Where a bondholder bids off the property for the benefit of all, pursuant to an announcement to that effect at the sale and a parol agreement with several of the bondholders, the deed must be made to the purchaser as trustee for the bondholders and not individually; and this is true although there was no prior authority from all the bondholders to make the bid in their behalf, where the bid was afterwards ratified by them.52 § 4939. Right of mortgage trustee to purchase as representative of the bondholders or otherwise. The trustee in a mortgage or deed of trust by a corporation to secure the payment of its bonds occupies a fiduciary relation towards the corporation and the bondholders, and he certainly cannot purchase for himself at his sale under the mortgage or deed, or be interested in the purchase. If he does so, he may be compelled to account for any profit, or the sale may be set aside,53 unless relief is barred on the ground of laches or acquiescence.54 Nor can the agent of the trustee in possession and control of the property purchase at the sale.55 On the other hand, the trustee has implied power to bid for the protection of bondholders, at least to the amount of the mortgage debt, it is held; 56 and especially has he power to purchase for the bondholders where the sale is brought about by other interests or parties,57 or the mortgage or deed of trust, as is often the case, expressly authorizes him to bid in the property for the benefit of the 52 Sullivan v. Haskin, 70 Vt. 487, 41 Atl. 437. 53 See § 1396, note 34, supra. Where a bank holding bonds of a corporation, and whose cashier was trustee in the mortgage securing the same, purchased at the foreclosure sale under the mortgage, it was held that the other bondholders could compel it to account for the profits. Péople v. Merchants' Bank, 35 Hun (N. Y.) 97. 54 See Hoyt v. Latham, 143 U. S. 553, 36 L. Ed. 259, and also § 1402, notes 78, 79, supra. Laches may bar the right to set the sale aside. Kitchen v. St. Louis, K. C. & N. Ry. Co., 69 Mo. 224. 55 Racine & M. R. Co. v. Farmers' Loan & Trust Co., 49 Ill. 331, 95 Am. Dec. 595. 56 But little authority upon the question can be found, probably for the reason that corporation mortgages usually provide specifically for the purchase at foreclosure sales, of mortgaged premises by the trustee, in the interest of the bondholders, and for the purpose of reorganization. Where such power is not explicitly given, it may very well be implied." Nay Aug Lumber Co. v. Scranton Trust Co., 240 Pa. 500, 504, Ann. Cas. 1915 A 235, 87 Atl. 843. See also § 1396, supra. But see Washington, A. & G. R. Co. v. Alexandria & W. R. Co., 19 Gratt. (Va.) 592, 100 Am. Dec. 710. 57 Allen v. Gillette, 127 U. S. 589, 32 L. Ed. 271. bondholders,58 or he is directed or authorized to do so, as he may be, by the decree of the court directing the sale,59 or by a statute.60 Where the trustee does buy in the property at his own sale, he is not in a position to object that he had no right to do so.61 In any case, when the trustee bids in the property, and transfers the same to a new corporation, he must do so for the benefit of all the bondholders whom he represents, and, if he disregards the rights of a bondholder, he is liable to him for the loss sustained,62 in the absence of laches.63 If the mortgage or deed of trust requires him to organize a new corporation and transfer the property to it, he is under a duty to do so, and he has no right to sell the property to another corporation, instead of the reorganized corporation, even with the consent of a majority of the bondholders. If he does so, a dissenting bondholder may hold him liable for the value of his bonds.64 A bondholder cannot complain of a transfer by the trustee to a new corporation, to which he has assented.65 If the trustee, after purchasing for the benefit of the bondholders. joins with one or more of the bondholders, to the exclusion of others, in forming a new corporation and transferring the property to it, he and the other bondholders who joined with him may be compelled to account for profits to the bondholders excluded,66 or to account for their share of the proceeds of the sale or of the value of the property,67 or they may sue to set the sale aside.68 The trustee has no right to make any secret profit at the expense, either of the bondholders, or of the corporation, for he represents both. Where a trustee in a railroad mortgage, in possession of the property as such, made a profit by buying up some of the bonds, he was held accountable therefor to the company.69 58 Etna Coal & Iron Co. v. Marting Iron & Steel Co., 127 Fed. 32; Zebley v. Farmers' Loan & Trust Co., 139 N. Y. 461, 34 N. E. 1067; James v. Cowing, 82 N. Y. 449. 59 Sage v. Central R. Co., 99 U. S. 334, 25 L. Ed. 394; Rogers v. Wheeler, 43 N. Y. 598. Compare Sanxey v. Iowa City Glass Co., 63 Iowa 707, 17 N. W. 429. 