Tolfree v. New York Title & Mortgage Co.
72 F.2d 702
2d Cir.
1934
Check Treatment
AUGUSTUS N. HAND, Circuit Judge.

On August 4, 1933, the defendant George S. Van Sehaiek, superintendent of insurance of the state of New York, applied to the New York Supreme Court for an order of rehabilitation of New York Title & Mortgage Company pursuant to the provisions of article 11 (section 400 et seq.) of the Insurance Law of that state (Consol. Laws, e. 28). On the same day the court made an order authorizing him to take possession of the property of the company and eondnet the business thereof, and enjoining all creditors and other persons from bringing suit against the title company or the superintendent, or interfering with thе administration of the latter. The superintendent took possession of the property of the company and is still conducting the business thereof. On September 22, 1933, acting under the so-called Sehaekno Act (chapter 74-5 of the Laws of 1933), he formally took over the functions of the title comрany, as authorized by that act, in rehabilitation in respect of certificate issues.

The complainants in the above suits were holder's of pаrticipation certificates in mortgages deposited ‍​​​​‌​‌‌​​‌​‌‌​​‌​​​‌​‌​​​​‌‌‌‌‌‌​​​​‌‌​‌​‌‌​‌‌​‍with Bank of Manhattan Company and running from the mortgagors to the New York Title & Mortgage Company. The certificates issued by the latter assigned to the holders an undivided share in the principal sum secured by the bonds and mortgages, guaranteed the payment of principal and interest at the rate specified, authorized the title company to collect the principal and intеrest in its own name and to pursue any remedies which any owner might pursue and to decide when and how to enforce any provisions of the bonds and mortgages, and appointed it irrevocably agent and attorney of all holders of certificates for the purpose of collecting intеrest and principal upon the bonds and mortgages, adjusting and collecting fire insurance, substituting other bonds and mortgages for those deposited, and dеciding when and how to enforce the bonds and mortgages.

On December 29, 1933', the complainants, nonresident holders of certificates, filed bills in the United States court for the Northern district of New York against the Now York Title & Mortgage Company, the superintendent of insurance, the deputy superintendent of insurance, and the Manhattan Company, the depositary. These bills, filed on behalf of the complainants and all other certificate holdеrs similarly situated, in substance, alleged that the collateral underlying each issue represented a trust estate, that various acts on the part of the superintendent and the title company disqualified them f Lorn continuing as trustees for the holders of the certificates, and that the New York statutes under which the superintendent is acting are unconstitutional in that they deprive the complainants of the benefits of the trust estates of which they are beneficiaries. The bills ‍​​​​‌​‌‌​​‌​‌‌​​‌​​​‌​‌​​​​‌‌‌‌‌‌​​​​‌‌​‌​‌‌​‌‌​‍prayed that the superintendent be removed, that suitable successors be appointed, and that he bo enjoined from аdministering the property. On or about January 6, 1934, petitions for intervention were filed by the solicitor for the complainants on behalf of certificate holders whof were residents of the state of New York, which were later withdrawn, in the belief that such intervention would destroy a jurisdiction based on diversе citizenship. The mortgages in which complainants have an interest are all upon lands within the Southern and Eastern districts of New York and, with the bonds, are physically on deposit at Bank of Manhattan Company in the borough of Manhattan, city of New York.

The District Court assumed jurisdiction of the suits, appointing temporary trustees of the bonds and mortgages underlying the series of participation certificates and enjoined the defendants from interfering with the possession or control of the trustees or from substituting any securities for those deposited, from paying out any moneys received except to the trustees, and from prosecuting any actions. We think that these orders cannot be justified and must accordingly be x'eversed.

