INVESTMENT REGISTRY, Limited, v. CHICAGO & M. E. R. CO. et al.; REYNOLDS et al. v. MOSES, 212 F. 594

BAKER, Circuit Judge (after stating the facts as above). Appellee has moved that the appeal be dismissed on the grounds:

(1) That the decree is not final, and (2) that appellants by offering to meet Griffiths’ bid released the alleged errors. A decree setting aside a sale on foreclosure and ordering a resale confessedly does not end the case. That continues with all the. parties in that were in before the sale. But- the bidder at the sale becomes a new party; the acceptance of his bid gives him the rights of a purchaser unless legal objections to confirmation can be shown; and the decree which puts him out of court as a party and terminates his asserted rights as a purchaser appears to us very clearly a final decree as to him.

No difference is perceived by reason of the fact that the purchaser may have been a party to the foreclosure issues. In the capacity of a purchaser he certainly first became a party when the property was struck off to him at the sale. And here, the Reorganization Committee, representing only depositing bondholders, is not the same party as the complainant trustee, representing all the bondholders. To say that the successful bidder at the first sale may become the puixhaser at the second or subsequent sales seems to us no answer. He may not.

And the finality of a decree is to be determined by its own force, not by contingencies outside the record. We find nothing in Butterfield v. Usher, 91 U. S. 246, 23 L. Ed. 318, McLish v. Roff, 141 U. S. 661, 12 Sup. Ct. 118, 35 L. Ed. 893, and Doyle v. London Guaranty Co., 204 U. S. 599, 27 Sup. Ct. 313, 51 L. Ed. 641, relied on by appellee, to require a different conclusion; and the numerous cases respecting confirmation may rightly be taken to indicate the general opinion of the profession that decrees .granting or denying confirmation are appealable as final decrees.

If one accepts by his acts a decree against him, he may be estopped from prosecuting an appeal. In this case the sale was set, aside because suppression of competition resulted in one inadequate bid. If there was no stifling of intending bidders, the sale should have been confirmed, for a bid of 50 to 60 per cent, of the after-opinion’ value of property offered at public auction is not shockingly inadequate. By offering to raise their bid, appellants, in our judgment, did not waive their right to insist that they had not chilled the sale.

Their conduct was not a confession of wrongdoing; riot even, as we regard it, an admission of the inadequacy of their first bid; but amounted at most only to this, that if the objections were withdrawn and the sale confirmed they would pay into court for appellee and other non-depositing bondholders their part of the'increase rather than have the estate suffer the expense and loss by delay from a resale, which expense and loss might well exceed the nondepositing bondholders’ proportionate share of the increase.

Appellants’ offer neither advantaged them nor prejudiced appellee with respect to the validity and full oper-ativeness of the decree, and is not, we believe, a sufficient basis for an estoppel against the appeal. The motion to dismiss is overruled. On the other hand, appellants seek to relieve us from taking up the merits by asserting that appellee was not in a position to object to confirmation. Through a representative appellee had cause to believe that the Reorganization Committee had planned to suppress competition, was present at the sale, and neither bid nor objected to the proceedings.

Appellee could not know in advance that the wrongful intent would be acted on. She was under no obligation to bid. And objections should be presented, as she did promptly, to the court, not to the court’s salesman. It is also said that Griffiths and appellee had an ulterior purpose to better Griffiths’ position as a bondholder of the Wisconsin corporation. We are not now concerned with the Wisconsin case. In the record of these Illinois proceedings we find nothing to impugn the motives of appellee or of Griffiths.

But if there has to be a resale or other disposition of the Illinois property, the money of Griffiths or of appellee, even if they were wrongdoers, should be as acceptable as that of the Reorganization Committee whose acts rendered confirmation impossible. At all events, the sale was the court’s and we are of the opinion that the court, on the motion of the master or of any outsider or on its own motion, could investigate allegations of actual or constructive fraud in the sale.

