Mercantile Trust Co. v. Schlafly

• Decision Date: 28 March 1924
• Docket Number: 6423.
• Citation: 299 F. 202
• Parties: MERCANTILE TRUST CO. v. SCHLAFLY. [1]
• Court: U.S. Court of Appeals — Eighth Circuit

299 F. 202

MERCANTILE TRUST CO. v. SCHLAFLY. ^[1]

No. 6423.

United States Court of Appeals, Eighth Circuit.

March 28, 1924

Samuel A. Mitchell and S. L. Swarts, both of St. Louis, Mo., for appellant.

Frank H. Sullivan, of St. Louis, Mo. (James C. Jones, Lon O Hocker, and Eugene H. Angert, all of St. Louis, Mo., on the brief), for appellee.

Before STONE and KENYON, Circuit Judges, and PHILLIPS, District Judge.

STONE Circuit Judge.

This is a bill by the trustee in bankruptcy of the Temtor Corn &amp Fruit Products Company against the Mercantile Trust Company to recover $67,250 as preferential payments made within four months of the filing of the petition in bankruptcy.

The basis of the equity in the bill is injunction and the avoidance of multiplicity of actions. The payments involved in the bill were two, namely, one of $45,000 and one of $22,500. At the trial, complainant dismissed as to the smaller payment. From a decree according recovery of the $45,000 payment, the Trust Company brings this appeal.

Temtor Company was owner of two glucose manufacturing plants and of notes for $1,000,000 executed by the Best-Clymer Manufacturing Company and secured by pledge of the shares of stock of that company. It executed a mortgage covering its property and a pledge of these notes and collateral of the Best-Clymer Company to secure a $1,500,000 issue of bonds. These bonds were in series of $75,000 each, coming due at succeeding six-month periods. The arrangement for payments of interest and principal of these bonds, as provided in the mortgage, was that the company should deposit with the trustee (defendant and appellant herein) each month one-sixth of the amount necessary to pay interest on the entire issue and to retire the bonds coming due at the next six-month period. Amounts so deposited were to be held by the trustee for the above purposes exclusively. The $45,000 here involved was an amount covering two of these monthly payments. It was paid less than two months before the petition in bankruptcy was filed and had not been paid over to the bondholders at the time this bill was filed.

Appellant attacks the sufficiency of the bill herein on several grounds. The first is that it does not state a cause of action in equity. Paragraph 11 of the bill is as follows:

'Unless the defendant be restrained and enjoined from so doing, it will disburse said funds to and for the benefit of the holders of said bonds, and the complainant will be put to his various actions against each of them to recover the amount so received by each, and will thereby be subjected to a multiplicity of suits against persons whose identity is unknown, residing in widely separated localities.'

The allegations quoted established the right of the court of equity to proceed herein to final adjudication.

The second attack upon the bill is that it lacks necessary parties because the bondholders are not made parties. The rule as to binding representation of bondholders by the trustee under a mortgage is stated in the leading case of Kerrison v. Stewart, 93 U.S. 155, 160 (23 L.Ed. 843), as follows:

'It cannot be doubted, that, under some circumstances, a trustee may represent his beneficiaries in all things relating to their common interest in the trust property. He may be invested with such powers and subjected to such obligations that those for whom he holds will be bound by what is done against him, as well as by what is done by him. The difficulty lies in ascertaining whether he occupies such a position, not in determining its effect if he does. If he has been made such a representative, it is well settled that his beneficiaries are not necessary parties to a suit by him against a stranger to enforce the trust (Shaw v. Norfolk Co. R.R. Co., 5 Gray, 171; Bifield v. Taylor, 1 Beat. 91; Campbell v. Railroad Co., 1 Woods, 376; Ashton v. Atlantic Bank, 3 Allen, 220); or to one by a stranger against him to defeat it in whole or in part (Rogers v. Rogers, 3 Paige, 379; Wakeman v. Grover, 4 Paige, 34; Winslow v. M. & P.R.R. Co., 4 Minn. 317; Campbell v. Watson, 8 Ohio, 500). In such cases, the trustee is in court for and on behalf of the beneficiaries; and they, though not parties, are bound by the judgment, unless it is impeached for fraud or collusion between him and the adverse party.

'The principle which underlies this rule has always been applied in proceedings relating to railway mortgages, where a trustee holds the security for the benefit of bondholders. It is not, as seems to be supposed by the counsel for the appellants, a new principle developed by the necessities of that class of cases, but an old one, long in use under analogous circumstances, and found to be well adapted to the protection of the rights of those interested in such securities, without subjecting litigants to unnecessary inconvenience.

'Undoubtedly cases may arise in which it would be proper to have before the court the beneficiaries themselves, or some one other than the trustee to represent their interests. They then become proper parties, and may be brought in or not, as the court in the exercise of its judicial discretion may determine.'

The rule thus announced has been adhered to repeatedly. Kent v. Canal Co., 144 U.S. 75, 90, 12 Sup.Ct. 650, 36 L.Ed 352; Beals v. Railroad Co., 133 U.S. 290, 295, 10 Sup.Ct. 314, 33 L.Ed. 608; Vetterlein v. Barnes, 124 U.S. 169, 172, 8 Sup.Ct. 441, 31 L.Ed. 400; Richter v. Jerome, 123 U.S. 233, 246, 8 Sup.Ct. 106, 31 L.Ed. 132; Shaw v. Railroad, 100 U.S. 605, 611, 25 L.Ed. 757; Corcoran v. Canal Co., 94 U.S. 741, 745, 24 L.Ed. 190; Raphael v. Railroad Co., 201 F. 854, 858, 120 C.C.A. 184 (this court); Woods v. Woodson, 100 F. 515, 519, 40 C.C.A. 525 (this court); Atlantic Trust Co. v. Chapman, 145 F. 820, 823, 76 C.C.A. 396 (9th C.C.A.); National Salt Co. v. Ingraham, 143 F. 805, 809, 74 C.C.A. 479 (2d C.C.A.); Talley v. Curtain, 54 F. 43, 48, 4 C.C.A. 177 (4th C.C.A.); Farmers' L. & T. Co. v. Railroad Co. (C.C.) 53 F. 182, 185 (Kan., opinion by Judge Caldwell). With the above rule in view, an examination of the deed of trust reveals the following: That it covers an issue of 1,500 bonds in the hands of various series which would naturally be distributed in the hands of many holders; that the powers granted the trustee to represent and care for the interests of the bondholders are broad; that among such powers are caring for taxes, insurance, financial statements and various other matters bearing on protection of the security for the bonds; that one purpose of the trust is ' * * * for the enforcement of the payment of said bonds and of the interest thereon when payable in accordance with the provisions of said bonds and interest obligations and of this indenture, and the performance of and full compliance with the covenants, terms and conditions...