Court Opinion

ID: 3493425
Source: CourtListenerOpinion
Date Created: 2016-07-05 22:01:33.518083+00
Date Added: 2024-06-11T14:14:58.910924
License: Public Domain

The trustee invoked the powers of the court of chancery in foreclosure of the trust mortgage and thereby subjected itself, as trustee, to the direction of the court within the terms of the mortgage and, upon foreclosure and sale if purchase is made by the trustee, then to further administration of the trust, as provided in the indenture, and under the direction of the court acting in the capacity of universal trustee. The court of chancery in such capacity has power sufficient to meet needs.
"The powers and jurisdiction of the circuit courts and circuit judges in chancery, in and for their respective counties, shall be co-extensive with the powers and jurisdiction of the courts and judges in chancery in England as existing on March first, eighteen hundred forty-seven, with the exceptions, additions and limitations created and imposed by the Constitution and laws of this State." 3 Comp. Laws 1929, § 13944.
In foreclosure of a trust deed mortgage the court may authorize the trustee to purchase at the sale. When the trustee is the purchaser the trust attaches to the res in behalf of the beneficiaries.
The question upon which we divide is whether a court may, by decree of foreclosure, authorize the trustee to purchase at the sale without having possession of the outstanding bonds.
It may be conceded that under the decision in Detroit TrustCo. v. Stormfeltz-Loveley Co., 257 Mich. 655
(88 A.L.R. 1263), the bondholders, secured by *Page 166 
a trust mortgage, are entitled to receive what their contract calls for and may not be compelled to take, in lieu thereof, beneficial interests in a trust, uncertain as to time and outcome and not contemplated by the trusteed mortgage. But that does not decide this case, for the trust mortgage not only contemplates but authorizes the trustee to purchase in their behalf, and no bondholder is here objecting. The contest is by the mortgagor and not in the interests of the bondholders but confessedly directly against their rights under the instrument. In support of this statement, we quote the following from the brief in behalf of the mortgagor:
"The amount due under the mortgage for principal and interest at the present time is over $1,150,000. The court will take judicial notice of the fact that there has been a depression in real estate and that most of the mortgages made in 1925 were made upon high valuations. There is every possibility that if the trustee or any other bidder is compelled to pay cash or deposit bonds in the payment of any bid, the amount bid for the property would be much lower than if the trustee could bid in the property without payment of cash or depositing bonds. For example: assume the trustee had on deposit 50 per cent. of the bonds and bid $500,000 for the property, which perhaps would represent fair market value of the property today. The trustee could pay for the property by depositing the 50 per cent. of the bonds on deposit with it and having credited thereon such deposited bonds' pro rata portion of the purchase price, leaving the balance of the purchase price, to-wit: $250,000, to be paid in cash for the benefit of nondepositing bondholders. The fact that the trustee must pay in cash or deposit bonds compels the trustee to bid an amount commensurate with the fair value of the property and permits defendants to redeem at such *Page 167 
price. This is a distinct advantage that defendants are entitled to through their contractual rights under the trust agreement. The defendants are thereby given the oportunity to reorganize through the sale of their equity of redemption. If, however, the property were bid in for the full amount of the indebtedness, it is clear that the amount necessary to be paid in order to redeem would be so great as to preclude the sale of the equity of redemption; destroy its value to defendants and deprive them of the exercise of the advantage secured to them under their contract."
This is a far cry from the spirit of theStormfeltz-Loveley rule, and would employ that case as a weapon against the bondholders. That case warrants no such action. Neither do principles of equity nor the trust instrument constrain us so to mulct the bondholders in order to enable the mortgagors to have an equity of redemption that will bring them something at the cost of the bondholders.
We now turn to the trust instrument provisions, so far as they relate to the powers vested in the trustee. The indenture is a long instrument, covering 109 pages of the printed record, contains 13 articles, with numerous sections and capitalized headings; the latter, however, of no consequence for section 13 of article 13, provides:
"It is hereby expressly agreed and understood, by, between and among all parties to or interested in or who shall become party to or interested in or under this trust deed, that the several headings in capital letters of each article hereof are not and are not to be taken or construed as any part of this instrument, and shall not be read, considered or construed as enlarging, diminishing, defining or limiting any provisions or text hereof, but are only *Page 168 
placed herein as a convenience and for more ready reference."
In quoting the powers vested in the trustee by the instrument we omit alternative powers in the beneficiaries in case the trustee declines to exercise the powers vested in it.
Article 7 authorizes the trustee, in its discretion and without any action on the part of any bondholder, to declare the principal of all outstanding bonds to be due and payable immediately in case default is made in the payment of the principal or of any interest on the bonds.
