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IN RE PRUDENCE CO.

July 30, 1935

In re PRUDENCE CO., Inc.; Applications of MANUFACTURERS TRUST CO. et al.


The opinion of the court was delivered by: MOSCOWITZ

MOSCOWITZ, District Judge.

The opinion in the above matter dated July 1, 1935, is hereby modified to read as follows:

The president and directors of the Manhattan Company, as corporate trustee under two certain trust agreements dated April 1, 1925, and March 1, 1927, entered into between Prudence-Bonds Corporation and said trustee securing the Fifth and Ninth series of bonds of Prudence-Bonds Corporation, which were guaranteed as to payment of principal and interest by the debtor, have applied to this court for an order modifying the restraining order issued by this court on February 1, 1935, so as to exclude from the jurisdiction of this court the trust agreements above referred to and the holders of the bonds issued and outstanding thereunder, and the moneys, properties, records, deeds, bonds, mortgages, documents of title, assignment of rents, and all other properties of every kind and description real, personal, or mixed, constituting the trust funds or the security for any thereof, covered by the trust agreements.

 In pursuance of an agreement between the debtor and the Prudence-Bonds Corporation a series of eighteen issues of collateral trust bonds was created. As to each series, securities acquired in the first instance by the debtor were transferred to Prudence-Bonds Corporation and immediately thereafter to the corporate trustee under the trust indenture. In exchange therefor bonds were issued by Prudence-Bonds Corporation, authenticated by the corporate trustee, and delivered to Prudence-Bonds Corporation, which in turn delivered them to the debtor. The debtor then sold the bonds to the public guaranteeing them as to both principal and interest. The debtor retained the privilege of servicing the securities underlying the trust indenture and received the differential between the interest collected and the interest guaranteed, usually one-half of 1 per centum of the principal amount of the underlying securities creating a substantial income for the debtor and strengthening its guarantee to bondholders, certificate holders, and holders of guaranteed mortgages.

 When the interest and principal became due upon the bond issue and the same was not paid by the Prudence-Bonds Corporation or the debtor, the corporate trustees declared the entire principal of the issue to be due. Some of the corporate trustees gave notice to the debtor and the Prudence-Bonds Corporation that the right to service the underlying mortgages was terminated. They demanded that the debtor relinquish the mortgage instruments, assignments of rents, and other documents held in connection with the servicing and pay over to the corporate trustee the income collected subsequent to the nonperformance of the guarantee. The corporate trustees of the sixth and eighteenth issue made no demand until after the appointment and qualification of the debtor's trustees. The Fifth, Ninth, and Sixteenth series demand was made before the superintendent of banks assumed control of the debtor.

 Neither the debtor nor the superintendent of banks complied with these demands, both taking the position that having been prevented by federal and state regulations, beginning with the Banking Holiday in March, 1933, from using the debtor's own funds, it was not in default.

 Suit was brought in the Supreme Court of the state of New York by the Manhattan Company as trustee of the Fifth series bonds to compel payment to it of moneys collected by the debtor on the underlying securities after the first date on which interest had not been fully paid on the bonds. By a stipulation entered into by the parties thereto, Prudence-Bonds Corporation being joined, it was agreed that the decision should control with respect to the Ninth series bond issue, for which the Manhattan Company was also trustee.

 The New York Court of Appeals on January 24, 1935, held that as against the corporate trustee nonpayment of the bonds constituted a default, which without demand by the corporate trustee terminated the rights of the Prudence-Bonds Corporation and the debtor to service the collateral and to retain the interest differential. President and Directors of the Manhattan Company, etc., v. Prudence-Bonds Corporation et al., 266 N.Y. 202, 194 N.E. 408.

 Before entry of judgment in the New York Supreme Court, the debtor's petition for reorganization was approved on February 1, 1935, which, among other things, restrained the continuance of any suits against the debtor. The Manhattan Company applied to this court, as indicated, for a modification of the order of February 1, 1935, to permit the entry of judgment upon the order of the Court of Appeals and compliance by the debtor's trustees therewith. It further seeks that the order of February 1, 1935, be modified to restrain the debtor (or its trustees) from continuing to service the securities underlying the Fifth and Ninth series bonds, and also to exclude such securities and the respective trust agreements from the jurisdiction of this court.

 On February 16, 1935, this court granted to the debtor's trustees an order authorizing them to pay to the respective bondholders of the eighteen issues "any income, interest and/or principal" in their possession or which might thereafter be received by them from the bonds and mortgages and other assets constituting the collateral security for the bond issues after deducting "such servicing or other fees as they may be entitled to receive or retain." In cases where assignments of rent were held by the debtor's trustees upon property subject to a mortgage constituting part of the underlying security of a bond issue, the debtor's trustees were authorized to apply the money received under the assignment towards the payment of taxes or other necessary expenses in connection with the property or to the payment of the interest on the bonds.

 The corporate trustees of the Fifth and Ninth series made an application to vacate the order of February 16, 1935, in so far as it affected the securities underlying the Fifth and Ninth series. Both of these applications came on for a hearing, together with the application of six other corporate trustees asking substantially the same modifications with respect to twelve of the bond issues, viz., series AA and the Third, Fourth, Sixth, Seventh, Eighth, Twelfth, Thirteenth, Fourteenth, Sixteenth, Seventeenth, and Eighteenth series. The applications will be decided together, since the pertinent provisions of the trust agreements of all, so far as material here, are substantially similar.

 The corporate trustees of the bonds are as follows: The Brooklyn Trust Company (Eighth series bonds), The Chase National Bank of the city of New York (Fourteenth series bonds), City Bank Farmers Trust Company (series AA, Third, Fourth, Seventh, and Seventeenth series bonds), Manufacturers Trust Company (Twelfth and Thirteenth series bonds), the Marine Midland Trust Company of New York (Sixteenth series bonds), and Central Hanover Bank & Trust Company (Sixth and Eighteenth series bonds), respectively, under similar trust agreements have applied for the same relief.

 Neither the Prudence-Bonds Corporation nor its trustees have declared any default by the debtor in the performance of its obligation as guarantor of the bonds, and they acquiesced in and offered no objection to the continued servicing by the debtor of the securities underlying the bond issues. The records of this court in the Prudence-Bonds Corporation proceedings show that the continuance of servicing by the debtor is specifically sanctioned by orders entered in the Prudence-Bonds Corporation reorganization.

 Upon application by the trustees of the Prudence-Bonds Corporation on February 8, 1935, Judge Inch entered an order which restrained the corporate trustees, except upon permission by the court, from foreclosing any of the mortgages underlying the bond issues, except further that no restraint was imposed as to certain specified distributions by the Manhattan Company from distributing any of the proceeds of the mortgages which they might have had in their hands. There was no objection by the trustees of Prudence-Bonds Corporation to the continued servicing by the Prudence Company, Inc., or ...


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