60 Barnes v. Chicago, M. & St. P. R. Co., 122 U. S. 1, 30 L. Ed. 1128. 61 Barnes v. Chicago, M. & St. P. R. Co., 8 Biss. 514, Fed. Cas. No. 1,016. 62 Riker v. Alsop, 27 Fed. 251, rev'd 155 U. S. 448, 39 L. Ed. 218; Zebley v. Farmers' Loan & Trust Co., 139 N. Y. 461, 34 N. E. 1067; James v. Cowing, 82 N. Y. 449. 63 Alsop v. Riker, 155 U. S. 448, 39 L. Ed. 218. 64 James v. Cowing, 82 N. Y. 449. 65 Butterfield v. Cowing, 112 N. Y. 486, 20 N. E. 369. 66 Cushman v. Bonfield, 139 Ill. 219, 28 N. E. 937. 67 Zebley v. Farmers' Loan & Trust Co., 139 N. Y. 461, 34 N. E. 1067. 68 Sahlgaard v. Kennedy, 1 McCrary 291, 2 Fed. 295. 69 Ashuelot R. Co. v. Elliot, 57 N. H. 397. § 4940. Right to pay bid in bonds. When the bondholders purchase the property of a corporation at a foreclosure sale, the court, instead of requiring them to pay the amount of their bid in cash, and then applying the cash in payment of their bonds, may allow them to turn in their bonds in payment at a valuation equal to what they will be entitled to receive on distribution.70 Or they may be permitted to do so by a provision to such effect in the mortgage or deed of trust.71 Such a provision is said to be "not only usual, but it is highly advantageous to all persons who have an interest" because it tends to enhance the price which may be obtained, and thus benefits other creditors as well as the mortgagor." >>72 Where the purchase is by a bondholders' committee, bondholders not represented by the committee cannot complain because the committee turns in bonds in part payment at the price which would go to such bonds in cash, where the objectors have received their due proportion in cash.73 § 4941. Rights of second mortgage bondholders. The holders of second mortgage bonds of a corporation have a right to insist that 70 Easton V. German American Bank, 127 U. S. 532, 32 L. Ed. 210; Schuler v. Hassinger, 177 Fed. 119; Moran v. Hagerman, 64 Fed. 499; Farmers' Loan & Trust Co. v. Green Bay & M. R. Co., 6 Fed. 100; Duncan v. Mobile & O. R. Co., 3 Woods 597, Fed. Cas. No. 4,139; Middendorf v. Baltimore Refrigerating & Heating Co. of Baltimore City, 117 Md. 443, 84 Atl. 150; Rumsey v. People's Ry. Co., 154 Mo. 215, 55 S. W. 615; Real Estate Trust Co. v. Perry County R. Co., 213 Pa. 57, 62 Atl. 25. See, generally, § 1387, supra. The right to make payment in bonds should not be limited to a particular bondholder. American Waterworks Co. of Illinois v. Farmers' Loan & Trust Co., 73 Fed. 956. Decree may require persons not bondholders, if they purchase, to pay at once in cash a part of their bid as earnest money, without being subject to objection as a discrimination in favor of bondholders. Sage v. Central R. Co., 99 U. S. 334, 25 L. Ed. 394. The decree should not fix the value at which the bonds shall be accepted in payment of bids, since the value depends wholly upon the price realized for the property at the sale. Farmers' Loan & Trust Co. v. Green Bay & M. R. Co., 6 Fed. 100. Bonds should not be received at par in payment of bid unless the purchase price is sufficient to pay all the outstanding bonds secured by the mortgage. American Water Works Co. of Illinois v. Farmers' Loan & Trust Co., 73 Fed. 956. 71 Child v. New York & N. E. R. Co., 129 Mass. 170. But it seems that the court may disregard such provisions in the mortgage and require payment in cash where no injustice to the bondholders would result therefrom. Farmers' Loan & Trust Co. v. Green Bay & M. R. Co., 6 Fed. 100. 72 Ketchum v. Duncan, 96 U. S. 659, 24 L. Ed. 868. 73 Middendorf v. Baltimore Refrig erating & Heating Co. of Baltimore City, 117 Md. 443, 84 Atl. 150. a foreclosure sale under the first mortgage shall be made fairly, and without any collusion among the parties in interest which may result in a sacrifice of the property; but they cannot, in the absence of fraud, prevent the first mortgage bondholders from purchasing at the sale under an agreement for reorganization, or sue to set the sale aside, or claim any right to participate in the reorganization, unless they have rights under the agreement.74 § 4942. Compliance with terms of agreement as condition to right to share in benefits of reorganization. Where the agreement is a valid one, parties thereto, or stockholders or creditors who are given an option to join therein within a limited time on certain conditions, must comply with the conditions imposed, both as to time and other conditions, in order to be entitled to share in the benefits of the reorganization.75 § 4943. Rights of minority or nonassenting bondholders-General rule. In considering the rights of minority or nonassenting bondholders, it is necessary to keep in mind the difference between a reorganization without any judicial or execution sale and a reorganization in connection with such a sale. In the first instance, it is well settled that a majority cannot bind the minority, who are entitled to their original contract rights,76 unless it is otherwise provided by 74 See Robinson v. Iron R. Co., 135 U. S. 522, 34 L. Ed. 276. 