Corbett v. Hospelhorn

OFFUTT, J., delivered the opinion of the Court. The National Bond & Mortgage Corporation of Texas, on November 1st, 1928, as grantor, and the Pennsylvania Surety Corporation as guarantor, executed to the Century Trust Company of Baltimore, a Maryland corporation, and Henry M. Laithe, a deed under which the grantor ¡undertook to pledge with the grantees property consisting (a) of cash, (b) United States government bonds or certificates of indebtedness, and (c) mortgages, which should be first mortgages to the extent of thirty-six per cent, of “the trust property, securing the first $1,000,000” of notes, to secure the payment of certain “6% Collateral Trust Gold Notes,” and the interest to accrue thereon. The surety company joined in the deed for the purpose of guaranteeing the payment of such notes. Eventually the Century Trust Company became merged with the Baltimore Trust Company, which succeeded it as trustee ¡under the deed, and G. Roy Mueller succeeded Laithe as the individual trustee. ²⁶¹ The Mortgage Company became insolvent, the guarantor was dissolved, without assets or resources available from either for payment on account of the indebtedness evidenced by such notes.

The deed provided that the trust property pledged to secure the payment of the notes should conform “in all respects” to the requirement of article III of the deed, “and no other.” Those requirements were that the property should consist of cash, government securities, and mortgages. As stated supra, the mortgages so pledged were to be first liens on the mortgaged property to the extent of thirty-six per cent, of the trust property securing the first $1,000,000 of notes, each mortgage maturing in three years or at a more distant time was to provide for amortization by equal monthly, quarterly, or semiannual payments, and the liens against the mortgaged property, including that of the mortgage, were in no case to exceed seventy-five per cent, of the value thereof as fixed by an appraisal by two appraisers selected in writing by the grantor and the guarantor, and each mortgage was to be accompanied by a surety bond executed by the mortgage company and the guarantor, guaranteeing the payment of the principal and interest of the pledged mortgage. It also provided that “The aggregate principal amount of the Notes issued and outstanding at any time shall never bear a greater ratio or percentage of the aggregate principal amount of the Trust Property, then in the hands of the Trustees, than that which results from a determination of the same by taking so much of said Trust Property as consists of United States Bonds, United States Certificates of Indebtedness and/or Cash at one hundred per centum (100%) of the principal amount thereof, and so much of said Trust Property as consists of Mortgages as the term ‘Mortgages’ is in this indenture defined, at eighty-three and one-third per centum (88 (4%) of the unpaid principal amount thereof, it being the intent hereof that to the extent said Trust Property consists of Mortgages aforesaid, there shall be deposited ²⁶² with the Trustees One Hundred and Twenty Dollars ($120.00) of unpaid principal amount in said Mortgages for every One Hundred Dollars ($100.00) of Notes then outstanding, which are properly apportionable to said Mortgages upon the basis of determination hereinbefore set forth.” It further provided that in the event of a default on the part of the Mortgage Company, or upon the appointment of a receiver for it, or if a petition were filed to have it declared a bankrupt, the trustee should, pending such default, bankruptcy, or receivership, collect the-notes, bonds, and obligations pledged with the trustee as “trust property.” Article VII of the deed provided that in the event of certain defaults the trustee should at the request of the holders of twenty-five per cent, in amount of the notes “and upon receiving satisfactory indemnity to them against all costs, expenses and liability to be by the Trustees incurred, and not otherwise, as in their discretion they deem best, or as directed in writing by the holders of at least fifty-one per centum (51%) in amount of the Notes then outstanding, declare all unmatured Notes immediately due and payable. * * *” Article XII provides that if the corporate trustee resigns his successors may be appointed by the holders of fifty-one per cent, in amount of the notes, or in an interim by the mortgage company, and the individual trustee may be removed and hi:s successor appointed at any time by the trustee. The deed further provided that the-mortgage company could not withdraw or substitute any collateral so- long as it was in default, and that it should substitute for mortgages in default other mortgages or trust property.

