Commonwealth Trust Co. of Pittsburgh v. Atwood

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: BUFFINGTON, WOOLLEY, and THOMPSON, Circuit
• Citation: Commonwealth Trust Co. of Pittsburgh v. Atwood, 78 F.2d 92 (3rd Cir. 1935)
• Decision Date: 22 May 1935
• Docket Number: No. 5518.,5518.
• Parties: COMMONWEALTH TRUST CO. OF PITTSBURGH et al. v. ATWOOD.

78 F.2d 92 (1935)

COMMONWEALTH TRUST CO. OF PITTSBURGH et al. v. ATWOOD.^*

No. 5518.

Circuit Court of Appeals, Third Circuit.

April 5, 1935.

Rehearing Denied May 22, 1935.

William A. Wilson, of Pittsburgh, Pa., for appellants.

John G. Frazer, Robert L. Kirkpatrick, and Smith, Shaw, McClay & Seifert, all of Pittsburgh, Pa., for appellee.

Before BUFFINGTON, WOOLLEY, and THOMPSON, Circuit Judges.

WOOLLEY, Circuit Judge.

In good times the Bank of Pittsburgh National Association, hereinafter called the bank, purchased mortgages on real estate and, under authority of the Pennsylvania Act of April 6, 1925, P. L. 152 (see 15 PS Pa. § 2514), placed them in a general trust fund commonly known as a mortgage pool, segregated from its other assets and held by it as trustee. In this pool, under authority of the same Act, it invested trust funds and sold shares to outsiders, in all instances represented by certificates of participation in different denominations which indicated the portions of interest and principal of the fund to which the certificate-holders were entitled. In this way the bank supplied its customers and its trusts with attractive investments and recovered most of the original cost of the mortgages.

At the time in question the aggregate face value of the mortgages so held was $5,347,585.57 and the aggregate of the certificates of participation outstanding was $5,056,565.12. Thus the mortgages exceeded the certificates by $291,020.45. As the trust department of the bank, which operated the pool, had not sold certificates or invested trust funds in certificates covering this amount, it had not turned back any part of it to the bank. Yet it held in the pool this excess of mortgages purchased with the bank's money.

In operating the pool the trust department collected interest on the mortgages and quarter-annually paid the certificate-holders interest at a named rate and also paid interest to the bank on the amount in which the face value of the pool exceeded the sum of the certificates issued. Bad times came and mortgagors defaulted on their interest payments. In consequence it was impossible to pay full interest on the certificates. To relieve the situation temporarily, the bank made advances of its own money to its trust department, aggregating $40,213.58 after certain re-payments, which was disbursed to certificate-holders.

The bank, yielding to the times, failed and was taken over for liquidation by a receiver appointed by the Comptroller of the Currency. Its receiver, for convenience called the bank, desired to be relieved of the custody and administration of the pool. By a proceeding, the lawfulness of which is not questioned, the Orphans' Court of Allegheny County, the bank consenting, appointed Commonwealth Trust Company of Pittsburgh substituted trustee of the mortgage pool with authority to administer the trust. Whereupon the bank assigned and delivered to the new trustee all assets of the pool, including mortgages in excess of certificates.

Under orders of the Orphans' Court the substituted trustee made various payments of interest and principal to holders of participation certificates but made no payment, indeed refused to make payment, of interest or principal to the bank on account of the balance which it claims to hold in the pool, represented by the difference between total mortgage values and the amount of the outstanding certificates, pending judicial determination of the bank's claims. Nor has it reimbursed the bank for moneys which it paid the certificate-holders in relief of interest defaults by mortgagors. Thereupon the bank, through its receiver, filed a bill in the United States District Court for the Western District of Pennsylvania instituting this suit, whereby it sought to have its claim to the excess of the pool in the sum of $291,020.45 and its claim for interest advanced in the sum of $40,213.58 established as claims against the pool, the latter prior in order of payment to claims of holders of certificates of participation. The learned court, by its decree, found the latter sum due the bank and ordered the trustee of the pool to pay it out of available moneys collected on the mortgages. It also found that the bank is a participant and cestui que trust to the amount of the former sum in the mortgage pool and as such is entitled to share proportionately with the holders of participation certificates in all distributions of interest and principal theretofore and thereafter made, and accordingly ordered the trustee to pay the bank its share of moneys collected and withheld in previous distributions to certificate-holders.

