In re Fid. Union Title & Mort Gage Guar. Co.

• Decision Date: 26 February 1935
• Citation: 177 A. 449
• Parties: In re FIDELITY UNION TITLE & MORT GAGE GUARANTY CO.
• Court: New Jersey Court of Chancery

177 A. 449

In re FIDELITY UNION TITLE & MORT GAGE GUARANTY CO.

Court of Chancery of New Jersey.

Feb. 26, 1935.

Syllabus by the Court.

1. Whatever puts one upon inquiry constitutes notice of that which would have been learned by such inquiry.

2. Holders of mortgage certificates issued against a mortgage subject to amortization payments are entitled to payment thereof according to their respective terms and out of the particular installment mentioned therein; such certificates indicating on their face that they are issued against an installment mortgage, and the mortgage not being in default.

3. The word "subordinate," as used in chapter 81, P. L. 1927, p. 144 (Comp. St. Supp. 1930, § 73—37a), authorizing the investment of trust funds in "shares or parts of bonds secured by mortgages * * * provided, that any share or part of such bonds and mortgages or bonds secured by such trust mortgage so held shall not be subordinate to any other bonds issued thereunder and shall not be subordinate to any prior interest therein," refers to the lien or security and not to the time of payment. It means inferior, not co-ordinate, with respect to such lien or security.

In the matter of proceedings under the Mortgage Guaranty Corporation Rehabilitation Act affecting the Fidelity Union Title & Mortgage Guaranty Company. On trustees' report and petition for instructions concerning amortization payments on short term certificates.

Decree in accordance with opinion. See, also (N. J. Ch.) 177 A. 447.

Merritt Lane and Herbert J. Hannoch, both of Newark, for William H. Kelly and J. Ashley Brown, trustees.

Hood, Lafferty & Campbell, Grosken & Moriarty, and Fredrick J. Waltzinger, all of Newark, for various investors.

BERRY, Vice Chancellor.

In the report and petition of the trustees of the Fidelity Union Title & Mortgage Guaranty Company as of the close of business October 31, 1934, instructions of the court were requested touching the disposition of certain amortization payments made to the trustees upon mortgages against which guaranteed first mortgage certificates had been issued. It was the practice of the company prior to the appointment of the trustees to issue two forms of guaranteed first mortgage certificates. With the first form, or ordinary certificate, we are not concerned; but a controversy has arisen with respect to the relative rights of investors in the second form of certificate, issued in cases where amortization installments weTe payable on the mortgage at specific intervals before the due date of the major part of the principal. These certificates indicated on their face that the mortgage against which they were issued was payable in installments. Some certificates were payable out of amortization installments and some out of the final installment, but all were payable out of a specific installment. Those payable out of amortization installments were classified as "Short Term" certificates, and to indicate such classification the letters "S T" appear on each of such certificates immediately preceding its number. No such letters appear on the certificates referring to the final installment, or major part of the principal, payable on the due date of the mortgage, but they are generally referred to, in company parlance, as "Long Term" certificates. In all other respects the short term and the long term certificates are in identical language.

It was the practice of the company to pay the short term certificates out of amortization payments when made. The holders of short term certificates claim to be entitled to priority of payment: (a) Out of the particular amortization payment mentioned in their respective certificates; or (b), at all events, out of the proceeds of the mortgage when satisfied either by payment, foreclosure, or otherwise.

The form of "S T" certificate issued by the company contaiped an assignment clause which reads as follows: "In consideration of the sum of——Dollars, receipt of which is hereby acknowledged, has assigned, transferred and set over and by these presents does assign, transfer and set over unto—— (hereinafter termed the Assured) an undivided interest to the extent of the above stated sum in and to the bond of—— dated——, conditioned to pay——Dollars (besides interest), in installments one of which amounting to——Dollars is payable on the——day of——, 19—, and in and to that certain first mortgage, which secures the said bonds, recorded in the office of the ——of—— County, New Jersey, in Book ——of Mortgages for said County on page —, covering premises in the—— of ——, County of——and State of New Jersey."

