The Continental Corporation v. the First National Bank of Westfield.
| Decision Date | 23 February 1934 |
| Citation | 285 Mass. 419 |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
| Parties | THE CONTINENTAL CORPORATION & another v. THE FIRST NATIONAL BANK OF WESTFIELD. |
September 21, 1933.
Present: RUGG, C.
J., CROSBY, PIERCE FIELD, & DONAHUE, JJ.
Bank, Certificate on bond. Bond, Secured by trust mortgage. Deceit. Trust Trustee's expenses.
A bank, which indorsed upon each of an issue of "First Mortgage" bonds of a corporation, "this bond is one of the bonds described in a [certain] mortgage or deed of trust to the . [bank] as trustee," did not thereby represent to persons who acquired the bonds that any material fact recited in the bonds was true; and in particular did not represent to such persons that the bonds were secured by a first mortgage upon real estate of a value, at the time of the issuance of the bonds, equal to or in excess of their face amount, even though the words "First
Mortgage" in the bonds by custom in the vicinity meant that they were so secured and the bank knew that the mortgage given to it as security for the bonds was not upon real estate but only upon chattels of a value equal to but a small fraction of the face of the bonds.
The bank above mentioned, as certifier of the bonds, was not acting in a relationship of trust toward prospective bondholders and therefore could not be held to have violated any trust duty to them by certifying the bonds with or without knowledge as to the adequacy of the security or as to the truth of the recitals in the bonds.
In the circumstances, it could not be said that the bank above mentioned certified the bonds without authority, or that even if it represented by its certification that the bonds and the mortgage were properly authorized, such representation was false, by reason of a discrepancy between the date of the mortgage and the date thereof as recited in the bonds and the bank's certificate or by reason of various other discrepancies between the corporate votes authorizing the bond issue, the bonds and the mortgage; furthermore, even if such representation were false, it caused no damage to the bondholders because the validity of the bonds and of the mortgage never was questioned by the corporation or by a receiver and trustee in bankruptcy thereof subsequently appointed, the coupons on the bonds were paid up to the time the corporation was adjudicated a bankrupt and, after the sale of the mortgaged property in the bankruptcy proceedings, the proceeds were held for the benefit of the bondholders.
In a suit in equity by one of the holders of the bonds above described against the bank for an accounting by it as trustee, it appeared that the defendant had employed counsel in litigation concerning the bond issue, had paid him $250 for services rendered to the defendant individually and $1,250 for services rendered to the defendant as trustee, and had deducted the entire $1,500 from the proceeds of the sale of the mortgaged property. A master found that, if the defendant were responsible for the discrepancies above mentioned, $650 of the total fee should be allocated to the defendant individually and $850 to it as trustee, but that, if the defendant were not responsible for such discrepancies, the fair allocation should be $400 and $1,100, respectively. A decree was entered charging the defendant with $250.
Upon appeal by the plaintiff, it was held, that (1) The defendant was not responsible for such discrepancies and therefore should not be charged with $650;
(2) The finding by the master as to the allocation to be made in such circumstances was not clearly wrong;
(3) The decree should be modified so as to charge the defendant with $400.
BILL IN EQUITY, commenced by a common law writ dated November 4, 1931. Also
TWO ACTIONS OF TORT. Writs dated September 19, 1932. Creditors' Composition Corporation was permitted to intervene in the suit in equity as a party plaintiff. In the Superior Court, the suit in equity and the actions were referred to the same person as master and auditor, respectively, for hearing together, his findings as auditor to be final. Material findings are stated in the opinion. By order of Dillon, J., there were entered in the suit in equity an interlocutory decree confirming the master's report, and a final decree described in the opinion. The plaintiff and the intervening plaintiff appealed. The judge allowed a motion by the defendant for judgment in its favor on the auditor's report in each action at law. Motions by the plaintiffs for judgment were denied. The plaintiffs alleged exceptions.
