MONTICELLO BUILDING CORPORATION, a Corporation, JOHN T. CRAVEN, BERRY P. CRAVEN and EUGENE CRUTCHER v. MONTICELLO INVESTMENT COMPANY, a Corporation, STRAUS BROTHERS INVESTMENT COMPANY, a Corporation, HERMAN S. STRAUSS, Trustee, and MERCANTILE-COMMERCE & TRUST COMPANY, Co-trustee, and BARNETT L. ROSSETT ET AL., Members of Bondholders Protective Committee, HERMAN S. STRAUSS, Trustee, MERCANTILE-COMMERCE BANK & TRUST COMPANY, Co-trustee, and BARNETT L. ROSSETT ET AL., Members of Bondholders Protective Committee, Appellants.
Division One
August 5, 1932
52 S. W. (2d) 545 | 1128
Hyman G. Stein and Foristel, Mudd, Blair & Habenicht for respondent.
In case the mortgagor defaulted in any payments or failed to perform any condition of the deed of trust, it was provided that the mortgagor should, without any notice whatever, forthwith, upon demand of the trustees, surrender possession to them. The trustees were authorized in their discretion without action of any bondholder to take and maintain possession, hold, manage and operate the property and collect the rents therefrom and lease the same “for not exceeding one year in any one instance.” The application to be made of revenue derived from so operating the property was specifically set out. The mortgage also authorized the trustees, before having the entire debt declared due and before entry of any decree for foreclosure, to restore the property to the mortgagor upon certain payments and conditions. The mortgage further provided when any default continued for more than “thirty days after written notice thereof to the mortgagor by the trustee or to the mortgagor
“Section 6. Whenever under the provisions hereinabove contained it shall have become the duty of the trustee to institute legal proceedings upon the written request of the requisite number of bondholders, and upon the deposit or tender of deposit of the requisite number of bonds with the trustees, and upon tender of proper indemnity, and the trustees shall have wrongfully or unreasonably refused or failed to act within thirty (30) days after such request and tender of the requisite number of bonds and proper indemnity, then and in any such case, but under no other provisions hereof have the right to demand action by the trustees, may jointly institute such proceedings in law or in equity as it was the duty of the trustees to institute, but for the benefit of all holders of the bonds and coupons then outstanding. Every holder of any of the bonds hereby secured (including pledgees) accepts action, whether at law or in equity, upon or under this Indenture, is vested exclusively in the trustees, and under no circumstances shall the holder of any bond or coupon, or any number of combination of such holders, have any right to institute any action at law upon any bond or bonds or any coupon or coupons, or otherwise, or any suit proceeding in
equity or otherwise, except in case of refusal on the part of the trustees to perform any duty imposed upon them by this Indenture after request in writing by the holder or holders of at least twenty per cent (20%) in amount of said bonds as aforesaid. No action at law or in equity shall be brought by, or in behalf of, the holder or holders of any bonds or coupons, whether or not the same be past due, except by the trustees or by the requisite number of bondholders acting in concert under the provisions of this section for the benefit of all bondholders. In the event that pursuant to the terms hereof twenty per cent (20%) or more of the bondholders shall have joined in exercising the right to act in lieu of the trustees, the remainder of the bondholders shall have no right to institute any legal proceedings of the same or a similar character for the same default of the Mortgagor.”
Another provision of the mortgage was that in all actions “the trustees shall be deemed the representative of the bondholders and in no case shall it be necessary to notify any bondholder or to make any bondholder a party to any action, suit or proceeding for the purpose of binding or concluding such bondholder.”
Plaintiff, John T. Craven was the president of the Monticello Building Corporation and plaintiff Berry P. Craven was its treasurer. They executed a personal guaranty of all the bonds secured by the mortgage on the Monticello apartments. In 1928 the Monticello Building Corporation conveyed the apartment building to the Monticello Investment Company, a separate corporation. The Monticello Investment Company executed and delivered to the Monticello Building Corporation a second deed of trust on the property securing the payment of $40,000 and also executed and delivered to it a third deed of trust securing $162,586. Both of these obligations were payable in monthly installments, of both principal and interest, which added a total charge of about $26,000 per year against the income of the building. The revenue could not bear this burden and in 1930 defaults were made on these second and third mortgage payments. Use of the income of the building to make these payments hastened the default on the first mortgage. On April 27, 1931, when the present suit was commenced there remained due on the principal of the bonds secured by the first mortgage $298,000. The taxes due and payable in the year 1930 were then in default. Default had also been made in the deposits for semi-annual interest and principal payments due on the first mortgage July 1, 1931. The income of the building had fallen below the amount required for these deposits and operating expenses.
