FIRST TRUST CO. OF LINCOLN, NEB., v. Ricketts

• Decision Date: 14 November 1934
• Docket Number: No. 9986.,9986.
• Citation: 75 F.2d 309
• Parties: FIRST TRUST CO. OF LINCOLN, NEB., v. RICKETTS.
• Court: U.S. Court of Appeals — Eighth Circuit

75 F.2d 309 (1934)

FIRST TRUST CO. OF LINCOLN, NEB., v. RICKETTS.

No. 9986.

Circuit Court of Appeals, Eighth Circuit.

November 14, 1934.

Frank D. Williams, of Lincoln, Neb. (Earl Cline, of Lincoln, Neb., on the brief), for appellant.

R. A. Boehmer, of Lincoln, Neb. (Perry W. Morton, of Lincoln, Neb., on the brief), for appellee.

Before GARDNER, SANBORN, and WOODROUGH, Circuit Judges.

SANBORN, Circuit Judge.

Prior to bankruptcy, the Lincoln Trust Company, of Lincoln, Neb., which will be referred to as the bankrupt, was engaged in the business of making and selling mortgage loans. On March 31, 1927, Ethel Harriman, as mortgagor, executed and delivered to the bankrupt, as mortgagee, a mortgage covering lands in Scotts Bluff county, Neb., as security for the payment of 11 notes, aggregating $7,000, due March 31, 1932, with interest at the rate of 6 per cent. per annum, payable semiannually, and represented by coupon notes. The notes or bonds secured by this mortgage, together with interest coupons, were payable to the bankrupt at its place of business in Lincoln. They were sold to certain of its customers. The mortgage provided that the mortgagor should pay taxes and assessments and keep the buildings insured against fire and tornado; that if the mortgagor failed to pay such expenses, the mortgagee might pay them, "and the sum so advanced with interest at ten per cent per annum shall be repaid by mortgagor, and this mortgage shall stand as security therefor." It also provided that, in case of the failure of the mortgagor to pay either principal or interest when the same became due or to comply with any of the terms or conditions of the mortgage, the whole sum of money secured by the mortgage, at the option of the mortgagee, might be declared to be due, or the mortgagee might foreclose only as to the sum past due without impairing the lien of the mortgage. The mortgage contained this provision: "In case of any of the bonds or coupons secured hereby are held by other parties than the mortgagee, the parties hereto hereby constitute and authorize the Lincoln Trust Company of Lincoln, Nebraska, as trustee under this mortgage, for the use and benefit of the holders of the debts secured hereby, with full power and authority upon maturity of this mortgage or the debts secured thereby, either by the lapse of time or by failure to perform any of the terms or conditions hereof, to foreclose or enforce collection or payment of this mortgage and the debts secured thereby, or in case of loss or damage to collect and receipt for insurance thereon; to satisfy and release of record or otherwise this mortgage or said debts; to make distribution of the proceeds thereof to the holders or owners of said bonds or coupons after payment of the costs and expenses thereof, and to do all things necessary or suitable to the performance of said duties and the exercise of said powers."

The bondholders received from the bankrupt, upon presentation of their interest coupons, all interest due on their bonds up to and including the 31st day of March, 1932, but the mortgagor only paid interest to and including September 30, 1929, and all interest thereafter was advanced by the bankrupt out of its own funds. The mortgagor failed to pay taxes for the years 1927 and 1928, and the mortgaged premises were sold for nonpayment thereof. On April 15, 1930, the bankrupt redeemed from the tax sale, and, in so doing, paid out $1,815.20. On June 20, 1930, the bankrupt paid the 1929 taxes, amounting to $840.35, and between April 17, 1930, and May 15, 1930, the bankrupt paid to the bondholders, upon their presentation of the interest coupons which were due March 31, 1930, the sum of $210. On July 7, 1930, the bankrupt commenced a suit to foreclose the mortgage for the taxes and interest which it had paid and which should have been paid by the mortgagor. While the suit was pending, and on February 2, 1931, the mortgagor gave to the bankrupt a quiclaim deed of the mortgaged premises, and thereupon the bankrupt took possession and control thereof, and collected rents to the amount of $1,109.33, paid additional taxes amounting to $854.30, insurance premiums, $45.94, repairs, $15.35, and clover seed, $52.74. The total amount of interest advanced by the bankrupt to take up interest coupons was $1,050. Although this mortgage was virtually in default from the beginning because of the nonpayment of taxes by the mortgagor, no bondholder was advised of any default until after July 9, 1932, when the Lincoln Trust Company was adjudged a bankrupt. Thereafter, the First Trust Company of Lincoln, Neb., was appointed by the state court successor trustee for bondholders under various trust deeds and mortgages in which the bankrupt had been named as trustee. The transfer of the trust property to the successor trustee was made upon express condition that the bankruptcy court should retain exclusive jurisdiction of the trust properties for the determination of any liens, right, titles, or interest the bankrupt might have in the property so transferred. Among the trusts transferred to the First Trust Company was the Harriman mortgage.

