Case ID: ad_116/html/0078-01.html
Source: Caselaw Access Project
Author: {"author": "Cochrane, J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Knickerbocker Trust Company, as Trustee, Respondent, v. Oneonta, Cooperstown and Richfield Springs Railway Company and Others, Defendants, Impleaded with Daniel M. Lounsbury and Others, as Executors, etc., of John W. Lounsbury, Deceased, Appellants, and Henry W. Bean and Others, as Bondholders’ Committee for the Reorganization of Oneonta, Cooperstown and Richfield Springs Railway, Respondents.
    Third Department,
    November 14, 1906.
    Foreclosure of trust mortgage — when rights of rival claimants to bonds should not be determined in judgment — détermination of issues between codefendants.
    The trustee of a trust mortgage suing to foreclose for. the benefit of bondholders has no interest in determining the rights of rival claimants to certain bonds, and although one of the claimants.has answered in the foreclosure action denying the title of another claimant and has made default in appearing :at trial, the judgment of foreclosure should not contain a provision determining the defendant’s right adversely on the theory that judgment on that issue went by default.
    
      Although the trustee’s complaint contains allegations as to the title of rival claimants to bonds, the allegations are irrelevant and cannot be made the basis of a judgment by default on that issue.
    When such claimant to bonds serves his answer on the adverse claimant, but the latter does not serve its answer in return, and the answer served does not specifically demand a determination of the rival claims, the claimant not serving an answer is not entitled to have the question determined in an action of foreclosure brought by the trustee.
    Under a trust mortgage 'empowering the trustee to foreclose in its discretion after default, it is not necessary to allege or prove that a majority of-the bond- - holders requested a foreclosure.
    Appeal bv the defendants, Daniel M. Lounsbury and others, as executors, etc., from an order 01 the Supreme Court, made at the Otsego Special Term and entered in the office of the clerk of the county of Otsego on the 19th day of April, 1906, denying the said defendants’ motion to vacate so much of a judgment of foreclosure and sale herein as determines that the reorganization committee of ■the defendant railway company are the owners- of certain bonds thereof, and awards costs to said committee.
    
      Henry C. Henderson and William A. Davidson, for the appellants.
    
      Davies, Stone & Auerbach [Charles E. Hotchkiss and Lynn J. Arnold of counsel], for the plaintiff, respondent.
    
      Joseph G. Deane, for the respondents Henry W. Bean and others, as reorganization committee, etc.
   Cochrane, J.:

Judgment has been entered herein directing the foreclosure and sale of the property of the Oneonta, Cooperstown and Richfield Springs Railway Company under ■ a mortgage for the sum of $1;500,000 executed by said railway company to the plaintiff as trustee for the benefit of the bondholders of said company. The respondents, Henry W. Bean and others, constitute a reorganization committee of certain alleged bondholders and claim to own 1,110 of the bonds secured by said mortgage, the par value of the bonds being $1,000 each. The appellants, owning seventeen of the bonds, dispute the alleged ownership of said reorganization committee and contend that the bonds which the committee claims to own'are in fact the property of the railway company, and that by reason of .such fact the value of the seventeen bonds owned by said appellants is enhanced, the property of the railway company being insufficient for the payment in full of the bonds. Both the reorganization committee and the appellants aré intervening defendants. The judgment on .its face establishes the ownei’ship by the reorganization committee of the bonds claimed by them, and it is this provision of the judgment which constitutes the grievance of the appellants.

The respondents seek to justify this provision of the judgment because of an answer interposed by the appellants, which answer it is claimed created an issue as to the ownership of the bonds in question. Having interposed such answer the appellants made default at the trial. The judgment is, therefore, a default judgment.

Section 1207 of the Code of Civil Procedure is as follows: "Where, there is no "answer the judgment shall not be more favor-, able to the plaintiff than that demanded in the complaint, Where there is an answer the court may permit the plaintiff to take any judgment, consistent with the case made by the complaint, and embraced within the issue.”. Unless, therefore, the question of the ownership of the 1,110'bonds" claimed by the reorganization coim mittee was embraced within the issue ” the judgment cannot determine such question, and the provisions in the judgment purporting to do so should be eliminated.

Plaintiff assumes that it was necessary to allege and prove thatva majority of the bondholders had requested a foreclosure. Such is not the case. According to the mortgage if default be made as therein specified the trustee is empowered in its discretion to maintain this action. The mortgage constitutes a part of the complaint a,ud it thus appears from the complaint itself that by the terms of the mortgage the right to maintain the action is not dependent on the request of the bondholders, although a majority of- -the bondholders might require the plaintiff to proceed by foreclosure or otherwise. It is optional with tlio plaintiff on its own volition on default of the mortgagor to maintain this action independently of the wishes of the bondholders. The complaint contains allegations based on the apparent theory that such request of a majority of the bondholders is a condition precedent to the plaintiff’s right to forer close, and hence it is argued that the identity of the bondholders is a material and necessary inquiry. Such allegations are immaterial and such inquiry is irrelevant.

