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May 27, 1936


The opinion of the court was delivered by: GALSTON

GALSTON, District Judge.

This is an equity action which was begun on April 8, 1935, in the Supreme Court of the state of New York. On the petition of the defendant Lloyd the suit was thereafter removed to this court on the ground of diversity of citizenship between the plaintiff and Lloyd, and on the further ground that the other defendants were merely nominal parties to the action. Plaintiff's motion to remand the action to the state court was denied. 12 F.Supp. 129. The facts are not in dispute and the cause is submitted on a stipulation of facts.

The plaintiff is the owner of three bonds of the par value of $1,000 each, known as Twenty-Year 6 per cent. Sinking Fund Gold bonds, dated November 1, 1927, of an authorized issue of the defendant Lloyd in the sum of $20,000,000. The plaintiff alleges the breach of certain provisions of the trust indenture defining the rights of the parties, to which detailed reference will be made presently.

 It is particularly the sinking fund provisions which are the subject of attack. It is alleged in breach of its undertaking that for fifteen days prior to November 1, 1933, and since that time semiannually thereafter, Lloyd failed to pay the sum of $902,500 or any part thereof due at such times. Plaintiff seeks to have such sums paid by Lloyd to the fiscal agents until all of the outstanding bonds in the agreement shall have been paid both as to principal and interest.

 It appears that in the latter part of 1933 Lloyd faced a difficult financial situation and it became necessary to readjust this issue of bonds so as to reduce, or rather make less onerous, the obligations thereunder. Accordingly, it caused a letter to be distributed on December 14, 1933, setting forth its financial condition and a proposed plan of readjustment. The main end sought was to reduce its fixed interest charges. This it proposed to the bondholders by asking them to agree to a change in rate from 6 per cent. to 4 per cent. in fixed interest and 2 per cent. in contingent interest, payable if earned. By way of compensation, the plan provided substantially as follows:

 1. Lloyd was to appoint an American subsidiary to collect gross dollar revenues from sources in the United States to pay the new interest charges on the bonds for the benefit of the coupon holders. Also, "the German governmental authorities, recognizing that the financial condition of the company requires the adoption of the Plan, have in a letter to the company approved the foregoing arrangement and have advised that it will not be subject to any German transfer or other governmental restrictions."

 2. Assenting bondholders were to receive for each $1,000 bond a warrant entitling the holder to purchase, prior to May 1, 1943, at 105 per cent. RM 500 par value of the ordinary shares of the company.

 3. The principal of $18,500,000 of outstanding debt of Lloyd was to be converted into junior obligations or otherwise eliminated as a debt charge ranking pari passu with the assenting bonds.

 The plan of readjustment became operative on June 22, 1934. Bondholders holding 87 per cent. of the outstanding aggregate principal sum accepted the plan and deposited their bonds in the amount of $14,276,500. Lloyd acquired these bonds, stamped by the fiscal agents, for which it gave new bonds of an authorized new issue. The terms and conditions of this new issue in the aggregate sum of $16,532,000 are set forth in an indenture executed June 25, 1934. It appears from the stipulation that Lloyd has complied with all the terms and conditions of the new indenture. The sinking fund provisions of the new indenture provide for the retirement of $16,632,000 in the aggregate of the new issue at the same rate as for the retirement of the old issue.

 The chief cause of complaint by the plaintiff seems to be that the defendant in meeting the sinking fund provisions of the original indenture, has been delivering to the fiscal agent, with the intention of complying with its covenants, stamped bonds deposited under the plan of readjustment; and plaintiff seeks to have Lloyd enjoined from using those bonds for such purpose.

 Plaintiff urges that the delivery of stamped bonds is not a compliance with article III of the agreement. Article III provides in part:

 "III. Until all the bonds shall have been retired or redeemed, the Company will pay to the fiscal agents. * * *

 "(b) At least fifteen days before November 1, 1929 and at least fifteen days before May 1 and November 1 in each year thereafter, the sum of nine hundred two thousand five hundred ($902,500) dollars for the payment of the interest on the bonds and as a sinking fund for the redemption of bonds as hereinafter in this Article III provided. * * *

 "The Company shall have the right not less than forty days prior to November 1, 1929, or any interest payment date thereafter, to deliver to the fiscal agents bonds * * * to an aggregate principal amount not exceeding that part of the amount payable by the ...

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