Zebley v. Farmers' Loan & Trust Co.

This action was brought by the plaintiff, a bondholder of the FT. Y. & Boston R. R. Co., against the defendant as trustee under a mortgage given by said company. The plaintiff alleged the incorporation of the defendant; the incorporation of the FT. Y. & Boston Railroad Company; the execution of the mortgage, the issuance of the bonds, and that the plaintiff, before the commencement of this action, became and still is the owner and holder of eleven of said bonds with the coupons thereon ; that said railroad company made default in payment of the interest on said bonds, and that thereupon the defendant, as trustee, elected that the principal of the bonds should become immediately due and payable in pursuance of the power conferred therein; that thereafter, on or about some day entirely indefinite, the defendant commenced an action in this court to foreclose the mortgage; and that on some day not mentioned a decree was entered directing a sale of the mortgaged premises, which decree provided that in case there should be no bona fide bid in cash at such sale to an amount equal to that of all the bonds outstamiing and secured by said mortgage, the defendant might bid for and purchase the premises, property and franchises so sold in behalf of all holders of such bonds and coupons in proportion to

The complaint further alleged that on June 5, 1876, no cash bid being made therefor, the said railroad property, franchises, etc., were sold to the defendant in conformity with the before mentioned decree; that subsequently the N. Y., Westchester & Putnam Railroad Co. was incorporated and the defendant, in co-operation with the corporators, conveyed said mortgaged property to said persons or to said company for some consideration to plaintiff unknown, and that at all the times mentioned the eleven bonds alleged to be held by the plaintiff were outstanding and the whole amount thereof with interest was due thereon.

The complaint further alleged that the plaintiff and the holders of said eleven bonds had no notice of the formation of said last mentioned railroad company or of said transfer by the defendant to said company, nor did said bondholders or this plaintiff in any wise assent or agree thereto; and that the N. Y. & Boston Railroad Co. was and "is insolvent.

The complaint contains the further allegation that this plaintiff has at all times been ready to pay his reasonable share of the expenses of the defendant, if any there be, and has at divers times, particularly on the 16th December, 1887, demanded that defendant account with him and that defendant pay him his just and reasonable share of the value of said mortgaged property, and that the defendant has refused and still refuses so to account, and has wrongfully and in violation of its duties as trustee converted to its own use the share of the plaintiff, and judgment is demanded for an accounting.

The defendants demur to the complaint upon the ground that it does not state facts sufficient to constitute a cause of action ; that the court has no jurisdiction of the action, and that there is a defect of parties defendant in that the N. Y., Westchester & Putnam Railway Co. is necessary to a complete determination of the questions raised therein. This demurrer was sustained and from the'judgment thereupon entered this appeal is taken.

Without discussing the many interesting points raised upon this demurrer, there is one which stands at the threshold of the plaintiff’s right to recover which seems fatal to the cause of action stated in the complaint. It is there alleged that by the terms of the decree of foreclosure and sale the defendant might, under certain circumstances, "purchase the property which was the subject matter of the foreclosure action; and that thereupon and upon payment by each bond and coupon holder of his proportion

This payment was a condition precedent to the acquiring of an interest. Until it was made, or' at least tendered, the defendant did not become his trustee for any purpose whatever. His claim upon the property was represented by the mortgage. By the foreclosure that claim was cut off, and it was only by coming in and paying his proportion of these various charges that he could acquire any interest in the purchase made by the defendant as trustee. The fact that this defendant did convey this property to another corporation was a matter of no interest or moment to this ¡Dlaintiff or his predecessors in interest of the bonds of which he now claims to be the holder. As it appears upon the face of the bill, the defendant owed to them no duty. The defendant was neither his trustee nor was he the defendant’s cestui que trust.

