Feldmeier v. Mortgage Securities, Inc. (1939) · DecisionDepot

Feldmeier v. Mortgage Securities, Inc.

Name: California Superior Court Tentative Rulings
Creator: DecisionDepot
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California Court of Appeal Aug 21, 1939 No. Civ. 2428Published

Before: Haines

HAINES, J.,

pro

tem.

The record in this case is a ponder ous one. The pleadings begin with a complaint on the part of L. P. Feldmeier and others, who are respondents here, to enforce what they deem to be their rights as the holders of mortgage certificates issued by defendant and respondent Mortgage Securities, Incorporated, of Santa Barbara, to ■ which, following the designation adopted in the findings of the trial court we shall hereinafter, for convenience, refer as the “Company”. The defendants include also appellant Security Title Insurance & Guarantee Company, the assignee of certain assets deposited with it to secure the said certificates, to which, following again the designation used by the trial court in its findings, we shall hereinafter refer as the “Depositary”. Sundry recognized holders of mortgage certificates, who are respondents here, were named in the complaint as defendants together with appellant Jane V. Reinert, who figures largely in the case as the claimant of certain further mortgage certificates, purporting to be issued by the Company, but found by the trial court to be void, and County National Bank and Trust Company of Santa Barbara, as pledgee of the certificates last referred to. Three successive additional pleadings designated as amendments and supplements to the complaint were filed. Answers were in due course filed by the Company, the Depositary, Jane V. Reinert, the County National Bank and Trust Company of Santa Barbara and various other defendants. A complaint in intervention was filed by Alice

Jackson asserting title to one of the mortgage certificates which was answered by the plaintiffs and certain of the defendants. A cross-complaint was filed by Jane V. Reinert in which her claims were set up. A cross-complaint in which the Company and sundry

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individual certificate holders named as defendants in the plaintiffs’ pleadings joined was filed, in which most of the other parties to the action were made cross-defendants, as were a number of new parties included by order of the court, among whom was Fred D. Jackson and Alice P. Jackson. A further cross-complaint for declaratory relief was filed by the Depositary, in which Jane V. Reinert, Associated Almond Growers of Paso Robles, a corporation, County National Bank and Trust Company and various others were made cross-defendants, and this cross-complaint was later amended. These several cross-complaints were answered by most of the parties named therein as cross-defendants. Sundry parties were served with pleadings and, having failed to respond to them, are in default. We shall not attempt to restate at large the contents of these various pleadings. Suffice it at this point to sa.y that they fill the greater part of the three large volumes making up the clerk’s transcript. We shall, in proceeding to discuss the case, make such allusions to them as the situation requires.

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the Company had assigned to the Depositary certain notes and the debts evidenced thereby, secured by mortgages or deeds of trust and proposed thereafter to assign to the Depositary other notes and the debts evidenced thereby, in each ease to be accompanied by certified guarantees, abstracts of title or policies of title insurance, evidencing that said mortgages or deeds of trust should be first liens upon the property therein described, and also be accompanied by proper indorsements and assignments of the instruments evidencing the security for such notes and debts, with the policies of fire insurance covering the improvements on the properties involved, which insurance the Company covenanted to keep in effect. It was agreed that the unpaid balance in each case should amount to not more than 40 per cent of the appraised value of the property by which the debt should be secured. The purpose of these transactions according to the recital in the Indenture was to facilitate “sales by the Company of parts or shares of said securities to be evidenced by mortgage certificates, each certificate representing such part or share as may be in such certificate described, said certificates evidencing the ownership by such purchasers of undivided parts or shares respectively in said securities”. It was further recited that in executing the Indenture each of the parties respectively represented “all parties in privity with them or either of them”. It was agreed that the Company had executed and would execute assignments of the securities and that the Depositary had accepted and would accept the title thereto “for the benefit and account of the Company and each and every person or corporation that may be or become the owner of an undivided part” of said securities. The Company was to reserve and have the right “to sell undivided parts or shares of said securities and to issue and deliver to the purchasers of such parts or shares, respectively, mortgage certificates each representing a part or share of the whole of said securities equal to the proportion which the purchase price named in the certificate issued therefor respectively is of the total amount of said securities”. The form of mortgage certificate contemplated was set out in the agreement. This form of certificate contained

