Home Mortg. Co. v. Ramsey

• Decision Date: 24 April 1931
• Docket Number: No. 3161.,3161.
• Citation: 49 F.2d 738
• Parties: HOME MORTG. CO. et al. v. RAMSEY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

49 F.2d 738 (1931)

HOME MORTG. CO. et al. v. RAMSEY et al.

No. 3161.

Circuit Court of Appeals, Fourth Circuit.

April 24, 1931.

John W. Davis, of New York City, and James H. Pou, of Raleigh, N. C. (James H. Pou, Jr., of Raleigh, N. C., R. P. Reade, F. L. Fuller, Jr., and Jones Fuller, all of Durham, N. C., W. A. Devin, Jr., and Thos. P. Pruitt, both of Hickory, N. C., and Allen Wardwell, Porter R. Chandler, Kenneth F. Clark, Rushmore, Bisbee & Stern, Joseph V. Kline, and Bertram F. Shipman, all of New York City, on the brief), for appellants.

Ernest S. Merrill, of Norfolk, Va., and L. I. Moore, of Newbern, N. C. (A. L. Jordan, of Norfolk, Va., R. T. Allen, of Kinston, N. C., and R. Clarence Dozier, of South Mills, N. C., on the brief), for appellees.

Before PARKER and NORTHCOTT, Circuit Judges, and ERNEST F. COCHRAN, District Judge.

ERNEST F. COCHRAN, District Judge.

The appellants were the defendants in the District Court, and the appellee the plaintiff, and will hereafter be styled the plaintiff and defendants, respectively. The plaintiff, claiming to be the owner of $3,500 of bonds of the defendant the Home Mortgage Company, brought suit against that company, and the defendant First National Bank of Durham as trustee, and prayed for a receivership. Temporary receivers were appointed without notice, and later, by successive orders were tered, making the appointment of the receiv-continued and finally a final decree was eners permanent; and the consolidated record brings up for review these successive orders and decree. The record is a voluminous one, and many questions have been presented, both in matters of procedure and as to the rights of the parties in the premises. The case is a very important one, and the situation demands a prompt decision. In these circumstances, we shall not attempt to discuss the evidence or to state all of the facts in detail. It is sufficient to say that we have carefully considered all questions presented, and inasmuch as we have reached the conclusion, upon a consideration of the merits of the cause, that the receivership should be vacated, we shall simply state as briefly as practicable those facts upon which our conclusion is based, without attempting any elaboration of our views or such extended discussion of the questions presented as we might deem proper if the case were such as not to demand a speedy decision.

The defendant Home Mortgage Company is a corporation having assets considerably in excess of $10,000,000. Originally it was one of a group of companies formed by its former president, and until January, 1930, he and his associates were in active charge of its affairs. There was some evidence of some mismanagement on the part of the officers of the Home Mortgage Company, prior to January, 1930; but the evidence discloses no fraud or mismanagement of such a gross nature as would imply misconduct or actual fraud. In January, 1930, however, the entire management of the company was reorganized and the president resigned. Numerous other changes in the personnel of the officers took place at the same time, and the policies of the company underwent a considerable change, and that course of conduct on the part of the previous officers which appears to have been (to some extent, at least) evidence of mismanagement, was abandoned, and efforts made by the new management to correct those matters. The Home Mortgage Company was engaged in the usual business of a mortgage brokerage concern, making loans upon real estate. At the time of the receivership the outstanding individual loans amounted to something over $10,000,000. The plan of the company was to issue bonds and certain indentures securing the same, supported by deposit, with the defendant First National Bank of Durham as trustee, the notes and mortgages of the individual borrowers to serve as collateral against the bonds. At the time of the receivership there was outstanding a total of more than $10,000,000 such bonds. They were issued under five separate indentures made by the Home Mortgage Company to the First National Bank of Durham, N. C., as trustee under each indenture. Under the first of these indentures (spoken of as the Metropolitan indenture), bonds were issued aggregating around $6,000,000 and were outstanding at the time of the receivership. Under this indenture, the bonds were issued in fourteen series, lettered consecutively. Each series is a unit, separate and distinct from every other series, and is secured by the deposit of separate collateral; so that the bonds of each series are secured by an independent lien upon independent collateral. The entire issue or series (under this indenture), besides being secured by real estate mortgages, is guaranteed as to both principal and interest by the Metropolitan Casualty Insurance Company of New York. The plaintiff claims to be the owner of $3,500, face amount of bonds belonging to Series I, issued under this indenture.

