Cont'l Corp. v. First Nat. Bank of Westfield

• Decision Date: 23 February 1934
• Citation: 189 N.E. 184,285 Mass. 419
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court
• Parties: CONTINENTAL CORPORATION v. FIRST NAT. BANK OF WESTFIELD. BAUER et al. v. SAME. CONTINENTAL BANK & TRUST CO. OF NEW YORK v. SAME.

285 Mass. 419

189 N.E. 184

CONTINENTAL CORPORATION

v.FIRST NAT. BANK OF WESTFIELD.

BAUER et al.

v.SAME.

CONTINENTAL BANK & TRUST CO. OF NEW YORK

v.SAME.

Supreme Judicial Court of Massachusetts, Hampden.

Feb. 23, 1934.

Appeal from Superior Court, Hampden County; Dillon, Judge.

Suit in equity by the Continental Corporation against First National Bank of Westfield, wherein the Creditors' Composition Corporation intervened as plaintiff, and two separate actions in tort, in nature of deceit, by Frederick R. Bauer and others and by the Continental Bank & Trust Company of New York against same defendant, which were heard together. From an adverse decree in the suit in equity, plaintiff appeals, and, to the allowance of defendant's motions for judgment, and disallowance of plaintiffs' motion for judgment on auditor's reports, in the law actions, plaintiffs bring exceptions.

Decree in suit in equity modified and affirmed, and exceptions in law actions overruled.

A. Brayton, of Boston, for plaintiffs.

L. Wheeler, Jr., of Boston, for defendant.

PIERCE, Justice.

The second two actions are at law; they are in tort, in the nature of deceit. The plaintiffs seek to recover from the defendant damages alleged to have been suffered by them by reason of false representations alleged to have been made by the defendant, as trustee, by its certificate on certain bonds of the Martin Trailer Company. The first suit is in equity, and is brought against the defendant, as trustee under an indenture, to secure these bonds, for an accounting and for damages for breach of its fiduciary duties. The bonds involved are the same as those which were before this court in Continental Corp. v. Gowdy, 283 Mass. 204, 186 N. E. 244, 87 A. L. R. 1039. The cases were tried together. In the law actions each declaration consisted of four counts, which, in substance, alleged that each plaintiff purchased twenty-eight bonds of the Martin Trailer Company upon which the defendant had indorsed a ‘Trustee's Certificate’; that the representations made by the defendant by this certificate were false; that the defendant knew or upon reasonable inquiry might have known that said representations were false; that the plaintiffs relied upon these representations in purchasing the bonds; that the Martin Trailer Company became bankrupt September 26, 1930, and that the bonds were worthless. The first count in each action alleged that by custom and usage the trustee's certificate was a representation that each bond was one of the bonds described in the indenture; that there was existing a mortgage or deed of trust to the certifying bank securing the bonds and dated April 17, 1929; that the bonds were duly executed and were the legal and authorized obligations of the Martin Trailer Company; that the mortgage of deed of trust was duly recorded and duly executed in accordance with the company's authorization; and that the bond was secured by a first mortgage on real estate sufficient in value ‘to cover the indebtedness of the entire issue.’ In the second count it is alleged that the defendant by the recitals of the bonds and the certification intended to represent falsely that the bonds were secured by a first mortgage on real estate of a value reasonably adequate to secure the issue, and thereby intended to induce persons to purchase the bonds. In the third count it is alleged that the defendant by its certificate on the bonds falsely represented to whomsoever the bonds might be presented for purchase that the bond was one of the bonds described in the mortgage or deed of trust to the subscriber as trustee and dated April 17, 1929. By the fourth count it is alleged that the recitals in the bond and the trustee's certificate on the bond were actually false and the defendant ‘by signing the ‘Trustee's Certificate’ thereon' negligently, wantonly and recklessly misrepresented that the recitals in the bond and certificate were true. The answer in each action was a general denial.

The law actions were referred to an auditor under a stipulation that his findings of fact should be final, except such as are inferences drawn by him from facts found. He filed separate reports. Upon motions for judgment by both parties on the reports, the judge ordered judgment to be entered for the defendant in each case. The actions come before this court on the plaintiffs' exceptions to the allowance of the defendant's motions for judgment and disallowance of the plaintiffs' motion for judgment.

