Oster v. Buildings Dev. Co.

• Decision Date: 09 January 1934
• Parties: OSTER v. BUILDINGS DEVELOPMENT CO. ALSHULER v. BUILDINGS DEVELOPMENT CO.
• Court: Wisconsin Supreme Court

213 Wis. 481

252 N.W. 168

OSTER

v.BUILDINGS DEVELOPMENT CO.

ALSHULER

v.BUILDINGS DEVELOPMENT CO.

Supreme Court of Wisconsin.

Jan. 9, 1934.

Appeals from two judgments of the Circuit Court for Milwaukee County; Daniel W. Sullivan, Circuit Judge.

The two actions were commenced on October 1, 1932, and November 1, 1932, by Blanche Oster and Cecilia Alshuler, respectively, as plaintiffs, against the Buildings Development Company, formerly the Water-Grand Holding Company, defendant. The actions were to recover upon certain bonds and certain interest coupons which plaintiffs claim to be negotiable instruments, and of which plaintiffs claim to be holders in due course. The actions were tried to the court, findings of fact and conclusions of law were made, and judgments entered on May 29, 1933, dismissing plaintiffs' complaints with costs. Plaintiffs appeal. The questions presented by the appeals are identical, and no issues of fact are involved. The material facts will be stated in the opinion to the extent necessary to an understanding of the legal issues involved.Gold & McCann, of Milwaukee (Morris Karon, of Milwaukee, of counsel), for appellants.

Poss, Toelle & Schuler, of Milwaukee (Benjamin Poss and Joseph P. Brazy, both of Milwaukee, of counsel), for respondent.

Goggins, Brazeau & Graves, of Wisconsin Rapids, amici curiæ.

WICKHEM, Justice.

The defendant is a Wisconsin corporation and the owner of a ninety-nine year leasehold interest in business property situated in the city of Milwaukee. On March 28, 1927, defendant executed a deed of trust to M. Ernest Greenebaum, Jr., conveying this leasehold interest as security for a certain bond issue. Plaintiff Blanche Oster is the owner and holder of five bonds each in the principal sum of $1,000, and plaintiff Cecilia Alshuler is the owner of five bonds in the total principal sum of $3,100. The leasehold estate is also subject to a second mortgage securing an issue of leasehold bonds.

On December 1, 1930, defendant defaulted with respect to an installment of principal which became due on that date. Subsequent defaults with respect to principal occurred on June 1, 1931, and December 1, 1931. On or before May 23, 1932, the trustee under the first mortgage or trust deed served notice upon the defendant stating that, pursuant to demand of the bondholders' protective committee, he had declared the principal of all bonds outstanding to be due and immediately payable. Demand was made upon defendant that it pay to the trustee, for the benefit of holders of bonds and coupons outstanding, the entire amount due thereon for principal and interest, with interest at the rate of 7 per cent. per annum upon the overdue principal. This notice was given pursuant to an acceleration clause in the first trust deed, by the terms of which the trustee was given the power, and upon the written request of holders of not less than 2 per cent. of the principal amount of outstanding bonds, and upon being indemnified, the duty of declaring the principal of all bonds outstanding to be due and payable immediately in the event of defaults on the part of the mortgagee which shall have continued unrepaired for a period of thirty days.

On May 23, 1932, the trustee under the first trust deed commenced an action against defendant (joining the National Bank of Commerce as trustee for the second trust mortgage). The complaints in these actions alleged the default of the defendant, asked judgment for the entire principal of the outstanding bonds, including those owned by the plaintiffs, and demanded foreclosure and sale of the mortgaged premises, the proceeds of the sale to be applied upon the money judgment.

