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a proper case where the reorganization is illegal or unauthorized. And if the reorganization is fraudulent or unfair, the courts will set aside the transfer or sale, under proper conditions,52 and will refuse relief to the guilty parties. A court will protect the interests of minority stockholders, bondholders or unsecured creditors, on a proper application, especially where the reorganization plan is fraudulent or unfair as to minority holders.54 Where the only parties interested in a reorganization are the bondholders, a sale by a receiver pursuant to a reorganization plan acquiesced in by five-sixths of the bondholders will not be interfered with because a three hundred dollar assessment is levied on a thousand dollar bond, where all the bondholders are treated alike and the plan seems the only practical one since no other and better plan is submitted.55

In case of railroads, the relation of a particular railroad to the system as a whole, its value to the system on that account, and the advisability of including or excluding it, in view of the necessities of the reorganization, as affecting the justice of the terms of a reorganization plan as offered to bondholders of several branch or subsidiary lines, is largely a matter of business judgment which will not be interfered with by a court ordinarily unless in case of fraud or grossly unreasonable discrimination.56

In a proper case, in order to preserve street franchise rights, the court may authorize its receivers to turn corporate property over to the reorganized company pending its sale on foreclosure.57

§ 4842. Reorganization as ground for abatement of action. The reorganization of a corporation does not, it seems, abate pending suits by or against it, unless an entirely new corporation is created.58

§ 4843. Contracts of promoters as binding themselves and reorganized company. As stated in a former chapter, a corporation is not bound by the contracts made by its promoters unless it expressly

52 See § 4866, infra.

53 See Pollitz v. Farmers' Loan & Trust Co., 53 Fed. 210, and see §§ 4933, 4943, 4948, infra.

54 See Lake St. El. R. Co. v. Ziegler, 99 Fed. 114, and see § 4875, infra.

55To warrant it [the court] rejecting such proposed plan, a court should have a clear and reasonable probability of some other plan or course which would bring better re

sults to these bondholders as a
whole.''
Fearon v. Bankers' Trust
Co., 238 Fed. 83, 85.

56 Guaranty Trust Co. of New York v. Missouri Pac. Ry. Co., 238 Fed. 812, 818.

57 Guaranty Trust Co. of New York v. Chicago Union Traction Co., 158 Fed. 1015.

58 See O'Connor v. Memphis, 6 Lea (Tenn.) 730, and also § 2955, supra.

or impliedly adopts or ratifies the same after its organization. But it is liable if it adopts or ratifies the contracts, and it does so if it accepts the benefit of them, as by taking a conveyance of property thereunder.59 These principles apply to contracts made by the promoters of a reorganization.60 Where the holders of mortgage bonds of a corporation take, in satisfaction of their bonds, a conveyance of the mortgaged property to trustees for their benefit, form a corporation to take the property, and enter into an agreement by which the corporation, in consideration of the conveyance of the property to it, is to assume certain burdens and obligations towards them, the corporation, when it is formed, is not bound by the agreement, unless it expressly or impliedly ratifies or adopts the same; but it does impliedly adopt the agreement if it accepts a conveyance of the property, and in such a case it is bound by its terms in favor of the bondholders. In accepting the benefits of the agreement, it assumes the obligations. Thus, in a New York case it was said, speaking of a land company organized to take land which had been conveyed to trustees for the benefit of the holders of bonds secured by a mortgage thereon: "The bondholders were the promoters of the land company. Being about to form a corporation for an authorized purpose, they made an agreement upon the subject in which they provided for benefits to be conferred upon it and burdens to be assumed by it after its organization. While it could have refused, when it came into existence, to accept the one or to be bound by the other, it could not accept the advantages and then refuse to assume the obligations. By accepting title to the land it adopted and ratified the agreement entered into by all its stockholders, and thereby voluntarily made itself a party thereto and became bound thereby. The adoption by the land company of the contract between the bondholders was a reasonable means of carrying into effect its authorized objects, and, after knowingly receiving the benefit of the arrangement, 'it cannot be permitted to deny that it agreed to assume the corresponding burdens.'"' 61

The promoters of a corporation are personally liable on contracts made by them in the course of the reorganization, as for services performed by others in connection with the reorganization, unless there is an understanding to the contrary.62

59 See § 150-156, supra.

60 Rogers v. New York & T. Land Co., 134 N. Y. 197, 32 N. E. 27; Providence Albertype Co. v. Kent & Stanley Co., 19 R. I. 561, 35 Atl. 152.

