Citizens Banking Co. v. Monticello State Bank

• Decision Date: 14 June 1944
• Docket Number: No. 12688.,12688.
• Citation: 143 F.2d 261
• Parties: CITIZENS BANKING CO. et al. v. MONTICELLO STATE BANK.
• Court: U.S. Court of Appeals — Eighth Circuit

143 F.2d 261 (1944)

CITIZENS BANKING CO. et al. v. MONTICELLO STATE BANK.

No. 12688.

Circuit Court of Appeals, Eighth Circuit.

June 14, 1944.

Harold K. Bell, of Cleveland, Ohio (Owen N. Elliott, V. Craven Shuttleworth, Tyrrell M. Ingersoll, Grimm, Elliott, Shuttleworth & Ingersoll, all of Cedar Rapids, Ia., and Spieth, Taggart, Spring & Annat, of Cleveland, Ohio, on the brief), for appellants.

Carl H. Lambach, of Davenport, Ia., and Robert Sidney Milner, of Cedar Rapids, Ia., for appellee.

Before STONE, THOMAS, and JOHNSEN, Circuit Judges.

STONE, Circuit Judge.

This is a class action by twelve banks against the Monticello State Bank in behalf of themselves and all other holders of collateral trust notes issued by the Commercial Investment Company and, under the terms of a trust indenture, certified by the Monticello State Bank as trustee. The basis of the action is various acts and omissions alleged to be breaches of trust by the trustee Bank. Defendant filed a consolidated motion made up of a motion to dismiss, a motion to strike, an alternative motion to strike, and a motion to make definite and certain and for a bill of particulars. The motion to dismiss was sustained with leave to apply to file an amended complaint in conformity with an opinion then filed. The opinion stated that the allegations in the petition did not entitle plaintiffs to proceed in equity or in a class action but that plaintiffs might apply to file an amended complaint in tort based upon the fraud of the defendant in certifying notes issued to them after it had knowledge of the alleged violations of the trust indenture by the Investment Company. From such order of dismissal, plaintiffs bring this appeal. The motion to dismiss was on three grounds: lack of jurisdiction over subject matter, lack of jurisdiction over the person of defendant, and failure to state a cause of action upon which relief could be granted.

Jurisdiction.

While appellants argue the ground concerned with jurisdiction of the person of defendant, there could be no serious doubt that such jurisdiction existed and we understand appellee makes no contest here as to that. The main controversy as to jurisdiction is whether or not this is properly a class action.

Rule 23 of Rules of Civil Procedure, 28 U.S.C.A. following section 723c, sets forth the situations which permit class actions.¹ To determine whether or not this is a class action within the Rule, it is necessary to know what the action is about and the interrelation of the plaintiffs thereto. The cause of action in some detail will be hereinafter set out in connection with examination of the sufficiency of the petition to state a cause of action. For the immediate purpose, it is enough to state a general outline of the petition.

