Morley v. Univ. of Detroit

• Decision Date: 23 October 1934
• Docket Number: No. 103.,103.
• Citation: 269 Mich. 216,256 N.W. 861
• Parties: MORLEY v. UNIVERSITY OF DETROIT.
• Court: Michigan Supreme Court

269 Mich. 216

256 N.W. 861

MORLEY

v.UNIVERSITY OF DETROIT.

No. 103.

Supreme Court of Michigan.

Oct. 23, 1934.

Appeal from Circuit Court, Wayne County; Adolph F. Marschner, Judge.

Action by George W. Morley against the University of Detroit. Judgment for defendant, and plaintiff appeals.

Affirmed.

Argued before the Entire Bench.

POTTER, J., dissenting.

Don M. Harlan, of Detroit, for appellant.

Monaghan, Crowley, Reilley & Kellogg, of Detroit (Edward T. Kelley, of Detroit, of counsel), for appellee.

BUTZEL, Justice.

Questions in the instant case were considered by us in Morley v. University of Detroit, 263 Mich. 126,248 N. W. 970,90 A. L. R. 464, on an appeal from an order denying plaintiff a summary judgment on the pleadings. Upon our affirmance of the order of the trial judge, the case was tried on its merits by the lower court and judgment rendered discharging defendant from liability on certain bonds and coupons in controversy. Plaintiff has again appealed. On account of the importance of the questions involved, we have given further consideration to the case. We abide by our former decision.

Plaintiff owns coupons that matured March 1, 1931, and bonds and coupons which became due September 1, 1931. Defendant paid the Fidelity Trust Company, which was trustee under the mortgage that secured the bonds, sufficient amounts to pay all bonds and coupons which matured on both March 1 and September 1, 1931. Payments were made by voucher checks, payable to the Fidelity Trust Company and showing that their purpose was to pay the maturing interest and bonds. Although payments were not made five days prior to the respective due dates as provided in the mortgage or in gold, as also specified therein as well as in the bonds and coupons, they were made on or prior to the due dates of the respective bonds and coupons and accepted by the trustee. No objection was by the trustee to the fact that the payments were not made in gold specie. Inasmuch as the Fidelity Trust Company was the agent for the bondholders, as hereinafter stated, and accepted the payments as made, no valid objections can be made to either the time or form of payment.

The Fidelity Trust Company closed its doors on or about October 17, 1931, on the order of the state banking commissioner, and receivers were appointed. The plaintiff failed to present his coupons and bonds that had become past due and for which payment had been made by defendant to the trustee. He seeks to hold defendant liable on the claim that the bonds were negotiable instruments, that the trustee was merely a depository and defendant's agent, and that defendant was not released from liability through payment to the trustee.

The mortgage securing such bonds provided that mortgagors will ‘promptly and punctually pay the principal and interest of every bond now or hereafter issued hereunder and secured hereby, at the dates and in the manner specified in such bond or bonds and/or in the coupons, according to the intent and meaning thereof, and will deposit the necessary funds for such purpose with the trustee at least five days prior to the respective due dates.’

In case of the redemption of bonds issued and secured by the mortgage deed of trust, the mortgage provided: ‘The mortgagor shall deposit with the trustee, to the credit of such bond, designating it by the number thereof, a sum equal to the redemption price, with interest accrued to the redemption date, and in that event, such deposit shall be deemed a full payment of such bond and the coupons belonging thereto as between the mortgagor and the holder thereof. No holder of any bond or coupon covered by a deposit so made shall be entitled to interest on such deposit with the trustee. Upon deposit being made as aforesaid, the bonds and coupons covered thereby shall be excluded from participation in the lien and security of this indenture, and the holder or holders of such bonds and coupons shall look for the payment of such bonds or coupons only to the sums so deposited in the hands of the trustee, and the mortgagor shall in no event be liable upon such bonds or coupons after deposit has been made as herein provided. The sum or sums so deposited shall be held by the trustee to the credit of said bonds and shall be paid by the trustee to the holder or holders upon surrender of such bonds with all outstanding coupons belonging thereto.’