61 Rogers v. New York & T. L Co., 134 N. Y. 197, 211, 32 N. E. 27 62 Babbitt v. Gibbs, 150 N. Y. 44 N. E. 952.

A corporation may, after it

§ 4844. Collateral attacks on reorganization. The validity of a reorganization cannot be tested by a collateral attack.6

63

II. AUTHORITY TO REORGANIZE AND METHODS OF REORGANIZATION

§ 4845. General considerations. The power to reorganize depends on various matters. There must be statutory authority therefor,64 although the power of particular persons to reorganize pursuant to statute may be conferred or limited by the terms of a corporate mortgage.65 The power to reorganize often depends upon the nature of the reorganization, i. e., whether it is a reorganization in connection with a judicial or execution sale or whether it is a reorganization independent of any such sale. So the power to reorganize may depend upon the consent or joinder of certain persons, such as all or a certain per cent of the bondholders or stockholders.66 Certain statutes sometimes specially provide for the reorganization of banking corporations,67 insurance companies,68 building and loan associations,

been declared insolvent, and after an injunction has been issued and a receiver appointed, take steps looking towards a reorganization and a resumption of its property and business; and it consequently may, in exercising that power, employ agents, and incur liability to compensate them, which may be enforced on the dissolution of the injunction and the removal of the receiver. Linn v. Joseph Dixon Crucible Co., 59 N. J. L. 28, 35 Atl. 2.

63 Armour v. E. Bement's Sons, 123 Fed. 56, 60.

A corporation, being insolvent, the creditors entered into a reorganization agreement, all creditors being entitled to participate therein. A large part of the property of the corporation was thereafter purchased at a price which might have been deemed less than the value of the property, although the amount was the upset price fixed in the decree of sale and the sale was confirmed by the court. Certain creditors who had not joined in the reorganization proceedings were held barred from attacking the sale collaterally on the ground that the

corporate assets had been disposed of
for an inadequate price. McEven v.
Harriman Land Co., 138 Fed. 797, 811.
64 See § 4847, infra.
65 See § 4868, infra.
66 See § 4865, infra.

67 Willius v. Mann, 91 Minn. 494, 98 N. W. 341, 867; State v. Germania Bank, 90 Minn. 150, 95 N. W. 1116; Hunt v. Roosen, 87 Minn. 68, 91 N. W. 259; Abel v. Allemannia Bank, 79 Minn. 419, 82 N. W. 680.

Statutes sometimes fix an exclusive method by which an insolvent state bank may be reorganized and reopened for business. First State Bank of Oklahoma City v. Lee, Okla. 166 Pac. 186.

68 In some states statutes expressly authorize mutual insurance companies to change from mutual to joint stock companies. Schwarzwaelder v. German Mut. Fire Ins. Co., 59 N. J. Eq. 589, 44 Atl. 769; Schwarzwalder v. Tegen, 58 N. J. Eq. 319, 43 Atl. 587; Grobe v. Erie County Mut. Ins. Co., 39 N. Y. App. Div. 183, 57 N. Y. Supp. 290.

Since policyholders in a mutual insurance company are practically stock

and the like, although many of such statutes in reality merely authorize a reincorporation rather than a reorganization, using the latter term in its more limited sense.

If the statute under the authority of which the reorganization is accomplished is void, but the business is carried on by the new company, the continued business is to be regarded as really that of, and belonging to, the old corporation.70

§ 4846. Authority of directors as distinguished from stockholders. The directors of a corporation have no implied authority to bind the members or stockholders by proceedings to reincorporate or reorganize under a statute, unless authorized by them." But where the directors have performed the acts prescribed by the statute, for the purpose of effecting a reorganization or reincorporation, and the association has acted as a corporation in pursuance thereof, it will be presumed that their action was authorized, until the contrary is made to appear.72

§ 4847. Necessity for, and construction of, statutory authorityGeneral rules. The right of the members of a corporation to reincorporate, or of the members, or members and creditors, of a corporation to reorganize, like the right to incorporate in the first instance,73 can only exist by virtue of authority from the legislature. In most

holders therein, a statute authorizing it to turn its property over to a stock corporation organized for that purpose is invalid where only a small part of the stock of the new company is to go to the policyholders. Huber v. Martin, 127 Wis. 412, 3 L. R. A. (N. S.) 653, 115 Am. St. Rep. 1023, 7 Ann. Cas. 400, 105 N. W. 1031.

