Noble v. European Mortgage & Investment Corporation

• Decision Date: 24 February 1933
• Citation: 165 A. 157,19 Del.Ch. 216
• Parties: HERBERT NOBLE AND FRANK A. RUSSELL, v. EUROPEAN MORTGAGE & INVESTMENT CORPORATION, a Corporation of the State of Delaware
• Court: Court of Chancery of Delaware

165 A. 157

19 Del.Ch. 216

HERBERT NOBLE AND FRANK A. RUSSELL, v. EUROPEAN MORTGAGE & INVESTMENT CORPORATION, a Corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

February 24, 1933

BILL FOR APPOINTMENT OF RECEIVER for the defendant corporation on ground of insolvency. The complainants, as holders of certain bonds issued under a collateral trust indenture executed by the defendant corporation, claim to be creditors thereof, and filed the bill of complaint under the provisions of Section 3883, Revised Code 1915. The defendant demurred to the bill. The grounds of demurrer are set forth in the following opinion of the Chancellor.

Demurrer overruled.

Ayres J. Stockly, of the firm of Hastings, Stockly & Duffy, for complainants.

Aaron Finger, of the firm of Richards, Layton & Finger, for defendant.

OPINION

THE CHANCELLOR:

1. The first ground of demurrer is that the bill fails to state such a case as entitles the complainants to the relief sought--that relief being the appointment of a receiver on the ground of insolvency.

The bill alleges insolvency on the part of the defendant. But a bare showing of insolvency alone will not result in the appointment of a receiver as a matter of course. Inasmuch as the appointment is discretionary with the Chancellor, the appointment will not be made, even though the jurisdictional fact of insolvency exists, if the Chancellor in the proper exercise of his discretion deems it unwise under the circumstances to make the appointment. Jones v. Maxwell Motor Co., 13 Del.Ch. 76, 115 A. 312; Freeman v. Hare & Chase, Inc., 16 Del.Ch. 207, 142 A. 793; Kenny v Allerton Corp., 17 Del.Ch. 219, 151 A. 257; Boggs v Bellevue, Inc., 18 Del.Ch. 108, 156 A. 202.

Inasmuch as a receiver will not be appointed except as a favorable appeal is made to the Chancellor's discretion, the solicitor for the demurrant argues that the bill should supplement its charge of insolvency by allegations of fact which, if true, would move the Chancellor's discretion in favor of the appointment. The question thus raised is, therefore, one of pleading. The cases just cited have no bearing upon it, for they were decided on final hearing.

This court, however, in Sill v. Kentucky Coal & Timber Dev. Co., 11 Del.Ch. 93, 97 A. 617, to all intents and purposes passed upon the question of whether facts to support a favorable exercise of discretion must as a matter of pleading be shown in the bill. That case was not on demurrer. It arose on a motion to dismiss, which in substance was a demurrer to the bill. Holschumaker, et al., v. Etchells, et al., 9 Del.Ch. 33, 74 A. 644. Chancellor Curtis so treated the motion in the Sill Case. In that case the Chancellor indicated in his opinion that a bill for receiver under Section 3883 of the Code was not subject to demurrer simply because facts were not alleged which would make a favorable appeal to the Chancellor's discretion. It is true that at two points in his opinion he stated that the bill ought to set out facts upon which to move the discretion in favor of the appointment. But the order he entered dismissing the motion shows that the bill would be safe from attack on demurrer even though such facts were not alleged.

I consider Sill v. Kentucky Coal & Timber Dev. Co., supra, decisive of the question of pleading and accordingly hold that the first ground of demurrer is not well taken.

2. The second ground of demurrer is that the status of the complainants as creditors is based entirely on the fact that they hold certain bonds--$ 5,000.00 out of a total issue of $ 10,502,500.00--which were issued under a collateral trust indenture securing them, and that the indenture, as shown by the bill, contains a provision by which the complainants as bondholders are forbidden to maintain such a suit as they have here instituted. The provision referred to is as follows:

"No holder of any bond or coupon issued hereunder shall have any right to institute any action or proceeding at law or in equity upon or in respect of this indenture, or for the execution of any trust or power hereof, or for any other remedy under or upon this indenture, without having given to the Trustee written notice of a default hereunder and of its continuance as hereinabove provided, nor unless also the holders of twenty-five per cent (25%) in amount of the bonds then outstanding hereunder, shall have made written request of the Trustee to act hereunder and have afforded it reasonable opportunity so to act, nor unless also they shall have offered security satisfactory to the Trustee against all costs, expenses and liabilities. Such notification, request and offer of indemnity are declared to be conditions precedent in every case to the obligation of the Trustee to take any action on account of any default under this indenture, and to any action or cause of action by any holder under said bonds and coupons and this indenture, it being understood that no one or more holders of bonds and coupons shall by his or their action disturb the lien of this indenture, or enforce any right hereunder, and that all proceedings at law or in equity shall, subject to the provisions of Section 2 of Article IV hereof and of Section 1 of this Article VI, be had for the equal benefit of all holders of outstanding bonds and coupons.

"Nothing in this Section or elsewhere in this indenture or in the bonds or in the coupons attached thereto shall affect or impair the obligation of the Company, which is unconditional and absolute, to pay the principal and interest of the bonds to the respective holders of the bonds and to the respective holders of the coupons attached thereto, at the respective due dates in such bonds and coupons stated, nor affect or impair the right of action, which is also absolute and unconditional, of such holders to enforce such payment."

The case of Thoroughgood v. Georgetown Water Co., 9 Del.Ch. 84, 77 A. 720, 723, it is contended, sustains the demurrant's position that bondholders under such an indenture cannot maintain a bill for receiver. I do not think so. The Chancellor did remark in that case that,

"As bondholder he [complainant] has no standing, for he has no direct lien, and it seems must enforce his rights as bondholder through the trustee named in the mortgage given to secure this and the other bonds."

But that observation must be taken in the light of the case in which it finds its setting. When so taken, its irrelevancy to the case sub judice is apparent. In the Thoroughgood Case the Chancellor held that inasmuch as the defendant was a corporation for public improvement, there was no jurisdiction in the court to entertain a bill against it for the appointment of a receiver on the ground of insolvency under Section 3883 of the Code, corporations for public improvement being expressly excepted by the section from its operation. Therefore, having so held, the bill ceased to be one under the statute, as is the pending one. It could be maintained only according as it found support under the general principles of equitable jurisdiction. Now it was in the light of that situation that Chancellor Curtis remarked that, qua bondholder, the complainant could not maintain the bill. All that he could have meant was that the complaining bondholder had not shown a case falling under any head of jurisdiction cognizable in equity--that the mere fact of holding the bond did not bring him under such a head. He was not dealing with the question of whether the holder of one of an issue of bonds secured by an indenture of mortgage sustained a status of creditor such as to entitle him to file a bill for a receiver under the statute against a corporation which is subject to the statute's provisions.

The Thoroughgood Case is the only case in this jurisdiction which can be said in any sense to bear on the question raised in this one, and that case, I conceive, has no pertinency. Central National Bank v Bateman & Cos., 15 Del.Ch. 31, 131 A. 202, is referred to as having some pertinency. It is of no assistance, however, for its sole point in the present connection is that, in proving claims against a fund in receivership awaiting...