300 Mass. 457 | Mass. | 1938
This cause is again here for the determination of certain questions of law which arise upon a report of the receivers and upon a petition by them that the court make rules governing the settlement of the affairs of the respondent corporations pursuant to the provisions of G. L. (Ter. Ed.) c. 175, § 6, as amended.
The former decision, reported in 296 Mass. 556, sufficiently describes the nature of the business carried on by the respondent Conveyancers Title Insurance and Mortgage Company, hereinafter called the Company, and its wholly owned subsidiary, the respondent Realty, Inc. The general character of the parti-mortgage receipts and of the mortgage certificates, which together constitute the "securities” issued or sold by the Company to its investors, and of the deposit agreements with the depositary bank also appears therein. These matters will be repeated or amplified here only in so far as may be necessary to make clear the grounds of the present decision or to indicate certain differences in the terms of the various classes of parti-mortgage receipts and mortgage certificates which were not of consequence when the case was here before, but which become material now. The word ‘'seigniorage,” which was used at the hearing before the single justice and which it may be convenient to use in this opinion, refers to a sum equivalent to the difference between the interest payable upon a mortgage held by the Company at the rate named therein for any period and the interest payable for such period on the securities issued with respect to such mortgage at the rate (commonly a lower one) named in such securities.
The questions now reported for decision, reduced to their
For convenience in this litigation the parti-mortgage receipts have been divided into classes A to F and the mortgage certificates into classes G and H, the classification depending upon the particular form of receipt or certificate and deposit agreement (if any) in use at the time of issuance. The parti-mortgage receipts comprising classes A to E, inclusive, recite (1) that the Company has received the money of the investor "in purchase of a parti-interest” in a designated mortgage note and provide (2) that the note is to remain in the name of the Company, which shall have as full and complete powers in reference thereto as if it were the absolute owner thereof; (3) that the net proceeds of the note or notes, after deducting all reasonable and proper charges, are to be held for and distributed
Without further discussion of the details of the several classes of receipts and certificates, but giving careful attention to their wording, arrangement and purpose as well as to the several deposit agreements which are incorporated by reference in the receipts and certificates, we are of the opinion that these instruments were intended not only to create contractual rights but also to establish and define property rights which the Company as well as the security holders should have in the underlying mortgages. See Commissioner of Insurance v. Conveyancers Title Ins. & Mortgage Co. 296 Mass. 556, 563. In general these property rights, whether they are treated as arising by way of a trust in which the Company and the investors are alike cestuis que trust, or as arising by way of several and differing legal interests created in the same security, or as partaking in various aspects of each of these characteristics, continue to exist in their.essential substance, notwith
We shall deal in turn with the several questions reported. The answers must depend upon the construction of the pertinent receipts or certificates and' deposit agreements in the light of the agreed facts.
1. There is no basis for the deduction by the receivers of seigniorage at a fixed percentage ás a prior claim upon the proceeds of mortgages which underlie the receipts and certificates of classes A, B, C, D, E and G. All of these' were issued prior to the plan of readjustment of 1932, and the holders of the few' which are now outstanding did not accept that plan. We do not understand that the receivers now seriously dispute this point. Indeed, from the literal wording of the pertinent instruments it could be argued that the holders of securities of these classes (except class G) were entitled to the entire proceeds of the mortgages, principal.and interest, “after deducting all reasonable and proper charges” incurred in the preservation and protection of particular mortgages. However, it
Parti-mortgage receipts and mortgage certificates of classes F and H stand in a different position. ' By far the greatest proportion of outstanding securities belong to these classes. These securities were issued to security holders who accepted the plan of readjustment of 1932 and are in accordance with the deposit agreement which accompanied that plan. The plan had its origin in the general conditions then confronting holders of real estate mortgages. The Company found itself in need of a substantial sum of money not subject to prior claims of particular security holders, but available for general use in carrying defaulted mortgages and foreclosed properties. Evidently it was thought that all the security holders could fairly be asked to aid in the creation of such a sum for the mutual benefit of all, whether or not at the moment the particular mortgages relative to their particular securities were in distress. Accordingly, the parti-mortgage receipts and mortgage certificates issued under the plan bore rates of interest reduced by one per cent. The receipts (class F) contained a new clause providing that all interest received from the underlying mortgage note, “after deducting the difference between the rate of interest payable on the Parti-Mortgage Receipts outstanding with respect to said note and the rate payable on said note, which difference the Company shall be entitled to retain for its own use, shall be held in trust by the Company for the pro-rata benefit of the holders of
