Security-First National Bank v. Spring Street Properties, Inc.

This is an appeal from a judgment in favor of respondent Federated Realty Company, Ltd., in an action for declaratory relief wherein it was sought to have it adjudged that the defendants had no title to certain furniture and furnishings in the Alexandria Hotel, or that any title they, or either of them, held was subject and subordinate to the lien held by plaintiff, and to have the rights of the parties in and to said furniture and furnishings declared.

The facts, as shown in substance, express or implied, by the findings of the trial court, are, briefly, as follows: During May, 1927, Alexandria Hotel Realty Corporation, a corporation, was the owner of seven ground leases upon which was constructed the Alexandria Hotel, then operated as a hotel. At that time the Alexandria Hotel Realty Corporation leased the premises to E. C. Eppley and Charles B. Hamilton, and at the same time sold and transferred the furniture, furnishings and equipment of said hotel to said Eppley and Hamilton, taking back a chattel mortgage on said furniture, furnishings and equipment to secure the obligation of said sublease. The Alexandria Hotel Realty Corporation then issued bonds and, to secure the same, executed to the Security Trust & Savings Bank, appellant’s predecessor in interest, as trustee, a trust indenture. By this trust indenture the Alexandria Hotel Realty Corporation pledged and hypothecated to said bank, as trustee, the seven ground leases above mentioned and also the sublease to E. C. Eppley and Charles B. Hamilton, as well as the chattel mortgage above mentioned.

Section 10 of article IV of the trust indenture provided as follows: “The Company (Alexandria Hotel Realty Corporation) covenants and agrees that it will at any time, upon request of the Trustee, make, do, execute, acknowledge and deliver all such further and other acts, deeds and things as shall be reasonably required to effectuate the intention of these presents and to assure and to confirm to the Trustee or its successors all and singular the property hereinbefore

Section 4 of article IV of the trust indenture provided in part as follows: “The Company covenants and agrees that this indenture now is and always will be kept a first lien (Excepting taxes or assessments due but not delinquent) upon all the property described or mentioned in the granting clauses hereof; that it will not voluntarily create or suffer to be created or to arise any lien or charge of priority to or preference over the lien of these presents upon the trust estate, or any part thereof, or upon the income thereof.”

The trust indenture further provided, by section 26 of article IV, that “Any chattel mortgage, or other mortgage, given for the security of the performance of the Hotel Lease, or of any lease or sublease hereafter made, of any part of the premises herein demised, shall be deposited with the Trustee as additional security hereunder, and the Trustee is hereby empowered as the attorney in fact of the Company hereby irrevocably appointed for that purpose, to take all steps necessary to maintain said security in full force, and to foreclose said security in the event that a default should occur under the terms of said Hotel lease or of any sublease, but nothing herein shall be construed as requiring any affirmative action on the part of the Trustee with respect to the enforcement of any chattel mortgage or other lien or security deposited with it under the foregoing provisions, unless it is requested by twenty-five per cent (25%) in amount of the holders of bonds secured hereby.”

Concurrently with the execution of the aforesaid instruments, and as a part of the same transaction, said Alexandria Hotel Realty Corporation, at the request of the trustee, executed and delivered to said trustee an assignment of rents, which assignment provided, in part, as follows: “Whereas under an Indenture made as of the 1st day of May, 1927, between the undersigned, Alexandria Hotel Realty Corporation and Security Trust & Savings Bank” (given to secure bonds, etc.) “it is provided that all rentals collected and/or payable to the undersigned, Alexandria Hotel Realty Cor

“Now Therefore for value received, the undersigned Alexandria Hotel Realty Corporation, hereby sells, assigns, transfers and sets over unto said Security Trust & Savings Bank, Trustee, as aforesaid, all rents, issues and profits to which it, as said Sublessor is or may hereinafter become entitled under and in accordance with the terms of said Sublease.

“This instrument is not intended to be and shall not operate as a transfer of said Sublease itself other than the rents, issues and profits to be derived therefrom, and the undersigned Alexandria Hotel Realty Corporation, the Sublessor shall continue to be liable and to perform and does hereby with said Assignee undertake and agree faithfully to perform each and all the .covenants, undertakings and agreements assumed by it under the terms of said Sublease.

“The said Security Trust & Savings Bank is hereby constituted and appointed the true and lawful attorney of the undersigned Alexandria Hotel Realty Corporation, in its name, place and stead, to ask, demand, sue for, collect and receive, as such Trustee, each and all of said rents, issues and profits as they respectively become due and payable. ’ ’ (Italics added.)

