Central Sav. Bank of Balto. v. Post

Markell, J., delivered the opinion of the Court. On December 23, 1930, receivers for the Seaboard Air Line Railway Company were appointed by the United States district court for Eastern Virginia, in equity, and in ancillary proceedings in Southern Florida. On July 31, 1946, after sale under foreclosure of bond mortgages pursuant to a plan of reorganization, the properties of the Seaboard system were transferred to the new corporation formed under the plan. As of August 1, 1931, an Underlying Bondholders’ Protective Agreement was entered into between an Underlying Bondholders’ Protective Committee and such holders of Underlying Bonds as might become parties to the agreement by depositing their bonds with a Depositary under the terms of the agreement, and the holders of certificates of deposit issued under the agreement.

Upon every deposit certificates of deposit were to be issued, identifying the issue of which the deposited bond was a part. Upon transfer of a certificate the transferee was for all purposes to be substituted, as a Depositor, for the prior holder. The Underlying Bonds comprised eleven issues, secured by mortgages on particular parts of the Seaboard system, of ten corporations to which Seaboard was the successor by consolidation and one sub ³⁷⁵ sidiary corporation whose property was by lease a part of the system. The lengthy deposit agreement, in conventional form, contains particular recitals and provisions relating to the Seaboard situation and general provisions many of which had become standardized fifty years ago.

Cf. Industrial and General Trust Ltd. v. Tod, 180 N. Y. 215 , 73 N. E. 7 . Each Depositor by the deposit of bonds assigns them to the Committee “in trust for the uses and purposes and with the powers” set forth in the agreement. The Committee is vested, “as trustee of an express trust,” with the full legal title to the bonds deposited.

Cf. Bullard v. City of Cisco, 290 U. S. 179, 189 , 54 S. Ct. 177 , 78 L. Ed. 254 . The deposited bonds and all assets from time to time in the hands of the Committee are “charged with the payment of the indebtedness, obligations and liabilities of the Committee and its compensation and expenses”. The Committee is authorized and empowered, whenever in its judgment it shall become advisable so to do, to prepare and adopt a plan for reorganization.

Any Depositor (a) within thirty days of notice of adoption or approval of a plan of reorganization [Article Sixth] or (5) if no plan shall have been adopted or approved within five years of the date of the agreement [Sixth] or (c) within specified periods of notice of an amendment of the agreement [Eleventh] or (d) a modification of a plan [Eleventh] or (e) if a majority in interest of Depositors of bonds of any underlying issue shall determine that a conflict exists between their interests and the interest of Depositors of any other issue [Sixteenth, 4] or (/) “if in the uncontrolled judgment of the Committee” such a conflict of interest or any other reason makes it expedient for the Committee to cease to represent the Depositors of any issue [Sixteenth, 5], may upon the terms and conditions set forth in Article Tenth withdraw from the agreement and “thereupon shall be entitled to receive securities or property as provided in Article Tenth and shall cease to have any rights hereunder.” ³⁷⁶ Article Tenth provides: “Whenever by any provision of this Agreement a right of withdrawal is conferred upon the holder of any certificate of deposit for Underlying Bonds, any such certificate holder desiring to exercise such right shall, at the time of and as a condition precedent to such exercise,” surrender his certificate and pay “(a) * * *, (b) a fair contribution, as determined by the Committee, toward the compensation and the expenses of the Committee incurred to the date of such surrender, the amount to be paid under this subdivision (&) not, however, to exceed a sum equal to one and one-half per cent. (1 %%) of the face amount of the bonds represented by the certificate of deposit surrendered, and (c) at the election of the Committee, such sum as the Committee in its sole discretion shall fix as his ratable proportion of all other indebtedness, obligations and liabilities of the Committee incurred to the date of such surrender;” and thereupon shall be entitled to the delivery of Underlying Bonds, of the issue and to the amount called for by his certificate, stamped with the payment of any amount that shall have been paid or credited thereon, or at the election of the Committee to receive his ratable share of the proceeds of or substitutes for such Underlying Bonds then under the control of the Committee, and of other securities, stocks or property, if any. “Depositors by such withdrawal shall thereupon and without any further act be released from this Agreement and cease to have any rights under this Agreement or under any plan or agreement adopted or approved pursuant to this Agreement; * * The only plan of reorganization ever formally adopted or approved by the Committee was the plan which had been approved by the receivership courts and was eventually carried out. By a letter to certificate holders dated October 31, 1944, and an advertisement published on November 1, 1944, the Committee gave notice of adoption and approval of the plan and the right of Depositors to withdraw from the agreement on or before December 2, 1944. The withdrawal fees fixed by the Committee ³⁷⁷ and in effect from time to time ranged from $15 per $1000 bond from November 25, 1936 to February 5, 1940 to' $18.25 from August 1, 1943 to December 2, 1944—and thereafter.

