Conover v. Guarantee Trust Co.

• Decision Date: 05 January 1918
• Docket Number: No. 40/723.,40/723.
• Citation: 102 A. 844,88 N.J.Eq. 450
• Parties: CONOVER. v. GUARANTEE TRUST CO. et al.
• Court: New Jersey Court of Chancery

102 A. 844

88 N.J.Eq. 450

CONOVER.

v. GUARANTEE TRUST CO. et al.

No. 40/723.

Court of Chancery of New Jersey.

Jan. 5, 1918.

Action by George Conover against the Guarantee Trust Company and others. Decree advised in conformity with opinion.

William M. Clevenger, of Atlantic City, for complainant.

Clarence L. Cole, of Atlantic City, for defendants.

LEAMING, V. C. By the bill complainant seeks the removal of defendant Guarantee Trust Company as trustee under a certain instrument of trust, the appointment of a new trustee, and an accounting by the trustee so removed; the bill also seeks to fasten upon the trustee, as personal obligations, liability for certain losses which are claimed to have arisen from alleged breaches of trust duties upon the part of the trustee.

The trust was created to enable the Ventnor Syndicate, a real estate corporation which is now insolvent, to issue and sell a series of its bonds. The trust agreement, under date of September 1, 1911, was executed by three corporations: The Ventnor Syndicate, who was to issue the bonds; the West Jersey Mortgage Company, a corporation which is insolvent now also, who was to guarantee the payment of interest and principal of the bonds; and the Guarantee Trust Company, who was to act as trustee and certify to the bonds as they were issued from time to time pursuant to the terms of the trust agreement.

The provisions of the trust agreement authorized the Ventnor Syndicate from time to time to assign to the trustee bonds and mortgages which were to be appraised as to value by the West J ersey Mortgage Company; as such bonds and mortgages, so assigned and appraised, were deposited with the trustee, bonds in like amounts, known as "guaranteed collateral bonds," could be issued by the Ventnor Syndicate upon such collateral bonds being guaranteed as to the payment of principal and interest by the West Jersey Mortgage Company and certified to by the trustee as having been issued pursuant to the terms of the trust agreement. The purchaser of a collateral bond would thus hold the direct bond obligation of the Ventnor Syndicate, the guaranty of payment of the West Jersey Mortgage Company of the principal and interest of the collateral bond, and also share pro rata with other holders of collateral bonds the security afforded by the bonds and mortgages of equal amount which had been and might thereafter be in like manner assigned to the trustee by the Ventnor Syndicate as a trust fund to secure payment of the principal and interest of the collateral bonds. The collateral bonds were all dated September 1, 1911, and drew interest at 6 per cent. payable each six months and matured as to principal three years from their date.

The authorized issue under the trust agreement was $200,000 in amount; $79,000 were issued. Two of the issued bonds, aggregating in amount $2,000, were subsequently surrendered to the trustee; accordingly, there is now outstanding $77,000 of the collateral bonds. Complainant owns two of these bonds aggregating in amount $2,000. The Guarantee Trust Company, the receivers of the Ventnor Syndicate and West Jersey Mortgage Company, and all the holders of collateral bonds other than complainant, are made defendants. The Guarantee Trust Company and the receiver of the West Jersey Mortgage Company have answered.

A charge is made by complainant to the effect that the trustee transcended its powers by accepting mortgages for the trust fund which were not authorized by the trust agreement. Of the $77,000 in amount of mortgages which now constitute the trust fund, all but $10,000 are mortgages which were made by the Ventnor Syndicate to the trustee on land owned by the Ventnor Syndicate; each mortgage is accompanied by a bond of the Ventnor Syndicate which it secures. The trust agreement does not authorize the trustee to accept for the trust fund mortgages made by the Ventnor Syndicate to the trustee. Throughout the trust agreement, in instances almost too numerous to justify specification, the bonds and mortgages which are to be made the trust fund are declared to be bonds and mortgages which are to be assigned to the trustee. On the first page of the trust agreement it is recited that the Ventnor Syndicate "has determined to issue its guaranteed collateral bonds, as hereinafter set forth, and to secure the same by assignment to and deposit with the trustee of bonds and first mortgages." In the form of the collateral bond embodied in the trust agreement, which form conforms to the form of the collateral bonds as subsequently issued, it is stated:

"To secure the payment of this bond and all other bonds which constitute this series, together with interest thereon, there have been assigned to and deposited with the said Guarantee Trust Company as trustee, bonds and first mortgages of a par value of not less than the par value of the bonds of this series outstanding and certified by the said trustee, to be held in trust by the said trustee, and its successors, for the benefit of the holders of said bonds according to a certain trust agreement. * * * This bond shall not become valid until the certificate hereon shall be signed by the trustee."