Our conclusions respecting the facts may be disclosed most briefly’by saying that we approve generally the finding of the trial court and by answering the material objections of appellants to that finding. It may be true that the Milwaukee Traction Company was eliminated as a prospective bidder when it disavowed the action of Beggs as its president. But Beggs, associating Pfister in the plan, continued the purchase of Illinois bonds and the negotiations for entry into' Chicago over the Elevated Railroad until they made their contract with the Assisting Syndicate.

Nothing in the record impugns their ability to maintain their position as intending bidders, and the action of the Assisting Syndicate seems to' us a recognition of that ability. We cannot accept the contention that the Assisting Syndicate’s purchase of the 1,647 Dutch bonds destroyed the ability and intention of Beggs and Pfister. That purchase gave the Assisting Syndicate a total of 1,900 bonds. Beggs and Pfister through their ownership of 401 bonds and control of 1,100 by virtue of their agreement with the Illinois Committee, had 1,500 bonds at command.

Before the Dutch purchase the Assisting Syndicate therefore had only about 250 bonds. Instead of being a death blow to Beggs and Pfister, the action of the Assisting Syndicate in forestalling Beggs and Pfister in' the purchase of the Dutch bonds was necessary to prevent an opposing bidder from having 3,150 bonds against their 250. After the Dutch purchase the two intending bidders were on nearly an equal footing.

Whether the Assisting Syndicate was merely buying bonds or was additionally paying Beggs and Pfister to refrain from bidding, and to aid the syndicate and its successors in interest in obtaining the property without competition is to be judged by the contract they made at the time rather than by their subsequent protestations.

In the contract Beggs and Pfister gave two things: First, 401 of the 1922 bonds and 530 of the underlying bonds;, and second, their agreement that they and their associates “shall, to the extent of their power and influence and information, in every reasonable way, aid and assist the purbhas-ers in becoming the purchasers of the Chicago & Milwaukee Electric Railroad property (both divisions) and in making effective their plan of reorganization,” and in consideration thereof the purchasers gave in money and in undertakings to pay $1,122,636.

Before this contract went into effect, the Assisting Syndicate apportioned the consideration by obtaining a contract from the Wisconsin Committee that the Assisting Syndicate should be liable for only 65 cents- on the dollar of the 401 bonds (which was approximately their value tested both by market price and the worth of the property) and that the Wisconsin Committee should be liable for the excess above that amount. How does the consideration stand when so apportioned by the Assisting Syndicate ?

Subtracting $538,244 (the highest value of the underlying bonds, and accrued interest) and $260,650 (the amount apportioned to the 401 bonds of 1922) leaves $323,742 as the amount apportioned by the Assisting Syndicate to the other element of the Beggs and Pfister contract, namely, their agreement not only to refrain from bidding but also to use their power and influence and information in aiding the purchasers of their bonds to suppress competition. In percentages these figures mean that 145 per cent, of the face of the 401 bonds was paid, 65 per cent, for the bonds and 80 per cent, for absence and influence.

A further contention in this connection is made that the $323,742 was paid to end litigation. This is but a'nother way of denying that that sum was paid for the absence and influence of Beggs and Pfister, and, as such, is answered by reverting to the only possible meaning-of the written bargain and by considering that in fact the outcome of the sale corresponded exactly with that meaning, namely, the property was struck off to appellants without competition, and not only were Beggs and Pfister absent but through their influence the Illinois Committee had disappeared.

Nevertheless we proceed to examine the foreclosure issues in this Illinois case. The trustee filed its bill to foreclose a defaulted mortgage. Neither the Illinois Company nor any of its stockholders was attempting to deny the facts in the bill or the trustee’s right to an immediate decree of foreclosure sale. No holder of Illinois bonds was protesting to the trustee or to the court that he had any other or different rights under the mortgage than the other holders of outstanding Illinois bonds.

So neither between mortgagor and mortgagee nor between the beneficiaries of the mortgage was there ánything to litigate or to delay the decree. Principal and interest of the Wisconsin bonds were guaranteed by the Illinois Company. On behalf of the holders of Wisconsin bonds a general creditor’s claim was filed against the Illinois Company on that account.

