Gibson v. American Loan & Trust Co. — 35 N.Y. St. Rep. 192

Majority

p. 192

George R. Gibson et al., Resp’ts, v. The American Loan & Trust Co. et al., App’lts.

(Supreme Court, General Term, First Department,

Filed December 29, 1890.)

Headnote

1. Trustee—Removal of—Corporation mortgage.

The C. W. Co. of Nebraska city executed a mortgage to the defendant, a corporation of this state, as trustee, to secure certain bonds. Thereafter a corporation was organized called the Nebraska C. W. & L. Co., and to this the 0. W. Co. conveyed its property and later the Nebraska 0. W. & L. Co. mortgaged all the property for a large sum. The C. W. Co. defaulted as to interest and on request of some of its bondholders the defendant began an action in Nebraska to foreclose the mortgage securing their bonds. All the attorneys in Nebraska having charge of the foreclosure on either side were interested in the Nebraska C. W. & L. Co. Such proceedings were had that certain expenditures made by the latter company upon the property after the same had been deeded to it by the C. W. Co. were preferred to the claims of the bondholders, and the defendant also refused the demand of certain bondholders to be allowed to intervene in the foreclosure action and assert thejr rights. Held, that the bondholders could maintain an action in the courts of this state to remove the trustee on the ground of bad faith and therein enjoin defendant from further action; and that some of the bondholders might sue for all others similarly situated.

2. Same.

The fact that the Nebraska C. W. & L. Co. cannot be brought in is not a defensé, the question being one between the bondholders and their trustee, a corporation of this state.

8. Same.

It was error to allow the expenditures of the Nebraska 0. W. & L. Co. to have a preference over the bondholders, the rule being that where a mortgage upon real estate has been given, improvements, fixtures or machinery subsequently added to and affixed upon the property become subordinated to the preceding mortgage.

4. Same.

If the defendant authorized' its attorney to consent that these expenditures be preferred to the lien of the mortgage, it would be misconduct justifying its removal.

5. Same.

The fact that if the present trustee is removed the court cannot in this case appoint another is not a defense, because the mortgage itself provides a method by which the bondholders can appoint a new trustee.

p. 193

Appeal from an order denying an iujunction.

Robert L. Harrison, for app’lts; E. Ellery Anderson, for resp’ts.

The action has been brought in favor of the holders of bonds issued by the City Water Company of Nebraska City, in the state of Nebraska. The total issue of the bonds amounted to the sum of $150,000.. Bach bond was for the sum of $1,000, and secured by a mortgage upon the property of the water company. This mortgage was executed and delivered to the American Loan & Trust Company of the city of New York in trust for the security and benefit of the holders of the bonds. The water company made default in the payment of interest upon the bonds, and at the request of the holders of sixty-one of the bonds the Trust Company commenced an action in the district •court of Otoe county, Nebraska, to foreclose the mortgage and sell the mortgaged property. Before this action was commenced, and after the execution and delivery of the mortgage, another corporation was organized in the city of Nebraska, called the Nebraska City Water & Light Company. And after .the organization of that company the City Water, Company, the mortgagor, transferred its property covered by the mortgage to a person who conveyed it to the Nebraska City Water & Light Company, which then encumbered it by a mortgage of $250,000. After this transfer and conveyance, the grantee made additions to and improvements upon the property, and these facts were alleged in the petition for the commencement of the action for the fore•closure of the mortgage. That company answered the petition, alleging that it had purchased real property and built water basins and provided apparatus for the use of the company, and had obtained the performance of architect and engineering services, and that the amount expended therefor was necessary to keep the plant in running order and retain the customers of the City Water Company, and that it amounted to the sum of $25,000, for which a priority was claimed in the action over the mortgage to the trust company. Other answers were served in the action, but containing no allegations affecting this part of the action. And •after the issues had been framed, the cause appears to have been brought on for a hearing by consent of the parties, and a decree ivas entered in conformity to the prayer of the petition, and also finding due to the Nebraska City Water & Light Company, as a first lien upon the property, this sum of $25,000. No contest appears from the docket entry in the action to have taken place concerning the allowance of this sum of money, nor any adjudication by the court determining it to be a prior incumbrance upon the property to the mortgage previously given by the City Water Company. But what took place at the trial appears from the docket entry to have been the result of consent on the part of the attorneys and counsel representing the two water companies and the trustee to which the mortgage had been given. It further appeared that one of the attorneys who had been employed to, and ¡did represent the trust company in the commencement and prose