The purpose and effect of these changes were, we think, to alter the respective property rights of the security holders and the Company in the interest accruing from the underlying mortgages by taking away from the security holders in part the direct and immediate security of the accruing interest on the relative mortgages and giving the seignior-age to the Company as a prior claim upon that interest to be added to the Company’s general assets, thus providing free cash which could be used for the protection of any mortgages which had fallen or might fall into default, and of which any balance remaining would also be available ultimately for all claims, by far the largest part of which would be claims of the security holders, to all of whom the Company continued to be liable. And in spite of considerations to the contrary we incline to the view that the Company’s property right in the seigniorage was not impliedly conditional upon its continued performance of its contractual obligations either as to payment of the interest or of the face amount of its securities. Such a condition would render the peculiar seigniorage provision largely ineffectual to accomplish its apparent object. The papers
But under the terms of the receipts and certificates seigniorage is to be deducted only from interest received on deposited mortgage notes, including, in the case of the certificates, any mortgage note legally deposited in substitution for those originally deposited. There is no provision for seigniorage on net income from properties foreclosed or in possession. In fact the deposit agreements pertinent to classes F and H, the only classes here involved, declare without qualification that acquired properties are to be held for the benefit of security holders. No facts are shown from which any right to seigniorage should be implied beyond that expressed in the papers. Provisions in the declarations of trust given by the Company to the depositary relative to foreclosed properties purporting to reserve seigniorage out of net income therefrom seem to us in conflict with the controlling instruments and not binding upon security holders in the absence of consent or acquiescence on their part. For similar reasons seigniorage cannot be deducted from any payments by mortgagors which under the common law rules relating to application of payments have been or must be applied to taxes as distinguished from interest. Therefore the receivers are not to deduct seigniorage from the net income of foreclosed properties or properties in possession or from sums not paid or applied under common law rules as interest, and
Although the principal reason for allowing seigniorage under the plan of readjustment seems to have been to provide the Company with funds for carrying charges for the general benefit, we do not perceive in the documents' any absolute requirement binding the Company to deduct seigniorage in every possible instance. The words are, “shall be entitled to retain for its own use.” We think that the Company, before the appointment of the receivers, could waive seigniorage, thereby reducing the amount of its ultimate liability to the investor. If, as some of the parties assert, the Company before the receivership paid over to security holders interest received on deposited notes without deduction for seigniorage, such payment would, in the absence of special circumstances, constitute a waiver of the Company’s right. The receivers are not now entitled to reclaim seigniorage with respect to any receipts of interest as to which the Company waived its right to seigniorage.
2. We interpret the second question reported as referring to charges for general management services such as would commonly be required in caring for a large number of mortgages and properties in possession or foreclosed and to the general expenses of administering the receivership. We do not understand that it refers to expenses particularly applicable to specific mortgages or properties. One purpose of this question seems to be to obtain a decision as to whether any part of the general expenses can be specially allocated to and charged against the holders of such securities as are not chargeable with seigniorage. In our opinion no such charges can be made. It is not customary in a receivership
3. The word "advances” in question 3 we "understand to refer to such items as taxes, insurance, repairs, water-rates and other current expenses of maintenance and operation which were reasonably paid or "advanced” by . the Company from its general assets or by its subsidiary for the protection or preservation of particular mortgages or properties. It is urged that the receivers cannot now restore these advances from the proceeds of the mortgagés or properties thus benefited to their general funds for the reasons that the Company has fully insured or guaranteed its security holders; that an insurer or indemnitor who is thus primarily liable will not be subrogated fco the disadvantage of» his indemnitee' or permitted to compete--, with him' for a share in the security; and that the security holders are entitled in equity to set off their rights against the Company tó be protected from loss against any right of the Company or its receivers to reduce the/security by reclaiming the advances. We need not discuss the general principles thus involved. They are not disputed. - ..They are illustrated in J. H. McNamara, Inc. v. McGuire, 254 Mass. 589, Jenkins v. National Surety Co. 277 U. S. 258, American Surety Co. v. Westinghouse Electric Manuf. Co. 296 U. S. 133, and Louisville Title Co.’s Receiver v. Crab Orchard Banking Co. 249 Ky. 736 (a case bearing some resemblance to the case at bar). But those principles must yield,.to the terms of the governing legal instruments by which the parties have seen fit to bind themselves, if those instruments provide otherwise, as we think they do, though
The parti-mortgage receipts of classes A, B, C, D and E, after giving to the Company the full and complete powers of an absolute owner over the underlying mortgages, including that of exercising the power of sale and in general of doing anything and everything customary and proper for a mortgagee to do, provide that the net proceeds of the mortgage notes, “after deducting all reasonable and proper charges,” shall be held for and distributed by the Company among the receipt holders. We think that the “reasonable and proper charges” which may be deducted include the advances, which are thus made a charge upon the proceeds of the mortgage notes, principal and interest, and upon the proceeds of foreclosed properties. It is difficult to see what was meant by these words unless it was intended that the Company, though an insurer and bound as such to make good the face value of the receipts in due time, should nevertheless have rights of reimbursement in the first instance with respect to expenses incurred to preserve or to enforce the underlying mortgages.
