95 A. 12 | Conn. | 1915
Lead Opinion
The trial court regarded the important point in this controversy to be whether the receivers or the trustees should collect this collateral. It decided in favor of the receivers upon what it considered the equities of the situation. It found the receivers were not antagonistic in interest to the debenture holders, since their interest in the collateral lay in liquidating it so as to create a surplus beyond the sum required to pay the debenture-holders. Its main reliance was, as is that of the receivers upon this branch of the case, in the fact that the receivers have under their control the organization perfected by the Banking Company through which the collections may be made more efficiently and economically than by the trustees, who at present have neither the facilities, nor the acquaintance, nor the experience, required in the conduct of such a business.
If it were a fact that only the receivers could make use of this organization in collecting this collateral it would affect strongly the equity of the situation. But *654 such is not the fact. The receivers, by direction of the court, may turn over to the trustees all of this organization, and if this were done the principal basis of the order falls. If this course will benefit the collection of the collateral, the court not only can, but no doubt will, make an appropriate order; indeed, it would then be the duty of the receivers to request such order and, upon proper terms, to facilitate its execution. Then the trustees will be in as good position to collect this collateral as these receivers, so far as this organization can aid; and, aside from this, there is no suggestion in the record from which it may be inferred the receivers can collect the collateral better than the trustees. The reasoning which finds in the equity of the case authority for the court's order, assumes that the trust is existent and the possession of the trustees merely suspended for the benefit of those in interest, and when this benefit is secured the full possession and control will pass again to the trustees.
There is a far more serious question involved than which will prove the better collecting agent, receivers, or trustees. For the receivers claim the court had "plenary authority to make such order as to the control, custody, and administration generally of this trust, not in contravention of vested rights, as the best interests of cestui que trustent may, in its judgment, require."
The receivers, as a general rule, can do what the insolvent company could have done; they take its assets burdened with all valid liens and equities against it. Merwin v. Austin,
When a debtor has deposited collateral with a trustee as security for the payment of his debt, the trustee cannot be compelled to surrender to receivers of the insolvent debtor the collateral until the debt is paid. And after default, if the trust be one to apply the proceeds of the collateral for the benefit of the secured creditor, the trustee is entitled to administer the trust as against the receivers of the insolvent. The authorities are in practical agreement in this doctrine and in its application. In Cooke v. Warner,
The appellees contend that the trust companies, as the holders of the mere legal title, hold the collateral *656 subject to the order of the court as to what is for the best interests of (1) the debenture-holders, and (2) the general creditors. This conflicts with the rule universally laid down, that pledged collateral cannot be taken out of the hands of the pledgee by the court, and if the pledge be upon trust to collect the collateral after default and apply the proceeds to the secured debt, the trustee is entitled to administer the trust as against the receiver of the debtor.
The appellees further contend that the order appealed from neither interferes with the vested rights of the trustees in this fund, nor with their possession, since it merely provides the means of liquidating it, and then places it in the hands of the trustees for the benefit of the debenture-holders. Let us see, first, some of the things the trustees agreed to do under the trust agreements. They agreed to act as trustees of this fund, and to hold and administer the collateral in accordance with the terms of their agreements. They agreed to certify as to each debenture upon it. They agreed, upon default, to collect this collateral and apply the proceeds, less their expenses and charge for services. They hold the assignments of the mortgages under agreement not to record them until default is made. Upon default the trustees have the right to perfect their title and thus protect the debenture-holder and carry out the trust. What did the order of the court do? It gave the receivers the right to compel the trustees to deliver to them, the receivers, the possession, for collection, of every mortgage and assignment held by the trustees. This would strip the trustees of the evidences of title to the trust fund. It forbade the trustees to perfect their title by recording the assignments as directed by the trust agreements. It took from the trustees the right of collecting the collateral. It gave the receivers power to deduct from the proceeds of the *657 collateral the expenses of collection and a reasonable sum for their own services, and then ordered the balance returned to the trustees. It required the trustees to accept other collateral substituted in place of that held by them, as and when the receivers might elect. It practically gave the receivers power to collect at their discretion, by giving them power to compromise claims by consent of the court. During the period of collection the trustees are deprived of the possession vested in them under their trust agreements. When the trustees are prevented from getting the abstracts of title and the necessary papers to facilitate collection, forbidden to record the assignments and to collect the collateral, plainly these are interferences with the trustees in the performance of their trust. When the receivers compromise claims and pay their own expenses and services out of the collected collateral, the collateral is depleted in ways contrary to the trust.
