Union Trust Co. v. Belvedere Building Co.

Pearce, J., delivered the opinion of the Court. It will be necessary to a proper understanding of this case that the facts be stated in somewhat full detail before considering the law applicable to the facts. The Belvedere Building Company of Baltimore City is a corporation formed under the general incorporation law of the State of Maryland, April 10th, 1901. The certificate of incorporation states that it was formed “for the purpose of buying, selling, mortgaging, leasing, improving, disposing of, or otherwise dealing in lands in this State, and also for the purpose of carrying on in the city of Baltimore, the industrial business of conducting a hotel in all its branches, the aforesaid purpose being, in the judgment of those forming said corporation, of advantage to the general interests of said corporation,” and the aggregate capital stock of the corporation was ⁵¹⁰ fixed at $500,000, divided into 5,000 shares of the par value of $100 each.

Under its corporate powers, and in pursuance of proper authority from its directors and stockholders, it was determined to issue its first mortgage bonds to the amount of $850,000 in order to pay for the.erection, equipment, and furnishing of a hotel building upon a lot of land at the southeast corner of Charles and Chase streets in Baltimore City owned by it, and also its second mortgage bonds to the amount of $500,000, for the erection, equipment and furnishing of said hotel building; and accordingly on June 20th, 1902, said corporation executed to the appellant, the Union Trust Company of Maryland, trustee, its mortgage upon the parcel of ground at the corner of Charles and Chase streets on which the Belvedere Hotel was then in the course of erection, together with all the improvements and machinery thereon when and as erected, and all the rights, privileges and franchises connected with said hotel in any manner, to secure the said first mortgage bonds mentioned, to the amount of $850,000, said bonds being for $1,000 each, payable on January 1st, 1923, with interest in the meantime semi-annually at the rate of five per cent, payable on the first day of January and July in each year; and on June 16th, 1903, said corporation executed to the said Union Trust Company, trustee, its mortgage upon the same property described in the said prior mortgage, and also upon all the furniture, equipment, machinery and supplies that should be placed in said hotel, to secure said second mortgage bonds to the amount of $500,000, said bonds for $1,000 each payable October 1st, 1918, with interest in the meantime payable semiannually at the rate of five per cent on the first days of April and October in each year. It also executed a third mortgage on May 27th, 1904, to the Fidelity and Deposit Company of Maryland, as trustee, to secure its bonds for $150,000, held by Wells Bros. Company, for work done by them on said hotel building. The whole amount of bonds secured by these three mortgages were issued concurrently with the execution of said ⁵¹¹ mortgages.

It does not appear in the record by whom all of these bonds are now held nor is it material that this should appear, but the record does ‘disclose the fact that the Union Trust Company of Maryland holds in its own right $620,000 of the first mortgage bonds, and that Ella K. Perin as life tenant under the will of Nelson Perin, now deceased, holds $134,000 of the first mortgage bonds. It also appears that of the second mortgage bonds, Ella K. Perin holds $120,000, The Merchants’ National Bank of Baltimore, $30,000, Hambleton & Co., $10,000, Citizens’ Nat. Bank of Baltimore, $10,000, U. S. Fidelity & Guaranty Co., $20,000, W. P. Harvey, $30,000, Parker and Thomas, $14,000, and the Sherwood Distilling Company, $8,000, and that of the 3rd mortgage bonds, $68,000 are yet held by Wells Bros. Company, and that there are unsecured creditors whose claims amount to a large sum of money.

