National Bondholders Corp. v. SEABOARD C. NAT. BANK, 4561.

• Decision Date: 09 March 1940
• Docket Number: No. 4561.,4561.
• Citation: 110 F.2d 138
• Parties: NATIONAL BONDHOLDERS CORPORATION v. SEABOARD CITIZENS NAT. BANK OF NORFOLK, VA.
• Court: U.S. Court of Appeals — Fourth Circuit

110 F.2d 138 (1940)

NATIONAL BONDHOLDERS CORPORATION v. SEABOARD CITIZENS NAT. BANK OF NORFOLK, VA.

No. 4561.

Circuit Court of Appeals, Fourth Circuit.

February 2, 1940.

On Petition for Rehearing March 9, 1940.

Ralph Wolf, of New York City (John W. Oast, Jr., of Norfolk, Va., and Milton Klein and Hays, Wolf, Kaufman & Schwabacher, all of New York City, on the brief), for appellant.

James Mann and S. Heth Tyler, both of Norfolk, Va. (Mann & Tyler, of Norfolk, Va., on the brief), for appellee.

Before PARKER and SOPER, Circuit Judges, and COLEMAN, District Judge.

SOPER, Circuit Judge.

The purpose of this suit is to establish an obligation on the part of the trustee under a collateral trust indenture or bond mortgage to pay to the certificate or bondholders or their representative, a sum of money paid to the mortgagor in the liquidation of certain collateral notes which had been deposited with the trustee as security for the payment of the bonds. The money received by the mortgagor was used by it for its own purposes and was not turned over to the trustee as it should have been; and the collateral remained in the hands of the trustee. The plaintiff's theory is that the mortgagor received the funds, as the agent of the trustee, and that in legal effect payment to the former was payment to the latter; and it is contended that the liability of the trustee to the bondholders has been conclusively established by previous litigation in the State courts of North Carolina in which it was held that the collateral notes had been legally paid to the collecting agency of the trustee.

The collateral trust indenture dated August 1, 1926 was executed on October 14, 1936 by Guaranty Title & Trust Corporation, a Virginia mortgage company located at Norfolk, Virginia, as mortgagor, to the Citizens National Bank of Norfolk, as trustee. This bank and its successor trustee, the Seaboard Citizens National Bank of Norfolk, will be referred to herein as the bank or the trustee. By the indenture the Guaranty Company delivered and pledged to the trustee certain notes secured by mortgage on real estate, United States bonds and other securities as collateral, to secure the payment of certain certificates or bonds payable to bearer issued by it. The National Surety Company guaranteed the payment of the bonds; and the collateral deposited with the trustee was given also for its protection since if it was called upon to pay the bonds, it was entitled to an assignment thereof and to subrogation to the rights of the bondholders.

Amongst the collateral deposited with the trustee were seven notes of George B. Lazarus in the aggregate sum of $5,500 payable to bearer at the office of the Guaranty Company in Norfolk at certain intervals during the period from 1928 to 1931, and secured by a deed of trust or mortgage of August 16, 1926 from Lazarus and wife to the Citizens National Bank, trustee, on real estate in Henderson County, North Carolina. Prior to April, 1929, Lazarus had paid the principal and interest notes as they matured, and had received the paid notes and interest coupons from the Mortgage Company, which had obtained them from the trustee.

In April, 1929, Lazarus was permitted by the Mortgage Company to anticipate the payment of his remaining notes, and paid the indebtedness in full with interest to August 16, 1929, plus an anticipation fee of $300, amounting in all to $5365. This sum was paid by check payable to the order of the Guaranty Company dated May 2, 1929, and bearing the notation that it was given in payment of the loan principal, anticipation fee and interest. The check was given by the attorneys of the Equitable Life Assurance Society, from whom Lazarus had obtained a loan on the same real estate, the attorneys acting also as the attorneys for Lazarus in the transaction. The payment was made to the Guaranty Company upon its assurance that the trustee had been notified and was willing to accept payment of the notes; but the trustee had not been so notified and the notes remained in its possession until they were turned over by it to the National Bondholders Corporation, a representative of the bondholders, and the plaintiff in this case, in March, 1935, together with other securities under the circumstances presently to be recited. The attorney's check was deposited by the Guaranty Company in its checking account with other items in the commercial department of the bank and was handled as an ordinary customer's item for collection and credit. The commercial department of the bank was located in a separate building at some distance from the trust department. No part of the proceeds of the check was paid to the trustee in payment of the Lazarus notes, and the trustee had no knowledge of the transaction.

