Opinion
October 3, 1939.
November 15, 1939.
Bonds — Actions — Mortgages — Contracts — Third party beneficiaries — Bondholders — Trustee — Principal and surety — Restatement, Contracts.
1. Where it appeared that a mortgage was given to a trustee for the protection of the purchasers of an accompanying bond issue; that the real owner of the premises secured by the mortgage, a corporation, and its president, who was financially interested in the affairs of the company, gave to the trustee under the mortgage an agreement in writing under seal whereby they guaranteed to the trustee "for the benefit of holders of bonds secured by said mortgage, the punctual payment of the interest upon said mortgage and the bonds issued thereunder, . . . . . . until the principal of the said mortgage shall be repaid in full"; and that when the bond issue and mortgage became due, payment of the principal was extended for additional periods of years, by agreement between the owner and the trustee, and at the same time the corporate owner and its president delivered to the trustee an agreement in writing in which they referred to their "guarantee of the payment of the interest of a certain mortgage" and assented to the extension of time and agreed that such extension "shall in no way affect our aforesaid guarantee of the payment of the interest on the said mortgage"; it was held, in an action by the holders of a bond against the defendant president of the corporate real owner, to recover unpaid interest, that an order sustaining a statutory demurrer to the statement of claim was properly entered on the grounds that the defendant and the corporate owner had intended to obligate themselves to guarantee the payment to the trustee of the interest on the mortgage or the bond issue as a whole, and not to guarantee the payment of interest on each of the bonds issued, and that individual bondholders were not entitled to maintain suit.
2. Restatement, Contracts, section 133, cited.
Appeal, No. 165, Oct. T., 1939, from judgment of C.P. No. 7, Phila. Co., Sept. T., 1938, No. 590, in case of Norris S. Barratt, Jr. et al. v. Albert M. Greenfield.
Before KELLER, P.J., CUNNINGHAM, BALDRIGE, STADTFELD, PARKER, RHODES and HIRT, JJ. Judgment affirmed.
Assumpsit.
The facts are stated in the opinion of the court below, in part, by OLIVER, P.J., as follows:
This matter comes before us on a statutory demurrer to a statement of claim in a suit in assumpsit brought to recover $480 overdue interest on a $1000 mortgage bond. As averred in the statement of claim, the facts are as follows:
The plaintiffs are the holders of one bond, part of an issue of 1750 bonds, each in the sum of $1000, secured by a mortgage dated and executed May 27, 1927, given by George H. Daley to The Pennsylvania Company for Insurances on Lives and Granting Annuities, Trustee, and secured on premises known as The Hotel Walton in Philadelphia. The real owner of the premises was Hotel Walton Corporation, of which the defendant, Albert M. Greenfield, was the president. Greenfield was also financially interested in the affairs of the Corporation. On June 16, 1927, Greenfield and Hotel Walton Corporation gave to the trustee under the mortgage their agreement in writing under seal, whereby they jointly and severally guaranteed "to The Pennsylvania Company", trustee, "for the benefit of holders of bonds secured by said mortgage, the punctual payment of the interest upon said mortgage and the bonds issued thereunder, at the times and in the manner specified therein, and according to the tenor thereof, until the principal of the said mortgage shall be repaid in full."
When the bond issue and mortgage became due May 27, 1930, payment of the principal was extended for an additional period of 3 years by agreement between the owner and the trustee. At the same time the defendant, Greenfield, and Hotel Walton Corporation delivered to the trustee an agreement in writing in which they referred to their "guarantee of the payment of the interest of a certain mortgage in the principal sum of $1,750,000, dated May 27, 1927," and assented to the extension of time and agreed that such extension "shall in no way affect our aforesaid guarantee of the payment of the interest on the said mortgage."
The plaintiffs acquired their $1000 bond July 11, 1927. In this suit against the defendant, Greenfield, plaintiffs seek to recover the unpaid interest on that bond from May 27, 1930 until May 27, 1938. . . . . .