On January 14th, 1931, the Pennsylvania Surety Corporation was dissolved and its business liquidated. On December 14th, 1931, the Mortgage Company addressed to the Baltimore Trust Company and Laithe, trustees, a formal written “proposal,” in which they admitted that the collateral then held in the trust had become inadequate to protect the noteholders (a) because of the failure of ²⁶³ the surety guarantee, and (b) the depreciation of the trust property; they called attention to the fact that no more mortgages could be accepted under the deed because the guarantor could no longer give the guaranty required by its terms, and that the collateral was\ being diminished by the foreclosure of prior liens. They further stated in that paper that “Any cash which accumulates in the Trust produces very little income and inasmuch as there are many Noteholders who, because of the prevailing depression wish to liquidate their holdings at a reduction from their face value, it would be advantageous both to the Noteholders and to ourselves to allow this cash to be used for the purchase and retirement of available Gold Notes.” In view of these conditions they offered to substitute for the terms of the deed of trust a plan of liquidating and administering the trust which in terms abrogated several of the more important of those provisions of the deed of trust, to which reference has been made and which were designed for the protection of the noteholders, under which plan the trustees, would be authorized to accept without limitation as to their ratio to the trust property second mortgages with or without amortization provisions, disregard the requirement of a surety bond, surrender for cash notes required by the mortgage company, and which would cancel the power of the trustees to declare outstanding notes due and payable by acceleration, cancel the rights accruing to the trustee and noteholders through defaults, and cancel the right of the trustee to require the substitution of other mortgages for trust property mortgages in default. On February 24th, 1932, the Mortgage Company filed against Laithe and the Baltimore Trust Company, trustees, in the Circuit Court No. 2 of Baltimore City, its bill of complaint in which it prayed that the trustees be authorized to accept that proposal.

On February 24th, 1932, the court by its decree of that date “authorized and directed” the trustees to accept the proposal. The decree recites that an answer was filed, but it does not appear that testimony was taken, or that the noteholders ²⁶⁴ had then any notice of the “proposal” or its effect on the deed of trust. On October 10th, 1933, the Mortgage Company made an additional “proposal” to the trustee, submitting plans of liquidation which contained, among others, these provisions : “Unless and until directed to do so by the Circuit Court of Baltimore City you are not to declare the outstanding Gold Notes due and payable by acceleration as provided in Article VII of the Indenture and shall not invoke any of the remedies provided in the Indenture for operation or liquidation of the trust after the occurrence of any event of default. “We are to continue to exercise all our fights under th© Indenture as modified by our Proposal, dated December 4th, 1931, as though no default had occurred thereunder, and all of the provisions of the Proposal dated December 4th, 1931, shall remain in full force and effect.” On October 13th, 1933, it filed in the case a petition praying the court to authorize the trustees to accept that proposal, and on the same day, upon the trustees’ answer, without testimony, or apparent notice to th© noteholders, the court decreed accordingly. With that background, on January 10th, 1934, the Mortgage Company addressed a communication to the noteholders requesting them to execute a supplemental agreement extending the maturity of the notes.

Although attention was not called to the fact, the supplemental agreement adopted and ratified the decrees of February 24th, 1932, and October 13th, 1933. The holders of notes, including the plaintiffs in the bill in this case, aggregating $79,400 of $86,500 outstanding, consented to the extension. At some time prior to October 9th, 1934, the corporate trustee named G. Roy Mueller individual trustee in the place of Henry M. Laithe, and on that day the court “confirmed” that appointment. As a result of its operation and management of the trust property, the Baltimore Trust Company, trustee, came from time to time into the possession of cash which ²⁶⁵ formed a part of the trust property pledged as collateral for the payment of the notes under the terms of the deed of trust.

That money it deposited in its banking department, and, at the time of the bank holiday referred to infra, the cash so deposited amounted to $23,878.54, which at this time is impounded or restricted as the result of certain statutes and judicial orders, for the payment of claims against the Baltimore Trust Company judicially determined to be entitled to a preference or priority. Prior to 1931, the Baltimore Trust Company was apparently a powerful and flourishing banking institution. But at least as early as the summer of that year public confidence in its stability became affected, and from then on doubt and fear in fast increasing measure took the place of the confidence which its depositors had had in its security, so that its deposits dwindled from $80,462,000 on July 1st, 1931, to $37,292,794.62 on February 24th, 1933. In the meantime the Clearing House Association of Baltimore City in September, 1931, attempted without success to stem the tide of withdrawals, and in the same month public spirited citizens attempted to establish public confidence in its stability by subscribing $7,755,400 to a guaranty fund.