chase prices of said various certificates . . . together with the registered owners’ shares of all interest accrued on the securities from the sale of said respective certificates . . . ” It is found that, though duly notified of the exercise of this option the Company failed to repurchase any of said certificates and is in default for such failure, in consequence of which the Depositary, as above stated, served upon it on June 4, 1932, a notice of such default, as well as of its default, also found to exist, in the nonpayment of interest in accordance with the terms of the certificates and agreement. The finding is that the Company admitted the default and that, with its consent, the Depositary entered upon its duties as provided for by the Indenture in case of such default. In one of its further findings the trial court sets forth a further schedule entitled " Schedule II”, in which, with respect to each of the mortgage certificates still outstanding, there is noted its face value, which, except in the case of certain certificates issued to one Jane V. Reinert, hereinafter to be referred to, is the price for which it is found to have been sold by the Company, and there is also noted the date when it issued, the total amount of the certificates outstanding on that date, the figure which would represent 110 per cent of that amount and the aggregate par value of the securities on that date on deposit with the Depositary to secure the then outstanding issue of certificates. The effect of this appears to be to show that there were always securities on deposit sufficient in par value to meet the requirements of the Indenture that they amount to not less than 110 per cent of the amount of the outstanding certificates, had they in fact been all first mortgages or first trust deeds as the Indenture contemplated, but the actual fact as found and also shown on this schedule is that a large proportion of the securities deposited was made up not of first mortgages and first trust- deeds, as stipulated, but of second trust deeds or of the vendors’ rights under executory contracts of sale of land, which latter were in at least a few instances subject to prior encumbrances. If all these were left out of account, the securities deposited would fall largely below the requirements. The trial court’s finding is that, except for the said Reinert certificates, all the outstanding certificates were bought in good faith and for full value and that the purchasers were not aware of any deficiencies in the deposits of collateral required by the Indenture under which their cer

certificates. That said Paulton was not a disinterested appraiser ; that he was at that time indebted to defendant ‘Company’ to the extent of several thousand dollars; that said certificates were certified and authenticated in the form provided by said Indenture in the office of ‘Depositary’ in the City of Santa Barbara, California, by an assistant secretary of defendant ‘Depositary’ at the request of said Fred D. Jackson, while the Santa Barbara executive manager of said defendant ‘Depositary’ was absent from the said office of ‘Depositary’; and that at and prior to the time of the pretended certification and authentication of said alleged certificates, as aforesaid, said Santa Barbara executive manager of defendant ‘Depositary’ had been and was ordered by the executive officers of defendant ‘Depositary’ in charge of the principal office of defendant ‘Depositary’ in the City of Los Angeles, California, and who had control and supervision of said Santa Barbara office, not to certify or authenticate any more or additional First Mortgage Certificates issued or sold by defendant ‘Company’ because and on account of the unstable financial condition of defendant ‘Company’; that the executive manager of defendant ‘Depositary’ in charge of its Santa Barbara office was not informed and did not learn of the issuance, certification and authentication of said certificates, or any of them, or of the deposit of said fictitious and sham agreement of sale to secure payment thereof until some weeks thereafter and William S. Porter, who was at that time executive vice-president of defendant ‘Depositary’ and who had his headquarters in the Los Angeles office of defendant ‘Depositary’ in Los Angeles, California, and who was also at the time a director of defendant ‘Company’ first learned, or was informed of the issuance and authentication of said certificates by defendant ‘Depositary’ and the deposit with said ‘Depositary’ of said fictitious and sham agreement of sale about three weeks after September 28, 1931, but, upon the discovery by said Santa Barbara executive manager and said Los Angeles executive officers of defendant ‘Depositary’ of the issuance and authentication of said certificates and of the nature of the pretended collateral deposited to secure payment thereof, to-wit: said fictitious and sham agreement of sale, no demand was made by ‘Depositary’ upon any person, or persons, for, and nothing was done, and no steps of any kind were taken by said executive officers or by defendant ‘De

