Lauinger v. Carrillo Building Co.

NOURSE, P. J. The plaintiffs sued to procure the foreclosure of a certain bond indenture and for the removal of the trustee acting thereunder. The defendants’ demurrer to the complaint was sustained without leave to amend.

The gist of the complaint is that the defendant company issued its bonds amounting to $300,000 in 1924 for the purpose of erecting a hotel building in the city of Santa Bar[661]bara and executed a certain bond indenture to secure them. Default was made in the payment of bonds maturing after September, 1931, and, in April, 1933, the company induced the owners of more than seventy-five per cent of the outstanding bonds to execute a “deferment contract” under which they waived payment of certain interest then due and agreed to reduce the rate of interest thereafter to be paid. The bondholders signing this contract agreed not to institute any legal proceedings because of the failure of the company to live up to the terms of the bond indenture, and requested the trustee to refrain from declaring a forfeiture because of failure to meet those terms. It is alleged that the security is not adequate for the outstanding bonds, that the security is steadily diminishing, that the plaintiffs will be injured if the bond indenture is not foreclosed, and that the income from the property is insufficient to pay the bonds as they mature. Plaintiffs did not sign the “deferment contract”, and in August, 1936, made demand upon the trustees to foreclose the bond indenture, or sell the property to satisfy the indebtedness of the company. This demand was refused by the trustee because of the “deferment contract” and “solely upon the request of the bondholders signing said document”.

The plaintiffs represent less than ten per cent of the bondholders. More than ninety per cent signed the “deferment contract” requesting that no foreclosure proceedings be instituted. The bond indenture is the contract under which all the rights and the liabilities of the parties arise. The controversy rests on the provisions of section 2 of article X of the bond indenture reading: “No holder of any bond or coupon secured hereby shall have any right to institute any suit, action or proceeding at law or in equity for the foreclosure of this indenture or for the execution of any trust or power hereof, or for the appointment of a receiver or for any other remedy under or upon this indenture, unless such holder previously shall have given to the Trustee written notice of an event of default; and unless also the holders of twenty-five percent (25%) in amount of the bonds secured hereby then outstanding shall have made written request upon the Trustee and shall afforded to it a reasonable opportunity either to proceed to exercise the power hereinbefore granted, or to institute such action, suit or proceedings in its own name; and such notification and request hereby are declared in every such ease, at the option of the Trustee, to