Whether or not this course will benefit these funds is of no pertinency. The sole question is, does it breach the contract between Banking Company and trust companies? If a court may in this case take property held in trust out of the hands of the trustees, administer it through a receiver, and turn the net proceeds back to the trustees, it may do this in every instance where property is placed in the hands of a trustee to secure a debt. And it would seem to follow that every agreement of lien or pledge may be similarly breached with impunity. The order, in our judgment, impairs the contract created by the trusts.
It is also questionable whether, so far as the absent and unwarned debenture-holders are concerned, this order constituted "due process."
In one part of their brief the appellees say the authority of the trustees under the trust agreement ceased upon the naming of the receivers, and their *658 authority can be only such as the court may now give them. This method of abolishing a trust is, we think, so new as never to have received judicial approval. A court of equity has control of trusts and trustees; it may, for cause, displace a trustee appointed by contract or otherwise, and name another in his stead. It may not order a receiver to act as and for a trustee. When the trustee is carrying out the trust it may not limit the exercise by the trustee of his powers under his trust agreement; it may restrain an abuse of his power, but it cannot control the exercise of the legal discretion vested in him under the trust agreement.
The receivers further contend that, although the trust agreements provide for a default in the payment of principal and interest and a sale thereafter, the default in contemplation was one to occur while the Banking Company was a going concern and not one occurring after insolvency. They find support for this claim in the terms of the agreements: "but no sale thereof shall be made at a less rate than the face value with accrued interest of said collateral, except upon the written consent of said Banking Company, its successors and assigns"; and in the provision that the trustee "shall not in any case be liable for any act or omission, except for bad faith, in the execution of its trust." From these provisions the receivers insist that the right to sell or collect this collateral never arose, since there was no default prior to the receivership, and no right to sell had then matured, and the receivership suspended the contract between the banking and trust companies.
If it be true that under the trust agreements this collateral was placed in the hands of the trustees without furnishing them the means of protecting the debenture-holders by collection of the collateral upon the insolvency of the debtors, perhaps a court of equity *659 might give the trustees power to collect. But it could only act upon application to the court to secure its aid in administering the trust. No such application was before the court. Taking the collateral from the trustees and turning it over to the receivers to collect is a very different procedure from that of invoking a court of equity to assist the trustee to administer his trust. The right of the trustee to collect after insolvency was not, upon this theory, suspended; it never arose.
But we think the agreements are not susceptible of this construction. It would be singular if a business of such magnitude and age should make the trust agreements, upon the faith of which the Banking Company's bonds were sold, incapable of affording protection to their holders in the common contingency of insolvency. The nature of the business and the salability of these bonds required such a provision. So long as the Banking Company met its financial obligations, there was no reason why it should not retain the record title to the collateral and collect the income. When it was in default, either as a going or an insolvent concern, it was imperative, in the interest of the debenture-holders, that the trustees should have the power to collect both the income and principal of the collateral. Then the necessity arose for having the right to record the assignments and the right to compel the Banking Company to deliver the abstracts of title and other papers relating to the collateral. The agreements give this power and do not limit the default to that of a going concern; with these broad provisions there was no occasion to specify whether the default referred to was that of a going or an insolvent concern.
But the appellees regard a part only of these agreements. They do provide that sale may not be made at less than the face value with accrued interest, except *660 upon the written consent of the Banking Company or its assigns. They further provide that in case the trust company "shall fail to make such sale on the aforesaid terms, it shall proceed to collect such collateral in such manner as it shall deem best for the best interests of the holder of the bonds of said series." These provisions may be construed together. So read, we think they provide that the trustee shall, in the first instance, secure the consent of the Banking Company or its assigns, the receivers, and if this is not secured, then the trustee is not confined to a procedure by foreclosure, but may collect the collateral "in such manner as it shall deem best for the best interests of the holder of the bonds." Under this broad power the trustee has the right to compromise claims according to its best judgment as such trustee, using due care and good faith.