This purchase was made under this decree in 1876 it would seem. When the sale was made to the New York, Westchester & Putnam By. Co. does not appear. But can it be claimed for a moment that this trustee was bound to hold this property forever in order to see as to whether outstanding bondholders would come in and contribute their share of the expenses and cash payments as required by the decree, and thus be entitled to share or have a voice in the disposition of the property purchased under the foreclosure sale. The action in question seems to have been instituted nearly fourteen years after this foreclosure sale, and all that the defendant was bound to do was to wait a reaábnable time in order to enable these bondholders to come in and participate, and it does not appear that it did not do so.

It is certainly too late fourteen years after the entry of this decree for the holders of these bonds now to claim that they may come in and contribute and participate in the benefits of the foreclosure sale. If such a scheme is to operate, then there never could be, in the case of bonds passing from hand to

It would seem to us to be almost too plain for argument were it not for the facts that one of my associates thinks otherwise, that before an action of this kind can be maintained the party must be a beneficiary, and this plaintiff shows upon the face of his complaint that he is not a beneficiary, as he has not done those things which he is bound to do before lie can participate in the trust.

The judgment should be affirmed, with costs.

Patterson, J., concur.

(dissenting).—Although several grounds of demurrer were assigned, the one upon which the judgment was based was that the complaint did not state facts sufficient to constitute a cause of action.

In determining the sufficiency of the complaint it is not necessary for us to set it forth in full, and we shall, therefore, confine ourselves to a statement of such facts alleged therein as we deem necessary to dispose of the questions thus raised on this appeal.

The action is brought by plaintiff, the holder of eleven bonds of, the N.Y. & Westchester Ry.Co. for an accounting from the defendant, the trustee in the mortgage under which the bonds were issued. The complaint alleges the incorporation of the railroad company, the mortgage to the defendant, the default of the railroad company in the payment of interest and the election of the defendant trustee that the whole principal and interest of the bonds should become due; that the trust company thereupon brought suit to foreclose the mortgage in which a decree and sale was had and the property of the railroad company bought in by the trustee for the benefit of all the bondholders under the power contained in the trust deed. It is further alleged that the bonds so now held by the plaintiff were ascertained to be outstanding, and that after the purchase the trust company conveyed the railroad property to the company which was formed in re-organization of the company in default, in which re-organization the holder of these bonds had no part, and in which he declined and declines to come; and that demand has been made upon the trust company, but the trust company denies that he has any rights whatever. Upon these facts the plaintiff demands that the defendant account for the disposition made of the property after the foreclosure.

The respondent contends that the facts stated do not constitute a cause of action for the following reasons :

II. If the plaintiff is entitled to any relief, it must be sought in the original foreclosure suit

III. W hen the defendant bought in the property it held the same as trustee under the provisions of the decree. To sustain any action against the trustee personally it must be alleged and proved that the trustee was guilty of a breach of trust, and departed from the provisions of the decree.

IV. The conveyance by the trustee to the new railroad company, if made by order of court, cannot be impeached collaterally, and if made without such order is a breach of trust and absolutely void.

Y. The allegation as to conversion by the defendant is defective, and amounts to nothing.

In regard to the first, while it is true that a court of equity frequently declines to entertain claims which are too stale, and while the complaint itself shows that many of the transactions now sought to be inquired into occurred more than ten years ago, still we have allegations of want of notice and knowledge on the part of the plaintiff which in the absence of a bar by reason of the statute of limitations (which could only be raised under our practice by answer) entitle the plaintiff to present the facts to the court and then have a ruling thereon.

As to the second ground, that the plaintiff’s relief, if any, must be sought in the foreclosure suit, this much need only be said. It may well be that the plaintiff might have intervened in that suit, and might have obtained the relief which he seeks in this. But that is all foreign to the question presented by the demurrer, which relates to the question whether the allegations are sufficient in law to enable him to maintain this action, and that is the question to be hereinafter considered.

