cured and if the stockholders and other bondholders proceed with a reorganization without his consent, he will not be bound thereby.81 But it has been held that if a scheme of reorganization without foreclosure is authorized by the court, in a suit to which the trustee for the bondholders is a party, and a small bondholder refuses to go into it, the court may order that the amount due him on his bonds may be paid or tendered, or an indemnity bond executed to pay the bonds. when due, and, if he refuses to accept payment or to exchange his bonds, he cannot recover the amount due thereon on their maturity.82 In case of a reorganization in connection with a judicial or execution sale, however, a part of the bondholders may combine to purchase the property and organize a new corporation, provided they act in good faith,83 and provided they afford an opportunity to other bondholders secured by the same mortgage to participate in the reorganization plan.84 Of course, if there is no statute 85 nor any pro 81 Bill v. New Albany & S. Ry. Co., 2 Biss. 390, Fed. Cas. No. 1,407; Hollister v. Stewart, 111 N. Y. 644, 19 N. E. 782; Reinach v. Meyer, 55 How. Pr. (N. Y.) 283; Taylor v. Atlantic & G. W. Ry. Co., 55 How. Pr. (N. Y.) 275; Philadelphia & R. R. Co. v. Love, 125 Pa. St. 488, 17 Atl. 455. A court of equity will not, at the suit of a corporation, compel its minority bondholders to assent to a reorganization scheme by which they are required to scale their bonds, accepting in lieu thereof new bonds for a smaller amount, without additional security; the benefits of the scheme, if any, inuring solely to the stockbolders. Lake Street El. R. Co. v. Ziegler, 99 Fed. 114. 82 Pollitz v. Farmers' Loan & Trust Co., 53 Fed. 210. 83 All the bondholders need not join in an agreement to purchase the property at a forced sale and then reorganize the company. Moss v. Geddes, 28 N. Y. Misc. 291, 59 N. Y. Supp. 867. In this connection, it was said by Chief Justice Waite, in an early case in the Supreme Court of the United States, that "to allow a small minority of bondholders, representing a comparatively insignificant amount of the mortgage debt, in the absence of any pretence even of fraud or unfairness, to defeat the wishes of such an overwhelming majority of those associated with them in the benefits of their common security, would be to ignore entirely the relation which bondholders, secured by a railroad mortgage, bear to each other." Shaw v. Little Rock & Ft. S. Ry. Co., 100 U. S. 605, 611, 25 L. Ed. 757. 84 All bondholders are entitled to membership in a pool organized among the bondholders to purchase the property at foreclosure sale. Reed V. Schmidt, 115 Ky. 67, 24 Ky. Law Rep. 1889, 61 L. R. A. 270, 72 S. W. 367. While a nondepositing bondholder cannot object to confirmation of a judicial sale solely on the ground that the bid of the reorganization committee was substantially short of the real value, yet he may object to such confirmation on the ground that he was not given an opportunity to participate in the reorganization agreement or that the conditions imposed were unconscionable. Investment Registry, Ltd. v. Chicago & M. Elec. R. Co., 212 Fed. 594, 610, aff'g 206 Fed. 488. 85 Vermont statute, see Brooks v. vision in the mortgage to the contrary, a nonparticipating bondholder cannot be required to accept bonds in the new company in place of his bonds but is entitled to his pro rata share of the proceeds of the sale.86 However, if a valid statute or the mortgage gives majority. bondholders the right to bind the minority, by reorganizing, after the foreclosure or other judicial or execution sale, then minority bondholders are bound by such a reorganization.87 Even where some of the bondholders have no notice of a foreclosure sale, at which the property is purchased by a part of the bondholders for the purpose of reorganization, they cannot sue to set the sale aside, in the absence. of fraud.88 Where a controversy as to a judicial sale of corporate property is between consenting and nonconsenting bondholders, it is the duty of the court to be vigilant "to see, on the one hand, that a dissenter be not permitted to create a maneuvering value in his bonds by opposing confirmation, and, on the other, that the majority does not use its power, unique in sales of this class, to oppress a helpless minority.' 89 § 4944. Power of majority to modify or change reorganization plan. A modification of the reorganization plan, not warranted by the reorganization agreement, is not binding upon minority bondholders who do not consent thereto; 90 but it is otherwise where the reorganization agreement expressly authorizes a modification by the majority.91 § 4945. Remedies of nonassenting bondholders. If there is a reorganization without a judicial or execution sale, a bondholder not Vermont Cent. R. Co., 22 Fed. 211. 