EDWARD J. PATTERSON and Others, Suing on Their Own Behalf and on Behalf of All Other Bondholders Similarly Situated under the Trust Mortgage Given by the Metropolitan Real Estate Improvement Company to the Guardian Trust Company of New York, etc., Appellants,
GUARDIAN TRUST COMPANY OF NEW YORK, Respondent.
APPEAL by the plaintiffs, Edward J. Patterson and others, from an interlocutory judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of Broome on the 4th day of November, 1910, upon the decision of the court, rendered after a trial at the Broome Special Term, sustaining the defendant's demurrer to the complaint.
S. Mack Smith, for the appellants.
Henry D. Hotchkiss and Joseph Diehl Fackenthal, for the respondent.
The defendant interposed a demurrer to the complaint upon the ground that it does not state facts sufficient to constitute a cause of action. The complaint alleges, among other things, that the Metropolitan Real Estate Improvement Company is a foreign corporation and that the defendant is a domestic corporation, having power under its charter to act as trustee under a mortgage; that on the 24th day of November, 1905, the Metropolitan Real Estate Improvement Company executed and delivered to the defendant, the trustee therein, a mortgage upon a tract of land in the city of Yonkers to secure the payment of 2,000 bonds of $500 each, to be issued by the improvement company, and to be paid for in ten equal annual installments, and that at the time of the execution of the mortgage the property was incumbered by existing mortgages to the amount of $263,400.
The mortgage as pleaded provides that 'Whereas it is desired and intended to pay off the said mortgages, and each of them, out of the proceeds of the sale of the bonds herein described, now, therefore, it is hereby agreed by the said company that during the third year of the life of this trust mortgage it will pay to the Guardian Trust Company as trustee the sum of $60,000, and during the fourth year of the life of this mortgage the sum of $100,000, and such further sum or sums as may be necessary to pay the principal and interest due on said mortgage, and to procure the discharge and satisfaction thereof, and the said Guardian Trust Company as trustee hereby agrees to apply such payments when so made to the payment and satisfaction of the said mortgages.' The mortgage also provides that the bonds secured by the mortgage shall be signed by the president of the company and have the corporate seal affixed and attested by the secretary, and that none of the bonds shall be issued or be of any binding force until the same are authenticated by a certificate of the trustee, 'that the within bond is one of the series of bonds described
in the trust deed or mortgage therein described.' It further provides that the bonds shall be delivered by the trustee only to the treasurer of the company, and then 'only upon the written order of that company, signed by its president; ' that none of them shall be valid until the first annual installment of fifty dollars has been paid to the improvement company, and that all payments 'are due at the Metropolitan Real Estate Improvement Company's office, in the city of New York,' and that 'upon the payment of each installment on this bond the holder is entitled to receipt signed by the president, the vice-president or treasurer' of the improvement company, which must be attached to the bond and shall be conclusive evidence of such payment and the amount thereof.
The complaint also alleges that of the 2,000 bonds secured by the mortgage, more than 800 were issued and sold with the knowledge and consent of the defendant as paid-up bonds; that they were certified as paid-up bonds by the defendant as trustee; that there was paid therefor the sum of $400,000; that the defendant was the depositary of the moneys received from the sale of the bonds, and suffered the said Metropolitan Real Estate Improvement Company to withdraw and misapply the moneys 'without applying the same to the payment of said underlying indebtedness.'
It further alleges that no part of the principal of the underlying mortgages was paid the defendant except one held by Randolph Lowerre to secure the sum of $8,400; that in the year 1908 two of the mortgages, on which there was then due the sum of $80,000, were foreclosed, and the real property described in the trust mortgage was sold for less than the amount due upon the underlying indebtedness, and the defendant as trustee was divested of all right therein; that the Metropolitan Real Estate Improvement Company is insolvent; that the plaintiffs are the owners and holders of three of the bonds certified by the defendant as paid-up bonds, and that this action is brought on behalf of all the bondholders who may desire to come in and contribute to the expense thereof.
It is also alleged that by and under the terms of the trust mortgage it became and was the duty of the defendant as trustee,
and as the representative of the plaintiffs, to compel the application of the moneys received from said paid-up bonds to the payment of the underlying indebtedness, and that it violated its covenants and agreements by failing to apply the moneys received from the sale of the bonds to the payment of the underlying indebtedness, as provided in the mortgage, and in knowingly suffering and permitting the company to misapply the ...