The provision for a default upon failure to pay interest or principal for a specified period is not exclusive; a default of necessity occurs immediately upon the Banking Company's becoming insolvent and the appointment of receivers. The theory of the appellees seems to be that the receivers are administering the trust, not acting outside of it. If the trustees may not compromise claims, we do not see how another official, acting under and through the same agreement of trust, may. Sixty per cent of their collateral was deposited under the Columbia Trust Company agreements. The Middletown Trust Company is the successor of the Columbia Trust Company by appointment of the court which named these receivers. Why should a court of equity take the collateral from the trustee of its own choosing, who is without fault, and hand it over to receivers of its choosing, for the purpose of having it collected?
Two cases are the main reliance of the receivers. The first, Miles v. New South B. L. Asso., 95 F. 919, does hold that receivers, under circumstances *661 such as are present in this case, may, by order of court, take possession of collateral held by a trustee and collect the collateral and hold the same as a separate fund subject to the trust under which the trustee held. We think this case is against authority, and certainly against settled principle. The second, Girard TrustCo. v. McKinley-Lanning L. T. Co., 135 F. 180, held the trust agreement gave the trustee no power to administer the assets in case of general insolvency; basing this construction chiefly upon the fact that the agreement of trust made no provision for payment to the trustee for its services in administering the trust after insolvency. In this case there is provision for paying the trustee.
There is error, the judgment and order are reversed, and the Superior Court is directed to render judgment in favor of said trust companies in accordance with this opinion.
In this opinion THAYER, BEACH and BENNETT, Js., concurred.
"A failure to pay any installment of interest due by the terms of any bond, or any portion of the principal thereof, when due, continuing for ninety (90) days after written notice served by mail postpaid or otherwise, on said Banking Company by the shall constitute a default on the part of said Banking Company within the terms and meaning of this agreement, and the whole of the series to which said bond belongs shall thereupon become due, and said may sell at public or private sale, the whole or any part of the collateral deposited with it for the series to which such bond belongs; but no sale thereof shall be made at a less rate than the face value with accrued interest of said collateral except upon the written consent of said Banking Company, its successors or assigns; and in case said shall fail to make such sale on the aforesaid terms, it shall proceed to collect such collateral in such manner as it shall deem best for the interest of the holders of the bonds of said series; and the proceeds of such sale or collection, after meeting the reasonable expenses thereof, including reasonable charges of the said for its services in such sale or collection, shall be applied in payment of the unpaid interest and principal of said series of bonds, ratably and without preference or priority in favor of any bond of said series as against any other bond of said series, the surplus, if any, to be delivered to the said Banking Company, its successors or assigns.
"The notice to the Banking Company in this section provided to be given, shall be given by said within ten (10) days after written request by the lawful holder of any bond secured by this agreement, or coupon thereof, which has been presented for payment and remains unpaid."
"Whenever said Banking Company shall make default in the payment of the principal or interest of any bond, it shall, at the request of said , forthwith deliver to the said all abstracts of title and all other papers in its possession or under its control relating to the collateral deposited with said for the series of bonds to which such defaulted bond shall belong; but until such default only the notes, bonds, assignments, mortgages and deeds of trust hereby guaranteed by said Banking Company to be first liens on real estate shall be deposited with said as collateral for any series of bonds."
The provision in reference to default in the Middletown Trust Company agreement was as follows: —
"If the Banking Company shall fail to pay any matured bond, contract, or coupon, secured hereunder, within ten days after proper presentation and demand for payment, according to the terms thereof, or shall fail to perform any of the obligations imposed upon it by the terms of any bond, contract, or coupon, so issued, or by the terms of this Agreement, such failure on the part of the Banking Company shall constitute a default.
"Upon any such default of payment by the Banking Company under the terms of this Agreement, the Trustee may at its option, call upon the Banking Company for all Abstracts of Title, and other papers, relating to the collateral held by it under this Agreement, and may sell all, or any part thereof, or make such other disposition thereof for the benefit of the holders of those outstanding bonds or contracts under which the default occurred, as in its judgment will yield the best results to the holders of such bonds or contracts; but no such sale or other disposition of collateral shall be made except after ten days' notice, in writing, to the Banking Company."
