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FIDELITY MORTG. INVESTORS v. FIRST NATL. CITY BANK

December 31, 1974

FIDELITY MORTGAGE INVESTORS, Plaintiff,
v.
FIRST NATIONAL CITY BANK as Indenture Trustee, Defendant-Counterplaintiff, v. BANK LEUMI TRUST COMPANY et al., Additional Defendants on the Counterclaim


Cannella, District Judge.


The opinion of the court was delivered by: CANNELLA

MEMORANDUM DECISION

CANNELLA, District Judge:

 This action for a declaratory judgment pursuant to 28 U.S.C. § 2201 (and certain other relief, infra) is presently before the Court on plaintiff's application for a preliminary injunction. Plaintiff, Fidelity Mortgage Investors [hereinafter "the Trust"] (a real estate investment trust), seeks an order restraining the defendant, First National City Bank [hereinafter "the Trustee"], from taking any steps which would be detrimental to the financial integrity or stability of plaintiff, including any action to accelerate any obligation of plaintiff which has not already matured pursuant to the terms of the instrument evidencing or creating such obligation, and from taking any action which is predicated upon the existence of a default with respect to any such obligation. The application is alternatively brought under the provisions of Fed.R.Civ.P. 65(a) and 28 U.S.C. § 2361. As the Court finds the relief prayed for wholly unjustified and unwarranted, this application has been denied in its entirety. See, Endorsement dated December 24, 1974.

 The controversy giving rise to this lawsuit revolves around the question of whether or not there exists any default by plaintiff in the payment of the principal or interest on any of its Senior Indebtedness. The relevance of this issue (the existence of defaults in senior indebtedness) is that under the terms of the December 1970 Trust Indenture a default by the Trust in the payment of any senior indebtedness would, under certain defined circumstances (discussed infra), constitute an event of default which, in turn, would allow the Trustee, or, alternatively, not less than 25% of the subordinated debenture holders, to accelerate and declare immediately due and payable the principal of all of the debentures issued under the Indenture. Such acceleration would, of course, trigger the exercise of similar acceleration remedies by the holders of the Trust's other debt securities and, in all probability, result in the financial demise of the Trust. It is the exercise of such acceleration rights by the Trustee and/or the subordinated debenture holders which plaintiff seeks to prevent by the instant application. (The resolution of this dispute, of course, rests upon the Court's construction and application of a lengthy trust indenture, a document which attempts compliance with the Trust Indenture Act of 1939, 15 U.S.C. § 77aaa et seq., as well as the Model Debenture Indenture Provisions (promulgated by the American Bar Foundation). See also, 3 CCH Fed.Sec.L.Rep. para. 43,501 et seq. (Suggested Provisions for Corporate Mortgages and Indentures). As the economy has been "good" for the past several decades, courts have not been called upon to construe such indentures or apply the federal trust indenture statute with any frequency. However, given the present economic forecast, such judicial undertakings will now, in all likelihood, occur more often.) In this regard, the Trust Indenture dated December 1, 1970 between the Trust and the Trustee (which document controls the rights and liabilities, as well as the relationship, of the parties hereto), defines Senior Indebtedness as (§ 1.01):

 
the principal of (and premium, if any) and accrued and unpaid interest on (a) indebtedness of the Trust, whether outstanding on the date of execution of this Indenture or thereafter created, incurred or assumed, for the payment of which the Trust is responsible or liable, and which is for (i) money borrowed from or guaranteed to others, (ii) purchase money indebtedness evidenced by notes or similar instruments or (iii) obligations for rental payments on real property leases but only to the extent such obligations are enforceable against the lessee under such real property leases, and (b) renewals, extensions and refundings of any such indebtedness; unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such indebtedness, or such extension or refunding thereof, is subordinate to any other indebtedness of the Trust or is not superior in right of payment to the Debentures.

 In June of this year, the Trust transmitted to the Trustee, pursuant to the terms of the December 1970 Indenture, an interest payment of approximately $104,000 which was due and payable to the holders of the subordinated debentures issued pursuant to the terms of that Indenture on June 1, 1974. The Trustee, however, having adopted the position that there existed or might probably exist defaults with respect to the Trust's Senior Indebtedness, withheld payment of this interest to the debenture holders. In so doing, it asserted reliance upon the provisions of § 13.02 of the Trust Indenture. (See, Trustee's letter of June 3, 1974, Ex. A to the Complaint.) *fn1"

 
No payment on account of principal (and premium, if any) . . . or interest on the Debentures shall be made if, at the time of such payment or immediately after giving effect thereto, (1) there shall exist a default in any payment with respect to any Senior Indebtedness or (2) there shall have occurred an event of default (other than a default in the payment of amounts due thereon) with respect to any Senior Indebtedness, as defined therein or in the instrument under which the same is outstanding, permitting the holders thereof to accelerate the maturity thereof, and such event of default shall not have been cured or waived or shall not have ceased to exist. . . .
 
