making the same person trustee, under a succession of mortgages, each covering the whole or some part of the property, is no doubt a convenient one, and when disaster overtakes the road, it may facilitate the effort to reorganize by making it easier to constrain the various conflicting interests to make concessions to each other; but from the point of view of a court which is called upon to adjudicate between such conflicting interests, such practice is unsatisfactory, and, unless corrected by substitution, or otherwise, after suit brought, may tend to induce judicial error and may lead to great injustice."45

46

It is a principle firmly established that it is greatly discretionary whether a bondholder or group of bondholders will be allowed to intervene in a foreclosure case, and it is merely more certain that when a trustee is such under conflicting deeds of trust, intervention will be granted, but, as I have said, there is no substitution of another trustee.

The United States Supreme Court has pronounced very definitely upon the question of the legal effect of a trust company or other trustee being such in conflicting mortgage deeds of trust." In this case a trust company was trustee under first and second mortgage-deeds of trust, and there was foreclosure of the first deed. Various negotiations were had between bondholders of the two deeds of trust and there was alleged to be an understanding as to a sale and reorganization for all bondholders to acquire certain interests in the reorganized

45. Farmers Loan & Trust Co. v. Northern Pac. R. R. Co. (1895), 70 Fed. 423. See, also, Penna. Steel Co. v. N. Y. City R. Co. (1908), 160 Fed. 222.

46. Land Title & Trust Co. v. Asphalt Co., 127 Fed. 1; Land Title & Trust Co. v. Tatnall, 132 Fed. 305; Continental & Commercial Trust & Savings Bank v. Allis-Chalmers Co. (1912), 200 Fed. 600.

47. Robinson v. Iron Ry. Co. (1890), 135 U. S 522, 34 L. Ed. 276.

company. There was demurrer to a bill to set aside the sale.

The court in affirming the judgment sustaining the demurrer said: "As to the allegation in respect of the inconsistent positions of the Trust Company as a trustee under both of the mortgages, no collusion on the part of that company is averred; nor is it alleged that the company, so far as it did or could represent the second mortgage bondholders was unfaithful to its trust. There having been an admitted default on the first mortgage and the foreclosure proceedings having been properly instituted, there is an absence of any allegation in the bill that the second mortgage bondholders, if they had been parties to the suit otherwise than through the trustee, could have taken any steps which would have prevented the decree of foreclosure. The Trust Company was a trustee under the first mortgage, which was prior in right to the second. *** Moreover, the bill alleges that the foreclosure suit was a suit to foreclose both of the mortgages, and, of course, according to their respective priorities. The bondholders were represented by their trustee, as is established by numerous decisions."

This language amounts, as I understand it, to saying, that the rights of bondholders under a prior mortgage cannot be affected by subsequent acts by parties under subordination to the prior mortgage and, if acts of these parties created an inconsistency they could not lay by and afterwards urge it to the detriment of those whose rights were paramount. It certainly could not be asked by them that the trustee under the former mortgage be removed or disqualified. At most, all they could ask would be that the company trustee under the second mortgage be removed, and as long as they did not do this,

they must abide by the situation that had been created and under which they derived their rights. As this bill was filed after the sale, objections then made for the first time could not be urged to invalidate that sale. It is interesting to note that the court said that: "The bondholders (not some of them, but all of them) were represented by their trustee."

Upon parity of reasoning it is held that the fact that a trust company holds some of the bonds as collateral security, and, therefore, is not disinterested, is equally unavailing as to its proceeding by foreclosure." It was said: "In bringing to a sale the mortgaged property it acts for the benefit of every bondholder who may show his right to share in the proceeds of sale. The question of where the proceeds of the sale shall go is not a question which concerns the Central Trust Company, as complainant in the cause, or as trustee under the mortgage under foreclosure." This question is slightly different from that where the inconsistency of position arises out of one being trustee as to conflicting interests, because it is brought about by the trustee acquiring personally an inconsistent interest. The other way he is vested by others with a power inconsistent with the former grant of power. It seems that his personal act would have disqualified him to carry out his former trust duty. This ruling must have been made by Lurton C. J. as applicable to a case which came under "the practice in railroad mortgage bond cases to postpone the final determination of all such questions" as related to the validity and amount of bonds held by each holder, a practice followed in very many cited cases. It was

48. Central Trust Co. v. Cincinnati H. & D. Ry. Co. (1908), 169 Fed 466.

thought that no case was stated for intervention, not fraud or collusion being charged.

§ 63. Trustees Under Conflicting Mortgages— Continued. Though there is inconsistency in a trusteeship where conflicting interests are represented by one trustee, yet there are many practical considerations in its favor. A trustee under mortgage-deeds of trust has well-defined duties and none of its powers are called into exercise, except upon default and the rights of those whom it represents are not strictly conflicting according to legal construction of the instruments appointing it. Subordinate deeds concede, on their face, prior rights and according to their tenor there is no conflict in right that is not recognized in advance. It could be as well said that there could not be the same trustee for a remainderman and legatees given a charge on the remainder interest.

It can never be anticipated, if instruments are clearly drawn, that any clash will arise out of the conservation of the property, for a trustee's duty could not be more or less stringent in this regard, whether it represents one mortgage or all of them, and when it comes to distribution on sale, the practice, as stated above, is to postpone all questions for decision until after the sale is made. If this could be ruled when a trustee's personal interest is concerned, a fortiori could it be so thought, when having no personal interest, it is submitting to a court documentary evidence of the rights of all parties claiming interests in the proceeds of sale.

The New York stock exchange condemns the practice of a single trustee for prior and secondary mortgages, but I see no substantial objection to the practice. I may say in concluding this section that no better

49

illustration of the objection to inconsistency of interest being a technical, rather than a material objection to a trustee under a mortgage-deed of trust can be given than a Massachusetts case, which refused to consider averments as to a trust company being vested with other powers, which created an opportunity to be untrue to its trust, when there was no averment of culpable negligence, especially as the trust agreement provided for a trustee's removal by a vote in writing of one-third in interest of the bondholders at a meeting called for that purpose.

§ 64. Removal of Trustee. A method of removing a trustee is frequently provided in the trust instrument." .50 Such a provision must be followed before legal proceedings for removal are instituted.51

An action for the removal of a trustee is properly founded upon allegations that it has acted in bad faith in the prosecution of an action for the foreclosure of the mortgage and in a manner prejudicial to the bondholders, by consenting to the subordination of the lien of the mortgage to certain expenditures and not permitting any bondholders to intervene in the foreclosure proceedings.52

The refusal of a trustee to comply with a judgment makes out a prima facie case for its removal.53 Acting as depositary for a bondholder's committee is not inconsistent with its duties as trustee and does not render it liable to removal.5*

359.

359.

443.

49. Dillaway v. Boston Gas Light Co. (1899), 174 Mass. 80, 54 N. E.

50. See Appendix, page 471.

51.

52.

Dillaway v. Boston Gas Light Co. (1899), 174 Mass. 80, 54 N. E.

Gibson v. American Loan & Trust Co. (1890), 58 Hun. (N. Y.)

53. Harrison v. Union Trust Co. (1895), 144 N. Y. 326.

54. Fidelity Trust Co. v. Washington Oregon Corporation (1914), 217 Fed. 588.