The agreements also provided: —
"Any collateral deposited with said by said Banking Company under this agreement may at any time be withdrawn by said Banking Company on its depositing with said other collateral in substitution for and equal in amount to the collateral withdrawn; and all the provisions of this agreement shall apply as well to such substituted collateral as to collateral originally deposited."
"Whenever said Banking Company shall surrender to said any bond issued under this agreement, said shall deliver to said Banking Company such collateral as said Banking Company may select from the collateral deposited for the security of the series to which said bond belongs equal in amount, as counted at the time of deposit, to such surrendered bond, and thereupon said bond shall be canceled by said and returned to said Banking Company."
"The Banking Company shall at all reasonable times in business hours have the right to inspect the collateral deposited by it under this agreement with said , and at all reasonable times in business hours the Official Examiner of any State or Territory of the United States shall, upon the written permission of said Banking Company, have the right to inspect the collateral deposited with and held by said under this agreement."
Dissenting Opinion
As I interpret the order of the court from which this appeal was taken, no attempt is made thereby to substitute the receivers of the Middlesex Banking Company for the original trustees, either as custodians of the pledged collateral before collection, or as custodians of the proceeds thereof after collection, or in the distribution of the proceeds under the terms of the trust contracts. It does not authorize the receivers to take the pledged collateral out of the hands of the trustees, except as may be necessary for the collection of the principal when due; and the receivers are required to return the net proceeds of such collections to the trustees for the account of the bondholders entitled thereto. In the *662 meantime the trust companies are protected by the receivers' bonds. In other words, the organization maintained and controlled by the receivers is, by order of the court, constituted a bonded collection agency for the trustees, both as to interest and principal, upon a finding by the trial court which conclusively establishes the fact that the trustees must otherwise create some similar agency for that purpose at unnecessary expense either to the bondholders, to the unsecured creditors, or to both.
A proper understanding of the real scope of this order differentiates it very plainly from Cooke v. Warner,
The finding in this case shows that the ministerial details of the collection of interest and principal cannot, in any event, be attended to by the trustees themselves, and that they must either utilize for that purpose the already existing agency, or create one capable of operating in other States. This order, therefore, leaves the trustees in the custody of the collateral except as it must necessarily be transmitted to third persons in *663 other jurisdictions for the purpose of collecting the principal; it takes out of their hands the collection of the interest which must, in any case, be collected in part through agents; and it provides proper security for the return of the net proceeds of all collections to the trustees, leaving them to execute the trust so far as it is possible for them to do so at all. No doubt the trustees could, under the terms of the trust, employ the receivers and the organization which they maintain and control to do the very things which the order requires the receivers to do; and the principal question before us is whether a court of equity, conducting a general administration in receivership proceedings, has power to compel the trustees to do so, when the fact is that such a course will result in a large saving for the benefit of either the bondholders, the unsecured creditors, or both.