Plaintiffs’ petition set out the first, second and third mortgages and the defaults therein; stated that the trustee, Herman Strauss,
“That the trustees and Straus Brothers Company have no rights nor interests to serve at this time to protect and are made defendants for the purpose, among others, of the court compelling them as trustees and otherwise to furnish to plaintiffs the list of owners of said remaining bonds outstanding, unpaid and not due to the plaintiffs; that the said trustees and Straus Brothers Company are
Defendant Monticello Investment Company followed plaintiff Monticello Building Company to the courthouse and on the same day filed answer by which it entered appearance and seconded the nomination of Mr. Worthington. The court granted a temporary injunction, appointed no receiver, but issued an order to show cause why a receiver should not be appointed. Hearing on this order was continued from time to time until the events of August 10, 1931, hereinafter referred to. The interest and principal payments due July 1, 1931, were not made.
On July 17, intervener, Eugene Crutcher, filed an intervening petition which alleged some of the facts concerning the mortgage given by the Monticello Building Corporation in 1925; stated that he was the owner of a $500 bond secured by the mortgage; that Herman S. Strauss was dead; and that Lehman was an employee of Straus Brothers and manager of their St. Louis office. The intervening petition then alleged that the intervener had read in newspapers and heard from other sources that Straus Brothers Company was insolvent and its transactions under investigation; that brokerage houses and trustees had, in many instances in collusion with mortgagors, taken advantage of depressed financial conditions to foreclose mortgages and buy in mortgaged property at less than its value and thereby defraud holders of bonds; that, in other instances, they had arranged for bondholders protective committees, which by fraud and deception induced bondholders to allow themselves to be represented by such committees, in order that they might be more easily defrauded, and that this “racket” had become so common that “it is proper for a court of equity to inquire into all kinds of defaults in first mortgage bonds, so that the protection of bondholders may be insured by the appointment of a fair and honorable receiver.” The petition prayed the appointment of a receiver “to take charge and control of and to manage the said real estate and property and to cause the same to be disposed of as the court may direct.”
On July 23, the intervening petition was amended by setting out more fully the facts concerning the first mortgage and alleging that Straus Brothers and Lehman were doing the things, which constituted the “racket,” referred to as being done generally by brokerage houses and trustees in the original petition. The amended petition asked for a foreclosure of the mortgage and for the appointment of a receiver in the meantime. A motion was filed to strike the intervening petition from the files. One of the grounds stated was that it failed to state facts sufficient to state cause of action
The next day of importance in this case was August 10, 1931. From May 13th up until that time, the building had remained in the possession of the Monticello Investment Company, but by agreement the rents, after certain deductions were made, were being turned over to Lehman. On that date the trustees and bondholders’ representatives, in accord with them, attempted to get control of the property by resorting to the Federal Court. Lehman, who had gone to the State of Michigan a few days before, executed and acknowledged a refusal to further act as trustee. Herman S. Strauss (the information concerning his death seems to have been erroneous) turned up and filed a suit, in the United States District Court in St. Louis, to foreclose the first deed of trust. This suit was filed on the theory that, Lehman having resigned, Strauss the sole remaining trustee being a resident of Illinois, and the Monticello Companies being Missouri corporations, the Federal Court had jurisdiction. The petition prayed for an injunction to restrain the plaintiffs and intervener from seeking the appointment of a receiver and interfering with Strauss’ right and possession of the property. The judge of the Federal Court was absent from St. Louis, but the petition was presented on that day to a Federal Judge at St. Paul, Minnesota, who refused to issue the injunction. That afternoon intervener‘s attorney, discovering the filing of the suit by Strauss in the Federal Court, went to the judge of the circuit court, before whom this cause was pending, and stated to the court that Strauss had filed a suit in a United States District Court in which he had asked that a receiver be appointed, that foreclosure be had, and that the parties be enjoined from proceeding in a state court. It appears that under an agreement made by counsel, the hearing on the appointment of a receiver was to be held in the circuit court on August 12th. The court, upon this statement and without notice or hearing, immediately appointed a temporary receiver who took charge of the property. The court stated at that time that: “The only reason I do it is that it is in the nature of a fraud on the court.” (Asking for the appointment of a receiver in the Federal Court when hearing was to be had two days later on the appointment of a receiver in the state court.) Intervener‘s attorney had hurriedly read the petition in the Federal Court and inadvertently misinterpreted the allegation contained therein that under the provisions of the mortgage the trustees were entitled to have a receiver appointed. The petition did not ask that a receiver be appointed.