The bondholders above named have all been made parties to the proceedings at some stage, and McDowell & Co. holding an unsecured claim of $3.133-34 have also come in by petition, acting in their own behalf and in behalf of other unsecured creditors. On February 10th, 1906, The Union Trust Company of Maryland, Trustee, filed its bill in the Circuit Court of Baltimore reciting the first mortgage above mentioned so far as necessary to the case, and especially alleging that in the second article of said first mortgage, the said mortgagor covenanted that on January 1st, 1906, and annually thereafter and so long as any of said bonds remained outstanding and unpaid it would pay to the plaintiff the sum of $12,500 for the purpose of constituting a sinking fund for the payment of said bonds at maturity; that by article 13 of said mortgage, the said mortgagor further covenanted to pay promptly all taxes and assessments, lawfully assessed against the property mentioned in said mortgage, so long as any of said bonds should be outstanding; that by article fourth of said mortgage it was provided that if the mortgagor, its successors or assigns, should at any-time, after demand made, neglect or omit, for any period exceeding nine months, to pay semi-annual interest on ⁵¹² said bonds, or to pay the principal sum of each bond for any period after the maturity thereof, “or shall suffer or allow any lawful tax or charges to fall in arrear, or any lien to be obtained on the said property, whereby the security of this mortgage may be impaired, or shall refuse or fail to keep or perform any of the covenants or stipulations contained herein, then, in either of such events, in case the same continue for nine months, the plaintiff might upon the written request of one-fourth the amount of bonds there-by secured enter upon and take possession of the mortgaged premises, and apply the net revenue and income therefrom as stipulated in said mortgage; or after, or without entering as aforesaid, upon the written request as aforesaid might proceed to sell and dispose of said mortgaged real estate, corporate rights and franchises; that it was further provided by said article fourth that in case of any default in any matter or thing to be done or performed by the mortgagor, according to the requirements of said bonds or of’ said mortgage, the plaintiff should be authorized to apply to any Court of competent jurisdiction in the State of Maryland for the appointment of a receiver, or receivers of the mortgaged property and franchises, and that the Court should forthwith appoint such receiver or receivers, and if named or designated as such by the plaintiff, that such appointment should be made by the Court as a matter of strict right to the trustee and to the bondholders, and without reference to the solvency or insolvency of the mortgagor. The bill then alleged that the defendant had made default, ist in failing to pay on January ist, 1906, to the trustee, the sum of $12,500 or any part thereof, for said sinking fund; 2nd. In failing and omitting to pay “the properly levied and assessed State and City taxes upon the property, real and personal, conveyed by said mortgage deed of trust for the years 1905 and 1906 as covenanted in article 13, which taxes are in arrears under section 40 of the City Charter, and are liens upon said property prior to the aforesaid deed of mortgage, and the security conveyed thereby is impaired by the failure to pay said taxes.” The bill then further averred that ⁵¹³ the failure to pay promptly the taxes for the year 1905 had continued for a period of more than nine months, and the contingency had arisen under which the plaintiff was authorised to enter upon and' take possession of said mortgaged property, or to exercise the power of sale before mentioned, or to apply for and have appointed a receiver or receivers as aforesaid; that the plaintiff deemed it necessary and expedient to exercise its rights and obligations under said mortgage and to take possession of the mortgaged property for the purpose of sale, and that it was the plaintiffs intention to sell the same as soon as it could be advantageously done, and that it deemed it necessary that a receiver or receivers should be appointed to continue the business of the defendant until the further order of the Court.

The prayer of the bill was, first, that the Court would assume control of all the trusts reposed in the plaintiff, and direct the proceedings as to the sale of said property, second that a receiver or. receivers should be appointed; third, that an injunction should issue restraining the defendant’s officers or servants from interfering with the receivers; and fourth, for general relief. On the same day the defendant answered admitting all the matters and facts stated in the bill, consenting to the appointment of receivers, and recommending Edgar G. Miller, Jr., as a receiver on behalf of the defendant and its stockholders representing the $308,300 of capital stock of the corporation. On the same day an order or .decree was passed. 1st. Assuming jurisdiction of all the trusts confided to, and the powers to be exercised by the trustee under said mortgage. 2nd.

Authorizing the trustee to sell the property mentioned in the proceedings, under the direction of the Court, and subject to its ratification. 3rd. Appointing George Blakistone and Edgar G. Miller, Jr., nominated by the Union Trust Company, as receivers, to take charge of the property until sold. 4th. Granting the injunction as prayed. A second bill was filed by the plaintiff as trustee under the ⁵¹⁴ second mortgage on February 14th, 1906, for the sale of the hotel property, its furniture and furnishings, the allegations being similar to those in the first bill.

A similar answer was filed thereto on the same day and a similar order was passed directing in addition to a sale of the hotel, a sale of the furniture and furnishings which were only embraced in the-second mortgage. ■ These two cases were consolidated, and on March 19th, 1906, Lawrence Perin, a stockholder of the defendant corporation, holding one hundred shares of its capital stock of the par value of $100 each filed a bill in the Circuit Court of Baltimore City under Art. 23, secs. 264 and 264A of the Code of Public General Laws of Maryland, being the insolvent law fo'r corporations, alleging that the defendant had outstanding a number of promissory notes for debts incurred in furnishing the hotel; that a few days before that time a judgment had been entered against the defendant for $10,000, in favor of Olin Bryan for personal injuries sustained in an accident in the hotel elevator, and that the defendant also owed about $24,000, for overdue State and city taxes, none of which the defendant was able to pay, and that the defendant was then insolvent. The bill recited the filing of the two previous bills, and prayed for a decree adjudging the defendant to be insolvent, and to have surrendered its corporate rights and franchises, and that it be dissolved and its assets be distributed among those entitled according to their respective rights and priorities, and that receivers be appointed to take charge of the assets of the defendant. An answer was filed the same day by the defendant, admitting all the allegations of this bill, consenting to the appointment of receivers, and suggesting Messrs. George Blakistone and Edgar G. Miller, Jr., as such receivers.

