Opinion
No. 13,589.
Decided December 17, 1934. Rehearing denied January 7, 1935.
Proceeding growing out of foreclosure of a trust deed. Judgment in favor of trustee.
Reversed.
1. TRUST DEEDS — Foreclosure — Order of Sale. In ordering sale under foreclosure of a trust deed, terms of sale must be fixed in accordance with the provisions of the trust deed, not in disregard thereof.
2. Foreclosure — Rights of Bondholders. On foreclosure of trust deed securing payment of bonds, the rights of bondholders are measured by their bonds and trust deed securing same; there being no provision therein authorizing the trustee to bid at the sale, for and on behalf of the bondholders, there was no power in the court to confer such authority.
3. Foreclosure — Rights of Bondholders. The holder of bonds secured by trust deed has a right to insist upon his contract, and upon sale under foreclosure proceedings to receive his share of the proceeds of sale; he cannot be compelled to take in lieu thereof a beneficial interest in a trust uncertain as to time and outcome and not contemplated by the indenture.
4. Foreclosure — Bondholders. The rights of the minority of the holders of bonds secured by trust deed are quite as sacred as the rights of others and cannot be discounted because their holdings are small.
5. EQUITY — Contracts. There is no wide discretion vested in the chancellor which permits him to disturb contract rights.
6. TRUST DEEDS — Foreclosure — Business Operation by Trustee. Long continued operation of a business by a trustee, on salary, pending foreclosure of trust deed and settlement of rights thereunder, amounting to a "glorified receivership," disapproved.
Error to the District Court of the City and County of Denver, Hon. Frank McDonough, Sr., Judge.
Mr. EDWARD L. WOOD, Mr. CHARLES GINSBERG, Mr. CHARLES ROSENBAUM, for plaintiffs in error.
Messrs. BARTELS, BLOOD BANCROFT, for defendant in error.
THIS controversy grows out of the sale of a large hotel and theatre property pursuant to foreclosure of a first deed of trust thereon, given to secure an issue of notes or bonds, variously and numerously owned, some of them by plaintiffs in error. Over their protest the trial court authorized defendant in error, trustee in the deed of trust, to bid at the sale, and in payment of its bid, if accepted, to employ the judgment given in the foreclosure suit based on all outstanding bonds, which, of course, included those of plaintiffs in error, and to take title in its name as trustee. Plaintiffs in error contend that under the provisions of the deed of trust the foreclosure sale was required to be for cash, hence, as argued, the court was without authority, they not consenting, to strip them of their contract rights and involve them in joint ownership of property against their will.
[1-3] Two provisions of the deed of trust operate, we think, to justify the nonconsenting bondholders in their assignments of error based upon this contention. The first goes to the equality of rights enjoyed by the bondholders, the clear intendment of which is that each holder shall be free from the domination of any other or of all the others. The deed of trust was "for the common and equal use, benefit and security of all and singular the person or persons, corporate or natural or their assigns, who shall at present and from time to time hereafter be the holder of any of the bonds and coupons hereinbefore mentioned, without any preference, distinction or priority as to lien or otherwise, of one bond from any other, so that each bond shall have under this deed of trust the same right and lien." What were those rights? Two may be mentioned. First, to have payment, principal and interest, ratably with all holders. Second, default obtaining, to enjoy the benefits of foreclosure in accordance with the terms of the deed of trust. "In case of default * * *," the instrument recited, "it shall and may be lawful for said trustee, * * * to sell and dispose of said premises and property herein described, * * * and all the right, title and interest of said grantor or his heirs or assigns therein, at public auction * * *, for the highest and best price the same will bring in cash." It does not provide that the trustee may make the bid of which complaint is made, or any bid. The trustee's authority, specifically stated, was to sell, not to purchase, and to sell for cash. No doubt there was justification for the foreclosure, and apparently it was proper for the court in such a proceeding to enter judgment in the full amount of all