In the equity suit the plaintiff's claim for relief was based on allegations in the bill of complaint to the effect that the defendant, as trustee, failed to use reasonable care to see that the bonds and trust instrument were duly executed and were the legal and authorized obligations of the mortgagor, with the result that the right of the bondholders to have applied for their benefit the property described in the deed of trust was disputed; that this made it necessary for the trustees to employ counsel to protect the interests of the bondholders, which would have been wholly unnecessary if due care had been used in connection with the original execution of said trust; that the defendant conspired with a firm of brokers to issue the bonds on insufficient security, in order to obtain payment of debts owed by the Martin Trailer Company to the defendant; that it negligently delayed in foreclosing on the security, improperly permitted a sinking fund set up for the retirement of said bonds to be paid out for other purposes, and received compensation, as trustee, which it should forfeit because of its misconduct. The defendant filed a demurrer which was overruled. The defendant appealed. Thereafter the defendant filed an answer to the bill of complaint. Subsequently Creditors' Composition Corporation was allowed to intervene as party plaintiff. The suit was referred to a master. Upon the filing of his report, which was confirmed without objection, a decree was entered ordering the defendant to pay to itself as trustee for the bondholders of the Martin Trailer Company certain sums, amounting to $316.87, which the court found to have been improperly paid out, and to pay the plaintiff and intervening plaintiff in equal shares, costs in the sum of $26.50. The plaintiffs appealed from the decree, and this suit is now before this court on their appeal. Respecting this appeal, the plaintiffs state in their brief that ‘The only point to be argued * * * relates to the contention by the plaintiff that the defendant should likewise be charged with certain payments of counsel fees made by it out of the trust property.’

The facts relating to the issue of these bonds as they appear in the auditor's and master's reports are these: The Martin Trailer Company, a Massachusetts corporation, was incorporated April 27, 1928, to manufacture trailers and similar auxiliary conveyances. In the spring of 1929, it needed cash for payroll, rent and additional capital for expanding business. In March, 1929, one Kenneth L. Mytinger of the stock brokerage firm of Walsh, Stockhausen & Mytinger, of Troy, New York, became interested in the affairs of the Martin Trailer Company and his firm, without solicitation by or communication with the defendant, submitted a proposal looking to the financing of the corporation. This plan was approved by the directors on March 28, 1929, and submitted to the stockholders on April 9, 1929, who voted ‘That The Martin Trailer Company hereby authorizes the issue of $100,000 First Lien, Ten-Year, Sinking Fund, Seven per cent., Debenture Bonds, to be dated May 1, 1929, and to mature May 1, 1939. * * * The said Bonds shall be a first lien obligation of the Corporation and will constitute its sole funded indebtedness and will be deposited with the Frist National Bank of Westfield, Massachusetts, as Trustee under a Trust Agreement which shall provide for a fixed sinking fund requiring the retirement of all of the said Bonds on or before the due date. * * *’ After this special meeting of the stockholders, Mytinger conferred at the defendant bank with Charles E. Avery, its cashier, who had been present at the special stockholders' meeting and had discussed the proposed bond issue with Mytinger. Mytinger prevailed upon Avery to have the bank accept the trusteeship in connection with the proposed issue, and Avery at the request of Mytinger recommended by name one or more attorneys who could draw up the necessary documents. Later, Avery conferred with the attorney selected by Mytinger and transmitted to him certain instructions of Mytinger. After the bonds and indenture were prepared, they were presented to the bank, and, at least to the extent that they were issued, were certified by the bank by J. A. Kenyon, its trust officer. It did not appear that Avery of Kenyon or any other officer of the defendant bank checked the terms of the bonds with the indenture or the bonds and indenture with the authorizing vote, or ascertained whether or not the indenture contained any identifying reference to the bonds or had been recorded. In connection with the instructions given by Avery at the instance of Mytinger to the attorney who drafted the bonds and indenture, Avery handed to him a so-called ‘Inventory of Machinery.’ It listed the machinery and tools to be covered by the indenture and was to constitute the security thereunder. Opposite each item on the inventory was a valuation, and the total thus appearing on the entire list of machinery and equipment was $12,568.01. It did not appear what the basis of the valuation was.

The Martin Trailer Company owned no real estate until May 20, 1929, when it purchased a plant it had been renting from the Planet Company, in consideration of assuming two $10,000 mortgages thereon and of the issue to the Planet Company of $5,000 face value of the bonds involved in this case. The certificate of the defendant, as trustee, on each of the bonds here involved is as follows: ‘This is...