Case Name: ETTLINGER v. PERSIAN RUG & CARPET CO.
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1894-04
Citations: 31 Abb. N. Cas. 301
Docket Number: 
Parties: ETTLINGER v. PERSIAN RUG & CARPET CO.
Judges: 
Reporter: Abbott's New Cases
Volume: 31
Pages: 301–308

Head Matter:
ETTLINGER v. PERSIAN RUG & CARPET CO.
N. Y. Court of Appeals,
April, 1894.
[Affirming 66 Hun, 94.]
1. Foreclosure.] The holder of bonds secured by a trust mortgage on chattels is not bound to make a previous demand upon the trustee to foreclose before bringing an action in his own name, where the trustee has left the country, and the mortgaged property will be lost before he can be reached ; or, if he could be reached, there is sufficient reason to believe that he would be mentally incapable to act.
2. The same.\ Nor, in such a case, is the bondholder required to apply for the appointment of a new trustee to bring the action ; such a course would present the same difficulty of requiring the incompetent trustee to be notified before a new one could be appointed, and the court ■ can as well proceed in an action by the bondholder as in one by a trustee.
Appeal by defendant from an order of the General Term of the Supreme Court, first department, reversing a judgment of the Special Term, which dismissed the complaint, and granting a new trial.
The action was brought by Louis Ettlinger against the Persian Rug and Carpet Company, Theodore Schumacher and Paul M. ICrause, to foreclose a chattel mortgage executed by the defendant company to the defendant, Paul M. Krause, as trustee, to secure certain bonds, of which plaintiff and the defendant, Schumacher, had become owners.
The complaint alleged in addition to the usual allegations necessary to foreclosure, that the defendant corporation was insolvent ; that its assets consisted of heavy machinery on the premises occupied by it, and which could' not be moved without great expense; that an action for rent had been commenced against it and proceedings to dispossess were threatened ; and that the trustee of the mortgage, the defendant, Paul M. Krause was in Germany and had become incurably insane.
The answer of the defendant, Theodore Schumacher, denied the above allegations of the complaint; and alleged that the plaintiff had never made any demand that the mortgage be enforced by"the trustee named in the mortgage, nor applied for the appointment of a new or substituted trustee; and that the action had not been brought in good faith for the purpose of enforcing the mortgage for the equal benefit of all the bondholders, but for the purpose of obtaining a preference to the plaintiff himself.
The Special Term dismissed the complaint on the ground that the action should have been brought by the trustee ; and if he was incapacitated as claimed, he should have been removed and a new trustee appointed ; that it was only when a competent trustee refused to act that a court of equity might be invoked directly by the cestui que trust
The General Term reversed the judgment of the Special Term and granted a new trial, holding that the facts alleged in the complaint showed that it would have been futile, if not impossible, to have made a demand upon the trustee in time to prevent what was feared, namely, the injury to the property of the corporation by its removal; and that such allegations supplied a reason for the failure of the trustee to begin the suit, and satisfied the requirement that before the right of the trustee to maintain the action in the first instance is taken away, some statement must "be furnished the court by which it can see that the injury sought to be remedied would otherwise go unredressed (Reported in 66 Hun, 94).
Defendant Schumacher appealed to the Court of Appeals, stipulating that if the order of the General Term was affirmed, a judgment absolute might be rendered .against him.
Francis B. Chedsey, for appellant.
I. The complaint was properly dismissed on the ground that the plaintiff ■could not maintain the action without service of the summons on the trustee. The plaintiff, as a beneficiary of the trust, could have no cause of action to enforce the trust unless the trustee had refused to do so, or had so acted in violation of the trust as to make a demand on him unnecessary (Citing Western R. R. Co. v. Nolan, 48 N. Y. 513; Greaves v. Gouge, 69 Id. 154; Brinckerhoff v. Bostwick, 88 Id. 52, 54; Crouse v. Frothingham, 97 Id. 105).