The successor trustee was of the opinion that the bankrupt, in taking title to the Harriman lands and in paying taxes and other expenses in connection therewith, including interest upon the mortgage, was not acting as trustee for the bondholders, but in its own right, and that it was the owner of the lands, subject to the mortgage. Application was therefore made by the successor trustee to the referee for leave to foreclose the mortgage. In response to this application, the trustee in bankruptcy of the Lincoln Trust Company asserted that the bankrupt, in taking title to the mortgaged premises, in paying taxes and insurance, and in making other disbursements, including the interest advanced, had acted solely in its capacity as trustee for the bondholders; that it had necessarily expended on their behalf $4,816.01, and had received rents of $1,109.33, leaving a net deficit of $3,706.68, for which it was entitled to reimbursement. He asked that, as trustee for the bankrupt, he be given a first lien upon the mortgaged lands for that amount, that the lands be sold, and the proceeds applied to the payment of the amount adjudged to be due him.

The referee reached the conclusion that, in paying taxes and insurance, in taking a deed to the land, and in making expenditures for repairs, etc., the bankrupt had acted as trustee for the bondholders and for their best interests and was entitled to reimbursement and a first lien upon the lands for taxes and insurance premiums, without interest, and to a deduction from rents received of other necessary carrying charges; that in advancing funds for interest, it was purchasing and not paying the interest coupons, and that it had a lien for such coupons of equal rank with the lien of the bondholders. He ordered a sale of the lands and the application of their proceeds, after the payment of costs, first to the payment of the bankrupt's first lien for taxes and insurance; the balance to be applied to the payment of the bonds and unpaid interest coupons, including those held by the trustee in bankruptcy.

The First Trust Company, as successor trustee, filed a petition to review the order of the referee. The court below reached the conclusion that the referee was right, and confirmed his order. This appeal followed.

With respect to the advances made by the bankrupt for taxes, insurance, and the preservation of the trust property, the contention of the appellant is that the record shows that the bankrupt was acting for itself and in its own interest, and not in the interest of the bondholders.

It is possible that the bankrupt intended to take title to the mortgaged real estate, to pay the carrying charges, and eventually to pay off the bonds out of its own funds and to sell the land for its own reimbursement, keeping any profit which might accrue from a sale. The fact is, however, that the bankrupt was trustee for the bondholders, that it bore toward them a relation of trust and confidence which the law would not permit it to violate, and that it could not acquire an interest in the trust property adverse to them. Michoud et al. v. Girod et al., 4 How. (45 U. S.) 503, 11 L. Ed. 1076; Robertson v. Chapman, 152 U. S. 673, 681, 14 S. Ct. 741, 38 L. Ed. 592; Magruder v. Drury and Maddox, Trustees, 235 U. S. 106, 119, 35 S. Ct. 77, 59 L. Ed. 151; Trice v. Comstock (C. C. A. 8) 121 F. 620, 61 L. R. A. 176; J. H. Lane & Co. v. Maple Cotton Mills (C. C. A. 4) 232 F. 421; Baker et al. v. Schofield, Receiver, etc., 243 U. S. 114, 119, 37 S. Ct. 333, 61 L. Ed. 626; Jackson, Receiver, etc., v. Smith, 254 U. S. 586, 588, 41 S. Ct. 200, 65 L. Ed. 418; Johnson v. Umsted (C. C. A. 8) 64 F.(2d) 316, 320, and cases cited; Johnson v. Hayward, 74 Neb. 157, 103 N. W. 1058, 107 N. W. 384, 5 L. R. A. (N. S.) 112, 12 Ann. Cas. 800; Dana v. Duluth Trust Co., 99 Wis. 663, 75 N. W. 429; Marshall v. Lovell (D. C. Minn.) 11 F.(2d) 632, 639, affirmed (C. C. A. 8) 19 F.(2d) 751.

Under the circumstances, a finding by the referee that the bankrupt was pursuing a course of conduct which it could not legally pursue could hardly be sustained.

It is also contended by the appellant that, since the bankrupt did not deal fairly with the bondholders and gave them no notice that the mortgagor had failed to pay taxes, insurance, and interest, and had deeded the property to the bankrupt, it is not entitled to reimbursement.

The general rule is that a trustee under a mortgage is entitled to be reimbursed for all expenditures authorized or contemplated by the mortgage, and for all expenditures made in preserving the trust property, and that he has a lien upon the trust property for the amount of such expenditures.

In Gisborn v. Charter Oak Life Insurance Co., 142 U. S. 326, 337, 12 S. Ct. 277, 280, 35 L. Ed. 1029, the court said: "In 2 Pom. Eq. Jur. §...