The notes were issued by the Company² subject to certification and registration by the Bank, which certification on the notes stated that the note was "one of the collateral trust notes described in the within mentioned Trust Indenture." The Trust Indenture was identified in and, by reference, incorporated in the note, which stated, also, that "under the terms of the Trust Indenture the corporation Commercial Investment Co. has agreed to transfer to and deposit with the Trustee collateral security and/or cash to insure the payment of said notes and interest equally and ratably without any preference or distinction by reason of number, time of issue or maturity." The Trust Indenture expressely stated that these notes were "secured by collaterals deposited with the Trustee"; that described collateral at par value in ratios of 100% or 120% (depending on character of collateral) of face value of outstanding notes was to be so deposited; that all collateral deposited is as security for "all such notes" and "no specific collateral is security for any particular note or notes"; that the Trustee was empowered, "in its discretion," to reject or require withdrawal of any collateral "even though under the terms hereof said collateral complies with all requirements herein specified"; that the Company covenanted that the aggregate principal amount of such outstanding notes and all other indebtedness by it (with certain exceptions) should never exceed three times the then unimpaired capital, surplus and undivided profits of the Company; that the Company would not redeem, retire or purchase any of its capital stock if it were in default under the Indenture or if such would affect the above three to one ratio; that described acts should constitute default by the Company; that, upon default, the Bank should "have the right to (either with or without the request of any holder of any such registered note or notes) collect, sell and enforce any or all of said securities securing all the said Collateral Trust Notes outstanding, so deposited with it, either in the name of the Corporation Company or in the name of the trustee," either at private or public sale, "but only after the Trustee has made not less than fifteen (15) days demand, in writing, of the Corporation for any default"; that the net proceeds of such sale (less Trustee's fees and expenses) should be paid pro rata to holders of registered notes, with any balance over to the Company; that the Trustee has the right to terminate the Indenture by notice that it will, after sixty days, cease registration of notes and, "thereafter when all notes theretofore registered under the terms of this Indenture, have been paid in full with all interest thereon or otherwise liquidated and all reasonable expenses and charges of the Trustee have been paid by the Corporation, the residue of said securities so deposited with the Trustee shall be returned to the Corporation"; that all costs, expenses and attorneys' fees incurred by the Trustee "in enforcing this Indenture, or any of the rights or duties of the Trustee herein" shall be primary obligations and be paid by the Corporation; and that "the Corporation agrees to furnish the said Trustee with an annual audit by certified public accountants, and to give said Trustee accessibility to the books and records of said Corporation with relation to said Trust, and hereby agrees to furnish such other information and reports as requested by said Trustee from time to time." The petition alleges that all of the notes so secured have matured; that there have been various specific violations of duty and obligation by the Bank as trustee; that such violations resulted in reduction of collateral value to about $30,000.00 from the required minimum of $235,100.00 (the aggregate of outstanding notes); that this collateral had, under court order, been turned over to a receiver of the Company appointed by an Iowa State court; that the owners of such notes will suffer a loss of at least $205,100.00 plus interest "due to the failure of the defendant to reasonably perform its duties as trustee as aforesaid." The relief prayed was (a) an account of all money and security received by the trustee under the indenture; (b) an accounting and determination of the amount of loss caused by these acts and conduct of the trustee with an order "to reimburse said trust for such loss"; (c) an accounting of the amount due on collateral trust notes secured by this indenture and the lawful owners thereof; (d) "that some proper person may be appointed to receive and collect all moneys which may be coming to the credit of said trust, and that the defendant may be ordered to pay to such person, for the benefit of the lawful holders of said collateral trust notes, the amounts that may be found due them with interest thereon as may be determined, and that judgment may be entered against the defendant therefor"; (e) judgment for $235,100 with interest from October 28, 1940; (f) "for such orders and processes as may be necessary to enforce the payment by defendant of such sums as may be found due from it to the lawful holders of said collateral trust notes"; for general relief.

Concisely stated, the situation for relief stated in the petition is that plaintiffs are some of a number of holders of collateral trust notes secured by defined classes of securities transferred by the maker of the notes in trust to the Bank under a trust indenture stating the conditions of the trust and the rights, duties, powers and obligations of the trustee; that all such securities are to secure commonly all noteholders without distinction or difference; that the trustee has, in violation of its duties and obligations, allowed or caused this trust fund to be badly diminished; and that such diminution has resulted in loss to all such noteholders alike. The relief is that there be determined the amount to reimburse the loss so resulting and that such be paid an appointed person for payment to noteholders ascertained to be entitled to share therein. In essence, this is an action to restore a trust fund wrongfully dissipated by a trustee and to distribute the proceeds to holders of the class of notes secured thereby who are entitled to share in this common fund upon an undivided pro rata basis.

This is an action properly cognizable in equity to avoid a multiplicity of actions and for accounting of a trust fund (Dillman v. Hastings, 144 U.S. 136, 140, 12 S.Ct. 662, 36 L.Ed. 378; Irvine v. Dunham, 111 U.S. 327, 334, 4 S.Ct. 501, 28 L. Ed. 444; City of Jacksonville v. Bankers Life Co., 7 Cir., 90 F.2d 141, 144; Lewis v. Ingram, 10 Cir., 57 F.2d 463, 466, certiorari denied 287 U.S. 614, 53 S.Ct. 16, 77 L.Ed. 533; Ingram v. Lewis, 10 Cir., 37 F.2d 259, 260, 70 A.L.R. 702, certiorari denied 282 U.S. 842, 51 S.Ct. 22, 75 L.Ed. 747). That the relief asked is in money does not affect the right of the beneficiaries to proceed in equity (Lewis v. Ingram, 10 Cir., 57 F.2d 463, 466, certiorari denied 287 U.S. 614, 53 S.Ct. 16, 77 L.Ed. 533) — such money recovery is usually the only way of replacing a trust fund where other character of property therein has been dissipated.

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