That claim was no defense to the bill for foreclosure and sale; it would attach only to tne surplus that otherwise would be returned to the mortgagor; and, since there can be -no surplus unless the property shall sell for $6,000,000, it is asking too much to have us believe that any part of the $323,742 was paid to quiet that demand. . We find no foreclosure issue to litigate but this: On behalf of the holders of Wisconsin bonds a claim was made that the West Line was built in whole or in part with proceeds from the Wisconsin bonds.

If the fact were so found, the-issue would be whether the equity of the Wisconsin bondholders was superior to the equity of the Illinois mortgagees. The determination of that issue needed not to delay the order of sale. When there remains no issue between the original parties and an intervener claims title or lien or equity in a relatively small part of the property, experience has generally taught courts of equity not to delay the main case on account of such on intervention, but to order a sale at which the small part shall be sold separately and allow the intervener’s claim to attach to the proceeds.

And that was exactly what was done in this case. So the only matter to litigate remains in court. And so the delay cannot be attributed to what was obtained in court. It will be noticed that the reserved issue was between Illinois bondholders as such, and Wisconsin bondholders as such. But outside that issue, outside the Illinois court, outside any interest of Illinois bondholders as such, there was a situation to which the Assisting Syndicate was giving attention.

When the' receivership in this Illinois case began and for some time afterwards, the persons who later came into the Assisting Syndicate were tremendously interested in the $10,000,000 issue of Wisconsin bonds and only trivially in the Illinois bonds.

If they had chosen to protect their interests as Illinois bondholders as such and on an equality with Illinois bondholders who had no other interest or motive than to share equally the benefits of the Illinois mortgage, they could have done so by depositing their bonds with the Illinois Committee, which had been organized for the protection of' all Illinois bondholders in an equality of benefits and with authority to bid and apply the bonds on the purchase price.

If the Illinois property should fall into the hands of a purchaser in the equal interest of all Illinois bondholders, and the same result should come about in Wisconsin, then the ultimate value of the Wisconsin bonds would depend on the outcome of negotiations between the two purchasers respecting a lease or a' consolidation. Manifestly the Assisting Syndicate thought an additional worth could be injected into the Wisconsin bopds by opposing a reorganization of the Illinois property in the equal interest of all Illinois bondholders. And therefore the Assisting.

Syndicate strove to keep Illinois bonds out of the hands of the Illinois Committee and to get them into their own. At this point the impending competition was' between the Illinois Committee and the Assisting Syndicate. Then Beggs and Pfister came upon the scene. If they should become purchasers of the Illinois property they evidently believed they could turn it over to advantage either to the purchaser of the Wisconsin property or to the Milwaukee Traction Company. The Illinois Committee, brought to a standstill by the Assisting Syndicate, formed an alliance with Beggs and Pfister.

In this situation Beggs and Pfister were trying to get an order of sale. Why the delay? Not because the case was not as ripe for the decree as it was later, but because the Assisting Syndicate was not ready for the sale under the decree, was not willing to face an equally strong competitor. Examination of the issues in court and what was going, on out of court, instead of putting a different face on the contract, only accentuates its meaning.

Appellants say that, although the issue respecting the West Line was not ended in court, it was by a provision in their reorganization agreement to the effect that if appellants should be confirmed as purchasers of the Wisconsin property and also of the Illinois property, then appellants should be judges of the issue. Plainly the issue is not settled. At most, the provision is a conditional substitution of appellants as judges for the judges appointed by law. An indispensable condition is that appellants be confirmed as purchasers of the Illinois property.

And when we inquire how they were to become purchasers, we are at once brought back to the $323,742 for the absence and influence of Beggs and Pfister. But even if appellants, by becoming the purchasers, should enter upon their judgeships, they could determine the issue only as between the Illinois and Wisconsin bondholders whose bonds were in their hands. Nondepositing Illinois bondholders, on the question of distribution, would have the right to insist that the court decide whether the proceeds from the sale of the West Line are subject to the alleged claim of the Wisconsin bondholders.

Therefore we cannot find, that any part of the 80 per cent, premium on the 401 bonds was paid to end the only issue in court. Although the Beggs and Pfister contract plainly covers two elements of bargain, and although the Assisting Syndicate apportioned 65 cents 'on the dollar to the 401 bonds, it is claimed that the remainder of the consideration, $323,742, is not to be attributed to the remaining element of the bargain, but to a reimbursement of Beggs and Pfister for services, expenses, and interest on money expended in and about their purchase of the bonds.

