On appeal from a final decree in Chancery advised by Vice Chancellor Bigelow, whose opinion is reported in 142 N.J. Eq. 285.
For affirmance: Chief Justice Vanderbilt, and Justices Case, Heher, Wachenfeld, and Ackerson. For reversal: None. The opinion of the court was delivered by Heher, J.
The essential question here is whether assets transferred by the Clinton Trust Company to the Newark Mortgage Company, a subsidiary holding company, "were impressed with a trust" for the benefit of the holders of participation certificates issued by the Mortgage Company to depositors of the Trust Company as of March 3, 1933, when it suspended business in accordance with the Presidential proclamation of a "bank holiday," enforceable against the surplus remaining upon the dissolution and liquidation of the Trust Company now in process, to the extent of the value of such of the assets as were retransferred to the Trust Company. The Trust Company was insolvent at the time business was suspended.
The transfer to the Mortgage Company was made pursuant to a plan of reorganization of the Trust Company formulated by a depositors' committee under ch. 116 of the Pamphlet Laws of 1933, and approved by depositors and creditors of the institution having in sum the minimum statutory interest and the Commissioner of Banking and Insurance, effective December 26, 1933. Vide Basen v. Clinton Trust Co., 115 N.J.L. 546 (E. & A. 1935). The retransfer of assets was made under a provision of the plan of reorganization reserving to the Trust
Company "the right to substitute any of the assets which remains in its possession after the transfer of assets to the holding company."
Under the reorganization, 50% of the deposits was made available in cash; and the remaining 50% was "waived" "in exchange" for Class B preferred stock of the Trust Company, "equal to approximately one-half of the amount waived," and participation certificates issued by the Mortgage Company for the remainder. The necessary capital fund of $400,000 was set up through the advancement of $250,000 by the Reconstruction Finance Corporation on the security of Class A preferred stock and the sale to stockholders of the bank "and others" of Class B preferred stock for $150,000. Thereby, a surplus of $574,012 was created.
The certificates evidenced the holder's right to "participation" in assets "aggregating $948,896.19" transferred by the Trust Company to the Mortgage Company, "subject to the right of substitution, as set forth" in the plan of reorganization, and his consent to be bound by "all terms and provisions" of an agreement between the Trust Company and the Mortgage Company made on April 20, 1934, which agreement obligated the Trust Company to transfer to the Mortgage Company "such part of its assets as have been deemed unacceptable by the Reconstruction Finance Corporation," whose total book value was in the sum last mentioned, with the reservation of the right of substitution by the Trust Company, for a period of five years thereafter, or any of the assets retained by it under the plan of reorganization "for any of the assets transferred" to the Mortgage Company, or any assets in the latter's hands "as a result of any such substitution." It was further provided that "All of the assets exchanged on such substitution or substitutions shall be held by each of the parties hereto, subject to all of the terms of this agreement, and each of the parties hereto shall have the same rights with respect to the assets so exchanged as though such assets had been originally retained" by the Trust Company "or originally transferred" by it to the Mortgage Company "under the terms of this agreement." The latter was obligated to liquidate all its assets "at the expiration of 10 years." In
due course it accounted for its administration in the Court of Chancery; and by a decree entered on April 3, 1945, its account, "including the substitution of assets," was allowed. Upon payment of the dividend of approximately 5%, complainants surrendered their participation certificates.
The allegation of the bill is that between May, 1934 and April, 1939, transfers of assets having a value of $340,000 and upwards were made by the Mortgage Company to the Trust Company in substitution for "worthless assets." The gravamen of the bill is that because of the Trust Company's insolvency at the time, "its assets were charged with an equitable lien for the benefit of its creditors and depositors." On the oral argument counsel contended that the lien attached at the time of substitution. It is said that the right of substitution reserved by the Trust Company "was for the benefit" of its "depositors who became the holders of participation certificates," and there was no "intention" that the right "should be used to deplete the assets of the Holding Company for the purpose of increasing the equity of the common stockholders (of the Trust Company) at the expense of the depositors and creditors * * * who became holders of participation certificates," and so the Trust Company and the Mortgage Company "were in the position of trustees" for their benefit. But this evinces a misconception of the design of the provision for substitution.
The merits are open to examination. The plea of res judicata is not well founded. The decree allowing the account of the Mortgage Company "and proceedings in respect to said assets, including the substitution of assets," is not conclusive of the issue of the certificate holders' right to the surplus remaining after liquidation of the Trust Company as against the latter's common stockholders. An adjudication establishing the propriety of the substitutions, as wholly in keeping with the contractual rights of the parties, is not decisive of complainants' asserted equity in the Trust Company's ...