Prudence Realization Corp. v. Atwell , 35 N.Y.S.2d 1001 ( 1942 )

Glennon, J.

This is a submission of a controversy. The plaintiff is the successor of the trustees of Prudence Company, Inc., while the individual defendants are the voting trustees of the corporate defendant Prudence Securities Corporation. It is agreed between the parties that the main question involved is whether the voting trust agreement executed' by the defendants or their predecessors is subject to the provisions of article 4-A of the Real Property Law, commonly called the Streit Act. If the answer is in the affirmative, the voting trust agreement expired on April 1, 1942; if in the negative, the voting trust agreement will continue until April 1, 1947, unless the collateral trust cumulative income bonds, series A, of the corporation are previously retired.

I am of the opinion that the voting trust agreement does not come within the provisions of article 4-A of the Real Property Law. Therefore, the question, in my view, should be answered in the negative.

It will be necessary to set forth, in substance, certain of the stipulated facts in order to indicate why I have reached this conclusion. Prudence Company, Inc., was organized in 1919 pursuant to the provisions of article VII of the Banking Law of the State of New York as then in force. It executed and delivered to the Central Union Trust Company of New York, as trustee, a trust indenture dated May 1, 1926. It issued $15,000,000 of its guaranteed collateral trust five and one-half per cent gold bonds due May 1, 1961, on May 1, 1926. Incidentally, it might be noted that this indenture is referred to as the “ old indenture ” and the bonds issued at that time as the “ old bonds.” The collateral security consisted of various kinds of personal property, which may be classified as follows:

(1) Single bonds each secured by a mortgage on real éstate;

(2) Cash;

(3) United States government obligations and other obligations of States and municipalities of the United States;

(4) Bonds issued by Prudence Bonds Corporation and mortgage participating certificates; and

(5) Securities constituting legal investments for savings banks and trustees.

Prudence Company, Inc., had a right to withdraw the collateral originally placed with the trustee, provided, of course, it was not in default, by substituting therefor “ bonds, mortgages, cash and /or - securities * * * of sufficient amount or value so that the value of the pledged property shall not be less than the face amount of the bonds then issued and outstanding hereunder * * *.”

It cannot be disputed that the old indenture was not a mortgage.' The collateral was described as “ the pledged property.”

Prudence Company, Inc., on May 1, 1933, defaulted in the payment of the installment of interest on the old bonds which became due on that date. The trustee, after the default, took over the control and management of all the collateral including the mortgages which secured the bonds. At that time it recorded certain assignments of the mortgages which it had in the pledged property. However, it never became the owner of the mortgages which were part of the collateral any more than it did of the cash or the governmental or municipal securities which it held. It might be well to point out that the old bonds were guaranteed by New York Investors, Inc., which was an investment company. The guaranty was on each of the bonds, which was purchased by the public and passed upon a resale to each successor bondholder.

In 1935 a petition was filed in the United States District Court for the Eastern District of New York for the reorganization of Prudence Company, Inc., under section 77B of the National Bankruptcy Act. An order was entered on May 1, 1935, approving the petition. Trustees were appointed. On February' 6, 1936, Prudence Company, Inc., proposed a separate plan of reorganiza- ■ tion for the old bonds in the reorganization proceedings in .the ' United States District Court. This plan of reorganization, as amended, was approved on December 16, 1936, and was accepted by ninety-two per centum of the bondholders and by the trustees of Prudence Company, Inc.

It is unnecessary to set forth at length the details of the plan of reorganization as confirmed by the United States District Court. The corporate defendant was organized pursuant to the provisions of the plan. Ownership of all the collateral securities pledged with the trustee under the old indenture was vested in the corporate defendant except title to the real estate acquired upon the foreclosure of some of the mortgages securing the bonds which were part of the collateral pledged with the original trustee. Title to the said real estate was vested in two subsidiary corporations of the corporate defendant.