It seems clear that the order, as I interpret it, does not deprive the bondholders of any contract right, unless it can be said that the order attempts to substitute the discretion and judgment of the receivers for the discretion and the judgment of the trustees in the matter of collection of the collateral. I do not think that under the circumstances of this case the order is open to objection on that ground. An examination of the contracts shows that they leave little room for the exercise of discretionary powers on the part of the trustees. The trustees had nothing to say as to the validity or value of the collateral deposited with them; and they were bound to accept substituted collateral of like contract value whenever tendered by the Banking Company. After default they have no right to sell the collateral (with the exception of the collateral deposited with the Middletown Trust Company under a separate contract or contracts to secure reserve value of so-called income bonds) at less than its face value *664 with accrued interest, without the consent of the Banking Company, to whose rights in this regard the receivers have succeeded. Upon failure to make sale of the collateral, the trust companies are required to collect the collateral in such manner as they deem best for the interest of the holders of the bonds belonging to the series secured thereby. This provision seems, at first sight, to confer considerable discretionary power; but in view of the prohibition against a sale for less than face value and accrued interest without the consent of the Banking Company or its successors in interest, the right to "collect" should not be construed as including a right to compromise any disputed or doubtful collateral by accepting less than its face value in full payment, without a like consent. The trustees, acting independently, are in effect limited to a collection by foreclosure in case of a breach of condition; or to a collection of interest and principal according to the terms of the debtor's obligation. As to the proceeds of collection, they are trustees, not only for the bondholders, but, in respect of any surplus, for the Banking Company and for the receivers as its successors in interest. The obligation to collect is mandatory, and I think it requires the trustees to collect according to the terms of the debtor's obligation, and does not authorize them, without the consent of the receivers, to waive a default, or, as already stated, to compromise any collateral for less than its face value. In other words, the independent discretionary powers of the trustees under these contracts, when analyzed, are restricted to the manner of collection; and the only possible interest which the bondholders can have in the matter is that the trustees should select the most effective and least expensive method of collection. In these receivership proceedings it is the right and duty of the court to protect the interest, or the possible interest, *665 of unsecured creditors, without impairing the contract rights of secured creditors; and it would be a strange thing if the Superior Court, having jurisdiction over the subject because engaged in a general administration of this estate, could not control the discretion of these trustees as to the manner of collecting the collateral, so far as to prevent them from unnecessarily wasting the trust fund in their hands.
It is suggested that the court, having control of its receivers, should require them to allow the trustees to use, for the purpose of collecting the collateral, the organization which the receivers maintain and control. Undoubtedly the court might have so ordered in the exercise of its discretion. But it has not done so; perhaps because of the possible difficulties which might result from putting three different managements in charge of the organization. Moreover, the trustees have not asked the court to permit them to make use of the receivership, and if they had done so, they must, upon familiar principles, have taken the benefit of the receivership upon such terms as the court, in the exercise of a legal discretion, might see fit to impose. The trustees are standing upon their contract right, and they must face the fact that they cannot be permitted to exercise their contract rights in the manner for which they are contending, without unnecessary impairment of the trust fund, and without actual or possible injury to their cestuis que trustent. That being so, I think, as already stated, that the trial court was justified in controlling the exercise of the trustees' discretion in the limited way in which this order does, for the purpose and with the effect of more effectually preserving the rights of the bondholders themselves, as well as of the unsecured creditors.
It is urged that the unsecured creditors cannot possibly have any interest in the collateral because it *666 does not exceed in value the face of the bonds secured thereby; but the noninterest-bearing collateral was deposited at eighty-five per cent only of its face value, and the income from the interest-bearing collateral is presumably larger than the interest on the bonds issued against it; so that it cannot be said that as a matter of law there is no possible surplus for the unsecured creditors.
Objection is made to other matters contained in the order, some of which are incidental to the principal issue already decided. For example, the order forbidding the trustees to record their assignments of mortgages is a necessary one, when it is once determined that the collateral shall be collected through the receivers; and the same is true of the denial of the trust companies' prayer that the receivers be required to turn over to the trustees all abstracts of title, papers and other memoranda relating to the collateral.
It is said that the order provides for withdrawals and substitutions of collateral in the judgment of the receivers; and that is true, though in a very limited sense, because it is restricted to a substitution of a better security, on the same land, for a worse, and is apparently intended to apply only to those cases where collection in full cannot be made. Nevertheless, the appointment of receivers in general administration of the estate of the Banking Company has all the effect of a default, as defined in the contracts, in fixing the right of the holders of each series of bonds to have the proceeds of the specific collateral, then held by the trustee to protect that series, applied in payment thereof; and I think this paragraph of the order should be modified by inserting a phrase equivalent to that found in paragraph six of the order, so that if any such substitution is necessary, it shall be upon the consent *667 of the interested trust company, or upon order of the court or a judge thereof.
The ninth paragraph of the order, which is also objected to, was added to enable the receivers to meet unforeseen contingencies; and as limited by its own terms I think it does not purport to confer upon the receivers any general discretionary powers, or any discretionary powers at all, which are larger in character and effect than those above referred to.
With the modifications of the order as suggested, the trustees will be fully protected by the orders of the court.
I think there is no error.
