Opinion
May 28, 1948. —
July 1, 1948.
APPEAL from a judgment of the circuit court for Milwaukee county: WM. F. SHAUGHNESSY, Circuit Judge. Reversed.
For the appellants there were briefs by Whyte, Hirschboeck Minahan, attorneys, and Victor M. Harding of counsel, all of Milwaukee, and oral argument by Mr. Malcolm K. Whyte and Mr. Harding.
For the respondent there were briefs by B. F. Saltzstein, Aaron D. Levine, and Gold McCann, and oral argument by Mr. Levine and Mr. Arthur Saltzstein, all of Milwaukee.
Action commenced April 28, 1942, by McGeoch Building Company, a Wisconsin corporation, against Dick Reuteman Company, a Wisconsin corporation, and two of its officers, H. L. Kadish and John G. Reuteman, for damages for alleged breach of trust. Judgment entered January 8, 1948, awarding plaintiff $18,270.36 and costs. Defendants appeal.
The McGeoch Building Company was organized as a corporation in 1924. Gustav Kahn, who was president of the corporation from 1924 until 1941, and B. F. Saltzstein, who was the secretary, each owned one half of the stock. The company owned real estate in the city of Milwaukee on which it desired to erect a building. On October 8, 1925, B. F. Saltzstein, acting on behalf of the plaintiff company, and defendant H. L. Kadish, acting on behalf of the defendant Dick Reuteman Company, executed an underwriting agreement whereby Dick Reuteman Company agreed to underwrite $200,000 of first-mortgage bonds to be secured by the real estate and building. The proceeds from the bonds were to be used in the construction of the building. Plaintiff paid defendant for its underwriting service.
On November 5, 1925, plaintiff and defendant Dick Reuteman Company executed a trust-mortgage indenture to secure the bond issue. The indenture provided that tile bonds should bear six percent interest and mature serially from 1927 to 1935. Dick Reuteman Company was named trustee and was authorized to enter into possession of the mortgaged property and to collect the rents, issues, and profits, applying the net proceeds upon the bonds and mortgage indebtedness, in the event of default.
On or about May 5, 1932, the plaintiff company defaulted in payment of principal, interest, and taxes then due. Early in 1933, plaintiff, represented by B. F. Saltzstein, entered into negotiations with defendant H. L. Kadish, representing. Dick Reuteman Company, in an endeavor to create a plan to pay off the delinquencies and meet future obligations. During these negotiations H. L. Kadish suggested inserting in the proposed agreement a clause which would permit the trustee, its directors, officers, and employees, to buy, deal, and trade in bonds of the plaintiff company on its own behalf. Because of the objection of B. F. Saltzstein, such a clause was not included in the agreement executed by the parties on July 9, 1933.
The agreement provided that the plaintiff would surrender possession of the mortgaged property to Dick Reuteman Company until the default was liquidated. Defendant H. L. Kadish, as agent of the trustee, was to manage the property, disbursing the moneys collected according to the contract. He was to be paid $75 per month. Kadish employed Gustav Kahn, president of the plaintiff corporation, as active manager of the property. He too was to receive a stated fee for his work, and the defendant Dick Reuteman Company was to receive a trustee's fee.
Dick Reuteman Company notified the bondholders of this agreement and furnished to them; as well as to the plaintiff, periodic statements of the income and expenses of the mortgaged property and the extent of the default.
On March 15, 1940, after negotiating for an extension of the bond issue, the plaintiff and the defendant Dick Reuteman Company entered into another agreement substantially like the one of July 9, 1933. Defendants again sought to include in the agreement a provision allowing them to deal on their own accounts in the mortgage bonds of the plaintiff company, but again B. F. Saltzstein objected, and the provision was not included.
By virtue of the relationship created by the several agreements between the plaintiff and Dick Reuteman Company, the defendants became fully acquainted with the financial status and transactions of the plaintiff. While they were receiving compensation from the plaintiff, both Dick Reuteman Company and H. L. Kadish purchased some bonds from bondholders. Between August 11, 1936, and August 1, 1941, H. L. Kadish at a cost to him of $3,960, bought bonds of a par value of $6,800. Between April 9, 1941, and November, 1942, Dick Reuteman Company paid $6,030 for bonds totaling $12,900 in par value.