. . .
 
In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Trust of any kind or character, whether in cash, property or securities, prohibited by the foregoing, shall be received by the Indenture Trustee or the Holders of the Debentures before all Senior Indebtedness is paid in full, or provision is made for such payment in money or money's worth in accordance with its terms, such payment or distribution shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the indenture trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in money or money's worth in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. *fn2"

 Plaintiff, on the other hand, then asserted, and continues to maintain, that, under the terms of the Indenture, it was not presently in default or, alternatively, was presently unable to determine whether or not it was in default with respect to any of its Senior Indebtedness owing to the fact that the validity of such senior claims are presently the subject of assertedly unresolved litigation and, therefore, that payment of the June interest to the subordinated debenture holders was proper. When the Trustee, upon being made aware of the Trust's position, further declined to make the involved payment, the Trust commenced this litigation, asking that the Court declare that no defaults in Senior Indebtedness are extant and that we direct the Trustee to make payment of the involved interest. In similar fashion, the Trustee (as counterplaintiff), in an attempt to avoid future liability to senior debt holders, as well as in an effort to enjoy the benefits of res judicata with regard to the Court's determination concerning the existence of defaults in senior debt, has interposed a counterclaim joining numerous other banks (which are claimed by the Trustee to hold indebtedness senior to that represented by the December 1970 Indenture) as parties and in which it seeks, in the nature of interpleader (Fed.R.Civ.P. 22 and 28 U.S.C. § 1335), that the Court ascertain the rights and liabilities of all of these parties to the involved interest payment. This, of course, again entails a decision by the Court as to which, if any, senior debt securities of the Trust are presently in default. In furtherance of such interpleader, the Trustee has paid the $104,000 interest payment in the treasury of this Court.

 As was indicated above, plaintiff brings the present application under Rule 65 of the Fed.R.Civ.P. and § 2361 of Title 28, which section affords the Court the authority to enjoin overlapping judicial proceedings which might adversely affect its ability to equitably distribute a res which has been paid in to court pursuant to the interpleader statute, 28 U.S.C. § 1335. (Here, the Trustee's counterclaim is in the nature of statutory interpleader.) In pertinent part, § 2361 provides that:

 
In any civil action of interpleader or in the nature of interpleader under section 1335 of this title, a district court may issue its process for all claimants and enter its order restraining them from instituting or prosecuting any proceeding in any State or United States court affecting the property, instrument or obligation involved in the interpleader action until further order of the court.

 Thus, while the statute (by its terms) affords the Court power to enjoin other judicial proceedings when such relief is necessary "to insure the effectiveness of the interpleader remedy," to prevent a "multiplicity of actions" or to otherwise reduce "the possibility of inconsistent determinations or the inequitable distribution of the fund," the wording of § 2361 renders it clearly inapplicable to the matter at bar. 7 C. Wright & A. Miller, Federal Practice and Procedure § 1717 at 462 (1972). Cf., 3A J. Moore, Federal Practice para. 22.04[3] at 3031 (2 ed. 1974) (indicating the intent of Congress in promulgating § 2361 to be "as an amendatory exception to the general proscription of Section 2283," the federal anti-injunction statute which would otherwise bar the court from enjoining state judicial proceedings).

 On the instant motion, the plaintiff does not seek an injunction against other judicial proceedings, but rather asks that the Court place restrictions upon the exercise of the acceleration remedies specified in the December 1970 Indenture (§ 7.02). Thus, it must be concluded that the relief sought is not of a nature cognizable under § 2361. See discussion, supra. Additionally, the present application goes not to the fund now in the possession of the Court or to its equitable distribution, but instead, bears only upon the rights and liabilities of the First National City Bank as Indenture Trustee and the holders of the debentures issued thereunder. "Here, the scope of the litigation, in terms of parties and claims, [is] vastly more extensive than the confines of the 'fund' . . . . In these circumstances, the mere existence of such a fund cannot, by use of interpleader, be employed to accomplish purposes that exceed the needs of orderly contest with respect to the fund." State Farm Fire & Cas. Co. v. Tashire, 386 U.S. 523, 533-534, 87 S. Ct. 1199, 1205, 18 L. Ed. 2d 270 (1967). In any event, the res now before the Court can not be viewed as being placed in jeopardy by the simple exercise of ...


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