In People v. Title & Mortgage Guarantee Company of Buffalo, 264 N. Y. 69, 190 N. E. 153, the Sehaekno Aсt under which the superintendent of insurance is administering invcsünnuts of mortgage guaranty companies and making plans for permanent administration of mox'tgаges in which groups of investors are interested was declared constitutional by the New York Court of Appeals. *704 Its validity must be assumed in order to authorizе a single District Judge to enjoin the superintendent. Even if some of its provisions transcend constitutional limitations, the title company in the present eаse was authorized by the contract it ‘made with the holders of the participation certificates to collect the mortgages and interеst by foreclosure or otherwise and obtain payment of the interest due thereon, and the legal title to such mortgages stood in its name. It also wаs given a share in the avails of the mortgages and interest so far as they exceeded the amounts guaranteed. The mere default in meeting the guaranties ‍​​​​‌​‌‌​​‌​‌‌​​‌​​​‌​‌​​​​‌‌‌‌‌‌​​​​‌‌​‌​‌‌​‌‌​‍would not seem to require the 'title company to rescind the bargain and transfer the mortgages to the owners of the certificates unless they united in the demand. Accordingly when the superintendent, by order of the New York Supreme Court, took over the assets of the title company, it took over a going business, together with a right to administer the mortgages. By virtue of the order and article 11 of the New York.Insurance Law (section 400 et seq.), the superintendent became in effect a receiver under the supervision of the state court and the property under his control becamе in custodia legis. People v. Title & Mtg. Guar. Co., 264 N. Y. 69, 190 N. E. 153; Isaac v. Marcus, 258 N. Y. 257, 179 N. E. 487; Matter of Casualty Co. of America, 244 N. Y. 443, 155 N. E. 735; Lafayette Trust Co. v. Beggs, 213 N. Y. 280; 107 N. E. 644; Kline v. 275 Madison Avenue Corporation, 149 Misc. 747, 749, 268 N. Y. S. 582. In such circumstances, under established rules of law, the federal courts should not interfere with the possession of thе state court. Lion Bonding Co. v. Karatz, 262 U. S. 77, 43 S. Ct. 480; 67 L. Ed. 871; Harkin v. Brundage, 276 U. S. 36, 48 S. Ct. 268, 72 L. Ed. 457; Farmers’ Loan & Trust Co. v. Lake Street Elevated Railroad Co., 177 U. S. 51, 61, 20 S. Ct. 564, 44 L. Ed. 667; O’Neil v. Welch (C. C. A.) 245 F. 261; People’s Trust Co. v. United States (C. C. A.) 23 F.(2d) 381. We can see no essential difference between the general character of the statutes under which a department of a state was appointed to manage and liquidate property in Lion Bonding Co. v. Karatz and O’Neil v. Welch, supra, and the statutеs involved in the present ease, and ‍​​​​‌​‌‌​​‌​‌‌​​‌​​​‌​‌​​​​‌‌‌‌‌‌​​​​‌‌​‌​‌‌​‌‌​‍we hold that here the District Court had no right to intervene.

It may be added that it is impossible for us to see how trustees can be removed, and others appointed, by mere interlocutory orders and without giving them their full day in court; that the suit is in rem and there is the greatest doubt abоut jurisdiction when the bonds and mortgages seem to be physically within the Southern district of New York. Moreover, it is hard to see how these suits can propеrly be regarded as on behalf of a class. Doubtless many of the certificate holders do not reside in the Southern district, and it is not shown what certificate holders desire to interfere with the exercise by the sujoerintendent of his duties under the New York statutes. If they do not, and are content to leavе the securities where they are, we cannot see how there is any common interest justifying-a class suit. Without it, jkrisdietion based upon diverse citizenship wоuld be lacking. But if we assume that the details alluded to in this paragraph would have to be developed at final hearing, the District Court should not have interfered with administration by the superintendent acting under the supervision of the state court, and it is upon this ground that we base our decision.

For the foregoing reason, the orders in each suit should ‍​​​​‌​‌‌​​‌​‌‌​​‌​​​‌​‌​​​​‌‌‌‌‌‌​​​​‌‌​‌​‌‌​‌‌​‍be reversed and the bills of complaint dismissed.