Louisville Title Co.'s Receiver v. Crab Orchard Banking Co.

• Decision Date: 13 June 1933
• Citation: 249 Ky. 736,61 S.W.2d 615
• Parties: LOUISVILLE TITLE CO.'S RECEIVER et al. v. CRAB ORCHARD BANKING CO. et al.
• Court: Kentucky Court of Appeals

61 S.W.2d 615

249 Ky. 736

LOUISVILLE TITLE CO.'S RECEIVER et al. v. CRAB ORCHARD BANKING CO. et al.

Court of Appeals of Kentucky

June 13, 1933

Rehearing Denied June 23, 1933.

Appeal from Circuit Court, Jefferson County, Chancery Branch, Second Division.

Suit by the Louisville Title Company's receiver, the Fidelity &amp Columbia Trust Company, and others against the Crab Orchard Banking Company and others. From a decree, plaintiffs appeal.

Affirmed in part, and reversed in part and remanded.

Wm Marshall Bullitt and T. K. Helm, both of Louisville, for appellants.

Hugh B Fleece, Lawrence S. Leopold, and Henry M. Johnson, all of Louisville, for appellees.

Ben F. Washer and Homer W. Batson, both of Louisville, for Masonic Widows' & Orphans' Home.

RICHARDSON Justice.

The Louisville Title Company, a corporation, organized under the laws of Kentucky, with power to engage in the business of insuring title to real estate, and in the real estate mortgage bond business. In connection with the latter business, it guaranteed "the payment of principal and interest" of all the real estate mortgage bonds which it sold by the indorsement thereon, reading: "This is one of the bonds mentioned in and secured by the within named mortgage deed of trust and subject to the conditions set forth on the reverse side of this bond; the payment of the principal and interest thereon at maturity are guaranteed by the Louisville Title Company." This was signed by its president. There were two types of mortgage bonds guaranteed by it, commonly called (a) term loan, and (b) "sinking fund" bonds. The mortgages to secure each kind of bonds were identical in their provisions, except the sinking fund type, included, in addition to all the provisions of the term loan type, this clause: "That in addition to the covenants last above written the other covenants and indebtedness of this instrument and in order to create a fund to be applied on the indebtedness secured by this instrument and the interest on same, the mortgagee will deposit with the trustee, monthly before the close of business on the even date of each month from this date until the maturity of said indebtedness the sum of $_____." The method of issuance of the bonds was, the owner of the real estate would execute them, with interest coupons attached, for different denominations, payable annually for a period of years, and secured by a mortgage on his real estate. The mortgage and the bonds were executed to and in the name of the Louisville Title Company, trustee. A part of its business was to engage in selling these bonds to the general public.

The Louisville Title Company closed its doors June 23, 1931, at which time there were in existence about 60,000 bonds and notes of the face value of about $17,000,000 (excluding bonds designated "suspended debt" bonds) secured by about 3,000 mortgages. They were all guaranteed by the company. About $2,500,000 were held by the company itself, and the rest, amounting to about $15,000,000, were owned by about 5,000 other persons. Of the term loan bonds $7,700,000 were owned by the public, and of the sinking fund bonds about $7,200,000 were also owned by the public. About $1,320,000 of the term loan bonds were in the possession of the company, and also about $367,000 of the sinking fund bonds. The company owed debts amounting to $997,250 secured by a pledge of about $1,500,000 of the company owned bonds and notes and other assets of the company. The security pledged to secure the $997,250 was of the total book value of something over $2,500,000. The $997,250 indebtedness was incurred and secured during the year or two years next before the company closed. The company also owned bonds of the face value of $503,000, which it marked as belonging to a guaranty fund, securing the company's title insurance policies as required by section 734, Ky. St.

The face value of the policies is $234,000,000. Losses on this amount, however, have been very small in the past, and it is conceded that these risks can be insured in other companies for a cash consideration of about $200,000, which, if the pledged bonds are taken at their face value, would release about $300,000 of these bonds. If the pledged bonds and the notes above mentioned be deducted from the company owned bonds, the amount of free assets of this class is reduced to less than $300,000. The contingent liability of the company as guarantor on the bonds in the hands of the public is estimated at $15,000,000. The trial court's conclusion was that its liability as guarantor resulting from the defaults of the borrowers and the loss of the proceeds of the foreclosure sales will be about $2,500,000. The resources estimated at the present value of the company's assets, both pledged and free, is about $1,800,000. It was the finding of the trial court that $997,250 will be required to pay secured creditors, "other than bondholders." When this amount is added to the $200,000 required for title insurance above indicated, and deducted from the $1,800,000 estimated value of the assets (pledged and free), we have remaining $602,075, the only resources for the payment of the $1,100,000 of sinking fund losses and the estimated liability of $2,500,000 on the company's guaranty, thus showing there will be nothing for stockholders, and reasonably certain nothing for general creditors, unless certain classes of bondholders are determined to be general creditors. Excluding the bondholders, it was determined by the trial court that the claims of the general creditors of the company amounted to about $20,000. It was also his finding that the only claims which could hope to share in any of the liquid assets of the company were those of the bondholders, thus eliminating the grounds of contest between the bondholders on the one side and general creditors on the other. The actual contest presented for determination is between the different groups of bondholders themselves, some of whom claim priorities and the others the opposite. The basis of this contest between them is (a) irretrievable losses by reason of the default and insolvency of the borrower; (b)...