It is found that, though the Depositary became aware of all the facts concerning the Reinert and Ewing transactions prior to May 4, 1932, it failed to notify the holders of the valid certificates of any of them but instead issued, both on June 4, 1932, and on October 13, 1932, communications to the certificate holders representing that it held policies of title insurance with each item of collateral deposited with it, showing the same to be secured by first mortgages or first trust deeds, though such was not the fact. It is found that the Depositary knowingly permitted the Company to issue to various of the plain tiffs-respondents ’ assignors mortgage certificates after it had knowledge that the same were not secured by the collateral required by the Indenture or by the state corporation commissioner’s permit, and that all this was done in order to induce the purchasers to buy the mortgage certificates. It is found that the Depositary never made any accounting of the collateral in its hands to the certificate holders except as it did so in court after the present action was instituted. The findings proceed to detail all of the property, real and personal, derived from the Company and now in the hands of the Depositary, all of which is found to be subject to a lien for the benefit of valid certificate holders as of date September 21, 1936. This consists of $32,-270.44 in cash, a considerable number of trust deeds, certain other items of personal property, and numerous parcels of real estate found to be derived from foreclosure by the Depositary. There are various other particulars in which the Depositary is found by the trial court to have been guilty of irregularities and to have fallen short of performing its duties. It is found to have failed to keep records of securities deposited and withdrawn, to have failed to secure the deposit of sundry schedules, appraisals and affidavits, and, when it surrendered collateral deposited with it, to have failed to keep any record of the schedules, appraisals or affidavits that it did get when it originally received the securities so surrendered. It is found to have allowed sundry notes and deeds of trust purporting to be deposited with it as collateral to remain in the actual custody of the Company.

husband. She doesn’t know how much she had invested in the mortgage securities but it was $55,000 or $60,000. No explanation was ever made to her that she was loaning money to the Associated Almond Growers through the Company. Her money went into certificates. She has been married eighteen years. When she was married her husband was in the hotel business in Chicago and had been for several years. Before that she says that she had been employed as secretary in an insurance office in Denver on a commission and salary and really had charge of the office and earned from $125 to $150 a month. Her husband had previous to their marriage been engaged in the brokerage business, selling stocks and bonds in Chicago. She had accumulated $2,000 or $3,000 of her own. Just before they came to California sale had been made for $200,000 of a hotel in which her husband had a half interest and “that was mine so I had close on to $100,-000. ... I put my money into it and that was mine. He gave it to me.” He had an interest in three hotels. She doesn’t know whether her husband ever invested any of her money in the Associated Almond Growers, but does know that what came out of the hotel sale was not so invested. Her husband “has always taken care of those things for me”. She thinks he may have her power of attorney. Her money was deposited in the Drexel State Bank at Chicago. She may or may not have drawn a check transferring it to California. She doesn’t remember. She may have drawn checks for investment in bonds and other securities while her account was still in Chicago but she doesn’t remember. She has burned up such records as she had of those things. She must have made some transfer of securities to invest funds in the Company but her husband attended to all that for her. She just remembers in a vague way that it was done. She doesn’t remember that $50,000 or '$60,000 was put in at any one transaction. As far as she knows $10,000 may have been put in at one time and $10,000 at another. She does know that Duncan P. Jackson holds her power of attorney. Her husband presented this power of attorney for her to sign. She does not know when it was signed or what has been done under it. She only knows that her husband told her it was to enable him to look after the certificates at Santa Barbara. She guesses that this power of attorney is still outstanding. She doesn’t think she has any cancelled checks showing the

together with the fact that Montgomery also attested for the Company the mortgage certificates in controversy, and, as to that assignment we notice that it is not written or typed on the contract itself but carried as a rider, now attached to the contract by wire staples, which in itself would do as well for an assignment of any other security. It bears date September 28th. Just what were the circumstances under which he attested the certificates, and under which he signed this rider or how it came to be attached to the contract, we cannot know from Montgomery's lips. The trial court was not obliged to believe Jackson’s statement that Montgomery was the one who carried the Ewing contract with the assignment over to the Depositary and obtained its authentication of the Reinert certificates. As to whether the Reinert and Ewing transactions were ever mentioned in the conference of September 25th or the meeting of directors on the morning of September 28th there is a conflict of evidence. Jackson and Soule say that they were and Porter says that he heard nothing of them until later. The trial court was at liberty to believe Porter’s account and disbelieve those of Soule and Jackson. Although the finding that Jackson’s maneuvers in connection with these matters were without notice to the Company’s other officers and directors is pretty sweeping, then, we cannot say that it is without support in the evidence. Even though it were conceded, however, that Soule and Montgomery were fully cognizant at the time of what was going on and participated therein, that would not amount to any actual authorization of this transaction by the board of directors in its capacity as such, nor have the same effect, and in view of the silence of the minutes on the subject and of Porter’s testimony that no such action was taken, we think the trial court entirely justified in believing it to be the truth that there was no authorization. While the corporate seal on the assignment, attached as a rider to the Ewing contract, affords some evidence that such assignment was executed by competent authority, it is not conclusive proof thereof and the trial court was, in the circumstances, entirely justified in regarding its presence as of small importance. Outside of the features of finding 17, above discussed, we find nothing in it that the evidence does not fully support.

