Manufacturers Trust Co. v. Kelby, 142.

• Decision Date: 03 February 1942
• Docket Number: No. 142.,142.
• Citation: 125 F.2d 650
• Parties: MANUFACTURERS TRUST CO. v. KELBY et al.
• Court: U.S. Court of Appeals — Second Circuit

125 F.2d 650 (1942)

MANUFACTURERS TRUST CO. v. KELBY et al.

No. 142.

Circuit Court of Appeals, Second Circuit.

February 3, 1942.

David Barnett, of New York City, for appellant.

George C. Wildermuth, of Brooklyn, N. Y., for appellees.

Before L. HAND, CHASE, and C. E. CLARK, Circuit Judges.

L. HAND, Circuit Judge.

The Manufacturers Trust Company appeals from an order of the bankruptcy court, which modified an order of the referee, and denied its motion to dismiss objections filed to its account as mortgage trustee under a "series" of bonds of the debtor. The original proceeding was for a reörganization of the debtor — Prudence-Bonds Corporation — under Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. After the Plan had been accepted, the reörganization trustees applied to the district court for an order directing the mortgage trustees of some eighteen pools of mortgages — of which the Manufacturers Trust Company was one — to account in the bankruptcy court for the management of their respective trusts. The district judge decided that he was without jurisdiction over such accountings and denied the order, but this court held otherwise in Central Hanover B. & T. Co. v. President and Directors of Manhattan Company, 2 Cir., 105 F.2d 130. The Manufacturers Trust Company then filed its account, to which a number of parties filed objections, the chief question being whether it had unlawfully surrendered some of the mortgages in the pool and had become accountable for the resulting loss. The objectors were (1) the reörganization trustees, (2) a new corporation which had taken over the assets of the debtor in accordance with the Plan, (3) a number of individual bondholders who were beneficiaries of the trust, and (4) an "advisory group," or committee acting for bondholders. The Trust Company moved before the referee, to whom the issues had been referred, to dismiss all the objections, first, because they were barred under the statute of limitations of New York, and second, because in any event only bondholders could object and of these only those who had held their bonds at the time of any wrongful surrenders. The referee held that the new corporation, the reörganization trustees, and the "advisory group" had no standing to object, and that no bondholder had any standing who had not held his bonds at the time of the surrenders; but he also held that such individual bondholders as had so held their bonds could object in their own interest because they were not barred by the statute of limitations. On appeal to the judge, he affirmed the ruling of the referee as to the statute of limitations, but reversed him upon the other questions, and held that all the objections were valid and not barred. He therefore denied the motion of the Trust Company to dismiss the objections and for summary judgment. From his order the Trust Company appealed; and several mortgage trustees of other "series" have filed briefs as amici curiae.

The first and most important question is whether the assignee of one of the bonds of such a "series" has any standing to complain of a surrender of a part of the res made before the assignment. Nobody denies that the assignee is substituted for the assignor as to the assignor's equitable interest as beneficiary in all the mortgages that remain in the pool; the only question is whether the assignment also covers the assignor's interest in the right of action to compel the trustee to restore the fund. Being a question as to the effect of an assignment made in New York, the decisions in that state are authoritative, and we proceed to examine them.

