Detroit Trust Co. v. Stormfeltz-Loveley Co.

• Citation: 257 Mich. 655,242 N.W. 227
• Decision Date: 04 April 1932
• Docket Number: No. 219.,219.
• Parties: DETROIT TRUST CO. v. STORMFELTZ-LOVELEY CO. et al.
• Court: Supreme Court of Michigan

257 Mich. 655

242 N.W. 227

DETROIT TRUST CO.

v.STORMFELTZ-LOVELEY CO. et al.

No. 219.

Supreme Court of Michigan.

April 4, 1932.

Appeal from Circuit Court, Wayne County; Lester S. Moll, Judge.

Suit by the Detroit Trust Company, as trustee, against the Stormfeltz-Loveley Company and another to foreclose trust mortgage on land. From a decree ordering sale of premises, defendant appeal.

Reversed without prejudice to right of resale under foreclosure decree. George E. Brand, of Detroit, for appellants.

Miller, Canfield, Paddock & Stone, of Detroit, for appellee.

Thomas G. Long, of Detroit, amicus curiae.

BUTZEL, J.

On November 1, 1926, Stormfeltz-Loveley Company, defendant herein, executed to plaintiff, Detroit Trust Company, as trustee, a trust mortgage on the land and eight-story building at the northeast corner of Woodward avenue and East Grand boulevard, Detroit, to secure a serial bond issue of $1,000,000, payable over a term of years. It contained the usual clauses providing for foreclosure and sale and also an assignment of income in accordance with Act No. 228, Public Acts 1925 (section 13498 et seq., Comp. Laws 1929). Upon default in a serial payment of $100,000 and of a balance of $20,000 for interest, both due November 1, 1930, plaintiff accelerated the entire balance due, asserted its rights to the income and property, and filed a bill of foreclosure. On April 16, 1931, a decree was entered, finding $813,173.30, plus fees, due, and ordering a sale by the circuit court commissioner.

On December 1, 1930, a bondholders' protective committee was organized, and all but $21,500 of the $800,000 of outstanding bonds were deposited with the committee under a bondholders' protective agreement. Its provisions gave the committee broad powers. They might purchase the mortgage property and apply the bonds towards payment. They could from a corporation to hold, own and operate the property, if purchased. The agreement amounted substantially to an irrevocable power of attorney to exercise the rights of ownership, but all for the benefit of the bondholders. The sale of the mortgaged property was advertised by the circuit court commissioner, who offered it for sale on September 29, 1931. The following day he filed a ‘preliminary report of sale’ showing that he had offered the property for sale, but that no bids were received and none appeared to be obtainable for a sum representing the present fair and reasonable value of the interest of the holders of the bonds. On December 10, 1931, a petition signed by all the members of the bondholders' committee was filed in the foreclosure suit. A copy of the bondholders' protective agreement was attached. The petitioners stated that they represented $778,500 of the $800,000 bonds outstanding, and had all rights and powers in respect to them; that no bids were obtainable at the attempted sale for a sum representing the fair and reasonable value of the interest of the bondholders, which amount was placed at $760,000. It prayed that the trustee by authorized to bid in the property under Act No. 111, Public Acts 1931, for such amount.

A brief reference to this act is necessary. It is entitled: ‘An Act to provide for the administration of mortgage trusts under the jurisdiction of equity where the consummation of the objects and purposes thereof in manner and form as intended by the mortgage indenture shall be found not capable of accomplishment.’

It provides that, upon the hearing of a report of sale under a decree in proceedings to foreclose a trust mortgage given to secure bonds or other obligations, duly issued and authenticated, if it appears that no bid has been made or appears to be obtainable for a sum representing the then fair and reasonable value of the mortgaged premises, the court may, at the written request of holders of not less than a majority of the bonds, who shall in both number and amount be fairly representative of the rights and interests of all bondholders, authorize the bidding in of the property for the fair and reasonable value of the interest of the bondholders, and order the sale of the property to the trustee for the benefit of all holders of bonds or other obligations secured by the mortgage. In determining the majority of the outstanding bonds, those held by the mortgagor or for its benefit are not included. The bidding by the bondholders shall constitute their appearance and intervention in the case, and any other bondholders may appear. The property when bid in is to be managed and administered by the trustee under and in accordance with the rules and principles of law and equity pertaining to express trusts, but shall be subject to the jurisdiction of the court. The trustee shall have the power to repair, maintain, and operate or lease the property until the sale thereof. It may borrow money and mortgage the property for the payment of the portion of the bid required to be paid in cash or for any other purposes of the trust, all for the benefit of the holders of the bonds, obligations, etc. It is the duty of the trustee to negotiate and effect a sale or other disposal of the property as soon as it can be done without sacrifice of the fair and reasonable value of the property. The sale may be for cash, or, in whole or in part, for bonds, notes, debentures, stocks, or other securities. No contract, the full performance of which shall extend beyond two years, may be made except by and with the approval and authorization of the court, upon due notice to, and consent of, the majority in interest of the beneficiaries of the trust. We shall not refer to many other important provisions of the act. The act was given immediate effect and approved May 18, 1931.

On hearing of the petition, it was shown that the average earnings from the property, without figuring depreciation, was in the neighborhood of 5 per cent. above taxes and fixed charges, notwithstanding the fact that a large part of the building was vacant. Even at the time of the foreclosure, the earnings had fairly well kept up. Plaintiff and defendant offered conflicting testimony as to the adequacy of the bid of $760,000 under the prevailing conditions. The court ordered the sale at the price bid. James J. Spillane, a holder of a $1,000 bond, appeared specially at the hearing for the purpose of objecting to the granting of the petition, and he, together with defendant, has appealed from the order of the court.

Counsel claim that, as one of the results of the financial depression, it is extremely difficult to obtain loans on real estate security; that in many instances the income from mortgaged property is insufficient to pay taxes, operating charges, interest, and serial retirements, and the trustee should bring foreclosure proceedings to avoid further loss; that a bondholders' committee representing but a portion of the bonds may be seriously handicapped and possibly not be able to bid at all on account of its inability to pay the amount of cash required to purchase the property at foreclosure sale even after the application of the deposited bonds; that, if a cash bid is made at all, it must be a very small one; that bondholders, realizing conditions, are apt to sell their bonds for far less than their actual value. The seriousness of the situation is recognized by the title to Act No. 111, Public Acts 1931, and also by the further fact that the act was given immediate effect by the Legislature. Plaintiff contends that the provisions of the act were not invoked until after the property had been offered at a judicial sale at which the bondholder, the mortgagor, and the public had an opportunity to bid; that the mortgage indenture created an express trust, the purposes of which were found incapable of being carried out in manner and form as intended by the mortgage; and thereafter the aid of a court of equity was sought to administer substantial relief to all bondholders without any discrimination. The defendant and objecting bondholder claim that the commissioner's sale may have failed because plaintiff desired to invoke the aid of Act No. 111, supra, and that the committee holding over 97 per cent. of the bonds could have purchased the property with a comparatively small cash outlay. But a few years previous it had been appraised at more than twice the amount of the mortgage loan, and it was paying a very substantial income over and above taxes and fixed charges even during the period of foreclosure.

It is further claimed that the title of the act is insufficient, and does not fully describe its purposes. We believe that the title does give sufficient notice of the purposes of the act. It is further contended that the act should not have been given immediate effect. In Industrial Bank v. Reichert, 251 Mich. 396, 232 N. W. 235, we upheld the powers of the legislature to give immediate effect to a law affecting the public safety by protection of property. See, also, Naudzius v. Lahr, 253 Mich. 216, ...