On March 21st, upon petition of Lawrence Perin, the consolidated causes of the Union Trust Co. against The Belvedere Building Company were consolidated with the last mentioned cause of Lawrence Perin against the same defendant, and the same receivers appointed in the two causes above mentioned were appointed receivers in the three consolidated causes, with ⁵¹⁵ all the rights and powers conferred by their previous appointments, and in addition thereto all the other powers which can be conferred upon receivers appointed under Art. 23, relating to the dissolution of insolvent corporations, with a proviso however that that order should not be deemed in any manner to affect the rights and privileges of the Union Trust Company of Maryland under the mortgages referred to in the two causes of said Union Trust Company against the Belvedere Building Company, or under the decrees passed in said causes. On March 27th, 1906, The Belvedere Building Company filed a petition for leave to file amended answers to the two bills of the Union Trust Company, alleging that there had been no default by the defendant under said mortgages, and that the defendant had been inadvertently led into making an erroneous admission of default, and praying that so much of said answers as consented to a sale should for that reason be stricken out; and subsequently Wells Bros. Company and Ella K. Perin, before mentioned, also intervened by petition and asked that said orders of sale be stricken out. The ground upon which these petitions were filed is set out in the petition of the Belvedere Building Company at much length, the substance being that the "averments of these two bills that the failure to pay the taxes for the year 1905 had continued more than nine months when the bill was filed on February 10th, 1906, was not true, since the nine months would begin to run from July 1st, 1905, at which time under sec. 40 of the City Charter, taxes on real estate and chattels real are in arrear and that therefore the nine months had not expired on February 10th, 1906; and although the said section of the City Charter also provided that taxes on personal property should be in arrear on May 1st, 1905, of the year in which they were levied, so that if the defendant were taxed on any personal property, and such taxes for 1905 had been in arrears on February 10th, 1906, they would then have been in arrears for nine months, yet the defendant was not taxed with any personal property, because under the law of Maryland, corporations having a capital stock on which taxes are assessed, are not taxed on their ⁵¹⁶ personal property, the tax on which is represented by the tax on their stock.

The petition admitted that the taxes assessed on the defendant’s capital stock were in arrears for more than nine months when these bills were filed, but contended those taxes are not the taxes contemplated by the terms of the mortgage which provides that if the defendant “shall suffer any taxes or charges to fall in arrear or any lien to be obtained on the said property whereby the security of this mortgage may be impaired” then a sale may be made. Amended answers were accordingly filed denying any default. The Union Trust Company answered the petition of the defendant; repeating the averment of default contained in the original bills, namely that there was a default in the non-payment of taxes agreed to be paid under said mortgage for a period of more than nine months, and that this default was twice admitted by the answers filed to the two original bills, at separate and distinct dates, and that said decrees having been enrolled the defendant is bound thereby. The Union Trust Company further answering, said that there is a conceded default in the payment of the taxes on the real estate, but that the defendant contends that this default has not existed for nine months as stipulated by the mortgage, but that this right has been waived by the defendant’s answer, and it is now too late to avail of that ground.

This petition of the defendant and the answer of the plaintiff were heard; and on April 27th, 1906, the Court revoked and rescinded so much of the decrees of February 10th and 14th, 1906, passed in the two causes of the Union Trust Company against the Belvedere Building Company, and consolidated with the case of Laurence Perin against the same defendant, as provided for a sale by the Union Trust Company, trustee, of the property described in said mortgages respectively, and also modified the order of March 21st, 1906, so far as related to the rights of the Union Trust Company under said mortgages and decrees so as to conform in all respects with this order, and its effect upon said orders or decree» of February 10th and 14th, 1906. ⁵¹⁷ So the matter stood until October 31st, 1906, the receivers in the meantime conducting the hotel when one of the receivers, Mr. Miller, filed a petition, asking the Court to determine whether a sale should be made, and if so, how, when, and by whom. Thereupon the Union Trust Company filed its petition on November 9th, 1906, referring to the previous proceedings, repeating the allegations of a default made and continuing for nine months, and stating the failure of a proposed plan of reorganization of the defendant’s finances, and the consequent urgent necessity of a sale; stating also that the holders of one-fourth in amount of the first mortgage bonds have in writing directed the trustee to declare the whole principal sum of said bonds to be due and payable, and that said trustee had so declared, and prayed for an order authorizing the trustee to sell under the powers contained in said mortgage, at such time and on such terms as the Court should prescribe. This petition was resisted by the defendant and the other intervening parties, and on December 6th, 1906, the Union Trust Company amended its last mentioned petition so far as the prayer for relief was concerned — so as to ask specifically for a dissolution of the defendant corporation, and also in event that the Court should determine the sale should not be made by the trustee under the mortgage, but by the receivers in the three consolidated causes, that then such sale should be made free and clear of the first mortgage held by the plaintiff as trustee, so that the Union Trust Company could be paid from the proceeds of sale, the amount due it under said mortgage, and in event of deficiency be put in position to prove its claim for such deficiency in the insolvent Court; The whole matter then came up for hearing, and the Court then passed the following decree from which this appeal is taken: 1st. That the Belvedere Building Company .is, and was at the time of th'e filing of the bill of complaint by the Union Trust Company, insolvent, and has lost its corporate rights and privileges. 2nd.

