Brack v. Union Trust Company

Urner, J., delivered the opinion of the Court, Under a trust indenture, dated September 1st, 1926, the Continental Bond & Investment Company transferred to the Union Trust Company of Maryland, as trustee, certain mortgages and cash, as security for a series of bonds issued by the first named corporation, each of the assigned mortgages being guaranteed as to the payment of principal and interest by the Maryland Casualty Company. By an amending agreement, dated' October 28th, 1930, Francis B. Weirs (later succeeded by William G. Dancy), was appointed a cotrustee with the Union Trust Company for the purposes of the trust created by the original indenture. On May 24th, 1934, the Circuit Court No. 2 of Baltimore City assumed jurisdiction of the trust upon a bill of complaint filed by the trustees. Included in the bill were allegations which may thus be summarized : Bonds in five series had been issued and were then outstanding under the trust agreement, as follows: Series A, $69,700; Series B, $96,000; Series C, $105,500; Series D, $79,500; Series E, $98,500.

By the terms of the trust agreement the bonds of each series and the collateral pledged therefor were to be considered a distinct unit. The assets pledged for the respective series of bonds were as follows: For Series A, $60,424.89 in mortgages and $10,186.69 in cash; for Series B, $83,211.66 in mortgages ⁶⁹ and $14,179.43 in cash; for Series C, $79,901.28 in mortgages and $30,513.65 in cash; for Series D, $77,846.47 in mortgages and $14,146.45 in cash; and for Series E, $81,457.34 in mortgages and $20,268.26 in cash. In June, 1933, the Continental Bond & Investment Company, at the instance of the Maryland Casualty Company, guarantor of the mortgages pledged with the trustees, proposed to the holders of Series A, B, C, D, and E bonds thereby secured a Refunding Plan, which provided for the surrender of the bonds for cancellation and for the acceptance, in substitution for those obligations, of cash and debentures of a new corporation to be formed, or of bonds of a new corporation, to be secured by the existing bonds of Series A, B, C, D, and E, or by the collateral then pledged for their payment. At the time of this proposal to the holders of Continental Bond & Investment Company bonds, a like proposal was made to the holders of other mortgage company bonds secured by mortgages guaranteed by the Maryland Casualty Company.

The holders of approximately seventy per cent, of Series A, B, C, D, and E bonds of the Continental Bond & Investment Company accepted the proposal and deposited their bonds with the Maryland Casualty Company as depositary in accordance with the terms of their acceptance. The complainants are also trustees under other indentures dated March 15th, 1932, securing issues of mortgage bonds of the Continental Bond & Investment Company designated as Series F and G. Under each trust the collateral assets consist principally of mortgages bearing the guarantee of the Maryland Casualty Company as to the payment of principal and interest. The Continental Bond & Investment Company did not pay the interest on its outstanding bonds which became due on September 15th, 1933, and has not paid any interest accruing thereon since that date. Shortly after September 15th, 1933, because of failure by the Continental Bond & Investment Corn-pans?- to pay interest then due on its bonds, the complainant trustees notified the Maryland Casualty Company of such default, and took charge of the collection of the ⁷⁰ mortgages included in the trust property held as security for the 'bonds of all the series to which the bill of complaint refers.

The assumption by the court of jurisdiction over the trust was alleged by the trustees to be advisable because of questions which would inevitably arise as to rights and duties of the trustees, and of the Continental Bond & Investment Company and the Maryland Casualty Company, and of the bondholders who have not deposited their bonds in acceptance of the Refunding Plan, and of the present holders of the bonds which have been so deposited, and because of. questions which would arise in the event of a request that the trustees proceed to foreclose the trust or take 'Other action in regard to the trust property in consequence of the deposit of bonds in acceptance of the Refunding Plan. In separate proceedings Circuit Court No. 2 assumed jurisdiction of the trusts under the two' indentures of March 15th, 1932, relating to Series F and G bonds, 'and, by its order of August 8th, 1934, all three of the proceedings were consolidated. The Refunding Plan was concerned not only with the bonds of the Continental Bond & Investment Company, but with all other mortgage company bonds supported by securities for which the Maryland Casualty Company was guarantor. The total amount of the liabilities which it had assumed in that capacity was approximately $50,000-000.

Its obligations related to mortgages on thousands of properties in various states. Because of defaults under the mortgages and the 'bonds they were intended to secure, the Maryland Casualty Company was subjected to a drain upon its resources which made some form of refinancing imperative in order that the value of its guaranty might be sustained for the benefit of the mortgage companies’ bondholders. By the Refunding Plan they were offered two options. The first entitled them to exchange their bonds for an equal amount of bonds to be issued by a new corporation, to mature in twenty years, to bear interest graduated from two per cent, to four per cent, and to be guaranteed by the Maryland Casualty Company as ⁷¹ to principal and interest.