There is evidence that during the period of default some bondholders, either directly or through brokers, offered their bonds for sale to the plaintiff, but Gustav Kahn and his son, Charles, referred them to Dick Reuteman Company.
In November, 1941, B. F. Saltzstein bought out the one-half interest of Gustav Kahn and became the sole owner of the corporation. This suit was commenced on April 28, 1942, on the theory that as fiduciaries defendants were not entitled to profit from their knowledge of the financial circumstances of the plaintiff. Certain other matters, not material to the outcome of this, appeal, were covered by the complaint and are a part of the record considered by this court. On March 3, 1944, the plaintiff formally notified the trustees of its election to retire the entire outstanding bond issue at par plus accrued interest. The trustee applied to the circuit court for instructions as to the amount it should require of the mortgagor for a satisfaction and release of the mortgage. Pursuant to the court's order the plaintiff deposited with Dick Reuteman Company a sum sufficient to pay par and accrued interest on all of the bonds held by the defendants, previously acquired by them at a discount. That order, however, provided that matters concerning which the parties were in disagreement were left for determination upon the trial of the case now before us on appeal.
The trial court made its findings of fact and conclusions of law in this action on December 30, 1947, and judgment was entered for the plaintiff on January 8, 1948. The contentions of the defendants, appellants here, are concerned principally with the following findings of fact:
"17. That the defendant Dick Reuteman Company has wrongfully paid to itself and to H. L. Kadish the par value of the bonds held by them with accrued interest to May 5, 1944, on the 5th day of April, 1944. . . .
"18. . . . That the claim of the defendants that they were authorized to deal in such bonds for their own account by either Gustav Kahn or Charles Kahn is not established by the credible evidence in this case. That such claimed consent neither extended to the defendant H. L. Kadish nor was it ever conveyed to the defendant Dick Reuteman Company."
The appellant, Dick Reuteman Company, agreed to underwrite the bonds which respondent was to use as security for money borrowed. Dick Reuteman Company, also named trustee under the trust-mortgage indenture, was successful in raising the money required by sale of bonds to its clients and friends. It transpired that seven years after the money was borrowed the mortgagor was unable to meet principal, interest, and tax payments then due. These defaults were the cause of efforts put forth by Dick Reuteman Company as trustee to improve conditions for the benefit of the bondholders. Under the arrangements made in the management agreements of July, 1933, and March, 1940, it came about that no foreclosure of the mortgage or liquidation proceedings to overcome the defaults occurred, and payment of the overdue sums was made.
While this result was being worked out, the appellant Dick Reuteman Company became the owner of ten of the mortgage bonds of varying amounts, and the appellant H. L. Kadish became the owner of eleven. The respondent insists that their purchase of these bonds at a discount was a breach of trust and that the advantage in price resulting to appellants when respondent called the bonds at par belongs to the respondent. The trial court so concluded and gave judgment accordingly. The evidence does not warrant that conclusion, and the findings of fact quoted above are against the great weight and clear preponderance of the evidence.
The trial court found that it was without the knowledge or authorization of the respondent that appellants acquired the bonds. The testimony of Gustav Kahn, then the president of the respondent company, and of Charles Kahn, vice-president, as well as the testimony of two brokers shows that when bondholders desiring to sell their bonds, came to the respondent company, they were told to go to Dick Reuteman Company and see Mr. Kadish. They were told that appellants could take the bonds off their hands. Gustav Kahn testified,
"My purpose in referring people to Dick Reuteman Company was because I felt if the bonds were in the hands of Dick Reuteman Company they were in better hands than getting in the hands of someone who might upset things. I knew Dick Reuteman Company were trying to save the building, and they did."