II. It was essential to the plaintiff’s right to bring the action that he should have sought to have the appellant, his co-beneficiary, join with him in bringing the action (Citing Code Civ. Pro., § 448; Hawes v. Oakland, 104 U. S. 450).
III. The alleged incompetency of the trustee to act did not confer the right on the plaintiff, as a cestui que trust, to bring the action ; it is only when a competent trustee refuses to sue that the cestui que trust may bring the action (Citing Brinckerhoff v. Bostwick, 88 N. Y. 52; Mills v. Goodenough, 9 N. Y. Supp. 764).
IV. The order appointing the receiver and directing a sale was entirely unauthorized, without service of notice of application for the order upon either the trustee or the defendant, Schumacher (Citing Code Civ. Pro., § 714; Colwell v. Garfield Nat. Bank, 119 N. Y. 408; Judson v. Easton, 58 Id. 664; Kimball v. Farmers’ & Mechanics’ Nat. Bank, 138 Id. 500; Tremaine v. Mortimer, 128 Id. 1).
V. The complaint was properly dismissed on the ground that the action was collusive, and instituted with the purpose of defrauding the creditors of the mortgagor and the defendant, Schumacher (Citing O’Mahoney v. Belmont, 62 N. Y. 133, 145; Howell v. Mills, 53 Id. 322).
Thomas P. Wickes (Thomas W. Peyton, attorney), for respondent.
I. The court had jurisdiction to entertain the action and to grant the relief prayed for at the suit of the plaintiff, and in such action to appoint a receiver and direct a sale (Citing Butler v. Johnson, 111 N. Y. 204; Diefenthaler v. The Mayor, etc., of New York, Id. 331; Code Civ. Pro., § 449; Hubbell v. Medbury, 53 N. Y. 99; Cridler v. Curry, 66 Barb. 337; Bort v. Snell, 39 Hun, 388; Davies v. N. Y. Concert Co., 41 Id. 492; Brinckerhoff v. Bostwick, 88 N. Y. 52; Greaves v. Gouge, 69 Id. 154, 155; Memphis City v. Dean, 8 Wall. 64; Hollenbeck v. Donnell, 94 N. Y. 342; Decker v. Gardner, 124 Id. 334; Butts v. Wood, 37 Id. 317; U. S. Trust Co. v. New York, West Shore, etc., Ry. Co., 6 Civ. Pro. R. 90; Weetjen v. Vibbard, 5 Hun, 265; Currier v. West Shore, etc., R. R. Co., 35 Id. 355; National Park Bank v. Goddard, 131 N. Y. 494; Jones on Chattel Mortgages, § 787; Beach on Receivers, §§ 538, 602; Matter of Dekay, 4 Paige, 403; Matter of Craig, 1 Barb. 33; Graham v. DeWitt, 3 Bradf. 186; Story’s Equity Pleadings, § 76; Gluck & Becker on Receivers of Corporations, § 39; Crane v. Ford, Hopk. Ch. 114; Devissee v. Blackstone, 6 Blatchf. 235; First Nat. Bank of Cleveland v. Shedd, 121 U. S. 74; Smith v. Consolidated Stage Co., 28 How. Pr. 377).
II. The objection to the maintenance of the action is not that the court has not jurisdiction of the subject matter or of the person, but that plaintiff had not legal capacity to sue, or has failed to join a necessary co-plaintiff, and this objection not being taken by demurrer is waived (Citing Code Civ. Pro., § 488, subds. 3, 5 ; Secor v. Pendleton, 47 Hun, 283 ; Home Insurance Co. v. Pennsylvania R. R. Co., 11 Id. 182 ; Sullivan v. N. Y., etc., Cement Co., 119 N. Y. 348).
The allegation on this point was as follows: “ That the defendant, Paul M. Krause, the trustee under said mortgage, is in a foreign country, and upon information and belief alleges that said Paul M. Krause did,while in Germany, become violently and incurably insane, and that he is now confined in a lunatic asylum at Frankfort, in the Empire of Germany, and cannot act upon said mortgage as trustee to preserve and sell said property for the benefit of said bondholders."