The first at all relevant is Mittlemann v. President and Directors of Manhattan Co., 248 App.Div. 79, 289 N.Y.S. 2, affirmed 272 N.Y. 632, 5 N.E.2d 367, the doctrine of which was more specifically and authoritatively stated by the Court of Appeals in Weil v. President and Directors of Manhattan Co., 275 N.Y. 238, 9 N.E.2d 850, a sister case. All that the court actually held in that case was that the plaintiffs, who were "Schackno trustees," did not succeed to the rights of the bondholders against the defendant; but it went on to say — following In re Title & Mortgage Guarantee Co., 264 N.Y. 69, 190 N.E. 153, 96 A.L.R. 297 — that the original mortgagee, which had by means of "participation certificates" made partial assignments of the mortgages, remained the owner and that the defendant, which was merely a custodian of the documents, was not like a trustee. In this there was not the least intimation as to whether a bondholder's right of action to restore the res is to be regarded as part of the res itself. In Morrison v. Barker, 164 Misc. 886, 299 N.Y. S. 921, certificate holders personally sought to recover from the directors of the same kind of depositary; and in Frank v. President and Directors of Manhattan Co., 168 Misc. 741, 5 N.Y.S.2d 937, they sought to charge the depositary itself. Only the second is relevant, and, while the plaintiffs were not indeed open to the objection that they were "Schackno trustees," they too were proceeding against the depositary who was not a trustee and had no standing as beneficiaries of a trust. In Hendry v. Title Guarantee & Trust Co., 255 App.Div. 497, 8 N.Y.S.2d 164, the defendant, a mortgagee, had made partial assignments of a single mortgage by means of "participation certificates." Later it released to the mortgagor an award in condemnation of a part of the res, for which the court held it liable to all but three of the certificate holders: two, whose certificates the defendant had issued after the release, and one, who had inherited hers from her sister also after the release. As to the first two, the case is clearly not in point; the defendant was itself the owner of their shares when the supposed wrong was committed; and the holders' only remedy was for issuing a misleading certificate. Cf. Brenner v. Title Guarantee & Trust Co., 276 N.Y. 230, 11 N.E.2d 890, 114 A.L.R. 1010. As to the third holder, her intestate having been a partial assignee of the bond and mortgage, the defendant, the mortgagee, was not a trustee (Restatement of Trusts § 16), and nothing decided could be relevant here. In addition, the case did not concern the implications to be imputed to the transfer inter vivos of one of a series of secured bonds, but apparently whether the cause of action should vest in the executor or the next of kin; and it is not entirely clear upon whom the right of action did devolve. The result in In re Mortgage Corp. (In re Title Guarantee & Trust Co.), 261 App.Div. 840, 25 N.Y.S.2d 999, followed from Weil v. President and Directors of Manhattan Co., supra, 275 N.Y. 238, 9 N.E.2d 850, and the decision adds nothing to what went before.

The Trust Company so particularly presses upon us Elkind v. Chase National Bank, 259 App.Div. 661, 20 N.Y.S.2d 213, affirmed 284 N.Y. 726, 31 N.E.2d 198, that we will set it out with some particularity. Unlike those we have just mentioned, the case involved the rights of bondholders against a mortgage trustee. The mortgage covered all the mortgagor's assets except its "quick assets," and the plaintiff bondholders, suing in a representative action, sought to hold the trustee for neglect of its duties, and apparently also for affirmative breaches of duty, though the second is not quite clear. The trustee, a bank, had also been a general creditor of the mortgagor, and along with some other banks which were likewise creditors, secured the payment of its loan by means of the following scheme. The banks compelled the mortgagor to pay thirty per cent of their loans and to give them notes for the remainder; and then to organize a subsidiary selling company all of whose shares it pledged to them. The earnings of the selling company were large and the mortgagor used them to give the banks an unlawful preference. The trustee, being party to these devices, did not foreclose as it should have done, but allowed the "quick assets" to be depleted, thus eventually impairing the value of the bonds. The court dismissed this complaint upon the ground that the action was in tort and could not be prosecuted on behalf of all the bondholders because they had no common interest to protect; each had suffered an individual wrong while he held his bonds, the cause of action upon which did not pass to the person to whom he sold them. The trial judge had held otherwise, on the ground that the wrongs alleged had injured the mortgagor's "good-will," which was part of the mortgaged assets and of which the trustee had received a part — along with the other banks. The appellate division repudiated this reasoning only because none of the mortgaged assets had been misappropriated. This appears several times in the opinion. Thus, the trustee, as party to the scheme, had received no "part of the property * * * covered by the mortgage" (259 App.Div. page 664, ...