unpaid bonds. When it came to ordering sale, however, the terms were necessarily to be fixed in accordance with the deed of trust, not in disregard thereof. The court could not be moved by a majority of the holders, or nearly all of them, or all save one, to a plan other than that stated in the deed of trust. By the deed of trust each holder was protected, and so long as he invoked the terms of that instrument the manner of his enjoyment could not be denied at the behest of like holders or at the instance of a court of equity. "The rights of bondholders were measured by their bonds and the trust deed securing the same, and, absent any provision therein authorizing the trustee to bid for and on behalf of the bondholders, there was no power in the courts to confer such authority upon the trustee. We think there can be no doubt as to the correctness of this conclusion. Each bondholder has the absolute right to determine for himself, in case of default, whether he shall take his loss and quit, or continue to gamble; if the property is sold at public sale, he has a right to take his proportion of the best bid that can be secured in cash, and cannot be compelled to become an owner of an undivided interest in the property." Judge McDermott, writing the opinion in Werner, Harris Buck v. Equitable Trust Co., (CCA 10) 35 F.2d 513. "A bondholder has a right to insist upon his contract, even if eventually he should fare worse by insisting upon his share of a sale for cash, together with the right to look to the responsibility of the mortgagor for a proportionate share in the deficiency. He is not bound to become an owner in common of a beneficial interest in a trust which may run on for many years and from which he may realize cash, stocks, bonds, or other securities that eventually may net him more or less than the amount he would have received had the property been sold for cash." Detroit Trust Co. v. Stormfeltz-Loveley Co., 257 Mich. 655, 242 N.W. 227. The Michigan court took occasion to approve the holding in Werner, Harris Buck v. Equitable Trust Co., supra, stating that the court there had announced the "correct and reasonable rule," and added: "The bondholders are entitled to receive what their contract provided for, and cannot be compelled to take in lieu thereof a beneficial interest in a trust uncertain as to time and outcome, and not contemplated by the indenture." In Beckman v. Emery-Thompson Co., 9 O. App. 275, Beckman, as trustee, bid as here and the sale was confirmed. Subsequently the trustee conveyed the property. After such conveyance some minority bondholders, not having joined the preponderating holders in the proceedings, sought to have the confirmation order set aside. The circumstances considered, the court denied the application, but said: "The complaining bondholders * * * can, as they have done, disavow Mr. Beckman's right to buy on their behalf, and they can insist upon his duty to account to them for their full pro rata of the proceeds of the bid price, as though it had been received by him."
In support of the judgment below, Nay Aug Lumber Co. v. Scranton Trust Co., 240 Pa. St. 500, 87 Atl. 843, is cited. The opinion there, if sound on its own facts, and it is especially disapproved in Werner, Harris Buck v. Equitable Trust Co., supra, and Detroit Trust Co. v. Stormfeltz-Loveley Co., supra, should not be regarded as persuasive in a case of different or additional facts. It does not appear that the trust deed there provided that the sale should be for cash, nor that the rights of individual bondholders had been so carefully safeguarded as in the trust deed here. In short, we are dealing with a very definite contract, which does not appear to have been the case in the Pennsylvania inquiry. That the decision there, admittedly without precedent, or, as said in Ann. Cas. 1915A, 237, "one of first impression," was unwise in any event, appears in Watson v. Scranton Trust Co., 240 Pa. St. 507, 87 Atl. 845, a proceeding by a bondholder in the same matter.
In addition to the Nay Aug case our attention has been called to Hoffman v. First Bond Mortgage Co., 116 Conn. 320, 164 Atl. 656; First Nat. Bank v. Neil, 137 Kan. 436, 20 P.2d 528; Central T. S. Co. v. Chester County Co., 9 Del. Ch. 123, 77 Atl. 771: Sturges v. Knapp, 31 Vt. 1; Straus v. Chicago Title Trust Co., 273 Ill. App. 63; Silver v. Wickfield Farms, 209 Ia. 856, 227 N.W. 97; Kitchen Bros. Hotel Co. v. Omaha Safe Deposit Co., 126 Neb. 744, 254 N.W. 507. A study of those cases reveals their distinguishing facts.
