Estabrook v. International Trust Co.

De Courcy, J. The Ashland Company on June 10, 1904, executed a mortgage of certain specified properties to the defendant as trustee for the holders of an issue of two hundred and fifty twenty year bonds. This suit was brought in 1915 by the plaintiff, for the benefit of himself and other bondholders, to compel the defendant trustee to account for the proceeds of four certain sales of property covered by the mortgage. Only three of the properties — 284 — included in the mortgage are involved in this suit, namely, all the shares of capital stock of the Diamond Mills Emery Company, all the capital stock of the Walpole Emery Mills Company and certain real estate in Ontario, Canada. The mortgage provided that the certificates representing these shares of stock should be indorsed for transfer to the trust company, but not actually transferred on the books of the respective companies until default or until request for such transfer by the mortgagor; and that, until default should be made, the Ashland Company should be entitled to retain possession of all the mortgaged property except the shares of stock and should have the right to vote at all corporate meetings “upon all the shares of the stock of the said corporations pledged hereunder with the same force and effect as though such pledge had not been made for all purposes not inconsistent with the provisions and purposes of this Indenture.” Article 4 of the mortgage required the Ashland Company to pay $15,000 a year, beginning June 10, 1909, into a 'sinking fund for redemption of bonds, such payments to be made either in cash or in bonds taken at their face value, and the bonds to be cancelled by the trustee. The proceeds of a sale of any of the properties subject to the mortgage were to be applied on account of these yearly payments. And it was provided that the trustee might, and at the request in writing of the mortgagor should, apply any money in the sinking fund to the redemption of bonds to be drawn by lot. Article 6 provided that if at any time any of the property granted and pledged could not advantageously be used in the proper and judicious operation of the business of the Ashland Company, or if the sale or disposition thereof became necessary or advisable for any cause, the same might be sold or exchanged for other property, and that upon the request of the Company, approved by two-thirds of its directors and by the trustee, the trustee should release the same from the lien of the mortgage upon the following, among other conditions: (b) that the proceeds of the sale or a sum equal' to the proceeds should be deposited with the trustee for the further security of the bonds. This article further provided that moneys received by the trustee upon any sale or other disposition of the property subject to the — 285 — mortgage should be applied “as and when directed by the company” (1) to paying the company sums equal to any expenditures that should be made by the company for the acquisition of additional property, upon subjecting such property to the lien and operation of the mortgage; or (2) at the option of the company, such proceeds, or any part thereof, should be applied for the account' of the sinking fund and for the redemption of bonds as provided in Article 4. Other provisions of the mortgage material to this case are as follows: Article 7, § 7, deals with the right of bondholders to institute suit for any remedy under the mortgage upon first giving notice of default to the trustee and offering to' indemnify it, or after affording the trustee a reasonable opportunity to exercise the powers granted to it or to institute proceedings in its own name. Article 9, § 1, provides that the trustee shall not be required to take certain proceedings, unless one or more of the bondholders give reasonable indemnity against expense; § 2 provides, that the trustee shall not be required to take notice of any default unless specifically notified in writing of such default, and § 3 provides among other things that the trustee should not be answerable “for any error or mistake of judgment made by it in good faith, but shall only be liable for its own wilful misconduct or gross negligence in the execution of said trusts.” Article 12 provides that the trustee shall incur no liability in consequence of permitting the Ashland Company to retain possession of the property mortgaged. The three alleged violations of duty by the defendant trustee, set forth in paragraphs 7, 8 and 9 of the plaintiff’s bill, may be considered together. The material facts as found by the single justice are as follows: The stockholders of the Diamond Mills Emery Company in September, 1905, voted to sell a certain portion of its real estate for $5,000. This- property was not included in the mortgage; but the Ashland Company, being owner of all the stock of the Diamond Mills Emery Company, caused the necessary corporate action to be taken. The Ashland Company received the $5,000, applied it in the purchase of five bonds of the issue in question and turned them over to