Central Trust Co. v. Louisville Trust Co.

• Decision Date: 15 March 1900
• Docket Number: 749.
• Citation: 100 F. 545
• Parties: CENTRAL TRUST CO. v. LOUISVILLE TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

100 F. 545

CENTRAL TRUST CO. v. LOUISVILLE TRUST CO.

No. 749.

United States Court of Appeals, Sixth Circuit.

March 15, 1900

Alex P Humphrey, for appellant.

St John Boyle, Edmund F. Trabue, and Wm. Marshall Bullitt, for appellee.

Before TAFT, LURTON, and DAY, Circuit Judges.

LURTON Circuit Judge.

Stripping the case of everything unnecessary to be stated in view of the single question on which the case must turn, it is this The complainant below (appellant here) is the trustee under a mortgage made by a railroad company to secure a large issue of the company's coupon bonds. Defaults in the payment of interest upon these bonds occurred. The mortgage, in substance, provided that, if such default should continue for six months, a majority of the holders of the bonds might, at their option, precipitate the maturity of the principal of the bonds by giving to the trustee written notice of the exercise of such option. It also provided that it should be the duty of the trustee, upon request of a majority of the bonds outstanding, due and unpaid, to institute proceedings in some court for the foreclosure of the mortgage by judicial sale, but that the trustee should not be required to take such proceedings until the bondholders making the request should have indemnified it against 'costs, counsel fees, and other expenses of litigation. ' The defendants below (appellees here), claiming to be a majority of the holders of the bonds, gave the trustee notice that they elected to mature the principal of the bonds, and requested it to institute proceedings for a judicial foreclosure of the mortgage by a sale of the mortgaged railroad, and in the same paper agreed 'to indemnify and hold harmless the said trustee from any loss or damage on account of costs, counsel fees, and other expenses of such litigation. ' In compliance with this request, the trustee employed counsel, and instituted suit for the enforcement of the lien of the mortgage. A protracted and complicated litigation resulted in a decree for the sale of the mortgaged property, and the application of the proceeds-- First, to the payment of the receiver's debts; second, to the payment of certain mechanic's lien claims; and, next, to the payment of the mortgage debt. A sale occurred, but at such a price that the liabilities, having priority over the mortgage bonds, absorbed the entire proceeds, and the bondholders received nothing. The bill, in substance, alleges that the complainant incurred a liability to certain solicitors, who are made defendants, for colnsel fees aggregating $17,500, and that the amount of these fees was adjudged by the decree of foreclosure, and ordered to be paid first out of the proceeds of the mortgaged premises, in accordance with a provision to that effect in the mortgage. Inasmuch, however, as the claims having priority over the mortgage exhausted the entire property, the direction to pay these fees could not be executed. The bill further charges that the trustee has come under a liability to its said counsel the fees so adjudged, and that the counsel have made demand for payment. The prayer of the bill is that the court will compel the indemnitors to discharge the obligation which the complainants had, at their request, and under this covenant of indemnity, so incurred.