Out of $23,672,000 of bonds of all issues deposited from time to time, $5,268,000 were withdrawn. The only bonds withdrawn after December 2, 1944 were all the $1,880,000 of then deposited bonds of two issues (Raleigh & Augusta and Raleigh & Gaston) which were not affected by the reorganization plan but were paid in full by the receivers out of earnings (principally war earnings) from those portions of the Seaboard system. Most of the certificates for bonds of these two issues had previously been bought by the receivers, who withdrew the bonds and paid the withdrawal fee in 1946, before consummation of the reorganization, in order to procure release of the mortgages. The withdrawal fees collected by the Committee aggregated $96,955.

When the plan was consummated in August, 1946 the Committee made a deduction, to reimburse itself for its expenses and compensation, from the cash payable under the plan on the bonds still held by it, of $15 per $1000 bond-less amounts previously withheld from interest payments on the bonds of four issues, including the two Raleigh issues. The aggregate amount collected, by withholding, from non-withdrawing certificate holders was $276,060. In the fifteen years of its activities the Committee incurred large expenses, part of which were currently paid out of loans obtained on the security of the deposited bonds and part were not paid, or the amount judicially fixed or approved, until after consummation of the reorganization. The Committee’s services and expenses, (a) in formulating and carrying out, together with other committees, the plan of reorganization, enured to the benefit of all interests in the reorganization, and (5) in protecting the position of Underlying Bonds as against other interests, e. g., in successfully opposing issuance of receivers’ certificates prior in lien to the Underlying Bonds and in negotiating for the best possible position of the Underlying Bonds in the plan of reorganization, ³⁷⁸ enured to the benefit of its Depositors only.

For expenses of the former kind, as receivership or reorganization expenses, the Committee was entitled to reimbusement from the receivers or out of a $10,000,000 expense fund under the reorganization plan, either under long established equitable principles (Trustees v. Greenough, 105 U. S. 527, 531-537 , 26 L. Ed. 1157 ; Cowdrey v. Galveston, etc., R. Co., 93 U. S. 352, 354, 355 , 23 L. Ed. 950 ), or under section 77 of the Bankruptcy Act, if applicable. 11 U. S. C. A. § 205, Act of March 3, 1933, c. 204, 47 Stat. 1474 , sec. 77, sub. (c) (8), Act of August 27, 1935, c. 774, 49 Stat. 911 , sec. 77, sub. (c)(12). For expenses of the latter kind the Committee was entitled to reimbursement, not from the receivers or out of the reorganization fund, but only from its Depositors.