Pursuant to the plan of reorganization, the corporate defendant executed and delivered to Empire Trust Company, as the new trustee, a trust indenture dated April 1, 1937. Under it the corporate defendant pledged with the new trustee all the following property: “ (a) 107 bonds secured by first mortgages as aforesaid in the aggregate principal amount of $6,377,539.50; (b) cash to the amount of $956,287; (c) Mortgage Participation certificates in mortgages secured by real estate in the amount' of $699,450; (d) bonds of Prudence-Bonds Corporation secured by bonds secured by first mortgages upon real property in the face amount of $1,159,800; (e) Home Owners Loan Corporation bonds in the principal amount of $48,125.” In addition all the capital stock and debenture bonds of the two wholly-owned subsidiary corporations, to which reference has been made already, were turned over to the new trustee.

Empire Trust Company, as trustee, under the new indenture was not in any sense a mortgagee but rather a pledgee of the collateral which had been given as security for the new bonds.

When the plan of reorganization was confirmed by the court, the value of the collateral excéeded the amount of the old bonds outstanding, so that an equity existed in favor of the trustees of Prudence Company, Inc. According to the agreed statement of ■facts, the entire capital stock of the corporate defendant, pursuant to said plan, was issued and delivered to the trustees of Prudence Company, Inc. Thereupon, the trustees of the latter executed a ■voting trust agreement dated April 1, 1937, and deposited the capital stock of the corporate defendant “ under said Voting Trust Agreement, as provided by the provisions of said Plan of Reorganization.” It is stipulated that “ It was the intention of the interested parties that the term of the Voting Trust Agreement should be ten years unless a shorter period was prescribed by then existing applicable law.”

It is contended by the plaintiff that the voting trust agreement expired on April 1, 1942, by virtue of the provisions of section 130-c of article 4-A of the Real Property Law. I do not believe that the section cited has any application to the question involved herein. It applies only to reorganizations dealing directly with real estate. It does not apply to collateral trusts such as we have here under consideration. While section 124 of the same article, which is entitled, “ Purpose and application of article,” might lead one to the view that the Streit Act, so-called, would apply, still a reading of the definitions of section 125 conclusively indicates that the act was designed to apply only to reorganizations of real property itself.

Surely the property which was pledged here cannot come within the purview of mortgage investment as defined in subdivision 1 of section 125 of the act; nor within the definition of property as found in subdivision 7. In addition when one reads what a trust indenture shall contain under section 126, it is quite clear that what the framers of the act had in mind was the reorganization of real property itself rather than collateral trusts.

I have pointed out already that the old bonds were guaranteed by New York Investors, Inc. While article 4-A does not contain a definition of the term investment company, still the facts as stipulated by the parties to this controversy indicate quite clearly that New York Investors, Inc., was an investment company within the meaning of section 125 of the act. Under its certificate of incorporation, it had the right to guarantee payment of the principal of and interest upon bonds and mortgages, so that even if the bonds here involved are to be considered mortgage investments, and since they were guaranteed by New York Investors, Inc., the definition of mortgage investments as contained in subdivision 1 of section 125 of the act, makes it apparent that those bonds referred to in the stipulation are exempt from the provisions of article 4-A. However, I do not believe that the bonds are mortgage investments.

It is urged by the defendants, and properly so, that the corporate defendant is not a corporation formed or used under a plan of reorganization of property as defined in article 4-A and, therefore, the provisions of subdivision 2 of section 130-c do not apply to the voting trust agreement so as to limit the terms of that agreement to five years. The only thing which was reorganized under the plan was the old bonds. Neither the collateral securing the bonds nor the real properties underlying the mortgages constituting part of that collateral were reorganized at all. As we have seen, the collateral was taken over by the corporate defendant and pledged under a new indenture, similar to the old indenture, as security for the new bonds which were exchanged for the old.

I have reached the conclusion, therefore, that the voting trust agreement did not expire on April 1, 1942, but will continue in full force and effect until April 1, 1947, unless the collateral trust cumulative income bonds, series A, are previously retired.

Judgment should be rendered for defendants, without costs.

Untermyer and Dore, JJ., concur; Martin, P. J., and Townley, J., dissent.