p. 194

cution of the .foreclosure action, was one of the incorporators of the Nebraska City Water & Light Company. The attorney who represented the mortgagor in the mortgage was also an incorporator in that company; and so was the attorney who represented and appeared for the Nebraska City Water & Light Company. And it was accordingly to their interest to promote and maintain all such advantages as might be secured for the Nebraska City Water &' Light Company-in preference to those of the Trust Company under the mortgage, the plaintiff in the foreclosure action. There was reason for believing, in the disposition which was made of the foreclosure action by the judgment agreed to be, entered, that the rights and interests of the holders of the bonds secured by the mortgage had been so far disregarded and sacrificed, and that this had. been done under tire authority and with the connivance of the Trust Company itself.

When these facts came to the knowledge of the plaintiffs measures were taken by way of correspondence to induce the Trust Company to permit the plaintiffs to be represented in the foreclosure action to secure a proper observance and vindication of their own rights under the mortgage. But this, was declined on the part of the Trust Company, which refused to authorize or consent to such interference. And this refusal tended to confirm the belief that the Trust Company was not in good faith prosecuting the foreclosure suit for the promotion of the interests and the protection of the rights of the holders of the bonds. And this action was thereupon commenced to obtain a judgment for the removal of the Trust Company as trustee under this mortgage, and for the appointment of another trustee to maintain and enforce the trusts created by its provisions. The complaint in the action prayed for the issuing of an injunction in the meantime restraining the Trust-Company, its officers, agents, attorneys and servants from proceeding in any way in the foreclosure action, and from executing the judgment or decree which had been entered, or taking any other steps or proceedings as trustee under the trust deed. And the court, considering these facts to have been established by the proof produced in the case, continued the injunction which had previously been issued having this effect, but leaving the Trust Company at liberty to take such defensive measures, or receive such sums of. money as should be necessary for the protection of the rights of the holders of the bonds.

In support of the appeal which has been taken from this order,, the objection has been urged that the court is without jurisdiction to restrain the trustee from carrying on or consummating these proceedings in the district court of Otoe county, in the state of Nebraska. And the case of Cole v. Cunningham, 133 U. S., 107 , and those cited in the course of the opinion, have been relied upon chiefly as authorities maintaining this objection.

But neither that case, nor anything which was decided in Phelps v. McDonald, 99 U. S., 298 , has any tendency to sustain this objection. On the contrary it is conceded, as it has frequently been held, where a necessity for the injunction appears to exist, that the courts of one state may enjoin the party within its jurisdic

p. 195

tion from proceeding in an action pending in another state. And so it has been held, not only in this state but in others, as the authorities collated and discussed in Cole v. Cunningham clearly prove and establish. So far as objection has been taken to the jurisdiction of this court over this action, it is plainly without support. Neither can the action be defeated for the reason that all the owners of bonds secured by the mortgage are not made parties to it For it has been brought by the plaintiffs as the owners of eighty-five of the bonds, forming more than a majority of those secured by the mortgage. And they are prosecuting it under the authority of § 448 of the Code of Civil Procedure, not only for the benefit of themselves, but of the other bondholders who may elect to make themselves parties to the litigation. This section has provided where the question is one of common or general interest of many persons, or where the persons who might be made parties are very numerous and it may be impracticable to bring them all before the court, that one or more may sue or.defend for the benefit of all. And as the holders of these bonds are numerous that is a sufficient authority for the support of the action by these plaintiffs for their own benefit, as well as that of the holders of the other bonds.

The action is against the Trust Company, which is a corporation formed under the laws of this state, and it is, therefore, directly subject to the jurisdiction and authority of this court. Indeed, there would seem to be no other authority provided for the removal of the trustee beyond that which the courts of this state are authorized to exercise, for it is directly within the reach only of the process of this court and subject to any judgment which may be recovered against it in the action. And that is sufficient to answer all the requirements of jurisdiction on the part of the court. For no disability appears to exist on the part of the plaintiffs preventing the prosecution of the action by them even though a portion of them, as the affidavits show the fact to be, are not residents of the state of New York. The defendant is here and if an equitable right exists for its removal, the plaintiffs are entitled to enforce that right through the instrumentality of -this jurisdiction.

