The opinion of the court was delivered by: BYERS
A perplexing problem has been presented to the Mortgage Trustee named in the Indenture hereinafter referred to, and the instructions of the Court was sought in a petition filed June 26, 1942, which has been amplified by supplemental and amendatory affidavits filed November 18, 1942, and January 15, 1943, respectively; these latter were required so that all relevant and attendant circumstances might be embodied in one record to facilitate review of the order to be entered hereunder.
The matter requiring decision is this:
The proper distribution to be made by the said Trustee of the dividend paid by the Superintendent of Insurance of this state in connection with the liquidation of the Bond and Mortgage Guarantee Company, as to mortgage certificates guaranteed by that company representing participation in a first mortgage of the debtor, and which certificates were purchased by the Trustee for a so-called sinking find, subsequent to the filing in the said liquidation proceedings of a proof of claim on June 11, 1938, on behalf of all then certificate holders, but which liquidating dividend was not paid until over four years thereafter, namely, during December of 1942.
The change in ownership of the certificates is what gives rise to the problem.
The mortgage, of which petitioner has become Trustee, was made by the debtor to Title Guarantee and Trust Company in the sum of One Million Dollars and participation certificates therein to the full amount were sold to the public by the mortgagee, and payment thereof as to principal and interest was guaranteed by said Bond and Mortgage Guarantee Company.
Default in the payment of the mortgage caused foreclosure proceedings to be instituted, and then the debtor came into this court for reorganization under the then Section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207, and in consequnce the foreclosure proceedings were restrained by order of this court. Thereafter and as provided in the plan of reorganization, the mortgage was transferred to Garden City Bank and Trust Company, as Mortgage Trustee, pursuant to an Indenture bearing date of May 25, 1938, which was modified by a Supplemental and Amendatory Indenture dated February 6, 1940.
It is not to be supposed that the foregoing were accomplished without the co-operation of the certificate holders, who were represented by a committee named in an order dated March 15, 1938.
The claim which was filed on June 11, 1938, in the liquidation proceeding, was on behalf of all certificate holders, as has been stated, and was based upon the guaranty of the Bond and Mortgage Guarantee Company; the said dividend paid in December of 1942 is at the rate of 6%, but whether it is final is not made to appear. Presumably it is to be regarded as a payment on account of the guarantor's indebtedness at the time of its insolvency, which comprised both principal and interest, but no one has suggested that it should be regarded as other than a sum received on account of principal due upon the mortgage indebtedness.
If the guarantor making such a payment had continued to be solvent, it would be subrogated to the rights of the mortgagee-certificate holders to the extent of such payment; the fortuitous event of insolvency merely renders he subrogation nugatory, but the fact remains that the mortgagee-certificate holders have received 6% on account of the mortgage indebtedness, and the mortgagor is relieved to that extent of its principal obligation.
The parties to this application are the Trustee, the debtor, and the certificate holders committee.
Distribution of the said liquidating dividend, so far as it pertains to the certificates which have been purchased by the Mortgage Trustee for the so-called sinking fund, can be made as follows:
(a) To the sinking fund, on the theory that such liquidating dividend pertained to the certificates purchased for that found although the latter were cancelled as soon as they were ...