The Committee invoked the jurisdiction of the receivership courts under section 77, sub. p, of the Bankruptcy Act, 11 U. S. C. A. § 205, sub. p, Act of August 27, 1935, c. 774, 49 Stat. 911 , sec. 77, sub. p, last paragraph, to determine' reasonable amounts to be paid by the Committee and charged to its Depositors. Apparently it was held by the receivership courts, by ratifying a special master’s, report, that compensation of the Committee could not be reimbursed as a receivership or reorganization expense, either under the- statute or under equitable principles applicable before the statute. Before consummation of the reorganization, the Committee did not pay any fee to its counsel (except $20,000 in 1932) or any compensation to its members, but application was made for allowance, as reorganization expenses, of a counsel fee of $300,000 (including $20,000 already paid) and compensation of $30,000 to the Committee. The courts, in ratifying the special master’s report on November 16, 1946, allowed $125,000 as a counsel fee: (including reimbursement to the Committee of $20,000 paid in 1932) out of the receivership estate, and held that- $100,000 would be a reasonable additional fee, and $30,000 reasonable compensation to the Committee, to be charged to the Depositors. ³⁷⁹ The Committee’s expenses and compensation amounted to $593,241, comprising counsel fee, $225,000; compensation, $30,000; secretary and depositaries, about $116,000 (including $12,121 paid by Depositors directly to Depositaries for issuing certificates), compensation and expenses of experts (accountants and engineers), $104,000; interest on loans, $81,000; printing, advertising, traveling, mail, telephone, etc., $34,000.

Under orders of the receivership courts, in June, 1944 $195,562 (a tentative allowance before adoption of the reorganization plan), in November, 1946, $125,000 (for counsel fee), and in July, 1947, $115,861, a total of $436,424, was received by the Committee as reimbursement from the receivership estate. The Committee’s receipts were $821,948, including withdrawal fees, $96,955; charge for issuing certificates, $12,121; assessment of non-withdrawing certificate holders, $276,060; reimbursements from the receivers, $436,424. After payment of expenses the Committee has on hand a balance of $228,706. Until receipt of the $195,562 from the receivers in June, 1944 the Committee was unable to pay off the loans obtained by it to pay out-of-pocket expenses.

Without the assessment of $276,060 from non-withdrawing certificate holders in August, 1946, or the last reimbursement of $115,-861 from the receivers in July, 1947, the balance of $228,-706 would be a deficit of $163,215. The Committee filed a bill in the lower court, alleging that it has this balance of $228,706 on hand “for distribution to those bondholders entitled thereto under the terms of the Deposit Agreement”, and that conflicting rights to share in the distribution “have been asserted on behalf of withdrawing and non-withdrawing depositors,” this conflict arising “from opposing interpretations of the Deposit Agreement, the basic question being whether or not under the terms thereof distribution should be made to all depositors, (in which event each depositor of both classes would receive a refund of approximately $9.00 for each $15.00 withheld or paid as a withdrawal fee) or only to those who remained as depositors until” con ³⁸⁰ summation of the plan of reorganization, “(in which event non-withdrawers would receive a refund of approximately $12.00 of each $15.00 withheld),” and praying that the court “assume jurisdiction of the further administration” of the Committee’s trust, and that a decree be passed construing the deposit agreement and directing the Committee in the complete distribution of the trust property. The bill names 68 defendants as representative of the two classes of all depositors, who are too numerous (more than 1500 in number) to be made parties. Cf.

Diggs v. Fidelity & Deposit Co., 112 Md. 50, 63, 64, 68, 82 , 75 A. 517 , 20 Ann. Cas. 1274; Orrick v. Fidelity & Deposit Company, 113 Md. 239, 246, 247 , 77 A. 599 ; Leviness v. Consolidated Gas Electric Light & Power Co., 114 Md. 559, 564-570 , 80 A. 304 , Ann. Cas. 1913C, 649. After hearing on bill, answers and testimony, a decree was entered, assuming jurisdiction and directing (a) allocation of the remainder of the funds (after payment of expenses, including costs and such counsel fees as may be allowed in this proceeding) among those bonds which were not withdrawn but were exchangeable for new securities under the plan of reorganization, and (5) distribution to be made accordingly. From this decree depositors who had withdrawn their bonds appeal. Appellants contend that: The deposit agreement is silent as to the distribution of such a fund as this $228,706.

Had the draftsman contemplated the possibility of the Committee having