None of this testimony was contradicted. In Schroeder v. Arcade Theater Co. (1921) 175 Wis. 79, 106, 184 N.W. 542, it was recognized that in the execution of a trustee's obligations and powers under a trust deed, "it is incumbent upon him to use the utmost good faith toward all parties in interest. He must act impartially for every person who has any rights in the estate." The record shows that the appellants met that test here. They cannot be criticized for using reasonable efforts to maintain a favorable market for the bonds. There is no showing that unfair methods were resorted to in acquiring the bonds. The respondent was not attempting to acquire or pay up the bonds. In the face of respondent's conduct in referring bondholders to appellants it cannot be said that appellants' acquisition of the bonds was without the knowledge or consent of the respondent.
Respondent relies on the general principle that a trustee or agent is under a duty not to profit by dealing for his own benefit in the business of the trust or agency. Magruder v. Drury (1914), 235 U.S. 106, 35 Sup. Ct. 77, 59 L. Ed. 151; Restatement, 1 Trusts, p. 431, sec. 170; Restatement, 2 Agency, p. 873, sec. 389; 1 Mechem, Agency (2d ed.), p. 894, sec. 1224; p. 895, sec. 1225; 49 Harvard Law Review, 521. It was evidently on the basis of this principle that the trial court found that appellants' receiving par value for the bonds previously acquired at a discount was wrongful. These statements of the duties of a fiduciary were made in connection with the ordinary agency or trust relationship. The relationship of the parties under a trust indenture is different from that of the ordinary fiduciary relationship. In the words of this court in Schroeder v. Arcade Theater Co., supra, p. 103, "The trustee, under the provisions of the trust deed, in some respects represents the bondholders, in other respects the mortgagor, and in still other respects both bondholders and mortgagor." The trust indenture is a form of mortgage security and is unlike the usual trust. There is language in the texts to the effect that even though he represents different types of interests, the trustee in a deed trust for security is subject to the same rules that govern all trustees. 2 Perry, Trusts and Trustees (7th ed.), p. 1032, sec. 602 m; 2 Bogert, Trusts and Trustees, p. 789, sec. 246. But the material which follows such language makes it clear that the rule does not necessarily prevent a trustee for bondholders from buying mortgage bonds. If the trustee under a trust indenture were given the power to sell the property securing the mortgage, the general rule applicable to all fiduciaries would operate to prevent the trustee from either purchasing the property on his own behalf or failing to account to the mortgagor for the proceeds. But that is not the situation here. It would also be a wrong on the part of a trustee, under circumstances like those existing in this case, to confederate with the mortgagor to reduce the value of the bonds or to depress their market value. The circumstances of this case and the resulting duties of the trustee are described in 2 Perry, Trusts and Trustees (7th ed.), p. 1293, sec. 749:
"The corporation itself issues the bonds, and promises to pay the principal and interest at a time named. So long as the corporation pays the interest or the principal of the bonds, as agreed, the trustees have little or nothing to do. The general principles of the law of trusts apply to them. They hold the security in trust for the bondholders, as cestuis que trust; and they must act in good faith, and for the best interests of all. They must take care that the property is not wasted, or depreciated, or rendered worthless as security. They should not acquire interests, or put themselves in positions or relations which are antagonistic or hostile to the interests of the bondholders. Doubtless they can purchase the bonds for which the mortgage stands as security in the open market: but they could not go among the bondholders and solicit the purchase of the bonds; for, holding the security for the bonds in their own hands, their position and influence would be such, and the danger of fraud so great, that a court of equity would not allow the bargain to stand."