75 See §§ 4896-4900, supra. 76 Canada Southern R. Co. v. Gebhard, 109 U. S. 527, 535, 27 L. Ed. 1020; Hollister v. Stewart, 111 N. Y. 644, 660, 19 N. E. 782. See Duncan v. Mobile & O. R. Co., 3 Woods 597, Fed. Cas. No. 4,139. Such a reorganization is voluntary, and requires the assent of all the parties interested. If any bondholder refuses to come into the arrangement, he cannot be compelled to do so. He may insist upon his rights as a stockholder or bondholder, and prevent any reorganization which will affect the rights secured to him by his contract with the company. Hollister V. Stewart, 111 N. Y. 644, 19 N. E. 782. A minority bondholder has a clear right to stand upon his contract, and the trustees in the mortgage have no power or authority to compel him to make a new or different one by a scheme of reorganization. Hollister v. Stewart, 111 N. Y. 644, 659, 19 N. E. 782. A consent decree in connection with a plan of reorganization cannot cut off or impair the rights of one not joining therein or consenting thereto, either individually or through some other acting for him in a representative capacity. Mechanics' & Metals' Nat. Bank v. Howell, 207 Fed. 973, rev'd on other grounds 215 Fed. 1. But a bondholder cannot enjoin the execution of a new mortgage and the issuance of new bonds to be substituted for the bonds secured by the old mortgage only when the holders of the mortgage or by statute. The governing rule was laid down by the Supreme Court of the United States as follows: "In the absence of statutory authority or some provision in the instrument which establishes the trust, nothing can be done by a majority [of bondholders], however large, which will bind a minority without their consent."77 Note that the two exceptions are where there is statutory authority and where authority is conferred by the mortgage or deed of trust. In other words, minority bondholders cannot object to a reorganization if it is authorized by a statute conferring such powers on a majority or a certain per cent of the bondholders, provided the statute is constitutional,78 or if it is authorized by the mortgage or deed of trust; 79 but even in such a case the minority are bound only when the majority act in good faith.80 A bondholder has a right to refuse to come into the agreement and to insist upon payment of his bonds, or upon a foreclosure of the mortgage by which they are se such bonds consent thereto. Emery v. New York, L. E. & W. R. Co., 9 N. Y. Misc. 310, 30 N. Y. Supp. 306. Rights under Maine statute, see Somerset Ry. v. Pierce, 88 Me. 86, 33 Atl. 772. 77 Canada Southern R. Co. v. Gebhard, 109 U. S. 527, 535, 27 L. Ed. 1020. In another case decided at the same term of court, the same Chief Justice clearly states the rule that while each bondholder "enters by fair implication into certain contract relations with his associates,” yet “such bondholders are not, like stockholders in a corporation, necessarily bound, in the absence of fraud or undue influence, by the will of the majority, when expressed in the way provided by law, but they occupy, to some extent, an analogous position towards each other. As in the present case, a very large majority of the bondholders sometimes think it is for their own interest as well as that of their associates to surrender a part of their rights and accept others instead, and they prepare and submit for execution an agreement, the object of which is to carry their plan into effect. Νο * majority, however large, can compel a minority, small though it be, to enter into such an agreement against their will, and under the Constitution of the United States, it is probable that no statute of a state, passed after the bonds were issued, subjecting the minority to the provisions of the agreement without their consent, would be valid." Gilfillan v. Union Canal Co. of Pennsylvania, 109 U. S. 401, 403, 404, 27 L. Ed. 977. 78 Constitutionality of statutes, see §§ 4868, 4869, supra. In this country, a state legislature cannot deprive a mortgage bondholder of a corporation of the right to the benefit of his security by authorizing a majority of the bondholders to force him into a reorganization without a foreclosure of the mortgage, since such a statute would violate the federal prohibition against impairment of contracts. Canada Southern R. Co. v. Gebhard, 109 U. S. 527, 27 L. Ed. 1020, and see § 4868, supra. 79 See Sage v. Central R. Co., 99 U. S. 334, 25 L. Ed. 394. See also § 1067, note 95, supra. 80 Hackettstown Nat. Bank v. D. G. Yuengling Brewing Co., 74 Fed. 110. |