We think the trial court entirely justified in its view of the matter. Though it is claimed that Mrs. Reinert’s funds were deposited with the Company in sums both large and small, pretty continuously from 1927 on until September of 1931, not a returned check, draft, voucher or scrap of paper of any sort has been produced to substantiate Jackson’s account of what was done or her own vague statements about it, or to show that she ever advanced or deposited a cent. Neither did any bookkeeper or clerk in the Company’s employ at any of those times testify to ever handling any particular one of her remittances or shed any sort of light upon the form in which they came; and this is true notwithstanding that Duncan P. Jackson, who, as we saw, is Fred D. Jackson’s son, is shown during some months prior to September, 1931, to have handled the Company’s bookkeeping and notwithstanding that during the same period he had Mrs. Reinert’s power of attorney. During this whole period Mrs. Reinert's name is omitted from each and all of the ten accounts in question on the Company’s books, and if it be assumed that the money was hers there is no reasonable explanation given for the omission. Two of the accounts are, without any apparent necessity for it, kept in fictitious names. Mrs. Reinert’s husband, though said to be the person who made these extensive deposits for her and the one who, if her account were true, ought to have been able to supply all the details, appears from the record to be a resident of the county adjacent to that in which the trial occurred and despite the size of his wife’s claims involved and the long time that the ease was pending and repeated continuances of the trial itself, he was not produced to testify in her behalf. Neither was his deposition taken, and the trial court was left to draw its own deductions from his unexplained absence. Nobody in the Company except Jackson claims to know any of the particulars about Mrs. Reinert’s deposits and his testimony, voluminous though it be, is, as to the exact form in which they were received, very far from circumstantial. No explanation is offered for the circumstance that, though the Reinerts were themselves interested in the Associated Almond Growers and Mr. Reinert was vice-president of that concern, either he or Mrs. Reinert should, instead of loaning money to it directly at such interest as they might think proper, have preferred to deposit the money with the Company, to be loaned by it to the Almond Growers

We think that the evidence sufficiently supports the finding numbered 22 which we have quoted except for its omission of any reference to Mrs. Reinert’s $5,000 trust deed purchase, which is immaterial in the present litigation. It also supports the above-quoted finding 23. We hold also, upon grounds already stated that it supports the above-quoted finding 24 in its entirety. This indeed goes further than the finding 22 hereinbefore discussed, in that it determines not only that Mrs. Reinert paid no consideration for the mortgage certificates referred to but that they were issued without any consideration at all. ' True the mere existence of such writings in the hands of others than the corporation issuing them is some evidence of a consideration but such evidence is not conclusive nor was the trial court bound to accept it. So far as any pretense is concerned that there was other consideration for their issuance than the cancellation of such interest in those ten accounts as Mrs. Reinert claims to have owned, it is without substance, since, as has just been seen, no interest which, according to Jackson, either he or his wife-had in the Jones and Alice P. Jackson accounts entered into such consideration. Both Fred D. Jackson and Alice P. Jackson have, indeed, made a record disclaimer in the instant case of any interest in the certificates issued to Mrs. Reinert, but that does not mean or tend to show that any interest which they admit having had in any of the accounts discussed made up any part of such consideration. On being asked whether, there was any writing transferring the ten accounts to Mrs. Reinert, Fred D. Jackson testified, “There was not at the time. In January of 1932 such a writing was presented to the Mortgage Company. ’ ’ That, of course, was long after the discussion under review occurred, and the paper referred to was not produced, nor is it apparent what consideration it could have furnished for the mortgage certificates m litigation even if it be believed to have existed.