In the case of a trust indenture, as in other trust cases, it is of course true that the instrument creating the trust or the fiduciary relationship is to be looked to for stipulations fixing the obligations of the parties. This is necessarily so as the nature of the trust assumed depends upon the relations of the parties. As circumstances change from time to time the obligations of the trustee also may change. In this case the suggestion is made that the management agreements of July, 1933, and March, 1940, made appellants something more than trustees by making them agents of the respondent for compensation. The management agreements did increase appellants' fiduciary duties regarding the management of the mortgaged property, but those agreements did not affect appellants' right to purchase bonds unless it can be said that because a provision which would specifically permit appellants to deal in the bonds on their own accounts was purposely omitted from the agreements, appellants were guilty of fraud in buying the bonds they did. There is no showing, however, that respondent was harmed by appellants buying bonds on their own accounts. Keeping the bonds in friendly possession was favorable to the mortgagor. At any time the bondholders came to them the officers of the respondent company could have bought the bonds themselves if they had chosen to do so. The record shows that neither the Kahns nor B. F. Saltzstein desired to acquire the bonds for themselves. There is no showing that appellants were in any way competing with the respondent in buying the bonds at a discount.
Respondent argues that even if it was proper for appellants to acquire the bonds in order to maintain a market, it was not proper for them to profit thereby. It is respondent's contention, on the basis of the general principles of agency law already referred to, that appellants are entitled to receive from the mortgagor only the amount they paid for the bonds. In Steven v. Hale-Haas Corp. (1946) 249 Wis. 205, 23 N.W.2d 620, 23 N.W.2d 768, that same argument was considered in connection with the fiduciary relationship between officers and directors of a corporation and the stockholders. There the court said at pp. 231, 232, of the opinion, —
". . . we come to the significance of the finding that Hale [a director] purchased preferred stock for an average of $75 and that by the consummation of the scheme the stock would be retired at the call price of $105, to the profit of Hale. Plaintiff contends that this was a wrong to the corporation. If so, it was because the corporation was thereby foreclosed of an opportunity to acquire the stock at less than the call price. . . . we do not consider that plaintiff has alleged, proved, or otherwise litigated the point that Hale-Haas was forestalled from purchasing this stock. This being true, whatever wrong there might have been would be to those from whom Hale purchased the stock, and if there was such a wrong, it would be because an insider bought the stock without disclosing inside information as to future corporate action affecting its value."
We recognize that when the trustee under a trust-mortgage indenture acquires some of the mortgage bonds he may have a greater opportunity than otherwise to confederate with other bondholders to force proceedings after default that might harm the interest of the mortgagor. If a bondholding trustee availed himself of such an opportunity, he would unquestionably be breaching his fiduciary duty to the mortgagor.
In the instant case the trustee bought the bonds with the knowledge of the mortgagor, did not solicit them from among bondholders and bought them under circumstances that benefited both the bondholders and the mortgagor. The bondholders were protected by the maintenance of a market for the bonds. The mortgagor was protected by having the bonds in friendly hands. No harm is shown to have resulted. The trustee has not been guilty of any breach of contract, and no reason exists in the broader field of equity for finding any breach of fiduciary duty necessitating appellants giving to respondent the earnings made by appellants by buying the bonds they did.
By the Court. — Judgment reversed. Cause remanded with directions to enter judgment in defendants' favor and dismissing the complaint.
MARTIN, J., took no part.
The following opinion was filed September 14, 1948:
The state of the record is such that the judgment ordered must stand. The misstatement concerning the existence of certain evidence, which was a basis of the motion for rehearing, is withdrawn. The writer of the opinion mistakenly referred to the following as evidence when this was but an offer of proof which had been excluded at the trial:
". . . our clerks who contacted our customers at the desks would tell people — the original bondholders — to hold their securities and not to sell them. The only bonds we were interested in were bonds offered by brokers, estates of people who were out to sell them. They were going to dispose of the bonds and we hoped to keep them off the market in order to prevent difficulties for the owners of the property and for the bondholders.
"No solicitation of any bondholder that he sell his McGeoch Building Company bond was ever made by Dick Reuteman Company or myself. At our instruction, our clerks urged bondholders not to sell their bonds."
The burden of proof as to overreaching or forestalling the mortgagor was upon the plaintiff. Therefore when that offer is eliminated and its contents disregarded the result is not affected under the rules of law upon which the decision was based.
As the respondent did not meet its burden of showing a wrong to the mortgagor the motion for rehearing must be denied. Motion costs not allowed.