Beggs and Pfister made no profit, the insistence is, therefore the $323,742 cannot be applied to the second element of the contract, but must be wholly and exclusively counted as a part of the purchase price of the 401 bonds.

First, the services, expenses and interest in excess of the value of the security were rendered and incurred, in our judgment, not in the purchase of the bonds which were quoted in the market at the price the Assisting Syndicate apportioned to them, but in furthering the enterprise of Beggs and Pfister as intending bidders; second, there is no finding or evidence that the $323,742 represents an actual outlay or a fair estimate of the value of services and the amount of expenses paid or incurred; third, it seems to us scarcely accurate to say there was no profit, when, affirmatively, Beggs and Pfister received interest on bonds in a foreclosure suit that was not collectible in the suit, and when, negatively, they were saved from losses that neither the market nor the property behind the bonds would bear; and finally we deem it immaterial whether the Assisting Syndicate was merely making Beggs and Pfister whole or was paying, them an enormous profit, when the only motive we perceive in the surroundings is the very consideration stated in the contract.

That appellants with open eyes stepped into the shoes of the Assisting Syndicate seems to us very clear. The Wisconsin Committee took over the obligation, and therefore the benefit, of the $323,742 part of the Beggs and Pfister contract.

When appellants became the Reorganization Committee that was to bid, the Assisting Syndicate and the Wisconsin Committee did not deposit their Illinois bonds as individual holders of Illinois bonds were required to and did deposit theirs, but they bargained with appellants that they would give appellants control .of their Illinois bonds if appellants, among other things hereafter considered, would assume the obligation and take the advantages of the existing arrangements.

It is unnecessary to weigh the inferences of fact that might be drawn from the record to show that appellants, as intelligent men, with eight out of ten of them taken from previous committees, must have had actual knowledge of every circumstance we have stated; the contents of the papers put in their' hands are enough. $4,500,000 was the value of the Illinois property as found by the court. Detailed estimates of competent engineers, some of the highest valuers being employed by appellants, varied from $3,800,000 to $5,600,000.

As the trial judge heard the witnesses in open court,, we are in no position to question his finding of value. Subtracting prior liens from the lowest valuation leaves at least $2,600,000 as the value of the Illinois bonds in suit, or 65 cents on the dollar. From this review we conclude that the court was right in the ultimate finding that the solitary bid was inadequate and that it was solitary on account of suppression of competition.

Against the decision that equity would not tolerate a confirmation of the sale as made by the master, appellant’s strong insistence is that the rule in respect to chilling applies only to intending bidders who have no lien or interest in the property. No authority of which we are cognizant goes to that extent.

If that were the test, an intending bidder who found competitors in the field with cash in hand could learn how much they wanted for withdrawing and say, “Go get a lien and then we can consummate our plan without possibility of interference by the court.” Decisions are numerous that an owner of a lien, as an incident of his ownership, has the right to sell his lien; that another lienor has as full a right as any one to purchase; that the natural effect is to remove the seller from the field of competition; and that an agreement which expresses the effect that would have .followed without the agreement is innocuous.

The line is drawn as well as anywhere in one of the cases relied on by appellants (De Baun v. Brand, 61 N. J. Law, 624, 41 Atl. 958): “On the other hand, the mere possession of a right to protect one’s own interest will not be permitted to cloak a violation of the rule under color of such right. Between these two exhibitions of the law lies its true application, which in the nature of things must often turn upon a question of fact.” In legal effect, we believe, Beggs and Piaster were always outsiders.

They were confessedly such when, the receivership being under way, they first conceived the plan of becoming purchasers of the Illinois property. Their action began, and continued until they sold out, as a movement, not to protect an existing interest, but to acquire an interest to aid them as intending bidders.

When Beggs and Pfister and the Illinois Committee, on the one hand, and the Assisting Syndicate, on the other, were confronting each other as practically equal antagonists, each at a sale was prepared to pay less than half .the purchase price in tokens (bonds usable only as advance receipts for their distributive shares) and would have been compelled to produce more than half in money. In the light of the law we see no difference between buying off an intending bidder who has all his money in hand and one who has converted a part of his money into counters.