the trustee, and they were cancelled and destroyed by the trustee on account of the sinking fund provisions of the mortgage. — 286 — In November, 1905, the Ashland Company, owning all the stock of the Walpole Mills Emery Company, caused this subsidiary company to sell its real estate for the sum of $8,000. The money was used to purchase eight bonds of the issue in question, which were delivered to the trustee and were cancelled on account of said sinking fund provision. The remaining real estate of the Diamond Mills Emery Company was sold in the same manner in August, 1909, for $14,000. The Ashland Company purchased therewith fifteen of the bonds, and these were cancelled and destroyed by the trustee on account of the said sinking fund provision. These three sales of property of the subsidiary companies were made without any prior understanding between the Ashland Company and the defendant trust company. There was no dissipation of trust property. There had been no default -under the mortgage, and there was no deficit in the sinking fund. Under the express provisions of the mortgage above referred to, the Ashland Company had a right to make these payments into the sinking fund with bonds at their face value. And no breach of duty was shown on the part of the trustee in accepting, cancelling and destroying the bonds. The remaining sale is that of certain real estate in Canada belonging to the Ashland Company. In consideration of a partial release of the mortgage so far as it covered this property, the defendant trustee received the purchase price amounting to $15,000. The complaint of the plaintiff is that the trustee used $14,394.15 of this amount to purchase from the Ashland Company twenty-three bonds of the issue in question, at sixty per cent of their face value, plus accrued interest. At the time of this purchase the $15,000 constituted the only asset of the sinking fund provided for in the mortgage. The mortgagor was then in default upon the sinking fund requirements for the years 1911, 1912 and 1913; but no request was ever made on the trustee to take any specific action by reason of said default, and no indemnity was ever offered to the trust company to secure it before taking any action. On this point the finding of the single justice who heard the case is: “I am unable to find that under the circumstances this was not a proper investment for the trust company to make and — 287 — that in making this purchase the defendant did not exercise the sound judgment and reasonable and prudent discretion required of a trustee.” Under the well settled rule this finding must stand unless shown to be clearly erroneous. There was evidence that the Ashland Company was fortunate in disposing of this real estate, which “was always a losing proposition,” and that it requested the trust company to use the proceeds for the retirement of bonds; that “at the time when said bonds were purchased the trust company had no reasonable ground to believe that sixty (60) did not fairly represent the value of said bonds, and that had they made a reasonable inquiry at that time they would not have discovered the facts tending to show the condition which subsequently developed at the time when bankruptcy proceedings originated.” This is not the case of an over-investment of a trust fund in a single security. See Bams, appellant, 183 Mass. 499. The sinking fund was created for the redemption of the issue of bonds in which these twenty-three were included. It was optional with the mortgagor to make its annual payments to that fund in money or in bonds of this issue, which should “be taken at the face value as payment pro tanto.” The real ground for complaint by the plaintiff is, that the trustee should have used the money for the redemption of bonds selected by lot under Article 4, § 1. But, as bearing on the judgment and discretion exercised by the trustee, the fact must be borne in mind that while such selection would have resulted in the redemption of fifteen of the bonds, the action taken resulted in retiring twenty-three bonds and leaving a balance of more than six hundred dollars in the sinking fund. It is urged, and with some support in the evidence, that a single group of bondholders profited by this transaction; but this undoubtedly was taken into consideration by the single justice. His finding is, “On the entire evidence, and under Articles 12 and 9, §§ 2 and 3, of the indenture of trust, I find and rule that the defendant is not chargeable for either amounts as set forth in paragraphs seven, eight, nine and ten of the bill.” In view of what has been said we deem it unnecessary to consider the scope and effect of the immunity clause in said § 3, or to discuss the application of Warren v. Pazolt, 203 Mass. 328. See Minot v. Burroughs, 223 Mass. 595, 604 and cases cited; — 288 — Digney v. Blanchard, 226 Mass. 335; Holmes v. McDonald, 226 Ill. 169; Rae v. Meek, 14 App. Cas. 558. We cannot say on this record, that the finding of the judge who heard the case and saw the witnesses was clearly wrong; and the entry must be Decree affirmed.