From this decree the substituted trustee of the pool and other defendants, hereinafter called the appellants, appealed, raising several questions of which the first is: Has a federal district court jurisdiction, on the facts of this case, to establish claims of a bank against a mortgage trust being administered by a state court?

It is certain that, so far as the res of the estate now being administered by the Orphans' Court are concerned, the jurisdiction of that court is exclusive. A federal court cannot reach into the state court and take the res or enforce a right to specific property in possession of its receiver or trustee, except upon application to the court which appointed him. Riehle v. Margolies, 279 U. S. 218, 49 S. Ct. 310, 73 L. Ed. 669; Harrison v. Moncravie (C. C. A.) 264 F. 776, 779. It is likewise certain that a federal district court, on jurisdiction otherwise shown, as diversity of citizenship or, as in this case, liquidation of a national bank, may establish "a claim constituting the basis of a right to participate in the distribution of property in the possession of" another court. The judgment of the federal court does not in such case purport to deal with property. Yonley v. Lavender, 21 Wall. 276, 22 L. Ed. 536. It deals solely with the existence and amount of a claim, Riehle v. Margolies, supra; Harrison v. Moncravie, supra, which when established by decree takes its "share of the estate as administered by the probate court." Waterman v. Canal-Louisiana Bank & Trust Co., 215 U. S. 33, 43, 30 S. Ct. 10, 12, 54 L. Ed. 80, 84; Byers v. McAuley, 149 U. S. 608, 13 S. Ct. 906, 37 L. Ed. 867; Thomas v. Commonwealth Trust Co. (D. C.) 2 F. Supp. 654; Alexander v. Fidelity Trust Co. (C. C. A.) 249 F. 1. Indeed, the appellants do not dispute the right of the bank to have its claims against the mortgage trust, which the Orphans' Court is administering, adjudicated in the federal district court, the forum of its choice. They maintain, however, that establishment of the existence and amount of the bank's claims is the limit of that court's jurisdiction, and dispute strenuously the right of a federal district court or of any court other than the one administering the res to determine the status or fix the rank or priority of a claim on distribution of assets.

There is a marked difference between adjudication of a claim against an estate and payment of the claim on distribution of its assets. The first stands on its own footing; the second turns on its relation to other claims. But the court which has jurisdiction to establish the existence and amount of a claim must necessarily view its characteristics and recognize its status with respect to itself, otherwise it could not "determine and award (the claimant's) share in the estate". Byers v. McAuley, 149 U. S. 608, 13 S. Ct. 906, 37 L. Ed. 867. If one of the fixed legal or equitable characteristics of a claim is a priority, as that of a mortgage claim or a tax claim, the establishment of the existence of the claim establishes also its existing characteristic of limited or general priority over claims of lower rank. So also the establishment of a claim as a secured claim fixes its status below claims of other classes until at least the security is availed of or surrendered. A claim against an estate by right of inheritance, established by a court other than the probate court, involved in one instance not merely its amount but the right of first cousins to take to the exclusion of second cousins. Byers v. McAuley, 149 U. S. 608, 13 S. Ct. 906, 37 L. Ed. 867.

The status of a claim is as much a part of it as the amount. When established, as to its existence, amount and status, the claim, in the instant case, leaves the District Court and enters the probate court where it takes "its place and share of the estate as administered by that court." Byers v. McAuley, supra; Yonley v. Lavender, 21 Wall. 276, 22 L. Ed. 536; Waterman v. Canal-Louisiana Bank & Trust Co., 215 U. S. 33, 43, 30 S. Ct. 10, 54 L. Ed. 80, 84; Riehle v. Margolies, 279 U. S. 218, 49 S. Ct. 310, 73 L. Ed. 669.

On these authorities we hold the District Court had jurisdiction of the bill and that it was required to exercise it.

Passing from the question of the court's jurisdiction, the appellants raise the substantive issue whether...