On September 14, 1931, intervener Crutcher filed his second amended petition, which is his final petition filed. It was alleged, therein, that on June 5, 1931, the United States District Court in Illinois had appointed a receiver for defendant Straus Brothers Investment Company. The petition further alleged certain facts concerning the first deed of trust given by the Monticello Building Corporation and the default thereon; that intervener was the owner of a $500 bond due July 1, 1935; that the trustees in the mortgage were both officers of defendant Straus Brothers Investment Company; and that the bondholders’ protective committee was composed of officers and associates of Straus Brothers Investment Company and were dominated by it. It contained many allegations concerning the manipulations of Straus Brothers Investment Company in other cases, through bondholders’ protective committees composed of the same persons as here, by which it was alleged that Straus Brothers Investment Company profited and the bondholders were caused great loss. It alleged that the Straus Brothers Investment Company, and others unknown to the intervener, were engaged in a fraudulent scheme and conspiring to profit at the expense of the bondholders in this case and that the trustees, defendants Straus Brothers Investment Company and Lehman were parties to the
On January 18, 1932, the court rendered its decision, in which it refused to vacate the order appointing the receiver and ordered that the temporary receiver be made permanent. Thereafter, on January 21, 1932, Herman S. Strauss and the Mercantile-Commerce Bank & Trust Company entered their appearance and filed motions to revoke and vacate the order appointing a permanent receiver. The bondholders’ committee filed similar motions. The court entered orders overruling their motions and all these parties have appealed from the order of appointment.
The original petition wholly failed to state a cause of action. The substance and effect of the complaint made therein by plaintiffs holding second and third mortgages was that the owner of the mortgaged property, already in default on the taxes, could not meet the payments due on the first mortgage July 1, 1931, and wanted extensions of time, reduction of payments, refinancing, and other concessions not provided for in, and directly opposite to, the terms of the contract made by the first deed of trust when the money secured thereby was borrowed. While the relief prayed for was an injunction, the real relief sought was a moratorium. If that was one of the powers of courts, there would no doubt be a great increase of judicial business by reason of applications therefor. It is apparent that the original petition would support neither an injunction nor the appointment of a receiver. This court has reaffirmed, in several recent cases, the well-settled rule that a court of equity has power
It is also clear that intervener‘s original intervening petition stated no cause of action. It alleged no facts, except as to the existence of the first mortgage, applicable to this case. It merely set out the intervener‘s suspicions concerning all brokers, trustees, bondholders’ committeees and property owners, and sought only an appointment of a receiver and an investigation into the motives of all parties connected with this mortgaged property, without alleging that they or any of them had done anything improper. We shall, however, in determining the authority of the court to appoint a receiver herein, consider the intervener‘s second amended petition. It was the intervening petition before the court when the order making the temporary receiver permanent (which is the order appealed from here) was made. Appellants contend that this petition sets up an entirely new and inconsistent cause of action from that attempted to be stated in plaintiffs’ original petition; that an intervener is not entitled to inject an entirely new and inconsistent cause of action for directly opposite relief into a case by intervention; and that therefore intervener has no standing in this cause and the court is without authority to appoint a receiver upon his intervening petition.