86 Landis v. Western Pennsylvania R. Co., 133 Pa. St. 579, 19 Atl. 556. See also Somerset Ry. v. Pierce, 88 Me. 86, 33 Atl. 772. 87 Gates v. Boston & N. Y. Air Line R. Co., 53 Conn. 333, 5 Atl. 695. A mortgage or deed of trust by a corporation frequently contains a provision for reorganization in case of foreclosure, and it may be such as to give a majority of the bondholders the power to bind the minority as to the scheme or plan of reorganization after foreclosure. Sage v. Central R. Co., 99 U. S. 334, 25 L. Ed. 394. 88 Gates v. Boston & N. Y. Air Line R. Co., 53 Conn. 333, 349, 5 Atl. 695, where the court said that it is manifestly impracticable that provision should be made for actual personal notice to all the bondholders under railroad mortgages of judicial action in reference thereto." See also Easton v. German American Bank, 127 U. S. 532, 32 L. Ed. 210; Terbell v. Lee, 40 Fed. 40. 89 Investment Registry, Ltd. v. Chicago & M. Elec. R. Co., 212 Fed. 594, 610, aff'g 206 Fed. 488. 90 See Post v. Simmons, 16 N. Y. St. Rep. 246, 1 N. Y. Supp. 572. 91 Olcott v. Powers, 39 N. Y. St. Rep. 551, 15 N. Y. Supp. 263. given a chance to participate therein may insist upon the payment of his bonds or a foreclosure of the mortgage and a sale of the property.92 If there is a reorganization in connection with a judicial or execution sale, a bondholder who does not participate therein, after being afforded an opportunity, can merely claim his proportion of the proceeds of the sale, provided there was no fraud or unfairness in the reorganization agreement or the sale. If there was such fraud or unfairness, a nonparticipating bondholder may have the sale set aside,93 or he may obtain a decree giving him the same rights as the other participating bondholders in the new corporation. Still another remedy is open in certain cases. For instance, where certain. bondholders are improperly excluded from a pool organized by other bondholders to purchase the property at foreclosure sale, they are entitled, after the property has been sold by the pool to third persons, to an accounting and to their proportionate share of the proceeds of the transaction.95 Objections to a reorganization plan may, and should be, made by 92 Hollister v. Stewart, 111 N. Y. 644, 19 N. E. 782. 93 Where some of the bondholders collusively and fraudulently procure a foreclosure, and purchase the property for the purpose of reorganization, to the exclusion or injury of other bondholders, the remedy of the latter is to sue to set the sale aside. They have no claim or lien upon the property. Richter v. Jerome, 123 U. S. 233, 31 L. Ed. 132. A resale should be ordered, on the application of a minority bondholder who has refused to join in a reorganization plan, where there has not been a fair plan of reorganization or sale. "In other words, when a reorganization committee has offered what in the light of the security holder's rights under the mortgage is not a fair plan, the refusal of a bondholder to accept it, is not an equity chargeable against him when he seeks to object to the judicial sale; but the court will accord such bondholder a hearing to ascertain whether there has been a fair sale. If there has not been such, then, by way of opening a door of fair opportunity to such bondholder, a resale should be ordered." Investment Registry, Ltd. v. Chicago & M. Elec. R. Co., 213 Fed. 492, 503. The sale pursuant to a reorganization agreement will not be set aside at the suit of a bondholder or others where there has been no fraud or bad faith, and there is no substantial ground for interference. Beaton v. Seaboard Portland Cement Co., 211 Fed. 84. 94 Concealment of the reorganization plan from a bondholder entitles him to a decree of court giving him the same rights as the other participating bondholders in the new corporation. See Ring v. New Auditorium Pier Co., 77 N. J. Eq. 422, 77 Atl. 1054. 95 Reed v. Schmidt, 115 Ky. 67, 24 Ky. L. Rep. 1889, 61 L. R. A. 270, 72 S. W. 367. bondholders individually rather than by the trustee of the mortgage securing the bonds.96 § 4946. Rights of bondholder given opportunity to participate in purchase at forced sale but who fails to join. If bondholders combine to purchase at a forced sale, and there is no fraud or bad faith, a bondholder invited to join in the combination to purchase, without any unjust discrimination against him or imposition of any unreasonable terms, but who fails to do so, cannot, after the purchase is made and the property resold or turned over to a reorganized company, participate in the benefits of the purchase.97 For instance, in one case, the purchase at foreclosure