The receipts of class F, which were issued under the plan of readjustment, taken in connection with the accompanying deposit agreement, give to the Company similar powers over the mortgages. They provide that all interest received from the notes, after deducting seigniorage, shall be paid to receipt holders, but payments of principal or the proceeds of sales of mortgaged property are to be paid over “after deducting all reasonable and proper charges.” The deposit agreement provides that the Company shall deliver to the depositary “a suitable declaration of trust” covering acquired properties for the benefit of receipt holders. The declarations of trust delivered in pursuance of this provision allow the Company to reclaim its advances. In view, however, of the express requirement that all interest received from the notes (after deducting seigniorage) shall be paid to receipt holders, we think that as to securities of this class advances are not recoverable out of in
The certificates of class H do not mention any deduction of reasonable and proper charges. But they also give to the Company full control of the mortgages. They, too, were issued under the plan of readjustment, and the accompanying deposit agreement provides that acquired property shall be held in trust for certificate holders, and that a “suitable declaration of trust” shall be held by the depositary. The declarations of trust so held provided for reimbursement of the Company for advances. We cannot say that such a provision was not “suitable.” Reimbursement for new money put into the properties for their benefit is not inconsistent with the holding of the properties in trust for certificate owners. It is consistent with the purposes of the plan of readjustment. The receivers should deduct advances as to class H from the proceeds of acquired properties held in trust. But for the same reason as in the case of class F, advances may not be reclaimed out of interest from the original mortgage notes.
Class G remains. The documents pertaining to certificates of this class do not mention advances. The deposit-agreement states that the Company shall have the right to withdraw from deposit any deposited mortgages and to retain for its own use any payments of principal on any deposited notes, “provided” that it “shall at all times comply with” its covenant as to the aggregate principal amount, interest rate and character of the relevant deposited notes and mortgages. Without entering upon a discussion as to the effect of this clause in general, it is difficult to find in it any authority such as is found with respect to the other classes allowing the Company to recoup itself for advances as such out of the avails of property now standing as security, in competition with its creditors and in derogation of the rule hereinbefore stated. We conclude that the receivers may not deduct advances made prior to the receivership pertaining to certificates of class G.
All deducted advances are to fall into the general funds
4. The fourth question relates only to mortgage certificates of class H.' Each certificate provides in substance for its purchase by the Company either at its due date or upon call at a price equal to its “face amount” with any unpaid interest, and that in the event of the appointment of a permanent receiver the Company's obligation to purchase “shall forthwith become due and payable.” The pertinent deposit agreement contains a clause to the effect that the Company shall hold payments of principal collected on deposited mortgage notes in trust for certificate holders and shall apply the amount of such payments to the purchase of outstanding certificates which it may call by lot at the next interest date or it may at its discretion request tenders of' such certificates and may apply the money “to the purchase at the lowest prices offered, not in excess of the face thereof, of the largest amount of such certificates that can be so purchased.” In our opinion this clause of the deposit agreement must be construed as intended to apply only to payments of principal made before the certificates fall due upon particular mortgages included in the group of mortgages which underlie the relevant certificates. The form and structure of the instruments leave this construction possible. It would be a most unusual procedure to select for payment by lot or by competitive tenders a few certificates out of a whole series all of which were equally due and payable in full. Such methods are especially inappropriate in the conduct of a receivership, the purpose of which is to secure fair and proportional distribution of available assets. The tender method would require certificate holders to guess at their peril as to-the amount which would ultimately become distributable and as to how low other certificate holders might bid. It might result in those who esteemed their certificates least valuable getting the lion’s share of the security. Or it might
Pursuant to the terms of the report a decree is to be entered embodying the foregoing determinations, and the decree entered May 28, 1937, and the rules therein promulgated and prescribed are to be modified in conformity thereto.
Ordered accordingly.