We think this contention must be sustained. Intervention is defined as “a proceeding in a suit or action by which a third person is permitted by the court to make himself a party, either joining plaintiff in claiming what is sought by the complaint, or uniting with defendant in resisting the claims of plaintiff, or demanding something adversely to both of them.” [Black‘s Law Dict., 651; 33 C. J. 477; Rocca v. Thompson, 223 U. S. 317, 32 S. C. 207, 56 L. Ed. 453.] If there is a fund, in the custody of the court to be distributed, which each of two parties claim, it is, of course, fundamental that any other party may be entitled to intervene and make a claim to it against both of the original parties. It is also true, that in matters concerning trust relations a cestui que trust, who is not a party to an action between a trustee and a third person, may intervene by showing the court that it is necessary to make him a party to protect his interest. In either case, such an intervener might claim against both of the original parties, [21 C. J. 344,
We do not overlook the fact that intervener‘s final petition as drawn might appear to come within the exception, that a cestui may intervene in an action between his trustee and another when necessary to protect his interests; this is because intervener‘s petition carefully avoids all reference to the mortgage provisions which preclude him from bringing an action to foreclose and which define the powers and duties of the trustees and the rights of the bondholders. However, we have more than the pleadings before us. When we look to the evidence of intervener, at the hearing on the vacation of the order appointing the temporary receiver, including the mortgage itself, it appears that intervener cannot maintain at all such an action as he has attempted to inject into this suit. The mortgage prohibits the holder of a $500 bond out of $298,000 of outstanding bonds from maintaining a suit for foreclosure. It restricts the right, in the first instance at least, to bring suit, upon either the bonds or the deed of trust, to the trustees and the requisite number of bondholders. The bondholders who can so act, upon failure or refusal of the trustees, are the holders of twenty per cent of the outstanding bonds. It appears here that the new co-trustee appointed by the court, the original trustee and the holders of more than twenty per cent of the outstanding bonds are in accord upon a plan of action and desire to be permitted to take possession of the property and act, pursuant to their ideas of what should be done, for the protection of all bondholders. Reasonable restrictive provisions, upon the right to take possession of the mortgaged property and to commence foreclosure or other suits to enforce the rights of the holders of the obligations secured thereby, intended for the protection of the majority of widely scattered bondholders and the owners of the mortgaged property from unwarranted actions, are generally given effect. [41 C. J. 882, sec. 1095; 19 R. C. L. 521, sec. 321; Seibert v. Minneapolis R. R. Co. (Minn.), 53 N. W. 1134, 20 L. R. A. 535; Muren v. Southern Coal & Mining Co., 177 Mo. App. 600, 160 S. W. 835; State ex rel. Bowling Green Trust Co. v. Barnett, 245 Mo. 99; Reetz v. Pontiac Realty Co., 316 Mo. 1257, 293 S. W. 382; as to nomination of Receivers, see 19 R. C. L. 319, sec. 95; 41 C. J. 415, sec. 263.] These provisions are at least valid in so far as they deal with remedies provided for in the mortgage, including the right to foreclose. [Reetz v. Pontiac Realty Co., supra.] While no interest is too small to be entitled to the protection of a court of equity, it is neither necessary to such pro-
The evidence produced at the hearing in this case also raises another fundamental question in our minds. The intervener had lived all his life in St. Louis. He was engaged in the real estate business. He said he was brought up in the real estate business in St. Louis by his father and had never been in any other business. He was apparently peculiarly in a position to know conditions and to find out what were the provisions of the deed of trust securing the bond which he acquired. The bond itself, which he acquired as part of a real estate commission, referred to the provisions of the trust deed, and was notice of them. [Reetz v. Pontiac Realty Co., supra.] When intervener acquired this bond, around July 1, 1931, the mortgage was already in default, and plaintiffs’ original suit pleading the dire financial straits of the mortgagor and owner of the property had been filed. According to his testimony, the property would bring only about one-half of the first mortgage debt on foreclosure. He acquired the bond only a few days before he filed his first intervening petition setting forth his suspicions
Trustees in mortgages and persons acting as members of bondholders’ committees, on behalf of widely scattered bondholders who are not in a position to individually protect their own interests, must act with loyalty, fidelity and integrity toward the interests of those they represent. They will be held strictly accountable at law and in equity to the faithful performance of the trust which they assume. They are subject to removal for cause. They will not be permitted to personally profit by taking advantage of those who trust them. If they undertake to do so they will be compelled upon proper action to disgorge ill-gotten gains. However, before intervener here can invoke a court of equity it behooves him to show his own good faith and the equities of his own position. One may purchase a cause of action at law and enforce all legal rights which go with it, but the right to appeal to the conscience of a court of equity cannot be bought or sold. [See Wilson v. St. Louis & Western Railroad Co., 120 Mo. 45, 25 S. W. 527; Haseltine v. Smith, 154 Mo. 404, 55 S. W. 633; Harrison v. Craven, 188 Mo. 590, 87 S. W. 962; Weissenfels v. Cable, 208 Mo. 515, 106 S. W. 1028; Ryan v. Miller, 236 Mo. 496, 139 S. W. 128; 5 C. J. 892, sec. 57; 2 R. C. L. 611, sec. 19; 2 Story‘s Equity (13 Ed.) sec. 1040-G; 3 Pomeroy‘s Equity (2 Ed.) sec. 1276; Ryan v. Miller, 236 Mo. 496, 139 S. W. 128.]
We hold that under the pleadings and the evidence herein the circuit court was without authority to appoint a receiver. Its decree appointing a receiver is therefore reversed and the cause remanded with directions to proceed in conformance with the views herein expressed. Ferguson and Sturgis, CC., concur.
PER CURIAM:—The foregoing opinion by HYDE, C., is adopted as the opinion of the court. All of the judges concur.
HYDE, C.