Another aspect of the matter supports our conviction that the court did equity in refusing to confirm the sale as made by the master. -At execution sales and at foreclosure sales of ordinary farms or town lots, 'the general public may ,in fact be interested as intending bidders because of their separate financial ability to purchase. It was in the consideration of such sales that the ancient and familiar rule arose. _Buf in modern times, when vast railroad and industrial enterprises áre financed by selling millions of bonds payable to bearer through the world’s exchanges, a different class of sales has appeared.

Courts have had • to recognize that separate individual ability is not equal to the purchase and rehabilitation of a broken-down railroad. “Reorganization” has become familiar. This means, usually, that the equity of the stockholders, if any ever existed in actual value, has vanished; that the property virtually belongs in equity to the bondholders ; and that, if the bondholders will combine for the mutual protection of their equal interest, they will have a practical monopoly of the bidding.

This last is so because, if all the bondholders are in the combination, it is utterly immaterial to them whether they bid the full amount of the decree or a sum that will pay only one cent on the dollar of their bonds; and therefore, by creating that masterful situation, they can force any Outside combination to offer the full amount of the decree without danger or expense to themselves. Most commonly the controversy over the sale arises when there are nonassenting bondhold-ers.

When such a controversy is on, the chancellor in our opinion not only has the right but owes the duty of being 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. Mr. Justice Brewer, in Ballentyne v. Smith, 205 U. S. 285, 27 Sup. Ct. 527, 51 L.

Ed. 803, said: ■ “That a court of equity owes a duty to the creditors seeking its assistance in subjecting property to the payment of debts, to see that the property brings something like its true value in order that to the extent of that value the debts secured upon the property may be paid; that it owes to them something more than to merely take care' that the forms of law are complied with, and that the purchaser is guilty of no fraudulent act.” In Starkweather v. Jenner, 216 U. S. 524, 30 Sup. Ct. 382, 54 L. Ed. 602, 17 Ann.

Cas. 1167, the right of a representative of the majority of co-owners to become the purchaser is recognized, provided, among other conditions, “he took no undue or unfair advantage of his co-owners.” If, in Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482, 33 Sup. Ct. 554, 57 L. Ed. 931, an outside combination, in competition with the reorganization committee, had been confirmed as the purchaser at $61,500,000, we can hardly conceive that Boyd would have been permitted to go behind the sale.

But, because'the purchaser had .created the masterful situation of controlling • the sale,' because the purchaser was not a stranger but the virtual owner of the property exposed for sale, neither the principle of the “stability.of judicial sales” nor “compliance with the forms of law” nor the intent to commit “no fraudulent a'ct” was sufficient to stop a court of equity from inquiring whether an “undue 'or unfair advantage” had been taken.

Courts of equity should be deemed no less powerful to-day than when the first chancellor looked to his conscience for guidance, to make fair dealing between man and man the test. And from what other source came,' or could come, the recognized practice, in sales of this class, of the court’s ascertaining in advance of sale the minimum value of the property and thereupon fixing a minimum selling price?

When a nondepositing bondholder objects to confirmation solely on the ground that the reorganization committee?s bid, though not grossly'inadequate, was substantially short of the fair value, the answer is that his co-owners of the common mortgage and the common decree offered him the opportunity to deposit his bonds and to share equally with them the benefits of the. purchase.

But, in sales of this class, we never have observed or heard of a case where the minority were turned away without having been given by the majority a fair opportunity to share equally with them the benefits of the purchase — where, for example, 95 per cent, of the bondholders of a vast railroad or.industrial enterprise have combined and then shut the door upon the scattered 5 per cent. And no just distinction can be drawn, we believe, ■ whether the door be shut or unconscionable conditions of em trance be imposed.

A reorganization plan is somewhat like an insurance policy or a bill of lading, against which there is no protection except through legislative control of the insurance and railroad companies’ offerings. The solitary and distant bondholder must accept the organization plan or let it alone, as it is written.

