Hubbard v. Safe Deposit & Trust Co. of Baltimore

• Decision Date: 17 June 1937
• Docket Number: 38.
• Citation: 192 A. 592,172 Md. 645
• Parties: HUBBARD v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE.
• Court: Maryland Court of Appeals

192 A. 592

172 Md. 645

HUBBARD v. SAFE DEPOSIT & TRUST CO. OF BALTIMORE.

No. 38.

Court of Appeals of Maryland

June 17, 1937

Appeal from Circuit Court No. 2 of Baltimore City; Edwin T Dickerson, Judge.

Application by the Safe Deposit & Trust Company of Baltimore, trustee for the benefit of a life tenant and remaindermen, for instructions as to distribution of certain income. From the decree, Emma Louise Hubbard, life tenant, appeals.

Reversed and remanded for passage of decree in accordance with opinion.

Argued before BOND, C.J., and URNER, OFFUTT, PARKE, MITCHELL, and SHEHAN, JJ.

John T Tucker, of Baltimore (Keech, Carman, Tucker & Anderson, of Baltimore, on the brief), for appellant.

William L. Marbury, Jr., and Boyd B. Graham, both of Baltimore, for appellee.

BOND Chief Judge.

A testamentary trustee for the benefit of a life tenant and remaindermen, holding an investment in notes secured by a pledge of mortgage bonds of the same debtor, applied to the court of equity for instructions on the distribution of money received as interest on the bonds after default on the notes at maturity, without sale or foreclosure of the collateral; and the life tenant appeals from a direction denying her a right to priority for payment of the interest installments on the notes after maturity.

The decedent, Howard Hubbard, devised and bequeathed all his estate to the Safe Deposit & Trust Company in trust to invest, to collect the income from time to time from investments made, and after payment of charges and expenses, "to pay over the net income at stated periods to my wife, Emma Louise Hubbard, during her life, or widowhood, and from and after her death or remarriage, in trust to divide the corpus or principal of the trust estate as then constituted, into two equal parts or shares," for the testator's children, in remainder. In the year 1927, subsequent to the testator's death, the sum of $6,000 was invested by the trustee in notes of the Interborough Rapid Transit Company, of New York, part of an aggregate issue of $31,672,100, bearing interest at 7 per cent., and maturing on September 1, 1932, and which were secured as to principal and interest by a pledge with the Bankers Trust Company, of New York, as trustee, of mortgage bonds of the same company aggregating $54,989,000 in par value, bearing interest at 5 per cent. and maturing in 1966. By the terms of the indenture under which they were deposited, the bonds were to secure "the payment of the principal and interest of all said notes at any time issued and outstanding under this indenture, according to the tenor, purport and effect thereof, and secure the performance and observance of all the covenants and conditions" contained in the indenture. Until default on the notes or the interest on them, no interest was to be payable on the pledged bonds. The trustee might sell the bonds upon default, or a specified percentage of noteholders might compel the sale, but none has been made. Upon a a sale, the surplus proceeds after payment of all costs, taxes, and advances made or liabilities incurred by the trustee, were by the terms of the indenture to be applied "to the payment of the whole amount then owing or unpaid upon the notes hereby secured for both principal and interest, with interest at the rate of seven percent per annum on principal after maturity and on overdue coupons, or in case such proceeds shall be insufficient to pay in full the whole amount so due and unpaid upon the notes, then to the payment of such principal and interest ratably, without preference or priority of principal over interest, or of interest over principal, or of any instalment of interest over any other instalment of interest." Receivers were appointed for the property of the Interborough Company on August 26, 1932, and there was a default in payment of interest and principal on the notes at the maturity date, September 1, 1932. Interest has been paid on the pledged bonds, beginning January 1, 1933, under an order of the court of the receivership, and as the par value of the bonds greatly exceeds that of all the notes, the interest paid, although at a lower rate, exceeds the interest on the notes.

The Chancellor below directed that at the time of distribution of interest money from the pledged bonds, the trustee under the will should divide the amount received between income and corpus of the estate, that is, between the life tenant and the remaindermen, in the proportion that the amount of principal bears to that of the overdue interest on the notes. The conclusion that this should be done followed from viewing the payment of interest on the bonds as a realization upon the collateral, of the same nature as that upon a sale of it with a resulting partial payment on the secured debt, insufficient to pay overdue principal and interest in full. And the rule of ratable distribution applied was one frequently found equitable upon such a realization and partial payment. See studies and reviews of decisions in 84 Univ. of Pa. Law Review, 157, 327, and 625, and 49 Harvard Law Review, 805. A like conception of the payment on the pledge was adopted in the United States District Court for the Southern District of New York, under which the receivers have been acting, in giving directions for the application of the payments by the trustee under the pledge indenture. American Brake Shoe & Foundry Company v. Interborough Company, 11 F.Supp. 418. In 1935, that trustee, the Bankers Trust Company, asked the instructions, and the court directed that the distribution expressly provided in the indenture for proceeds of sale of the collateral when insufficient to pay the whole amount then due and payable on the notes should be followed as the solution of an analogous problem, and that therefore the notes and coupons...