The form of trustee's certificate embodied in the agreement, which form conforms to the form thereafter used as collateral bonds were from time to time certified by the trustee, is as follows:

"It is hereby certified that the within bond is one of the guaranteed collateral bonds of Ventnor Syndicate, all of like tenor and effect, and in denominations of one thousand or five hundred dollars each, amounting in the aggregate to two hundred thousand dollars ($200,000) described in the agreement therein mentioned, Guarantee Trust Company, trustee."

The second paragraph of the trust agreement is as follows:

"2. That Ventnor Syndicate, a corporation of the state of New Jersey, party of the first part, has granted, bargained, sold, assigned and set over and by these presents doth grant, bargain, sell, assign and set over unto the Guarantee Trust Company, also a corporation of the state of New Jersey, party hereto of the second part, all the bonds and first mortgages set forth apd described in the schedule hereto annexed and which forms a part of this instrument, and bears even date herewith, and is identified by the certificate of the trustee and of the company, it being the intention of the company to assign and set over said bonds and mortgages to the trustee fully and effectually not only by these presents but also by a separate instrument of assignment of each of the said bonds and mortgages."

It will be noted that the schedule there referred to is a schedule which is to be built up from time to time as mortgages are assigned to the trustee. Paragraph 3 of the trust agreement provides:

"That inasmuch as at the time of the execution and delivery of these presents, the company may not desire to issue all the said guaranteed collateral bonds, and to transfer and assign to the trustee bonds and mortgages or other securities to the full contemplated amount of two hundred thousand dollars ($200,000), it is agreed that from time to time hereafter the company may issue its said bonds and. assign to the trustee bonds and first mortgages until the amount of two hundred thousand dollars ($200,000) in value of such bonds and mortgages is made up, and that as the said bonds and mortgages are assigned and delivered to the trustee, they shall be entered in the schedule hereto attached, and shall form a part of the trust fund hereby created, and shall in all respects be subject to the provisions of this agreement with like force and effect as if they and the particulars thereof had been entered in said schedule at the time of the execution and delivery hereof, and as if such bonds or mortgages bad then been assigned and delivered to the trustee. The trustee shall be under no obligation to record this instrument or the assignment of any of the bonds and mortgages constituting the trust fund at any time unless and until any default shall be made on the part of the company in the payment of interest on the company's bonds, or any of them, or unless and until in its judgment the protection of the bondholders shall require such action on its part."

Paragraph 4 provides:

"At the time of the presentation of any of said bonds to the trustee for certification, there shall be delivered to the trustee a request in writing signed by the president of the company, certified under the seal of the company, requesting the trustee to certify and deliver to the company or its nominee a specified amount of such bonds, together with such number of said bonds as the company desires to be certified for issue, and bonds and first mortgages equal in value to at least the par value of the bonds so to be issued, together with properly executed instruments of assignment thereof to the trustee. Upon the receipt thereof, the trustee shall permit the company to enter said bonds and mortgages in the annexed schedule as hereinbefore provided or shall itself make such entry and shall forthwith certify the bonds so presented to it for certification and deliver the same to the company for issue."

Paragraph 5 provides:

That in case the company shall, for any reason deem it necessary to take any proceedings for the collection by foreclosure or otherwise, of any bond and mortgage belonging to the trust fund, the company shall forthwith substitute bonds and first mortgages, of equal value, and shall assign and transfer the same to the trustee to be held as part of the trust fund, and shall thereupon be entitled to the delivery to it of the bond and mortgage which is so to be collected."

It will be noted that this provision contemplates a possible foreclosure by the Ventnor Syndicate of mortgages withdrawn from the trust. In paragraph 5 it is also provided :

"Whenever and as often as there shall be in the hands of the trustee cash belonging to the trust...