The answer of the appellants by various denials and allegations raises an issue as to the right of the plaintiff to maintain the action. It also alleges facts showing that the reorganization committee is not the owner of the bonds in question, but that such bonds belong to the railway company. There are other allegations in the answer immaterial to this appeal.

As between the plaintiff and the appellants Lounsbury, the only . issue raised by the pleadings was the right of the plaintiff to maintain the action. When the plaintiff proved the default of the mortgagor and the other material allegations of the complaint its right to foreclose the mortgage was established. ' The plaintiff was not concerned with this controversy existing between codefendants. It could not assume to determine conflicting claims of ownership to the bonds in question. Its fiduciary duty as trustee required it to conserve the interests of all the bondholders, whoever they might be, but it was no part' of its duty to detérmine conflicting interests as between rival' claimants to the same bonds. And as between the plaintiff and the appellants no such issue arose by reason of anything in the appellants’ answer. The plaintiff could not by injecting into the complaint immaterial allegations as to the ownership of the bonds raise a false issue in respect thereto which would be binding as between conflicting bondholders. Nor did the defendants by answering such irrelevant matter and by the insertion of other irrelevant matters in their answer accentuate or extend the issue. If- parties choose to insert in their pleadings useless and irrelevant allegations, and to form an issue in respect thereto, such issue is as irrelevant as are the allegations. The right to foreclose the mortgage and sell the property is entirely distinct and independent from the question of the proper bondholders to receive the avails of such sale and in what proportion. In the first question the plaintiff was properly interested. The latter question does not .concern the plaintiff. • The only issue as between the plaintiff and the appellants referred to the former question.

The plaintiff urges that as the appellants contended that the bonds belonged to the: railway company it was necessary to prove that they in fact belonged to the reorganization committee, else there would have been no default in the payment of such bonds. Default in the payment of interest, of the appellants’.bonds was the. only justification plaintiff needed for this-action. But were it otheiv wise proof as to the identity of bondholders for the purpose of establishing the propriety of this action is" a very different proposition from proof of ownership as between rival claimants to the same bonds. The issues are distinct, and- while it may have been necessarily proved for tlie purpose of establishing plaintiff’s right to maintain -this action, that the bonds were held by certain parties, such -proof and a corresponding finding by the court must be limited to that purpose and cannot be- extended and applied to ar dif-' fererrt issue as between different parties. That is.all that is meant and nothing more by the provision' in the mortgage that “ The Trustee shall not" be bound to recognize any person" as a bondholder unless nor until his bonds are submitted" to the. Trustee for inspection if required, and his title satisfactorily established if disputed.” , - -

Furthermore, it is clear that the plaintiff lias no interest in the question here under consideration; The plaintiff’s only interest is in procuring a judgment under which it may sell the property. The judgment to that extent is not complained of and .cannot be affected by this motion. It can make no difference to the plaintiff to whom the proceeds of the sale are paid. It seems to me as far as the plaintiff is concerned the question is purely academic,

The practical question here rais.ed "affects the appellants’ codefendants, .the reorganization committee; The right of .the latter to retain in the judgment the provisions sought to be eliminated depends on section 521 of the" Code of Civil Procedure, which in part "is as" follows: “ Where the judgment, may determine the ultimate rights of two or -more defendants as between themselves, a defendant who requires such a determination must demand it in his answer, and must-at least twenty days béfore the trial serve a copy of .his answer upon the attorney for each of the defendants to be affected by the determination.” The appellants served their answer on the attorney for fhe reorganization committee-and the latter could of course waive the provision requiring such service twenty days before the trial, which provision' was for their benefit. But I very much doubt whether such answer demands that the judgment “ determine the ultimate rights of two or more defendants as between themselves,” as required by the above statute. The answer does not specifically make such demand.. All that can be claimed is that such demand is implied. Waiving, however, that point, the reorganization committee did not serve on the appellants a copy of their answer, and 'hence did not bring themselves within the benefits conferred by said section 521 of the Code. They did not take the necessary steps to permit a determination to be made as between defendants and cannot avail themselves of their codefendants’ answer for the purpose of procuring such determination. If these appellants had made themselves plaintiffs in an action against the reorganization committee, and had alleged in their complaint in such action the same facts which appear in their answer herein, and had made default at the trial, the utmost the reorganization committee could ordinarily procure in such a case in the absence of special reasons to the contrary would be a dismissal of the complaint. It is difficult to see how they can procure any greater benefits in the present case. • . ■

•The judgment herein was entered on motion of all of the respondents and contains a provision that the referee therein named shall take proof and report who are the owners or holders of the bonds secured by the mortgage ■ in so far as said ownership is not determined by the-judgment. The appellants ask that the question of such ownership be determined by the said referee, and as we conclude that the judgment could not properly determine such question it may be left to the referee to take proof and report thereon as the judgment provides.

The order must be reversed, with ten dollars costs and disbursements, and the motion granted to the extent specified in the paragraphs of the notice of motion numbered 1st, 2d and 3d.

All concurred, except Smith, J., not voting.

Order reversed, with ten dollars costs and disbursements, and motion granted to the extent specified in the paragraphs of the notice of motion numbered 1st, 2d and 3d, without costs.