Article 9 provides:
"In any case in which, under the provisions of article 7 of this indenture, the trustee * * * may * * *
"Proceed to protect and enforce its rights and the rights of the bondholders herein, either by suit or suits in equity or at law, in any court or courts of competent jurisdiction, whether for specific performance of any covenant or agreement contained herein or in aid of the execution of any powers herein granted or for any foreclosure hereof or hereunder, or for any other sale of the mortgaged premises or any part thereof, so far as may be authorized by law, or for the enforcement of such other or additional appropriate legal or equitable remedy as the trustee may deem most effectual to protect and enforce the rights aforesaid. * * *
"At any such sale any bondholders or coupon holders or any committee or trustee appointed by them or a part of them, or the trustee or any successor in trust herein named may bid for and purchase said mortgaged premises or any part thereof. * * * Should the trustee become the purchaser at such sale, the following rights, privileges and obligations shall thereupon be credited, result and obtain: *Page 169 
(a) All the bondholders shall contribute and pay the trustee their respective and proportionate share (in proportion to the amount of unpaid bonds and matured coupons owned by them respectively) of the total of the items referred to in subparagraphs (a) and (b) of section 4 of this article, for which contribution and payment they shall be respectively liable as for money paid by the trustee at their request and in default of such contribution and payment, and as a cumulative and not alternative right, the trustee shall have a lien therefor upon the interest of such defaulting bondholders in said premises or in the proceeds received by the trustee upon any subsequent sale thereof; (b) the trustee may forthwith or at any time thereafter sell and convey said premises as a whole or in such parts and parcels and for such price and upon such terms as to it in its sole discretion may seem proper, but shall in no event sell for less than an aggregate amount which will be sufficient to pay each bondholder his, her or its amount found due for principal, interest and any advances made or assessed to him, her or it hereunder, and any and all outlays, expenses, costs or attorney's or trustees' or receivers' fees, not otherwise met and paid out of rents, or by the grantor, unless the consent in writing of bond and coupon holders having and owning one-half of the entire mortgage indebtedness found to be due upon such foreclosure shall be first procured by or be given to said trustee, and (c) until the trustee shall thus sell and dispose of said premises, it shall be entitled to enter upon and take possession of the same, complete the construction and equipment of any building, lease or operate, maintain and manage the same by such agents, servants and attorneys as it may select, and receive and collect the rents, earnings, incomes and profits thereof, and pay therefrom and from the proceeds of any sale thereof, all proper costs, charges and expenses *Page 170 
of such construction and equipment, taxes, insurance premiums and cost of maintenance, including reasonable compensation for such trustee, its servants, agents and attorneys, and distribute the remainder of moneys thus received by it ratably among those entitled thereto. * * *
"Every holder of any of the bonds hereby secured, including pledgees, accepts the same subject to the express understanding and agreement that every right of action, whether at law or in equity upon or under this indenture, is vested exclusively in the trustee as trustee of an express trust, and under no circumstances shall the holder of any bond or coupon, or any number or combination of such holders, have any right to institute any action at law upon any bond or bonds or any coupon or coupons, or otherwise, or any suit or proceeding in equity or otherwise, except in case of refusal on the part of the trustee to perform any duty imposed upon it by this indenture after request in writing by the required number of holders of bonds and/or coupons as aforesaid and except upon deposit of said bonds with said trustee and furnishing it with satisfactory indemnity as herein otherwise provided."
Article 10, § 2, provides:
"The trustee shall not be under any obligation to recognize any person, firm or corporation as the holder or owner of any of the bonds secured hereby or to do or refrain from doing any act pursuant to the request of any person, firm or corporation, professing to be or claiming to be such holder or owner, until such supposed holder or owner shall produce the said bonds and deposit the same with the trustee in the respective cases and instances herein required and specified. But all powers and rights of action hereunder may be exercised and enforced at all times by the trustee, at its election, *Page 171 
without the possession or production of any of said bonds or coupons or proof of ownership thereof at any time whatsoever."
In these provisions I find ample power authorizing the decree permitting the trustee to purchase at the foreclosure sale without having the bonds in its possession.
In 1 Restatement of the Law of Trusts, § 231, it is said:
"If the trustee properly holds in trust a mortgage upon real property and the mortgage is foreclosed, the trustee can properly purchase the property on foreclosure, if it is prudent to do so in order to avoid a loss, although the trustee is not authorized to invest in the purchase of real property. He is under a duty, however, to sell the property when he has a reasonable opportunity to do so."
In such case the trustee buys the property in and holds it for the benefit of the bondholders. The purpose of the decree authorizing the trustee to purchase at the sale is to avoid a loss to the bondholders.
The very reason urged by the mortgagor in this case against purchase by the trustee was the reason given by the Florida court in Smith v. Massachusetts Mutual Life Ins. Co., 116 Fla. 390,411 (156 So. 498, 95 A.L.R. 508), why he should purchase. We quote:
"If, as was expressly provided, the trustee was authorized to purchase the property at judicial sale, circumstances might become such that it would be its absolute duty to do so, and we think the record in this case, in connection with the judicial notice which we have of the extreme deflation in real estate values which took place after the collapse of the boom of 1925 and the almost total lack of market *Page 172 
for real estate which existed in Dade county at the time this sale took place, were such as to make it the duty of the trustee to bid in and purchase the incumbered property at the foreclosure sale for the bondholders."
I cannot join in an opinion that denies this right, militates against the bondholders' rights and brings to the mortgagor an inequitable advantage.
The decree should be affirmed.