Declaring the Belvedere Building Company to be dissolved. ⁵¹⁸ 3rd. Ordering a sale of all the property real and personal of the Belvedere Building Company, to be made by the receivers, subject to the liens and terms of the two mortgages held by the Union Trust Company as trustee, and prescribing the manner and terms of sale. Among these terms of sale is a provision that a sale to the highest bidder would not be ratified unless before final ratification, satisfactory evidence should be produced to the Court, that the purchaser would within thirty days after ratification supply thirty-five thousand dollars, as a working capital for the operation of the hotel, and that within six months after ratification, the purchaser would expend in the necessary repairs of the hotel such amount as should be by the Court ascertained and determined, at least ten days before the day of sale, to be reasonably sufficient for that purpose. It is obvious from the foregoing statement of facts that this is simply a contest between the first mortgage bondholders on the one hand, and the second mortgage bondholders and the unsecured creditors on the other hand, as to whether the sale shall be made clear of, or subject to the lien and terms of the first mortgage held by the Union Trust Company as trustee for itself and other holders of the first mortgage bonds, since the Belvedere Building Company admits its insolvency, and the Union Trust Company is willing to waive its alleged right to sell under the first mortgage if the receivers should be directed to sell free and clear of its mortgage so that a complete settlement of all the affairs of the Belvedere Building Company should be made as a result of the sale.

In so saying, we are not unmindful of the fact that Mrs. Ella K. Perin, who is the holder of $134,000 of the first mortgage bonds, is resisting a sale thereunder; but she is also the holder of $120,000 of the second mortgage bonds, and her mixed and nearly balanced interest naturally range her with those who oppose a sale under the first mortgage. Under the decree made, she will at least have a chance of continuing the investment represented by both series of bonds, with the assurance of continued protection in event of future defaults ⁵¹⁹ by those who may be in charge of the conduct of the hotel, and her second mortgage bonds would increase in value in proportion as future compliance may be made with the provision for sinking fund payments on the first mortgage bonds. But with the wishes or mere interests of the respective parties we are not permitted to be concerned. It is the rights of the parties alone which we are authorized and required to determine.

The primary question therefore, and one which is fundamental in this case, is whether there had been any such default at the time of filing the first bill by the Union Trust Company, trustee, as gave a right to sell under said first mortgage, for if there was such right, it cannot be denied by any decree of a Court whose jurisdiction was invoked not to destroy, but to direct and regulate the exercise of the power of sale created by the terms of the mortgage and which might have been exercised without resort to the Court for authority to make such sale, and which sale would have been brought within the jurisdiction of the Court upon the filing of the bond required as preliminary to the exercise of the power of sale— only for the purpose (if the power was found to exist) of proper control over the making of the sale authorized by the mortgage, and the distribution of the proceeds of sale. In our opinion the question above stated is concluded by the Casualty Insurance Company case, 82 Md. 535 . We have seen from the reference heretofore made to the first mortgage, that article four provides that if the Belvedere Building Company should “suffer or allow any lawful tax or charges to fall in arrear, or any lien to be obtained on the said property whereby the security of this mortgage may be impaired,” and if this condition should continue for the period of nine months, then, with or without entering into possession the Union Trust Company was authorized, upon the written re-, quest of the holders of at least of one-fourth in amount of said bonds, to proceed to sell all said real estate, corporate rights and franchises at public sale, and to apply the proceeds “after deducting therefrom proper allowances for all the expenses thereof including attorney and counsel fees, and all other ex ⁵²⁰ penses, additions or