Fidelity Trust Co. v. D.T. McKeithan Lumber Co.

• Decision Date: 16 January 1914
• Citation: 212 F. 229
• Parties: FIDELITY TRUST CO. v. D. T. McKEITHAN LUMBER CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

212 F. 229

FIDELITY TRUST CO. v. D. T. McKEITHAN LUMBER CO. et al.

United States District Court, E.D. South Carolina.

January 16, 1914

[Copyrighted Material Omitted]

Mitchell & Smith, of Charleston, S.C., and Williams, Thomas &amp Williams, of Baltimore, Md., for complainant.

Louis G. Addison, of Columbus, Ohio, James Simons, of Charleston S.C., and Willcox & Willcox, of Florence, S.C., for defendants.

SMITH District Judge.

In this cause a bill was filed by the complainant to obtain the instruction of the court upon certain legal questions in the interpretation of the trust instrument with regard to the performance of its duties thereunder. The complainant is the mortgagee trustee. To the bill of complaint there were made as parties defendant the D. T. McKeithan Lumber Company, the mortgagor, and the three individual defendants, Bonsal, Barr, and McKeithan, as being the sole beneficiaries under the terms of the deed of trust by way of mortgage, as they were the holders of all the obligations thereby secured. An answer was filed by the defendant the D. T. McKeithan Lumber Company, and a separate and independent joint and several answer was filed by the three individual defendants. The questions as to the construction of the mortgage upon which the complainant sought the direction of the court came to a hearing and were decided by a decree filed in this court on the 21st day of May, 1913. Other questions were raised by the answers of the codefendants as against each other, as well as one against the complainant. The individual defendants, Barr, Bonsal, and McKeithan, alleged that their codefendant, the D. T. McKeithan Lumber Company, was engaged in cutting a large quantity of timber from a tract of land of 2,700 acres, known as the Bright Williamson timber, upon which, when cut, it was required, under the terms of the mortgage, to pay the sum of $2.50 per thousand feet into the sinking fund provided for by the mortgage, as to be paid to the trustee under the mortgage. The other defendant, the D. T. McKeithan Lumber Company, has filed an answer and supplemental answer setting up a number of counterclaims under rule 31 of the rules in equity (198 F. xxvii), which answer and supplemental answer were duly served upon the codefendants, the individual defendants herein, who filed a general reply thereto.

These counterclaims in brief are five in number and set up the following contentions:

(1) That the deed of trust by way of mortgage should be reformed so as that the clause therein providing for certain payments to be made out of the sinking fund therein provided for, and which has been construed by this court by its decree already filed not to include and cover the payment of the annually recurring interest upon any bonds except those which mature in the year of payment, should be reformed so as to permit and require the payment by the trustee out of the sinking fund of the annual interest on all the bonds outstanding, whether they mature in the current year or not.

(2) That the plaintiff had paid and redeemed $20,000 at par value of the bonds secured by the deed of trust by way of mortgage, and was entitled under the terms of deed to have the mortgagee release and discharge from the lien of the mortgage an equal pro rata or proportion of the mortgaged properties; that, although request had been made of the trustee so to do, it had failed to perform its duty in that regard, under the terms of the deed of mortgage.

(3) That the individual defendants, as holders of all the bonds secured by the mortgage, had taken the same with notice that the D. T. McKeithan Lumber Company had been led to believe that its mill would be completed and ready for operation by the 1st day of October, 1911; that, by reason of the representation on behalf of the corporations from which the defendant had purchased the property to that effect, it had delivered the bonds to its individual codefendants upon the understanding that, inasmuch as the mill had not been completed and ready for operation until the 1st day of January, 1912, one-half of all the coupons on the bonds payable on the 1st day of April, 1912, should not be presented for payment, but should be canceled.

