aff'g 206 Fed. 488. 47 Terbell v. Lee, 40 Fed. 40. A judicial sale of a railroad to a reorganization committee will not be confirmed, as against the objection of bondholders not joining in the agreement, where the committee had bought off a competing bidder so as to enable it to purchase the property for less than its value. Investment Registry, Ltd. v. Chicago & M. Elec. R. Co., 212 Fed. 594, aff'g 206 Fed. 488. Compare, however, Simon v. New Orleans, T. & M. R. Co., 242 Fed. 62. 48 Kitchen v. St. Louis, K. C. & N. Ry. Co., 69 Mo. 224, 258. Fraud on unsecured creditors by taking in stockholders of old company, see § 4949, infra. 49 See § 4936, supra. 50 See § 4949, infra. 51 See § 4946, infra. |