It is true that more apt words were used in provisions of the indenture for the redemption of bonds by the mortgagor prior to the date of maturity, upon any interest payment date. It is there expressly stated that the deposit of moneys with the trustee for the redemption of such bonds shall constitute payment and release the mortgagor from further liability to that extent. The failure, however, to use equally effective language as to payment of bonds and coupons, as they mature, does not vitiate the effect of the provision of the indenture obligating the mortgagor to deposit funds with the trustee at least five days prior to the respective due dates for the purpose of paying such maturing bonds and coupons. The mortgagor bound itself in the indeture to punctually pay the principal and interest of every bond according to the terms of the bonds and coupons, and, as stated in the indenture, it agreed to ‘deposit the necessary funds for such purpose with the trustee at least five days prior to the respective due dates.’ Such deposit was made for the very purpose of payment, and constituted payment. The bonds were negotiable in accordance with the rule laid down in Paepcke v. Paine, 253 Mich. 636, 235 N. W. 871, 75 A. L. R. 1205, and Merchants' National Bank v. Detroit Trust Co., 258 Mich. 526, 242 N. W. 739, 85 A. L. R. 350. The trust indenture unquestionably constituted the Fidelity Trust Company the bondholders' agent, charging it with the duty to obtain payment of the bonds and coupons prior to their due date for the better security of the bondholders. The creation of such agency would not make the bonds non-negotiable. A negotiable instrument may be discharged when payment is made to the agent of the holder thereof in good faith. Northwestern Mutual Life Ins. Co. v. Blohm, 212 Iowa, 89, 234 N. W. 268;First National Bank v. Hessell, 133 Wash. 643, 234 P. 662;Marling v. Nommensen, 127 Wis. 363, 106 N. W. 844,5 L. R. A. (N. S.) 412, 115 Am. St. Rep. 1017,7 Ann. Cas. 364.

It is claimed that, in accepting the deposits in payment of the maturing bonds and coupons, the trustee was the agent of the mortgagor. The indenture does not so provide. The record is silent as to how the trustee was appointed in the instant case. Neither does it show that, when a borrower seeks a loan of large sums of money through the issuance of serial bonds or debentures which he offers to secure by mortgage or other indenture, it is customary for the purchasers or underwriters of the entire issue to select the trustee for the benefit of the bondholders, so that their interests may be properly protected; that subsequently the bonds or debentures are sold to the public who rely upon the fact that a proper trustee is looking after their interests. The trustee acts for the benefit of the bondholders, although it may be given special authority and power under certain conditions to act for the mortgagor, and then only for the very purpose of protecting the interests of the bondholders. The insurance policies on all buildings erected upon the property included in the indenture are payable to the trustee for the protection of the bondholders. The trustee gives notice of default, and, in order to ascertain whether or not there has been a default, it does not inquire of each holder of the ‘bearer’ bonds whether he has received payment, but simply determines whether the moneys have been deposited with it as trustee in payment of the maturing bonds and coupons. Had the money not been forthcoming on the date when the bonds and coupons became due, it would have been the duty of the trustee to make every endeavor to obtain payment to itself as agent of the bondholders. The trustee is charged with the duty to act in case of default, if directed by 25 per cent. of the bondholders, and under certain circumstances, even without such direction; it further has the right, in the even of defeault, to recover judgment against the mortgagor. The right of action for the mortgagor's breach of the terms of the indenture is vested exclusively in the trustee, subject to certain provisions, and under no circumstances may any bondholder institute any action or other proceedings on or under the indenture except in case of the trustee's refusal to perform its duty. The trustee may agree to a modification of the bond or release part of the securities, with the consent of 50 per cent. of the bondholders.

The indenture shows beyond any question that the duties of the trustee are for the benefit of the bondholders and adverse to the mortgagor. Reference to the security in the indenture would disclose the duty of the mortgagor to make payments to the trustee in advance of the due dates of the bonds and coupons. This provision is for the security of the bondholders, for it enables the trustee who is guarding their interests to have the required moneys on hand for the payment of the bonds and coupons as they become due and to take prompt action in case such moneys are not paid. The indenture was issued for the purpose of securing a series of bonds, there being 1,600 issued, aggregating $1,500,000 under series A, all payable to bearer, unless registered, and others under series B. The mortgagor could not know who held the bonds and coupons. It could not, under the terms of the indenture, refuse to pay the trustee until the bonds and coupons were presented. It was bound to make the payments prior to the due date, and, after such payments were made, it could not withdraw them. Although the question involved in the instant case was not presented in Armada...