Thereafter, Hamilton and Eppley assigned their interest in the above-mentioned sublease to the Alexandria Hotel Company (a different corporation and not to be confused with Alexandria Hotel Realty Corporation), which company thereafter operated the hotel. The interest of the mortgagor, to wit, the Alexandria Hotel Realty Corporation, was sold to Spring Street Properties, Inc., under an express acceptance by the purchaser of the terms, covenants and conditions of the trust indenture and pursuant to an agreement by the purchaser to perform all of the covenants and conditions imposed thereby on the mortgagor.

On September 29, 1932, at which time it is conceded that the Alexandria Hotel Company, the sublessee, was hopelessly insolvent, Spring Street Properties, Inc., cancelled the lease, took possession of the hotel and thereafter conducted and managed the operation thereof. Theretofore, however, to wit, on May 31, 1932, Spring Street Properties, Inc., had informed the trustee under the trust indenture that the sub-

It should be noted here that although the Alexándria Hotel Company had defaulted in its payment of the rents due under the sublease, nevertheless Spring Street Properties, Inc., had paid to the trustee the amount of the rentals reserved by the sublease so that there was, at the time of the cancellation thereof, no default on the part of Spring Street Properties, Inc., so far as its obligation under the trust indenture was concerned.

As hereinbefore stated, the foregoing recitation of facts is shown by the findings, in addition to which the court found specifically that Alexandria Hotel Realty Corporation pledged the sublease and chattel mortgage; that plaintiff was, prior to September 29, 1932, the pledgee of the lessor’s rights under said sublease; that the rights of plaintiff as such pledgee were expressed in the trust indenture and not otherwise; that upon and after September 29, 1932, upon the cancellation and termination on that day of said sublease said chattel mortgage stood and remained as security only for the payment of rentals which had accrued prior to September 29, 1932; that Spring Street Properties, Inc., had paid plaintiff the full amount of rentals which had accrued under said sublease prior to September 29, 1932; that said chattel mortgage by its terms was given for the purpose of securing payment of the rent reserved in said sublease and for the prompt per

As a conclusion of law, the trial court found that plaintiff had no lien upon the chattels described or referred to in the chattel mortgage; that at the time of the sale, to wit, on October 17, 1932, of the personal property covered by the chattel mortgage, there was no default under the terms of the trust indenture, and neither Spring Street Properties, Inc., nor Alexandria Hotel Company was under any obligation to pay plaintiffs any monies whatever; that the sale of the chattels was valid and that Federated Realty Company, Ltd., became the owner of the property covered by said chattel mortgage; and that plaintiff had no right, title or interest therein nor lien thereon. The trial court further concluded as a matter of law that plaintiff was estopped to deny that the sublease was cancelled and terminated, and was estopped to deny the right of Spring Street Properties, Inc., to sell the personal property described and referred to in the chattel mortgage, and was therefore estopped to deny that Federated Realty Company, Ltd., was the owner of said personal property, as well as estopped to assert any right, title or interest therein or any lien thereon.

It is appellant’s contention: First, that a pledgor of a lease, chattel mortgage or other chose in action cannot, without the consent of the pledgee, cancel such lease or foreclose such mortgage or exercise any other right or remedy given the pledgor by the pledged instrument; second, that under the provisions of the trust indenture and the unconditional acceptance thereof by Spring Street Properties, Inc., it was estopped to assert any rights so to do or to attempt to cancel the sublease or by any act or means take out from under the

It is respondents ’ contention, on the other hand, that notice of all actions taken by Spring Street Properties, Inc., was given to the trustee and that they were acquiesced in by the trustee, and that Spring Street Properties, Inc., was the only one who had the right to enforce the provisions of the sublease or to terminate same for a violation 'of the provisions thereof.

It is further contended by respondents that Alexandria Hotel Realty Corporation did not make an absolute assignment of the sublease to the trustee; that the provision in the instrument assigning rents, to wit, “This instrument is not intended to be and shall not operate as a transfer of said Sublease itself other than the rents, issues and profits to be derived therefrom” was a modification of the trust indenture to the extent that no outright assignment of the lessor’s interest under the sublease was made or intended to be made.