In the Connecticut case the court said: "The mortgage specifically vested the right to enforce it exclusively in the trustee in case of default. Thereupon it `may proceed to call said notes, or to enforce the rights and lien of said noteholders under this mortgage, either by foreclosure, or any other proper proceeding, in any proper court, by way of remedy, as said trustee shall deem most effectual to protect said noteholders.'" There is no equivalent provision in the record we are reviewing.
In the Kansas case, as with all the cases thought to sustain the judgment of the trial court, nothing appears to indicate that the sale was required to be for cash. Even in the absence of that requirement the court remarked that a definite rule to fit all cases cannot be laid down.
Of the Delaware case the compilers of Ann. Cas. 1915A, 237, properly say that "It was attempted to set aside the sale on other grounds, no question being raised as to the right of the trustee to purchase for the bondholders."
In the Vermont case the trustees purchased a railroad property pursuant to bond foreclosure, and thereafter leased it to another railroad company. Certain bondholders (a majority in this instance) sought to have the lease set aside, urging that as the result of the purchase the trustees held a "dry, naked trust," and that their only authority was to convey it to the cestuis que trust. The court held that the trustees were acting in accordance with the terms of the deed of trust. No question as to the power of the trustees to bid on foreclosure was presented.
In the Illinois Appeals case the trust deed provided: "That in case of default the trustee may, without any action on the part of any bondholder, declare all bonds immediately due and payable, and may proceed to protect the trust by any means which he may deem most effectual; that in case of a foreclosure sale of the property, any bondholder or the trustee may bid and purchase the property and apply the amount due on the bonds in payment of his bid; that the powers, duties and rights of the trustee may be exercised by him `without the possession or production of any of such bonds or coupons or proof of ownership thereof'; that in all suits or transactions relating to the trust deed or the mortgaged property the trustee is deemed to be the representative of the bondholders, and that in no case shall it be necessary for him to notify any bondholder or make any bondholder a party to any suit or proceeding." "Under these provisions," the court said, "we think the trustee may foreclose the trust deed, purchase the property at the sale for the benefit of the bondholders, and apply the amount due on the bonds, as found by the decree, in payment of his bid."
In the Iowa case a mortgagee was foreclosing a mortgage on a defaulted debt. It held as collateral for the same debt bonds of an issue secured on other lands of the mortgagor. This mortgage had been foreclosed, and the trustee bid the full sum of all the bonded debt, including those held by the creditor first referred to. What was sought in the litigation was to require the creditor to abandon his own foreclosure and to be adjudged to have been paid by virtue of the trustee's bid on the bond foreclosure. The court refused to so decree, saying that the mortgagee "had the right to elect what remedy it would pursue."
The deed of trust in the Nebraska inquiry provided, that, upon foreclosure, "The trustee, as such trustee, for the benefit of the holders of the bonds and coupons then outstanding and unpaid without any further authority or direction from such holders, may bid at such sale and become the purchaser of the property and take and hold the title thereto for the benefit of the holders * * *, and the trustee shall then have full power and authority to manage, operate and control such property and to resell the same at such price and on such terms as it deems for the best interest of the bondholders."
In Detroit Trust Co. v. Stormfeltz-Loveley Co., supra, where the right of individual bondholders to enjoy foreclosure in accordance with the provisions of the deed of trust was upheld, the court's determination was in the face of a statute which provided for the procedure adopted out of hand by the trial court here, the holding being that the act contravened the due process clause of the Fourteenth Amendment of the Constitution of the United States and the corresponding provision of the Michigan Constitution. The Michigan case fairly met the issue, as the quotations from the opinion, appearing earlier in this opinion, make manifest. Of the cases cited, facts considered, only the case from Michigan and Werner v. Equitable Trust Co., supra, are in point. The courts in those inquiries examined the deeds of trust, and, finding that the manner of foreclosure had been set forth in clear language, as here, adjudged that it did not lie with a judicial tribunal to say that because some bondholders wished to depart from the terms of the instrument of their security, other noteholders, protesting, should be required to adopt the departure. Most simple and essentially sound.
