Brackett v. Middlesex Banking Co.

• Decision Date: 27 July 1915
• Citation: 95 A. 12
• Court: Connecticut Supreme Court
• Parties: BRACKETT et al. v. MIDDLESEX BANKING CO.

95 A. 12

BRACKETT et al.

v. MIDDLESEX BANKING CO.

Supreme Court of Errors of Connecticut.

July 27, 1915.

Koraback, J., dissenting.

Appeal from Superior Court, Middlesex County; Edwin B. Gager, Judge.

Action by Anna J. Brackett and others against the Middlesex Banking Company. Applications of the Middletown Trust Company and another, trustees and receivers of the defendant company, for directions. From the order and judgment, the trustees appeal. Reversed, and judgment directed for trust companies.

The Middlesex Banking Company loaned funds on mortgages on Western farm lauds, which in different forms were sold to investors. The most common form of these investments was to issue and sell the notes of the Banking Company, called debenture bonds, the payment of which was secured by the deposit with a trust company of mortgages, accompanied by an assignment of them to the trust company under a trust agreement, and these were substantially similar in form. The collateral so deposited was arranged in series of from $25,000 to $100,000, and each group was separate from the other, and under an independent trust agreement pledged for the payment alone of the debentures issued against the collateral of this group. There are in force 15 of these collateral trust agreements. Twelve of these were made originally with the Columbia Trust Company, and upon its dissolution the Middletown Trust Company was appointed by the superior court trustee in its stead. Two of these agreements were made directly with the Middletown Trust Company, and one with the Security Trust Company, under its then name of Security Company. Each debenture bond recited that it was one of a series of bonds of like form and tenor issued by the Middlesex Banking Company under and subject to the provisions of the trust agreement of a named date between the Banking Company and the Trust Company, and secured by certain collateral deposited under this agreement with the Trust Company as trustee. Upon the bond the Trust Company certified its number and series, and that the collateral so deposited with it was equal to the bonds certified to under the trust agreement. Under these agreements the trust companies were not to record the assignments except upon default, the provision in reference to which in the Columbia Trust Company and the Security Trust Company agreements was as follows:

"A failure to pay any installment of interest due by the terms of any bond, or any portion o£ the principal thereof, when due, continuing for ninety (90; days after written notice served by mail postpaid or otherwise, on said Banking Company by the —— shall constitute a default on the part of said Banking Company within the terms and meaning of this agreement, and the whole of the series to which said bond belongs shall thereupon become due, and said —— may sell at public or private sale, the whole or any part of the collateral deposited with it for the series to which such bond belongs; but no sale thereof shall be made at a less rate than the face value with accrued interest of said collateral except upon the written consent of said Banking Company, its successors or assigns; and in case said —— shall fail to make such sale on the aforesaid terms, it shall proceed to collect such collateral in such manner as it shall deem best for the interest of the holders of the bonds of said series; and the proceeds of such sale or collection, after meeting the reasonable expenses thereof, including reasonable charges of the said —— for its services in such sale or collection, shall be applied in payment of the unpaid interest and principal of said series of bonds, ratably and without preference or priority in favor of any bond of said series as against any other bond of said series, the surplus, if any, to be delivered to the said Banking Company, its successors or assigns.

"The notice to the Banking Company in this section provided to be given, shall be given by said —— within ten (10) days after written request by the lawful holder of any bond secured by this agreement, or coupon thereof, which has been presented for payment and remains unpaid."

These agreements also provided:

"Whenever said Banking Company shall make default in the payment of the principal or interest of any bond, it shall, at the request of said ——, forthwith deliver to the said —— all abstracts of title and all other papers in its possession or under its control relating to the collateral deposited with said —— for the series of bonds to which such defaulted bond shall belong; but until such default only the notes, bonds, assignments, mortgages and deeds of trust hereby guaranteed by said Banking Company to be first liens on real estate shall be deposited with said —— as collateral for any series of bonds."

The provision in reference to default in the Middletown Trust Company agreements was as follows:

"If the —— shall fail to pay any matured bond, contract, or coupon, secured hereunder, within ten days after proper presentation and demand for payment, according to the terms thereof, or shall fail to perform any of the obligations imposed upon it by the terms of any bond, contract, or coupon, so issued, or by the terms of this agreement, such failure on the part of the —— shall constitute a default.

"Upon any such default of payment by the —— under the terms of this agreement, the trustee may at its option, call upon the —— for all abstracts of title, and other papers, relating to the collateral held by it under this agreement, and may sell all, or any part thereof, or make such other disposition thereof for the benefit of the holders of those outstanding bonds or contracts under which the default occurred, as in its judgment will yield the best results to the holders of such bonds or contracts; but no such sale or other disposition of collateral shall be made except after ten days' notice, in writing, to the ——."

The agreements also provided:

"Any collateral deposited with said Security Company by said —— under this agreement may at any time be withdrawn by said —— on its depositing with said Security Company other collateral in substitution for and equal in amount to the collateral withdrawn; and all the provisions of this agreement shall apply as well to such substituted collateral as to collateral originally deposited."

"Whenever said —— shall surrender to said Security Company any bond issued under this agreement, said Security Company shall deliver to said —— such collateral as said —— may select from the collateral deposited for the security of the series to which said bond belongs equal in amount, as counted at the time of deposit, to such surrendered bond, and thereupon said bond shall be canceled by said Security Company and returned to said ——."

"The —— shall at all reasonable times in business hours have the right to inspect the collateral deposited by it under this agreement with said Security Company, and at all reasonable times in business hours the official examiner of any state or territory of the United States shall, upon the written permission of said ——, have the right to inspect the collateral deposited with and held by said Security Company under this agreement."

The Middlesex Banking Company some years ago took over on foreclosure a large acreage in the West and South. In order to liberate the sums so invested in these lands it organized the Realty Investment Company, sold it these lands, and took in payment mortgages for the full value of the lands and deposited these mortgages with a trust company, to secure payment of its own debenture bonds which it sold to the public, the method being as already described. About 60 per cent. of the collateral now held by the Middletown Trust Company consists of these mortgages. The Banking Company also holds as trustee a large amount of mortgages of the Realty Investment Company as security for the payment of the debenture bonds of the Investment Company.

On November 30, 1914, the directors of the Banking Company voted to go into voluntary liquidation, and on January 18, 1915, the court appointed two receivers of this company, who entered upon their duties and are now so engaged. Subsequently these receivers were duly appointed receivers of the Realty Investment Company.

The Middlesex Banking Company for the more efficient conduct of its business, very early established a western office at St. Paul, Minn., and later in various other states of the West. All these were manned by men who became, through years of contact with the borrowers, very familiar with all the sections where the company made its loans in the various states; extensive and valuable maps and much other detailed and technical knowledge of the locality and people with whom the company was dealing were accumulated, and are now in the possession of the receivers.

The borrowers have always been, to a very large extent, foreign-born, and without bank accounts, and often with little education; and personal contact with them by the representatives of the Middlesex Banking Company early became an important and an indispensable feature of its western business. These representatives visited the borrowers, kept their farms under observation, saw that the insurance, taxes, and other charges were paid, collected the interest and principal when due, etc. This work should still be done by personal contact, and cannot be effectually done by correspondence, or by strangers. This method of handling the property results in keeping the farms under cultivation, the buildings in repair, the taxes paid, and the lands improved, and the continuance of the arrangement becomes very important for the preservation of the values of the farms, which, if abandoned, deteriorate rapidly, and could only be sold, if at all, at figures which would be disastrous to the holder of the mortgage and would, in most cases, wholly destroy the equity.

All the mortgages, those on the lands of individual...