That the Water Company of Nebraska City may not be brought into the action by any proceeding which has been provided for the service of the summons upon a resident of another state will not necessarily defeat the action, for that company has no direct interest m the controversy existing between these bondholders and this trustee. It is not proposed, and could not be, to remove the trustee bn account of any misconduct on the part of the Nebraska City Water Company, but the action has been brought for its removal because of its own misconduct in consenting to the charge -of this sum of $25,000 as a superior lien upon the property covered by the mortgage, when under the authority of the law the City Water & Light Company was entitled to no such advantage. The ground of the action is the alleged misconduct of the Trust Company itself and no injury whatever can result to the Nebraska City Water Company from the removal of the Trust

p. 196

Company as trustee under this mortgage. And for that reason if jurisdiction shall be incapable of being acquired over that company this failure does not appear to constitute a defense to the action. But as to that no definite decision is required to be made, for the: company may still appear and make itself a party to this litigation. But if it does not, then the question will for the first time arise whether the action can be maintained without that company becoming a party..

That the consent should not have been given by which the expense of improvements upon the mortgaged property were made a superior lien to first encumbrance, appears to be reasonably well supported by the authorities. For they sustain the rule to be,, where a mortgage has been given upon real estate, that improvements, or fixtures, or machinery, afterwards added to or affixed upon the property, become subordinated to the preceding mortgage and are liable for the payment of the mortgaged debt the same as the property to which the articles are afterwards annexed.. This principle is settled by the following, as well as other authorities : Smith v. Goodwin, 2 Greenl., 173; Frankland v. Moulton, 5 Wis., 1 ; Winslow v.Merchants Ins. Co., 4 Metc., 306 ; Pettengill v. Evans, 5 N. H., 54 ; Butler v. Page, 7 Metc., 40 ; Snedeker v. Warring, 2 Kern., 170, 174, where it was said in the opinion that “ permanent erections, and other improvements made by the mortgagor on the land mortgaged become a part of the realty and are covered by the mortgage.” And the same rule is equally as applicable where the improvements and erections shall be made by a party acquiring title under the mortgagor subsequent to the mortgage. And to the same effect is McFadden v. Van Buren, 50 Hun, 361 ; 20 N. Y. State Rep., 366. And this principle has also been applied to growing crops upon land mortgaged, as will be seen by 1 Hilliard on Mortgages, 3rd ed., 180, note c.

If the Trust Company authorized its attorney and' counsel to-consent to the subordination of the lien.of the mortgage to the expenditures alleged to have been made upon the mortgaged property, then certainly it is chargeable with that degree of misconduct which may properly result in its removal. People v. Norton, 5 Seld., 176; Quackenboss v. Southwick, 41 N. Y., 117 . And that this consent resulted from its preceding authority, or subsequent acquiescence, may be inferred from the papers in the case exhibiting what has taken place and the refusal of the Trust Company to permit any person representing these plaintiffs to intervene for their own protection in the foreclosure action.

The inability of this court to appoint another trustee under the mortgage, in case the Trust Company shall be removed, will not defeat the action, for by the eighth paragraph of the mortgage it has been provided that a majority in number and value of the bondholders may, by an instrument in writing under their hands, duly acknowledged or proved, and recorded in Otoe county, appoint or select one or more person or persons, or any other corporation, to be a trustee under the mortgage in case of the removal of this Trust Company. This provision secures ample authority to

p. 197

the bondholders to select a trustee to execute and enforce the trusts and obligations created by the mortgage if this Trust Company shall be removed by the judgment of this court from its position. And that certainly tends to restrict this litigation to the determination whether the trustee shall or shall not be removed from its office under the mortgage. And to that extent there seems to be no well founded objection to the jurisdiction or authority of this court.

The order from which the appeal has been taken should, therefore, be affirmed, with'ten dollars costs and the disbursements.

Van Brunt, P. J., and Beady, J., concur.