In addition to the Metropolitan indenture under which plaintiff claims to hold her bonds, there are four other indentures under which bonds were issued, commonly referred to as the Straus indentures. Under each of them were issued outstanding bonds in the face amount of $1,000,000, or $4,000,000 in all. The bonds under these indentures were likewise secured by first mortgages on real estate deposited as collateral with the First National Bank of Durham as trustee; but were not further secured by any outside guarantor, as was the case with plaintiff's bonds. At the time of the receivership, none of the bonds issued under any of the Straus indentures were or at any time had been in default as to either principal or interest. As to the bonds under the Metropolitan indenture, none of them, either of the plaintiff's series or any other, has at any time been in default with respect to either principal or interest; principal and interest on all of them having been punctually paid both before the receivership and since.

The bonds claimed by plaintiff and all other bonds issued under the Metropolitan indenture incorporate by reference the provisions of the indenture into the bond, the language of the bond in that respect being as follows: "This Bond is one of a duly authorized issue of Bonds of the Company known as its Guaranteed First Mortgage Collateral Gold Bonds, Series ____ (herein called the Bonds), limited as to said series to the aggregate principal amount of One Million Dollars ($1,000,000.), at any one time outstanding, all of which Bonds of said series are issued and to be issued under and equally secured by and subject to the terms and conditions of a trust indenture dated the ____ day of May, 1927, made by the Company to the First National Bank, as Trustee (herein called the Trust Indenture), reference to which is hereby made for a description of the nature of the security and of the rights, obligations, and duties of the Company, of the Trustee and of the holders of the Bonds, and the terms and conditions under which the Bonds are secured."

The Metropolitan indenture under which the bonds claimed to be owned by plaintiff were issued contains the following provision:

"Section 12. Anything in this Article or elsewhere in this Trust Indenture to the contrary notwithstanding, no holder of any Bond or coupon issued hereunder and hereby secured shall have any right to institute any suit, action or proceeding at law or in equity or take any other steps or proceedings for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of such default and the continuation thereof, as hereinbefore provided; nor unless the holders of not less than twenty-five per cent. (25%) in amount of all the bonds of said series, then outstanding, shall have made written request upon the Trustee and shall have offered to it a reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceedings in its own name, and shall have offered to the Trustee adequate securities and indemnity against the costs, expenses and liabilities to be incurred therein or thereby; provided, however, that the right herein provided for shall not be exercised by bondholders without the consent of the Surety Company so long as no event of default as prescribed in subdivisions (1) and/or (2) of Section 2 of this Article V shall exist, and in such case, in respect of a default as prescribed in subdivision (1) only after the elapse of ninety (90) days from the commencement of such default, and in respect of a default as prescribed in said subdivision (2) only after the elapse of eighteen (18) months from the commencement of such default. Said notification, request and offer of indemnity are in each and every such case to be conditions precedent to the exercise by the bondholders, except through the Trustee, of the powers and trusts of this Trust Indenture; it being understood and intended that no one or more holders of Bonds and coupons shall have any right in any manner whatsoever by his or their action to affect, disturb or prejudice the lien of this Trust Indenture, or to enforce any right hereunder, except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided, and for the equal benefit of all the Bonds of any Series outstanding hereunder.

"The foregoing provisions of this Section 12, however, are intended only for the protection of the Trustee, and shall not be construed to affect any discretion or power by any provisions of this Trust Indenture given to the Trustee to determine whether or not it shall take action in respect of any default without such notice or request from bondholders or the Surety Company, or to affect any other discretion or power given to the Trustee.

"Nothing in this Section 12 or elsewhere in this Trust Indenture or in the Bonds or in the coupons, if any,...