As to the third, we agree with the respondent that when the defendant bought in the property it held the same as trustee under the provisions of the decree. It should, however, be remembered that there is no allegation in the complaint that all the property received by the defendant as trustee in the foreclosure suit were by the terms of the decree or any order of the ■court turned over to the new or reorganized company. It is true there is an allegation that the property was turned over; but there is an express statement that divers persons having ■associated themselves together formed, or attempted to form, a corporation * * * that the defendant in co-opera.tion with said persons thereafter conveyed said mortgaged property to said persons for the said company upon some consideration to the plaintiff unknown; and

“That this plaintiff and the holders of said eleven bonds had no notice of the formation of said railroad company, or the said transfer of said property by defendant to said committee or company, nor did the said bondholders or this plaintiff in any wise .assent or agree thereto, nor have they or he received any benefit or advantage under said so-called reorganization, but on the con

So far, therefore, as the complaint itself gives us any information upon the subject, it would appear that the defendant acquired the title to all the property of the mortgagor railroad and thereafter held the same as trustee, until, as alleged, it made a disposition thereof by transferring the same to another corporation, but for what consideration or under what arrangement, or whether it was the result of a decree or order of the court, is not made to appear.

It seems to us reasonably clear as an elementary principle that-where nothing else appears, and where the decree in foreclosure gave no specific directions as to the disposition to be made by the-trustee of the property, that the defendant would hold the same as trustee for all the bondholders, subject, of course, to the terms- and conditions fixed by the decree relating to the rights of the bondholders.

It was provided therein that upon payment by each bond or coupon holder of his proportionate share of the cash pajnnent necessary to meet and defray the expenses of the action, and the other payments directed by the decree to be paid in cash, the purchase so made by the trustee should enure to the benefit of such bond or coupon holder in proportion to his interest

It appears that the plaintiff did not pay his proportion, but he asserts his readiness and willingness to pay his reasonable share of the expenses of the defendant, which, when taken in connection with the statement of the demand upon the defendant to account, was undoubtedly intended as a statement of willingness to comply with the condition precedent to obtain an interest in the property purchased upon the foreclosure by the trustee.

There can be no doubt upon a trial, upon a showing that this property pursuant to a decree or order of the court was transferred to the reorganized company, or upon a showing that the plaintiff was not entitled to any share or interest therein, that that would be a complete answer to the plaintiff’s right to recover. It seems to us, however, upon the facts stated, that we cannot ignore plaintiff’s right to know what became of the property which was purchased in the interest of the bondholders, except by assuming that the property purchased by the trustee was properly and lawfully disposed of. All these presumptions, however, do not destroy the plaintiff’s right to have a statement from the trustee as to what was done with the property.

The complaint does not allege that the property was wrongfully conveyed to another corporation, but there is a statement that the-property was converted by the defendant. Without, however, giving any weight to that; being a conclusion unsupported by any facts otherwise alleged in the complaint, it still appears from the facts alleged that the property was transferred in some way and upon some consideration to the plaintiff- unknown.

While we must therefore concede the respondent’s fourth contention that the conveyance by the trustee to the new railroad company if made by order of the court cannot be impeached col

Upon this demurred therefore, it will be seen that our view is that the abstract question of the power of the trustee to convey in good faith, and for an adequate consideration is not involved. The proposition before the court is whether upon facts showing that the trustee has come into the possession of the trust property he can dispose of the same upon terms and conditions unknown to the cestuis que trust, and thereafter refuse or deprive the latter of ■a right to know just what has been done with the trust fund. TVe have always regarded it as elementary that a cestui que trust had a right to demand of a trustee an accounting as to the administration of his trust, and in this respect there can be no distinction between the trustee of a railroad company and any other trustees, for the reason that the former are governed by the general rules that govern trustees in the ordinary performance of the duties of a trust.

We are of opinion therefore that the judgment should be reversed, with costs to the appellant to abide the event, and with leave to the defendant to answer, without costs.

Judgment affirmed, with costs.