It is sought to discount the contractual rights of the protesting noteholders because their holdings are small. That is neither sound in law nor moving in equity. As to one of the plaintiffs in error, it is urged that he purchased bonds while the foreclosure was pending, and at much below their face value. Power to impinge his legal rights can find no predicate there. The rights of all minority holders, concededly lawful, are quite as sacred as the rights of others. There is no occasion, as we think, for the court to determine between them. Let all be relegated to the instrument which is the source of their security, there, as representing like, not opposing, rights, to enjoy according to law that which was plainly contracted in their several behalf.
Without question the trial court thought what was done partook of wisdom, but, as said by Mr. Justice Brewer, sitting at circuit, the court was dealing "with legal rights, as the parties have, by contract, made them, and although it may believe that a party insisting upon those rights is probably, or even certainly, bound to suffer loss, yet while he insists it must protect him in his insistence. There is no wide discretion vested in the chancellor which permits him to disturb contract rights." Merchants' Loan Trust Co. v. Chicago Rys. Co., 158 Fed. 923, 927. This is not a contest between debtor and creditor, as in Home Building Loan Association v. Blaisdell, 290 U.S. 398, 54 Sup. Ct. 231, 78 L. Ed. 413, cited by counsel for defendant in error, but is between creditors of like rank, contracted to enjoy to "common and equal use, benefit and security" the deed of trust and its provisions. The creditors, whether composed of a majority wishing to proceed in a manner conceived by them to be desirable, or a minority insisting on proceeding as the deed of trust provides, are equal before the law, and equal under the provisions of the deed of trust. They are not adversaries in the sense that out of regard for the desires of either, a court of equity may require the other to waive contract rights. National Surety Co. v. Coriell, 289 U.S. 426, 436, 53 Sup. Ct. 678, 77 L. Ed. 1300. Nor did the problem justify the trustee in taking a partisan attitude. Its required course was clearly outlined in the deed of trust, and when conditions warranted action on its part it had but to follow the blazed trail. It was no part of its duty to incline a welcoming ear to any interest, and it should have had no concern beyond the instrument of its authority. Its obligation considered, it represented all or a majority of the bondholders no more than it represented each bondholder. The warrant of its representation was a writing free from ambiguity. Only there should the trustee have looked, and the court, also looking to that instrument, should have appreciated its lack of power to require any protesting bondholder to waive specific rights.
A further thought is, that what was done does not amount to foreclosure. It was stopped short of consummation. Before the proceeding was begun, and pursuant to power set forth in the deed of trust, the trustee was in possession and management of the property. Not the slightest change has resulted. The trustee still possesses and manages the property. Sale, so far as the beneficiaries are concerned, is yet to be made. Until then the beneficiaries must wait. In the meantime, they, not the trustee already in the enjoyment of an allowance of $15,000 by the court with definite reservation in the decree for more, nor the trustee's counsel compensated by an allowance of $25,000 with like reservation, assume all the hazards of inexperienced management where experienced management failed. "The temptation of the exercise of power and patronage," said Chief Justice Taft, "in the * * * management of great businesses under the court should not be a feather's weight in prompting court action." Harkin v. Brundage, 276 U.S. 36, 55, 48 Sup. Ct. 268, 72 L. Ed. 457. The philosophy of that great jurist finds lodgment in our reflections. See, also, International Trust Co. v. United Coal Co., 27 Colo. 246, 266, 60 Pac. 621, where Mr. Justice Campbell emphasized the futility of a court of equity's attempt to carry on a business in which the owner had been unsuccessful. Before the trustee's gratuitous act of overlordship, and the interposition of the court's order, the beneficiaries, and each of them, enjoyed the legal right to whatever protection the definite provisions of the deed of trust afforded. One such provision was that on foreclosure the sale was to be for cash. If the judgment below were to stand, those who made the investment, acquiescing or protesting, will necessarily have to await the pleasure of the trustee, perhaps moved and controlled to that end by a ponderous court of equity, as to when, in what manner and for how much the property shall be sold. In a phrase, it would result in nothing short of a glorified receivership. The course pursued does not have our approval.
Let the order be that the judgment is reversed, further proceedings to conform to this opinion.
MR. JUSTICE CAMPBELL and MR. JUSTICE BOUCK dissent.