This was followed by a guaranty clause, which reads as follows: "And the Company hereby guarantees to said Assured or to any other lawful holder of this certificate, but subject to such reduction for taxes as may be required by law: (1) payment of interest at the rate of——— per cent. per annum from the day of the date hereof, upon the principal sum for which this certificate is issued, on the first day of——next and semi-annually thereafter until said installment of principal sum specifically referred to above shall be wholly paid or deposited to the account of the assured; (2) payment of said principal sum for which this certificate is issued as and when collected out of said installment of principal specifically referred to above secured by said bond and mortgage but in any event within eighteen months after the payment shall be demanded by the Assured, provided such demand be made after said instalment shall have become due under the terms of said bond and mortgage, or of any extension thereof assented to by Assured, as hereinafter provided."

Other provisions in the mortgage certificate which may have some bearing on the issue are as follows:

"This certificate is not valid unless identified by the signature of the President of the Company and the Secretary or an Assistant Secretary and the corporate seal attached. It is registered and is transferable by written assignment only to be registered in the name of the assignee and is given upon the following terms which the assured accepts as constituting the contract between the assured and the Company, to-wit:

"a. The Company may issue participations of similar tenor in such amounts as it may desire and upon its surrender and cancellation of existing participations may issue in lieu thereof new participations, either for the original sums or otherwise, but in no event shall the total participations issued or to be issued aggregate more than the amount of the principal moneys remaining unpaid on said bond and mortgage.

"b. The Company is appointed irrevocably by the Assured the agent and attorney of the Assured to collect, sue for and receive the principal and interest secured to be paid by the said bond and mortgage and to satisfy and discharge the said mortgage in its own name upon receiving full payment thereof; to collect, sue for and receive, and settle or compromise fire insurance and other insurances in case of loss; to exercise any right, option or privilege given to the mortgagee in said bond and mortgage, or either of them, or in any extension thereof.

"c. Whenever the principal sum secured by said bond and mortgage shall become due for any cause the Company shall have the right without expense to or waiver of any rights by the assured, to collect the same and out of the proceeds of such collection to retain so much as may remain after paying to the assured whatever may be due to the assured of principal and interest under this certificate.

"d. In the event of the payment of a part of the principal sum secured by said mortgage the Company shall have the right to retire any certificate to an equivalent amount or to hold the amount so paid for the benefit of the holders of all the certificates of said mortgage. * * *

"h. The Company may for its own corporate account be the holder or pledgee of one or more certificates which may be issued by the Company with respect to the bond and mortgage aforesaid, and, to the extent of such certificates, share in the same manner as the Assured, and in such event nothing herein contained and nothing in such act shall be construed to operate as a merger of the interests represented by the Assured and the mortgagee interest in said mortgaged premises held by said Company for all certificates held thereunder."

Attached to each such mortgage certificate were two other certificates: One, the so-called "qualification certificate" of the Fidelity Union Title & Mortgage Guaranty Company; and, the other, the so-called "deposit certificate" of the Fidelity Union Trust Company, with which latter company the mortgage and title papers were deposited for the benefit of all persons interested therein. These certificates are as follows:

"Qualification Certificate.

"Fidelity Union Title and Mortgage Guaranty Company of Newark, New Jersey, a title guaranty corporation organized under the laws of the State of New Jersey, hereby certifies that the mortgage described in the foregoing participation certificate is a first lien upon improved real estate; that the amount thereof, at the time of making said loan, did not exceed sixty per cent. of the estimated worth of the real estate covered by said mortgage: that the rate of interest accruing on said mortgage is not less than three per cent. nor more than six per cent per annum: that the bond secured by said mortgage has been divided into shares or parts, evidenced by participation certificates in tenor similar to the foregoing instrument, except as to amount: and that none of the said shares or parts is subordinate to any other bond issued thereunder nor subordinate to any prior interest therein. Fidelity Union Title and Mortgage Guaranty Company, By——Assistant Treasurer. Dated——.

"Deposit Certificate.

"Fidelity Union Trust Company of Newark, New Jersey, a trust company organized under the laws of the State of New Jersey, hereby certifies that the...