69 Mechanics & Traders Savings, Loan & Building Ass'n v. People, 72 Ill. App. 160; Holmes v. Royal Loan Ass'n, 128 Mo. App. 329, 107 S. W. 1005.

Notice of meeting of stockholders, see Holmes v. Royal Loan Ass'n, 128 Mo. App. 329, 107 S. W. 1005.

By statute in Illinois relating to reorganization of building and loan associations, the resolution for reorganization must be passed by a twothirds vote of the shareholders.

Me

chanics & Traders Savings, Loan & Building Ass'n v. People, 72 Ill. App. 160. And see Assets Realization Co. v. Defrees, Brace & Ritter, 225 Ill. 508, 80 N. E. 263, aff'g 127 Ill. App. 454.

70 Huber v. Martin, 127 Wis. 412, 3 L. R. A. (N. S.) 653, 115 Am. St. Rep. 1023, 7 Ann. Cas. 400, 105 N. W. 1031. 71 See § 1997, supra, and also, in connection therewith, § 1998.

72 State v. Steele, 37 Minn. 428, 430, 34 N. W. 903.

73 See § 167, supra.

74 See State v. Steele, 37 Minn. 428, 34 N. W. 903; People v. James, 5 N. Y. App. Div. 412, 39 N. Y. Supp. 313; People v. De Grauw, 62 Hun (N. Y.) 224, 16 N. Y. Supp. 697, rev'd 133 N. Y. 254, 30 N. E. 1006.

Under the Business Corporations Law of New York, providing (section

states, if not in all, such authority has been granted by the legislature under certain conditions.75 And under some circumstances it exists under the general laws authorizing the formation of corporations.

A statute authorizing a majority of the stock to dissolve a corporation does not authorize such majority to reorganize the company into another corporation without the consent of all the stockholders.76

Authority to sell, lease, exchange and dispose of property does not include power to reincorporate or reorganize so as to change the terms by, and the purpose for which, the property was held by the old company, or to confer enlarged powers on its agents, or to dispose of all the corporate property in return for a part thereof.”

§ 4848. Where original company illegally or ineffectually created or organized. When a corporation has been illegally or ineffectually organized, a new corporation may be formed, under a general law authorizing the formation of corporations for such purposes, to carry out the enterprise.78 And the fact that some of the old corporators do not take stock in the new company is no ground for objection by the state.79 An insurance statute authorizing the reincorporation of "any existing corporation, association, or society incorporated" under the laws of the state, authorizes the incorporation of associations whose attempted incorporation under prior laws was unauthorized and ineffectual.80

§ 4849.- Where original company dissolved by nonuser. Under a statute authorizing reincorporation of any corporation which has

4) that any corporation may reincorporate on filing a certificate which shall contain the statement required thereby, and that from the time of such filing it shall have and exercise all such rights and franchises as it had and exercised under the laws pursuant to which it was originally incorporated, but making no provision for extending the term of its corporate existence, or for changing its business; and providing that a certificate of incorporation shall state the object for which the corporation is formed, and the number of shares of capital stock, and that its duration shall not be more than fifty years,an existing corporation cannot reincorporate for a period longer than

that prescribed by its original charter, or make any change in its business. People v. James, 5 N. Y. App. Div. 412, 39 N. Y. Supp. 313.

75 See § 4859, infra.

76 Farish v. Cieneguita Copper Co., 12 Ariz. 235, 100 Pac. 781.

77 Treat v. Hubbard-Elliott Copper Co., 4 Alaska 497.

78 Hyde v. Doe, 4 Sawy. 133, Fed. Cas. No. 6,969; State v. St. Paul & M. Turnpike Co., 92 Ind. 42. See also Southern Pac. R. Co. v. Orton, 32 Fed. 457.

79 State v. St. Paul & M. Turnpike Co., 92 Ind. 42.

80 State v. Steele, 37 Minn. 428, 34 N. W. 903.

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