Respondents’ contention last mentioned is untenable, first, because the court expressly found to the contrary; and, second, construing the assignment in the light of the terms of the trust indenture, the clause in question, namely, “This instrument is not intended to be and shall not operate as

Likewise is respondents’ contention untenable that “notice” bears any relevancy to the controversy. In this connection Spring Street Properties, Inc., several times notified plaintiff of its intention to cancel the lease, to which plaintiff replied, in one communication, under date of June 17, 1932, as follows: “After carefully considering the various documents relating to this transaction we have concluded that this sublease may not be cancelled without the concurrence of this Bank as the Trustee under the Trust Indenture of the Alexandria Hotel Realty Corporation.” Thereafter, on June 22d, Spring Street Properties, Inc., in a letter to plaintiff reasserted its right to cancel the sublease, accompanied by the warning that any interference by the trustee would be regarded as an invasion of the rights of Spring-Street Properties, Inc., for which the trustee would be held responsible. The letter concluded with the paragraph: “We are giving you this notice pursuant to your request therefor, and if we do not receive your immediate reply, will assume that you concur in our interpretation of our rights in the premises.” To this letter plaintiff made no reply. Such a notice, or any notice, to the trustee of an intention to cancel the sublease manifestly could not alter the terms of the trust indenture, which trust indenture definitely determined the rights of the bondholders, as well as the authority and duty of the trustee; moreover, the same trust indenture fixed the rights and authority of Spring Street Properties, Inc., in the premises. The failure to reply to such a letter pursuant to the terms thereof or to the threat therein contained, or at all, is of no evidentiary value. Such failure binds the addressee to no course whatever nor does it operate as an estoppel. Silence, under such circumstances, is never the equivalent of consent; such a doctrine would place the whole world at the mercy of letter-writers.

Respondents’ claim that plaintiff had acquiesced in and consented to the termination of the sublease was sustained

Referring again, but with more particularity, to the cancellation of the sublease and the sale of the property secured thereby, in addition to section 4 of article IV of the trust indenture, above quoted, said trust indenture further provided, in section 3 thereof, as follows: “The Company (Alexandria Hotel Realty Corporation) covenants and agrees that all business in connection with the trust estate will be

By the pledge with the trustee of the sublease and the chattel mortgage, the risk in this regard was reduced to a minimum, a condition upon which the bondholders had a right to rely, for it is the law that “When the owner of securities pledges them to secure the payment of his own debt, he impliedly transfers the right to the remedies which will make the securities available for the payment of his debt in case of his own default. The pledgee of property has the control of it for the time being, and he represents not only his own interest, but that of the pledgor, in taking any proper action for the preservation of it and the collection and care of its proceeds”. (21 R. C. L. 666, sec. 29.) Spring Street Properties, Inc., was without right, therefore, to foreclose the chattel mortgage and to attempt thereby to enforce the pledged security. Such right was exclusively in the pledgee. (Works v. Merritt, 105 Cal. 467 [ 38 Pac. 1109 ] ; Puckhaber v. Henry, 152 Cal. 419 , 425 [ 93 Pac. 114 , 125 Am. St. Rep. 75 , 14 Ann. Cas. 844]; Gilman v. Curtis, 66 Cal. 116 , 117 [ 4 Pac. 1094 ]; Bridge v. Connecticut Mutual Life Ins. Co., 167 Cal. 774 , 777 [ 141 Pac. 375 ].)

Nor is it any defense that Spring Street Properties, Inc., would have been left without a “remedy”. If such was the fact, it was because the “remedy” was relinquished when the sublease and chattel mortgage were pledged. Under the circumstances, the course to pursue was for the trustee to determine, who, as agent for the bondholders, and by virtue of the terms of the trust indenture, was, unless requested by the bondholders as the indenture provided, impliedly vested with the power to determine questions likely to arise in the administration of the trust estate. In this regard, so far as the interest of the bondholders was concerned, the advisability of canceling the lease, and thereafter the advisability of foreclosing the chattel mortgage, manifestly presented two questions entirely different in the effect of each on the value of the bonds. The lease might have been cancelled without necessarily jeopardizing the trust, whereas the foreclosure of the chattel mortgage and the removal of the hotel furnishings might, and indeed did, as the record herein appears to indicate, virtually complete the destruction of the trust estate. Such problems were of vital concern to the trustee. Whether the result would have been any different, if the right to foreclose or otherwise enforce the pledged security had remained in the trustee undisturbed, is beside the issue. The assumption of those rights by the pledgor was without legal sanction and the sale under the attempted foreclosure was, therefore, void.

Respondents point out that having taken possession of the chattels described in the mortgage, Spring Street Properties, Inc., would have been responsible for conversion for failure to sell the chattels within a reasonable time, citing in support of such rule, Peet v. People’s Trust etc. Bank, 56 Cal. App. 46 [ 204 Pac. 413 ], Peet v. People’s Trust etc. Bank, 90 Cal. App. 436 [ 266 Pac. 300 ], and Blodgett v. Rheinschild, 56

For the foregoing reasons the judgment appealed from is reversed.

Houser, P. J., and York, J., concurred.

A petition by respondents to have the cause heard in the Supreme Court, after judgment in the District Court of Appeal, was denied by the Supreme Court on June 28, 1937.