The covenant sought to be enforced is not one to pay the counsel fees incurred by the trustee, but 'to indemnify and hold harmless the said trustee from any loss or damage on account of costs, counsel fees, and other expenses of such litigation. ' The complainant has not paid anything on account of the counsel fees and confessedly could not maintain any action at law for a breach of the covenant. Wicker v. Hoppock, 6 Wall. 94, 18 L.Ed. 752; Mills v. Dow's Adm'r, 133 U.S. 424, 10 Sup.Ct. 413, 33 L.Ed. 717; Johnson v. Risk, 137 U.S. 308, 11 Sup.Ct. 111, 34 L.Ed. 683. These cases emphasize the distinction between a covenant to pay and one to indemnify, and hold that an action will lie for a breach of a covenant to pay before actual payment by the plaintiff, but not upon a mere covenant of indemnity until the plaintiff has actually sustained loss or damage. Learned counsel concede that this distinction is one well recognized at law, but contend that a court of equity will, on the principles of a quia timet bill, compel the specific performance of the contract of the indemnitor in advance of any actual loss or damage, even though the covenant be one of simple indemnity. That a bill quia timet will ie in favor of a surety, before payment, to be exonerated by a decree compelling the debtor to pay off the obligation hanging over him, may be conceded. Story, Eq. Jur. Secs. 327, 730, 850. The case of Lee v. Rook, Mos. 318, cited by counsel for appellant, is one (if not the earliest) authority in support of the doctrine. Wolmershausen v. Gullick (1893) 2 Ch. 514, also cited by same counsel, was a bill by a surety, against whom a judgment had been rendered for the whole debt, but who had paid nothing, to compel his co-surety to exonerate him by paying to the creditor his proportion of the joint liability. The rule giving to a surety the right to compel his principal to pay the obligation, and thus relieve him from liability, does not necessarily apply to the case in hand, for there exists a distinction between the relation of surety and principal and that of indemnitor and indemnitee. This distinction was pointed out in Antrobus v. Davidson, 3 Mer. 569, 578, by Sir William Grant, master of the rolls. The bill was one seeking to compel the defendant to relieve the estate of the complainant's testator from liability to the government on account of alleged defaults of certain agents of the testator, for whom the testator was, under the law, responsible, by paying and discharing any sum for which the testator'sestate should stand liable by reason of such defaults. These agents had given bond to the testator, and Davidson, the defendant, had bound himself to indemnify the testator 'against all costs, charges, and expenses which should or might be incurred by the neglect or default (of said agents) in the premises, or in any manner relating thereto. ' The contention of counsel for the complainant was, that the testator stood in the situation of a surety, and that, as a surety, he was entitled to exoneration in anticipation of any loss or damage, and for this relied chiefly upon Lee v. Rook, Mos. 318, and Ranelaugh v. Hayes, 1 Vern. 190. Sir William Grant, among other things, said:

'In the case of an ordinary money bond there is no distinction, upon the face of it, between the principal and the surety; but it is otherwise in the case of a bond of indemnity. In the present instance, Mr. Davidson stipulates for no act of his own. He had no money to receive, no account to settle; but, as surety for Messrs. Ross and Ogilvie, he engages that they shall duly account, and that he will indemnify Sir William Fawcett against the consequences of their neglect or default. In doing this Mr. Davidson incurred a definite legal obligation. Then, the first question that arises is, why should the plaintiffs come into a court to enforce a mere legal obligation? They say, because, as the representatives of Sir William Fawcett, they stand in the situation of a surety, and, as a surety, are entitled in equity to a relief which they cannot obtain at law. It is true that a surety may come here to compel the principal to relieve him of his liability, by paying off the debt. But Sir William Fawcett's representatives and Davidson do not stand in the relation of principal and surety in the sense in which the rule of equity considers that relation. Whatever loss there may be, it is true, will ultimately fall on Davidson, and, therefore, in a certain sense, Davidson may be legally considered the principal debtor; but in equity he is no more the proper debtor than Sir William Fawcett. Both are answerable for Ross and Ogilvie; and, though Davidson is bound to keep Sir William Fawcett indemnified, that obligation does not arise out of any principle of equity, but is created by special convention between the parties. Except for the bond, Davidson would have nothing to do with the debts of Ross and Ogilvie. The bond, therefore, which alone created, must determine the extent of, his liability. There is no principle upon which a court of equity can extend the legal effect of the bond. Its legal effect is to protect against the consequences of future deficiencies, but not to entitle the party to call for anticipated and precautionary payment by way of preventing the risk of his being hereafter damnified.'

The same distinction was noted in the case of Hoy v. Hansborough, 1 Freem.Ch. (Miss.) 533, 544, where the learned chancellor said:

'The relation between the parties to a bond of indemnity is in no equitable sense analogous to that of principal and surety. The right of a surety to call for precautionary payment of his principal does not arise from any contract between them, but rests exclusively upon the doctrine and principles of a court of equity; whereas, the rights of parties to a bond of indemnity arise from a definite, legal obligation, created by express contract, having no dependence upon abstract principles of equity.'

The indemnitors, under the covenant here involved, came under no obligation whatever to the counsel employed by the complainant, and did not agree with complainant to pay such fees, but to 'indemnify' the trustee against any...