sale was by a committee for cash, and it was held that a bondholder who had an opportunity to join in the purchase but did not do so, was not entitled, on a distribution of the cash among the bondholders, to any greater amount in proportion than that set apart for the purchasing bondholders, notwithstanding the purchasing bondholders immediately resold the property for sufficient to pay all the corporate bonds in full and though the proceeds of the foreclosure sale netted less than fifteen per cent of the par value of the bonds, where there was no charge of fraud or illegality in the proceedings leading up to the sale, or in the conduct. of the sale itself, or in the purchase made thereunder.98 In other words, the conduct of a reorganization committee in fairly and openly seeking to obtain the co-operation of all the bondholders in buying 96 Guaranty Trust Co. of New York v. Missouri Pac. Ry. Co., 238 Fed. 812, 816. 97 McEwen v. Harriman Land Co., 138 Fed. 797. Especially is this so after the lapse of several years. Landis v. Western Pennsylvania R. Co., 133 Pa. St. 579, 19 Atl. 556, 26 Wkly. N. Cas. 64. "The committee was not bound to solicit the bondholders, nor were they bound to call the attention of every bondholder to the formation of this committee." Moss v. Geddes, 28 N. Y. Misc. 291, 296, 59 N. Y. Supp. 867. 98 Bound v. South Carolina Ry. Co., 71 Fed. 53, distinguishing Jackson v. Ludeling, 21 Wall. (U. S.) 616, 22 L. Ed. 492, and State v. Anderson, 91 U. S. 667, 23 L. Ed. 290, on the ground that in such cases the purchasing bondholder himself obtained the judgment and sale in a separate proceeding conducted by himself. Of course, the rule would be different if there is fraud or concealment or an attempt to prevent others from bidding at the sale. A bondholder who refuses to join in a reorganization plan cannot, after full knowledge thereof and of the purchase in its behalf at the foreclosure sale to which he made no objection, thereafter obtain full payment of his bonds from a fund derived from a sale by the foreclosure purchasers. Cutter v. Iowa Water Co., 128 Fed. 505, rev'd solely on question of want of jurisdiction in 140 Fed. 986 (mem. dec.). in the property at a foreclosure sale, and organizing a new company, although it results in a large profit to the assenting bondholders, does not make them trustees for nonassenting bondholders, or give the lat ter any right other than to share in their proportion of the proceeds of the sale applicable to the bonds. "When a sale of mortgaged railroad property is decreed," said the court, "an association of bondholders for the protection of their mutual interest is a necessity, and the appointment of a committee to act for them is advisable and customary. Those charged under the terms of such association with the duty of acting must employ counsel and be responsible for expenses and costs. That one of the terms of being admitted to such an association should be the deposit of the bonds to be protected is surely most reasonable. If notice of the fullest kind possible is given to all bondholders, and all are invited to come into the association upon the same terms, and the privilege is not withdrawn until there is a really valid reason for doing so, there can be no just complaint by those whose inaction has left them outside that they do not share in the benefits of those who are inside the association, and have taken the risks of its success or failure." 99 A bondholder who refuses to join in a reorganization agreement cannot urge that the combination is highly advantageous to those joining therein as a ground of objection to the confirmation of the judicial sale.1 § 4947. Rights of nonassenting bondholders, after sale, no greater than those of assenting bondholders. Where all of the bondholders, except plaintiff, entered into an agreement for the selling of the property under the mortgage, buying it in, creating a new mortgage, and sharing in the same proportions in the new security that they did in the old, the rights of plaintiff, where he was given an opportunity to enter into the agreement but was not made a party to or given notice of the foreclosure suit, are no greater nor less, in the new security, than those of the other bondholders, upon paying his share of the expense of the scheme.2 X. RIGHTS OF UNSECURED CREDITORS § 4948. In general. If the reorganization is not in connection with a judicial or execution sale, unsecured creditors of the old company ordinarily may enforce their claims against the new company; 99 Bound v. South Carolina R. Co., 78 Fed. 49, aff'g 71 Fed. 53. 1 Simon v. New Orleans, T. & M. R. Co., 242 Fed. 62. 2 Ring v. New Auditorium Pier Co., 77 N. J. Eq. 422, 77 Atl. 1054. 3 See §§ 4984-4987, infra. |