A. Brayton, for the plaintiffs. L. Wheeler, Jr., for the defendant.
The second two actions are at law; they are in tort, in the nature of deceit. The plaintiffs seek to recover from the defendant damages alleged to have been suffered by them by reason of false representations alleged to have been made by the defendant, as trustee, by its certificate on certain bonds of The Martin Trailer Co. The first suit is in equity and is brought against the defendant, as trustee under an indenture, to secure these bonds, for an accounting and for damages for breach of its fiduciary duties. The bonds involved are the same as those which were before this court in Continental Corp. v. Gowdy, 283 Mass. 204 . The cases were tried together. In the law actions each declaration consisted of four counts, which, in substance, alleged that each plaintiff purchased twenty-eight bonds of The Martin Trailer Co. upon which the defendant had indorsed a "Trustee's Certificate"; that the representations made by the defendant by this certificate were false; that the defendant knew or upon reasonable inquiry might have known that said representations were false; that the plaintiffs relied upon these representations in purchasing the bonds; that The Martin Trailer Co. became bankrupt September 26, 1930, and that the bonds were worthless. The first count in each action alleged that by custom and usage the trustee's certificate was a representation that each bond was one of the bonds described in the indenture; that there was existing a mortgage or deed of trust to the certifying bank securing the bonds and dated April 17, 1929; that the bonds were duly executed and were the legal and authorized obligations of The Martin Trailer Co.; that the mortgage or deed of trust was duly recorded and duly executed in accordance with the company's authorization; and that the bond was secured by a first mortgage on real estate sufficient in value "to cover the indebtedness of the entire issue." In the second count it is alleged that the defendant by the recitals of the bonds and the certification intended to represent falsely that the bonds were secured by a first mortgage on real estate of a value reasonably adequate to secure the issue, and thereby intended to induce persons to purchase the bonds. In the third count it is alleged that the defendant by its certificate on the bonds falsely represented to whomsoever the bonds might be presented for purchase that the bond was one of the bonds described in the mortgage or deed of trust to the subscriber as trustee and dated April 17, 1929. By the fourth count it is alleged that the recitals in the bond and the trustee's certificate on the bond were actually false and that the defendant "by signing the trustee's certificate thereon" negligently, wantonly and recklessly misrepresented that the recitals in the bond and certificate were true. The answer in each action was a general denial.
The law actions were referred to an auditor under a stipulation that his findings of fact should be final, except such as are inferences drawn by him from facts found. He filed separate reports. Upon motions for judgment by both parties on the reports, the judge ordered judgment to be entered for the defendant in each case. The actions come before this court on the plaintiffs' exceptions to the allowance of the defendant's motions for judgment and disallowance of the plaintiffs' motion for judgment.
In the equity suit the plaintiffs' claim for relief was based on allegations in the bill of complaint to the effect that the defendant, as trustee, failed to use reasonable care to see that the bonds and trust instrument were duly executed and were the legal and authorized obligations of the mortgagor, with the result that the right of the bondholders to have applied for their benefit the property described in the deed of trust was disputed; that this made it necessary for the trustees to employ counsel to protect the interests of the bondholders, which would have been wholly unnecessary if due care had been used in connection with the original execution of said trust; that the defendant conspired with a firm of brokers to issue the bonds on insufficient security, in order to obtain payment of debts owed by The Martin
Trailer Co. to the defendant; that it negligently delayed in foreclosing on the security, improperly permitted a sinking fund set up for the retirement of said bonds to be paid out for other purposes and received compensation, as trustee, which it should forfeit because of its misconduct. The defendant filed a demurrer which was overruled. The defendant appealed. Thereafter the defendant filed an answer to the bill of complaint. Subsequently Creditors' Composition Corporation was allowed to intervene as party plaintiff. The suit was referred to a master. Upon the filing of his report, which was confirmed without objection, a decree was entered ordering the defendant to pay to itself as trustee for the bondholders of The Martin Trailer Co. certain sums, amounting to $316.87, which the court found to have been improperly paid out, and to pay the plaintiff and intervening plaintiff in equal shares, costs in the sum of $26.50. ...
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