(4) That part of the consideration given by the defendant the D. T. McKeithan Lumber Company for the purchase of the mortgaged premises was the agreement on the part of its vendors, the Williams-McKeithan Lumber Corporation of Virginia and the Williams & McKeithan Lumber Company of South Carolina, that all accounts and claims for lumber sold since April 1, 1911, should be paid to the vendee; that the aggregate amount of lumber sold since that date up to the date when the final conveyance was made to the vendee and the vendee put in possession was $60,958.53, of which the estimated balance remaining after the payment of freight was $42,670.97, of which about $11,887.92 had been paid, leaving unpaid $30,783.05; that the codefendants, the individual holders of the bonds, had taken the bonds with full knowledge of the obligation to pay this amount, and its failure, and that the amount so due should be taken off from the bonds in the hands of its codefendants.

(5) That misrepresentations of a most material question had been made as to the quantity of timber, in consideration of the purchase of which the bonds secured by the deed of trust by way of mortgage had been given; that the D. T. McKeithan Lumber Company was entitled to an abatement in price to the extent of this deficiency; and that the individual bondholders had received and accepted the bonds with full knowledge of the fact that the said bonds had been given in part payment of that timber, and of the deficiency therein, and that the plaintiff is entitled to have a decree for the amount of such deficiency, and that the same should be deducted from the amount of the bonds in the hands of the individual codefendants.

(6) The counterclaim interposed in the supplemental answer and counterclaim, to the effect that the bonds held by the individual codefendants were in like manner responsible in the hands of the individual codefendants for a failure of consideration in the nonconveyance and delivery to the D. T. McKeithan Lumber Company by the vendor corporation, before referred to, of the timber upon a large tract of 3,088 acres of timber mentioned therein, and of the failure to include in the deed of conveyance the timber upon five smaller tracts of land also mentioned therein; that, for the damages or failure of consideration thereby inuring to the D. T. McKeithan Lumber Company, the individual codefendants, as holders of the bonds, should be decreed to have the amount of such damage or deficiency deducted from the amount of their bonds.

There is involved in one of the counterclaims for a failure of consideration the claim that, at the time of the purchase of this property, representations were made which are, for the purposes of the prayer of the counterclaim binding upon the individual defendants to the effect that one of the tracts of land sold, to wit, that lying along the Great Peedee river, was in a contiguous connected tract, with a solid boundary; that it appeared that such was not the case; one portion was separated by an intervening tract, which very much affected the value of the timber thereon by reason of the increased cost of manufacturing and marketing, and that was an element of loss to be considered in estimating the amount of the failure of consideration.

The case having come to a hearing upon these issues, the testimony propounded by the parties has all been heard, and counsel on behalf of all parties interested have been heard, and it is thereupon now adjudged and decreed as follows:

First. With reference to the contention raised by the three defendants that the codefendant, the D. T. McKeithan Lumber Company, should be required to pay the sum of $2.50 to the trustee mortgagee on account of the sinking fund provided for in the mortgage, the court finds, as a conclusion of fact that the timber on the Bright Williamson tract was not owned at the date of the mortgage by the mortgagor; that it is not specifically described or included within the property mortgaged or covered by any of the express terms thereof; that, as already decreed by this court, the mortgage must be understood as referring to its date and to the property then held and possessed by the mortgagor. In this case the mortgagor possessed only an option to purchase this timber. This option had been given years before for the payment of a sum of money very much less than the amount to be paid for the timber itself, should the option be exercised. It was entirely within the discretion of the mortgagor whether it should or should not exercise its option. The money to be paid for the timber, if it did exercise the option, was in no wise included within the property mortgaged. The mortgagee and the beneficiaries under the mortgages had no interest in this money. This investment in the timber was not a part or in substitution of any property subject to the mortgage, but was the investment therein by the mortgagor of a sum of money which it was in no way bound to make, under the terms of the mortgage. If it had never seen fit to exercise the option, the amount of the property mortgaged would not have been diminished. The court holds that, under the terms of the option, it was not bound to exercise it so as to enhance the amount of property mortgaged. It is therefore decreed, as a conclusion of law, that the timber upon the Bright Williamson tract is not subject to the terms of the mortgage, and the mortgagor is not bound to pay into the hands of the trustee, as part of the sinking fund provided for by the terms of the mortgage, the sum of $2.50 per...