ence any part of the authentication or mortgage certificate which did not actually exist. The question before us, therefore, is whether, in the instant case, the purchasers of mortgage certificates are or are not entitled to rely on statements distinctly made on the face of the authentication which could be only given greater definiteness but not in any way contradicted, if the intending purchasers were with all diligence to read in full both the mortgage certificate and the Indenture referred to in it. We are in accord with the view that a representation in the certificate of a depositary or trustee ought not to be held to mean more than it says, but think that to be no reason for holding it to mean less than it says. Specifically, in the present case, we agree that, as provided in the Indenture, the Depositary had no responsibility for passing on the legal validity of the securities or the validity of any insurance policy, certificate, guaranty or abstract of title accompanying the same, as to their binding force upon the companies or persons issuing the same. Further, we agree that the Depositary, as further stipulated in the Indenture, was entitled to conclusively rely on the contemplated affidavits, to be submitted with the securities deposited, as to all of the matters which the Indenture specifies as to be covered by such affidavits, provided such affidavits were not contradicted by matters appearing on the face of the securities deposited, themselves. This does not, however, in our opinion, mean that the Depositary might lawfully close its eyes to the most obvious departures apparent from the merest glance, in the securities deposited with it, from the plain terms of the Indenture and the plain requirements of the corporation commissioner’s permit; and, on the strength of such affidavits, proceed to certify to something manifestly contrary to the fact. More than that, the contemplated specifications of the affidavits included no statement that the securities to be submitted were of the classes contemplated by the Indenture, but were intended rather to assure the reader that they were in fact what they purported to be. We see no reasonable ground on which the Depositary could be justified in assuming or stating that they were of a description and class authorized by the Indenture, when they did not even purport to be securities of the authorized description and class. The Depositary here had certified and represented that it holds “the securities referred to in the within certificate”. That meant notes and the debts repre

“It is obvious that it is here impossible of even approximate ascertainment what losses have fallen to or will eventually be sustained by the collateral bondholders by reason of the breach of trust here in question, for the course of the trust, in the absence of the exercise of unauthorized power by the trustee, can never be known. In such circumstances, the trustee must be deemed to have assumed personal responsibility for such losses as should fall to the holders of the collateral bonds by reason of the securities which were improperly accepted by the trustee and made the basis of issued collateral bonds by reason of the trustee’s certificate ultimately producing less in value than the amounts for which they were unlawfully accepted and certified. Although the trust agreement by its terms imposes no responsibility on the trustee for the value of the mortgages to be assigned to the trust fund, when the trustee assumed to accept for the trust fund mortgages not authorized for that purpose by the trust agreement and certified against such securities collateral bonds as issued pursuant to the trust agreement a just regard for the rights of collateral bondholders, who were privileged to rely upon the trustee’s certificate, necessarily imposes upon the trustee the measure of liability already stated, in the absence of any possible means of ascertainment whether a loss would have arisen had the trustee performed its plain duties as defined by the trust agreement. That measure of liability alone satisfies the principle that the trustee ‘acts at his peril’ in transcending his powers. A suggestion that, had the Ventnor syndicate made conveyances of lots to dummy vendees and taken purchase-money mortgages and assigned them to the trustee, the letter of the trust agreement would have been satisfied, is without force; had the trustee been made acquainted with such procedure, the situation would have been unchanged. In this view the trustee must answer to the bondholders for such loss as they ultimately sustain by reason of the mortgages which were made to the trustee realizing less than the amount they were pledged to secure, unless the immunity clauses of the trust agreement shall be found to exempt the trustee from such liability.’’

The Depositary complains of various findings. One of those objected to is that no accounting was made by it prior to the trial. It is not claimed that it made any but what seems to be objected to is the supposed implication that it failed to respond to requests from certificate holders for information. We do not think that the finding carries any such implication. It objects to the finding that it failed to keep any record of securities deposited and withdrawn. It is not claimed that it kept any such record or that the finding is untrue but its claim is that it was under no duty to keep records of securities not retained by it. We do not think the finding one of which it may reasonably complain. It may be a finding not strictly necessary to the decision but its tendency is to show that the difficulty of establishing the extent, if any, to which the certificate holders have been prejudiced by its conduct, has been rendered the greater by its failure to keep any record of the substitution by the Company of some securities for others - and, therefore, of the extent, if at all, to which securities deposited with it, conforming to the requirements of the Indenture, were supplanted with its acquiescence by others that did not conform thereto. The finding does not seem to us of special importance one way or the other since the audit made of the Company’s books, at length, covered the situation. Objection is made to the finding that it allowed collateral nominally deposited with it to remain in the actual custody of the Company. There is a conflict in the testimony on the subject but Jackson testified that while the Company’s headquarters were maintained in the same building with that of the Depositary various of these papers were so kept as to be accessible to persons such as Mr. Porter who were at the same time connected with both concerns. According to this account, when the Company’s offices were later removed to another location a safe belonging to the Company in which securities deposited as collateral were kept, as well as various files pertaining to such collateral were moved, by inadvertence, to the Company’s new office, though when their presence there was noticed they were returned to the Depositary.

Feldmeier v. Mortgage Securities, Inc.

HAINES, J.,

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