Opinion:
Finch, J.
The determination of a single question discussed on the argument will dispose of this appeal. The plaintiff was one of two bondholders protected by a trust mortgage. His complaint showed all the facts necessary to a judgment of foreclosure if the action had been brought by the trustee, and sought to justify his intervention as bondholder and plaintiff in the action upon the ground that the trustee had left this country, and was somewhere in foreign parts, and had become insane. On the trial the fact of such absence was shown; that the family of the trustee had also departed to join him abroad, and that inquiries made in natural and reasonable directions were answered b" the statement that the trustee had become insane.
The Special Term dismissed the complaint upon the ground that the bondholder could not sue where there was a competent trustee unless the latter refused to act, and where the trustee had become incompetent it was necessary first to procure the appointment of a new trustee. ' The dismissal of the complaint did not go upon any failure of proof, but assuming the allegations of the complaint to have been established, still held that the plaintiff could not sue for a foreclosure.
An appeal was taken to the General Term, which reversed the judgment and ordered a new trial. Instead of going back and presenting his defense so far- as he had one, the defendant, who was the remaining bondholder, and for whose interest a foreclosure was as much of a necessity as for that of the plaintiff, adopted the perilous experiment of an appeal to this court, with the required stipulation for judgment absolute.
It appeared on the argument that the defendant was injured only at a single point—not by the foreclosure, not by its natural and proper result, not even by the appointment of a temporary receiver, but by a sale of the property claimed to have been collusive, and which vested title in the plaintiff for less than the real value. All that could have been remedied on a new trial. A re-sale could have been ordered, or the plaintiff compelled to account for the property at its jusf and fair value, which would have given to the defendant everything to which he was entitled. Seeing the situation, and observing the defendant's danger, we suggested to his counsel on the argument the prudence of escaping it by a withdrawal of his appeal. He declined the suggestion, and if any hardship results it will not be the fault of the court.
We are satisfied that the plaintiff had the right to maintain the action, and that fact alone justified the reversal of the judgment by the General Term. It is conceded that the beneficiary may sue where the trustee refuses, but that is because there is no other remedy, and the right of the bondholder otherwise would go unredressed. The doctrine does not rest rigidly upon a technical ground, but upon a substantial necessity. In the case of a corporation, a stockholder may sue, not because it refuses, but because those who represent it are the very parties who have committed. the wrong (Brinckerhoff v. Bostwick, 88 N. Y. 52). In that case we said that a demand upon the corporation to sue would be " futile " and so was " unnecessary," and since the action could not be " effectually prosecuted in that form," the shareholders might sue. What occurred in the present case was tantamount to and an equivalent of a refusal by a trustee. He had gone beyond the jurisdiction ; the whole apprehended mischief would be consummated before he could be reached; and if reached there was sufficient reason to believe that he was incompetent.
But the Special Term say that in such event a new trustee should have been appointed. That simply reproduces the same difficulty in another form, for a court would hardly remove a trustee without notice to him and giving him an opportunity to be heard. And why should a new appointment be made when any one of the bondholders can equally do the duty of pursuing the foreclosure ? The court, in such an action, takes hold of the trust, dictates and controls its performance, distributes the assets as it deems just, and it is not vitally important which of the two possible plaintiffs sets the court in motion. The bondholders are the real parties in interest; it is their right which is to be redressed, and their loss which is to be prevented ; and any emergency which makes a demand upon the trustee futile or impossible, and leaves the right. of the bondholder without other reasonable means of redress, should justify his appearance as plaintiff in a court of equity for the purpose of a foreclosure.
It is unnecessary to consider or discuss other questions,, which were numerous. What we have said requires us to-affirm the order .of the General Term and award judgment absolute against the defendant upon his stipulation, with costs.
All the judges concurred.