Under the second option a bondholder had the right to receive $300 in cash for each $1,000 bond and a debenture issued by a new corporation for ¡the remaining $700, to mature in twenty years, to bear interest graduated from two per cent, to six per cent, and to be guaranteed by the Maryland Casualty Company as to interest but not as to- principal. A large majority of the holders of bonds issued by the Continental Bond & Investment Company accepted one or the other of the two options thus offered. The new corporation formed to accomplish the objects of Option No. 1 as to bonds of that company was given the name of the Continental Investment Bond Corporation, and the one organized to serve the purposes of Option No. 2 as to those bond's is the Continental Investment Debenture Corporation. The bonds acquired by the first named of the new corporations, as the result of the exchange of bonds under Option No. 1, were deposited by it with the trustees under a trust indenture as collateral securing the new bonds issued under that option.

A different disposition was made of the bonds similarly acquired by the Continental Investment Debenture Corporation. They were pledged, with the consent of the depositing bondholders, to the Reconstruction Finance Corporation for a loan of $330 per $1,000 bond, and the proceeds of the loan were used to pay $300 in cash and accrued interest to the depositors of bonds under Option No. 2. The Reconstruction Finance Corporation advanced a total of $12,000,000 for such purposes, and for expenses under the general refinancing project. It also rehabilitated the Maryland Casualty Company by the purchase of new issues of the preferred stock of that company to the amount of $17,500,000.

In the trust indentures under which the bonds and debentures, respectively, of the Continental Investment Bond Corporation and the Continental Investment Debenture Corporation were issued, in exchange for the bonds deposited with them under the options, it was stated that the bonds were so delivered and received in pursuance of the Refunding Plan described in the deposit agreement, ⁷² and it was provided that all bonds pledged as collateral under the indentures should 'be held and applied or exchanged in the same manner and for the same purpose, “it 'being contemplated and intended that as soon as practicable collateral securing the exchanged bonds which may be pledged under the indentures shall be substituted as collateral for any and all exchanged bonds so pledged,” and that all rights which the corporation or the trustee might have as holders of the bondls should be exercised for the purpose of procuring or effecting such substitution by the cancellation of the exchanged bonds and withdrawal of an appropriate amount and kind of collateral “through foreclosure or in any other lawful manner.” Defaults having occurred, as defined in the trust indenture of September ist, 1926, with respect to the bonds of each series issued under its terms, the trustees under the indentures of the Continental Investment Bond Corporation and the Continental Investment Debenture Corporation, together with those corporations, requested the trustees under the first mentioned indenture to take the following action in pursuance of its provisions: “For the purposes of settling all claims related to< the trust estate, to sell, at public sale, all of the trust property (except cash and the individual guarantee bonds executed by Continental Bond and Investment Company as_ principal and Maryland Casualty Company as surety) securing the bonds of each series in separate blocks, each block to consist of all the trust property, (except cash and said individual guarantee bonds) pledged as collateral for each separate series- of bonds; each said sale to be made to the highest and best bidder for each block, even though the amount of the bid is less than the principal amount of the trust property so sold, and each such sale to be conducted at such time and place and upon such terms as said trustees may determine.” That request was recited in a petition filed by the Continental Investment Bond Corporation and the Continental Investment Debenture Corporation in the proceedings in which jurisdiction had been assumed by Circuit Court No. ⁷³ 2 over the corporations created by 'the indentures of September 1st, 1926, and March 15th, 1932. The petition stated the pertinent facts to which we have referred, and it prayed for a decree authorizing 'the trustees under the original indenture to sell, in the manner proposed in the petition, the trust property securing the bonds under that indenture, and after confirmation of 'the sale to distribute the proceeds in accordance with its provisions. On March 26th, 1936, the court decreed that Union Trust Company, as corporate trustee under the trust indenture of September 1st, 1926, sell at public auction, at the Real Estate Board Rooms, No. 7 St. Paul Street, Baltimore, Md., all of the trust property (except cash and the guarantee bonds executed by Maryland Casualty Company) held by the 'trustee under the indenture as collateral respectively for Series A, B, C, D, and E bonds of the Continental Bond & Investment Company; that the collateral for the bonds of each series be sold as a single unit; that notice of the time, place, manner, and terms of sale, describing briefly the kind of property offered for sale, be published at least once a week for three successive weeks prior to the date of sale in the Daily Record; that no bid be