When the unitary property of a single company of the kind in question is to be reorganized, the persons who assume or accept the committeeship, realizing the equality of all bondholders and recognizing that no bondholder has any right to preferential treatment, usually offer a plan that will give the common owners of the mortgage equal benefits through the foreclosure, usually become nothing but the agency through which the bondholders act for their mutual protection. In such a reorganization, if a bondhqlder does not come through the foreclosure as well off as any other bondholder, it is his own fault.

In the case at bar, the Reorganization Committee was not a meré, agency for appellee and her fellow Illinois bondholders ; under sweeping powers, to be exercised “at its sole discretion,” it could buy bonds, take up claims of subordinate right, allow compensation to pre-existing committees and assume their contracts, and do anything and everything it saw fit to do, whether specified or not. Preferential treatment of Illinois bondholders, who were acting in the primary interest of their Wisconsin bonds, was accorded .in many ways.

The Assisting Syndicate did not deposit its Illinois bonds as appellee was'expected to do. Appellants, as has already been pointed out, assumed the contract of Beggs and Pfister. By the reorganization plan the 401 bonds were not only to stand for the same pro rata share of new bonds which appellee was offered, but the sellers were additionally to receive $323,742 in money; and the Assisting Syndicate, for bringing about this situation, was to have $795,500 of the stock of the reorganized ■ company.

Creditors; with subordinate rights, were promised $12,500 cash, $63,600 in the bonds, and $24,400 in the stock of the new company. Compensation and expenses, not only of the Illinois Committee, but of the Wisconsin Committee as wdll, were assumed. Thus the Illinois property, which in- equity belonged to the Illinois bondholders in equal right under the mortgage.and under the foreclosure decree, would, in the hands of appellant, be loaded down with premiums, bonuses, services, expenses, etc., with which neither appellee nor any other Illinois bondholder as such had any concern.

There fore "no inequity was chargeable to appellee in asking the court to open a door of fair opportunity. No matter what the plan, it does not matter whether the committee bids much or little if all the bondholders are in. Here, some $160,000 of bonds were outstanding. And the temptation to use the monopoly of bidding for the purpose of recouping partially the outside expenses and losses of the majority at the expense of the minority seems to have been too strong. . Our conclusion at this point is that the court was warranted in refusing to confirm the sale as made by the master.

When the court had determined to vacate the sale as made by the master, what was to be done? In the case of an original sale the statute seems to be mandatory as to the method. But when a court of equity finds that it cannot confirm a sale as made by its master, we are inclined to believe that the course approved in Blanks v. Farmers’ Loan & Trust Co., 122 Fed. 849, 59 C. C. A. 59, wherein 24 increasing bids were received in open court and the bidding was continued until every bidder had reached his limit, is permissible. That course, however, was not taken by the court in this instance.

Instead of receiving Griffiths’ proposition to start bidding at a resale at $2,100,000 and his deposit of $210,000 in money, as a bid and a qualification at a sale in court, the court took them as evidence that appellants’ bid was substantially short of the fair value of the property and as an assurance that a resale, wherever and whenever held, would be started at $2,100,-000. Nor did appellants follow the procedure in the Blanks Case. They never raised Griffiths’ offer. There was no competitive bidding in court.

They wrongly assumed that their preferential position as purchasers continued after the court had set aside thé master’s sale. To attain a standing thereafter they should have asked to have the bidding open in court and should have overbid Griffiths. At any bidding Griffiths’ money would be as good as appellants. A court will not look into the conduct of prospective bidders as such; what it wants.is bids. The question is whether the method of trying out bidders approved in the Blanks Case was the only one that the court could order. We think not.

A discretion in balancing the advantages of a readvertised public sale against the trying out of the proposed bidders then in court, was involved. If the court should hereafter consider that ’ probably no other bidders than Griffiths and appellants would appear at a public sale and thereupon should choose to modify the decree of resale so as to try out the two bidders in open court, we should consider that a matter within the court’s discretion. But we have no right to reverse except for error Of fact or law, no right to control the court’s discretionary choice of one or the other of two permissible methods.

The decree is: Affirmed.