The withdrawals, however, continued; in meeting current demands the company disposed of a great part of its more liquid securities on a poor and falling market, until, at the time of a bank holiday proclaimed in February, 1934, it was hopelessly insolvent. It had, however, and still has, cash more than sufficient to pay all trust deposits entitled to priority which have so far been filed. The operation of the Trust Company was suspended at the close of business on February 24th, 1933, the inception of the bank holiday, and not resumed thereafter. On January 5th, 1935, at the suit of the State against it, John D. Hospelhorn, State Bank Examiner, was appointed a receiver to wind up its affairs.

On October 28th, 1936, with the leave of the Circuit Court of Baltimore City, the appellants, who are note-holders, filed in this case their “Amended Petition,” in ²⁶⁶ which, after reciting in substance the facts stated above, they prayed, “on behalf of themselves and of all others similarly situated, that they or the said trust, or the said Trustees, for the benefit of your Petitioners and of all others similarly situated, be given preference and priority for the full amount of the restricted or impounded cash,” to wit, the sum of $23,878.54. The relief was denied, the demurrer sustained, the petition dismissed and from that order this appeal was taken. The appellants suggest as a basis for the relief prayed three propositons: (1) That the Baltimore Trust Company is a judicial trustee, appointed by the Circuit Court of Baltimore City, and therefore, under Code, art. 11, sec. 48, the claim of the noteholders is entitled to a priority in the distribution of the assets of the insolvent estate of the trustee; (2) that apart from that statute the claim is entitled to priority under Acts of 1933, ch. 546, sec. 1, which amended Code, art. 11, sec. 48; and (3) that apart from any statute it is entitled to a like priority because, they say, the restricted fund of $23,878.54 is their property, which they have traced into the possession of the trustee and are entitled to recapture. Considered in that order, the first question presented by the appeal is whether the Baltimore Trust Company was such a trustee as was contemplated by Code, art. 11, sec. 48, as it stood prior to Acts 1933, ch. 546, sec. 1.

The contention of the appellants appears to be that the Circuit Court of Baltimore City assumed and exercised jurisdiction over the trust created by the deed from the mortgage company to the Century Trust Company, and that, since it assumed and exercised such jurisdiction, it “appointed” the trustee, and that, therefore, since the trustee held the trust property as a trustee “appointed” by the court, the noteholders are entitled to a preference under Code, art. 11, sec. 48, which provides that, upon the dissolution or insolvency of a trust company which is acting as a fiduciary, “all debts or liabilities due or owing by said corporation in any of said fiduciary capacities, shall be preferred in the distribution of the assets ²⁶⁷ of such company to all debts or liabilities of any nature whatsoever, including salaries and wages of employees and other preferred debts or liabilities.” It was decided in Frederick County v. Page, 163 Md. 619, 635 , 164 A. 182 , and Frederick Iron & Steel Co. v. Page, 165 Md. 212 , 166 A. 738 , that the provision just quoted referred only to judicially appointed trustees, and not to conventional trustees. The question therefore is, Was the trustee appointed by the court? Appellants contend that he was, because the court assumed jurisdiction of the trust by advising and directing the trustee in the performance of its functions, and, affirmed the appointment of a successor to the individual trustee. Undoubtedly the court did assume jurisdiction of the trust, for it could not have given such advice and directions without doing so.

But its jurisdiction was special and limited to the approval of particular acts; it was not asked to assume general jurisdiction of the trust nor did it do so. What happened was that the Mortgage Company and the trustee attempted to give an appearance of legality to modifications in the deed of trust, which they were not authorized to make, by securing judicial approval of them. Since the question is not involved in this appeal, we express no opinion ¡as to the power of a court of equity to authorize changes in a validly executed deed so extensive as to substantially change its character without the assent of the beneficiaries thereunder. But, regardless of the propriety of its acts, certainly it could not approve such changes without assuming jurisdiction of the trust, and to the extent of that approval it assumed jurisdiction of the trust.