On June 26, 1929, the Guaranty Company was placed in the hands of receivers in the Circuit Court of the City of Norfolk, and on December 9, 1929, it was adjudicated a bankrupt in the District Court below. The indenture gave the Surety Company the right to direct and control the method and place of conducting any proceeding for the sale of securities, or of any other proceeding taken under or subject to the indenture with respect to the securities if any proceedings had been instituted for the enforcement of the indenture as to any of the certificates. On October 17, 1929, the trustee filed a petition in the receivership proceeding of the Guaranty Company for the purpose of enforcing the indenture as to the outstanding certificates, and secured a decree approving a plan proposed by the Surety Company and stated by the trustee to be to the best interests of all concerned, whereby the Surety Company undertook to complete the foreclosure proceedings begun by the Guaranty Company against forty properties in North Carolina, and to institute and carry through the foreclosure of other loans as would from time to time be necessary. After bankruptcy, this procedure was also approved by the Bankruptcy Court on February 3, 1930. At the time that the petition was filed by the trustee in the receivership proceeding, the Guaranty Company was in default under the indenture, but the Surety Company was not in default under its guaranty.

After the receivership proceedings had been instituted against the Guaranty Company, the trustee learned of the Lazarus payments and of two other similar payments by other borrowers, and called upon the Surety Company to instruct it as to the position it should take with reference thereto. In response to the trustee's inquiry, the Surety Company, through its attorney, on October 11, 1929, advised the trustee that it should take the position that the Lazarus payments were made to the Guaranty Company as Lazarus' agent, and did not discharge his obligation on the notes held by the trustee. The attorney pointed out that although the trust indenture did not specifically make the Guaranty Company the agent for the trustee for the purpose of making collections, the indenture seemed to assume that the Guaranty Company would make such collections. He referred to certain provisions of the indenture which contemplated an exchange of information between the Mortgage Company and the trustee with respect to collections made by each of them, and to provisions which gave the trustee the right to reasonable compensation for services rendered in the collection of monies under certain conditions, and also gave it the right to exercise its powers through agents or attorneys, with the provision that where the trustee should appoint an agent or attorney to collect money, the trustee should require him to hold the collections as trust funds, and should be responsible for all collections so made. Notwithstanding these provisions in the indenture, the attorney was of the opinion that the trustee was not liable for the Lazarus payments, because it had not expressly appointed the Guaranty Company as its agent.

On April 13, 1931 the Equitable Life Assurance Society instituted a proceeding in the Superior Court of Henderson County, North Carolina, to recover from Lazarus the sum which he had borrowed from it. The complaint also prayed for a decree of foreclosure and sale of the mortgaged premises, the application of the proceeds to the payment of the debt, and also an adjudication that the indebtedness secured by the prior deed of trust from Lazarus to the Guaranty Company had been fully paid, and that said deed of trust should be adjudged a cloud on the title to the land and be cancelled of record. The defendants joined in the suit were Lazarus and wife, the trustee under the deed of trust to the Equitable Society, the Guaranty Company, the trustee in bankruptcy of the Guaranty Company, the trustee under the indenture (that is, the defendant in the pending suit), the Surety Company and the Greyling Realty Company, a subsidiary of the Surety Company. At the request of the Surety Company the trustee under the indenture, defendant herein, appeared in said suit and filed an answer through an attorney who also appeared and answered on behalf of the Surety Company. In said answer it was alleged that the trustee had never received the money paid by Lazarus to the Guaranty Company, and that the Guaranty Company was not the agent of the trustee and had no authority to receive the money on its behalf, and that the Lazarus notes held by the trustee had not been paid, and that the Equitable Society was not entitled to a surrender or cancellation thereof.

A jury trial was waived. Two issues were submitted and answered by the judge as follows:

"(1) Have the Lazarus notes and deed of trust, being those in controversy in this action and now held by the defendant Seaboard Citizens National Bank, trustee, been legally paid and discharged as alleged in the complaint? A. No.

"(2) If not, what is due said Seaboard Citizens National Bank on account of said notes and deed of trust? A. $5,000 with interest from February 16, 1929."

The court...