On May 25, 1932, the circuit court for Milwaukee county entered an order in the trustee's action, enjoining individual holders of bonds from commencing any action in law or in equity upon said bonds, or any actions in garnishment or attachment for the purpose of reaching rents, income, profits, and issues of the mortgaged premises. The order directs individual bondholders to apply to the court for permission to become parties plaintiff in the foreclosure action, if any deem their rights not fully protected by said suit. A copy of this order was published in the Daily Reporter, a newspaper devoted to legal notices, and mailed to the holders and legal owners of bonds in so far as their addresses were known to the trustee, and this was done within twenty days after the entry of the order. On October 1, 1932, the action of Blanche Oster against the defendant was commenced. At the same time Blanche Oster commenced an action in garnishment in which tenants of the ground floor of the office building secured by the trust deed were named as garnishees. On October 5, 1932, the trustee obtained an order directing plaintiff Oster to show cause why she should not be compelled to dismiss her action against defendant and also her garnishment action as being in violation of the restraining order of May 25, 1932. Plaintiff Oster appeared specially in response to the order to show cause, and objected to the jurisdiction of the court over her person and over the subject-matter covered by said order to show cause, upon the ground that the order of May 25, 1932, is void and of no effect as against her because issued without notice to her, without giving her an opportunity to be heard, and without the service of any process or notice upon her. Upon hearing, on October 15, 1932, the court held the order of May 25, 1932, to be void and of no effect as to the plaintiff Blanche Oster. Cecilia Alshuler commenced her action against the defendant on November 1, 1932, and at the same time commenced garnishment action against tenants of the building, the leasehold interest in which is conveyed by the trust deed. These actions were tried on March 28, 1933.

The answer of the defendant set up the foregoing facts as well as certain provisions in the trust deed and bonds which will hereafter be discussed in detail, and asked dismissal of plaintiffs' answers upon the grounds of the pendency of the foreclosure action by the trustee.

The principal question involved in this case relates to the right of an individual bondholder, while an action by the trustee to foreclose the trust deed and to recover the indebtedness secured thereby is pending, to disregard the foreclosure action, sue upon the bonds and interest coupons, and garnishee the rents and profits of the building, the leasehold interest in which forms the security for the bond issue.

Plaintiffs contend that the bonds here involved are negotiable; that plaintiffs are holders in due course; that plaintiffs, having had no previous notice of the trustee's action, and having refused to deposit their bonds, and the trustee never having taken judgment in his action although no defense was interposed, are entitled to sue upon the instruments in disregard of the trustee's action. Since plaintiffs' bonds are not due except as they have been matured by the operation of acceleration clauses in the trust deed, it is necessarily plaintiffs' contention that the acceleration by the trustee of the maturity of the bonds operates to mature plaintiffs' bonds for all purposes. The interest coupons, in so far as they are relied upon by plaintiffs in this action, are due and do not require the assistance of an acceleration clause.

Plaintiffs start with the assumption that the bonds here involved are negotiable instruments; that bonds identical in form and secured by a trust deed containing similar provisions were held negotiable by this court in the recent case of Pollard v. Tobin, 211 Wis. 405, 247 N. W. 453. With this as a major premise, plaintiffs insist that, under section 116.56 of the Negotiable Instrument Law, the right of the holder to sue in his own name upon the instrument is an inseparable incident of negotiability which cannot be abridged, and that the fact that the trust deed authorizes the trustee to sue upon the bond cannot destroy the bondholder's right to sue. It is further contended that the trust indenture does not in fact restrict the right of the bondholder to bring an independent action upon either bonds or interest coupons.

[1] The contention of plaintiffs that, the bonds being negotiable, the trust deed cannot validly restrict the bondholder's right to sue upon them, does not present the correct starting point for a consideration of this case. The first problem is to ascertain whether the rights of the bondholders are, by the terms of the bond, subject to the provisions of the trust deed. If they are, the next question is whether the provisions of the trust deed limit the right of the bondholders to sue. For purposes of convenience, questions arising upon the bonds and the interest coupons will, for the most part, be separately dealt with. The bonds all contain the following provision: “For a description of the mortgaged property, the nature and extent of the security, and the terms and conditions under which this bond is issued, secured and held, reference is made to said deed of trust, to all the provisions of which this bond and each coupon thereon are subject with the same effect as if the same were herein fully set forth.”

The bonds and coupons, unlike those involved in the case of Pollard v. Tobin, supra, are expressly made subject to all of the provisions of the trust deed, with the same effect as though these provisions had been expressly set forth in the bond. It would not be difficult to marshal an impressive array of authorities to the effect that this clause effects an...