Its approval of the appointment of Mueller as the successor to- Laithe as individual trustee was wholly superfluous and nugatory. Under the terms of the deed the corporate trustee alone was empowered to appoint a successor to Laithe, no other person was given the right to veto its appointment, it made the appointment, and no other act or approval was necessary to make it effective. It is true that it was required to notify the guarantor, a non-existent corporation, but, since it was non ²⁶⁸ existent and without further interest in the suit, that requirement was automatically canceled. The proposition that such judicial acts amounted to an “appointment” of a. trustee which had been appointed by deed years before, and who appeared in court because it was so appointed, is wholly inconsistent with any accepted meaning of the word “appoint,” which ordinarily means to designate some person to occupy an office or perform some function.

The mere recognition of the authority of one so appointed to perform functions incident to the office cannot be accepted as an appointment to it. In this case the court was not asked to appoint a trustee, but to advise and direct one who had already been appointed before the jurisdiction of the court was invoked. The creator of the trust had appointed the trustee in the deed, its right to make that appointment may not be denied (65 C. J. 575), there was no vacancy in the office (Id. 590; In re Elton’s Estate, 252 Pa. 491 , 97 A. 677 , Monk v. Everett, 277 Mass. 65 , 177 N. E. 797 ), nor any circumstances, justifying the reappointment of ,a trustee already appointed, qualified, and acting as such. To hold that under such circumstances the acts of the court in advising and directing the trustee in the performance of its duties amounted to an appointment would be repugnant both to common sense and the plain meaning of a plain word.

It follows, therefore, that the appellants are not entitled to a preference under the provisions of Code, art. 11, sec. 48, because the Baltimore Trust Company is a conventional trustee appointed by deed to administer the trust under consideration, and not a trustee appointed by the court. (2) The Acts of 1933, ch. 546, sec. 1, changed in this important particular the Acts of 1910, ch. 219, sec. 47 (p. 22), codified in the Code of 1924 as article 11, section 48. The older act excused trust companies from giving bond in respect to any trust they might be appointed by a court to administer; the present act requires such a bond if requested by a person in interest, or ordered by the court. ²⁶⁹ The case has been, argued in this court on the theory that that amendment of the Act of 1910 gave the beneficiaries of conventional trusts priorities in, the distribution of the property of an insolvent corporate trustee charged with the administration of the trust, which were not allowed by the Act of 1910 as construed by this court in Frederick County v. Page, 163 Md. 619 , 164 A. 182, 190 , and Frederick Iron & Steel Co. v. Page, 165 Md. 212 , 166 A. 738, 741 . But it is not apparent that the Act of 1933 had any such effect.

Apart from that indicated above, the only changes made by the Act of 1933 in the Act of 1910! was to substitute, for the words “shall be appointed” occurring in the second clause of article 11, section 48, the words “and whether appointed by an order of court or otherwise,” and to substitute for the term “such company” occurring in the third clause of said section the words “trust company.” In construing the third clause! of that section, which, deals with preferences to beneficiaries as to debts or liabilities owing by insolvent corporate trustees to them in a fiduciary capacity, it was held in Frederick County v. Page, supra, and Frederick Iron & Steel Co. v. Page, supra, that the operation of that part of the statute was limited to cases in which the corporation had been appointed a fiduciary by the order of some court. Except for the slight and unimportant changes in phraseology noted in the second and third clauses, the only change wrought by the amendment of the Act of 1910 was the modification of the absolute exemption of corporate trustees from the necessity of giving a bond in respect to any trust to which they might be appointed, given by the Act of 1910, by requiring such a bond, where requested by a party in interest, or ordered by the court. The reasoning of the court in those cases, in holding that the preferential provision of the statute related only to corporate trustees appointed by some court, applies to the amended statute with the same force as to the original. In Frederick County v. Page, supra, it is said: “The words ‘said fiduciary capacities,’ used in the last clause, can only refer to the fidu ²⁷⁰ ciary capacities specifically named in the first and second clauses, for they or like fiduciary capacities would be the only capacities in which a fiduciary would be required to give bond,