In construing covenants in a collateral bond, Mr. Justice MAXEY, in Manufacturers and Merchants Building and Loan Association v. Willey et al., 321 Pa. 340 (1936) at 344, said: "The covenants in a bond should be construed to mean what the parties intended in so far as that intention can be ascertained by the words used: Equitable Trust Co. v. Nat. Surety Co., 214 Pa. 159, 63 A. 699. If, however, the language is not free from doubt, then the circumstances surrounding the making of the bond and particularly the purpose for which it was given, should be taken into account: March v. Allabough, 103 Pa. 335. . . . . . . While we have held that in cases of corporate sureties, the bond is to be strictly construed in favor of the obligee, we have also held that when obligations of suretyship or indemnity are assumed by individuals without pecuniary compensation, their obligations are not to be extended by implication or construction. Their liability is strictissimi juris." Mr. Justice MAXEY then referred to a supplemental agreement between the parties for a declaration therein, as to the tenor and purport of the collateral bond in question, in order to clear up "any ambiguity (if such existed)" respecting its terms.
Let us therefore examine the original agreement in the present case, and, if necessary, the supplemental agreement and the purpose for which the original agreement was given, in order to see what the parties intended.
It is clear from the statement of claim that the mortgage in this case was what is generally known as a deed of trust, given to a trustee for the protection of the purchasers of the accompanying issue of 1750 $1000 bonds. There is no allegation that this mortgage differed in any way from the usual deed of trust which virtually always provides that all proceedings for the collection of the mortgage shall be instituted only in the name of the trustee for the equal benefit of all bondholders.
The guarantee agreement of the defendant and Hotel Walton Corporation, dated June 18, 1927, given to the trustee under the mortgage, expressly guarantees to the trustee the punctual payment of interest. It contains no guarantee whatever to the holders of bonds, although it might be held to contain a recital that the guarantee is "for the benefit of holders of bonds secured by said mortgage." We say "might be held" to contain such a recital because the guarantee is so ambiguously worded that the phrase "for the benefit of holders of bonds secured by said mortgage" might either be held to relate back to the designation of the Pennsylvania Company as trustee, or to the guarantee. Clearly, if the phrase relates back to the designation of the Pennsylvania Company as trustee, the bondholders would have no right to sue. In this opinion, we have therefore approached the question assuming that the phrase quoted was intended, as plaintiff contends, to relate back to the word "guarantee" and not to the word "trustee".
In addition to having expressly been given to the trustee, and not to bondholders, the guarantee covers "the punctual payment of the interest upon said mortgage and bonds issued thereunder." The words "and bonds issued thereunder," following the word "mortgage", seem to us at most to mean the bonds as a whole, and not the bonds severally. We conclude that the promise is not a guarantee of the payment of interest upon each bond, but a guarantee of payment of the entire sum of interest due upon the mortgage or the bond issue as a whole. This conclusion is strengthened by the final words of the agreement, which guarantee such payment "until the principal of the said mortgage shall be repaid in full." It is clear, we think, that the parties had in mind the mortgage and the total interest due under the mortgage, and not the bonds severally or the interest on each bond severally.
This construction, which flows directly from the words of the guarantee agreement itself, is sustained by the reference to that agreement in the assent to the extension of time executed and given to the trustee 3 years later, wherein the defendant and Hotel Walton Corporation designated their original agreement as a "guarantee of the payment of the interest on a certain mortgage" and stated that the extension of time to which they assented should in no way affect "our aforesaid guarantee of the payment of interest on the said mortgage." There is no reference whatever to the payment of interest on the bonds. As stated by Mr. Justice MAXEY in Manufacturers and Merchants Building and Loan Association v. Willey (supra) at page 345. "The parties themselves by their supplemental agreement . . . . . . cleared up any ambiguity (if such existed) as to the tenor and purport of" the original agreement.
We conclude, therefore, that the defendant and Hotel Walton Corporation intended only to obligate themselves to guarantee the payment in its entirety of the interest on the mortgage, or at least on the bond issue as a whole, and did not in any way intend to guarantee the payment of interest on each of the bonds issued thereunder and thereby to subject themselves to the liability of being harassed and sued, in event of default, by hundreds of bondholders. It seems clear they intended to give to the trustee, and that the trustee accepted, a collateral obligation which the trustee, and only the trustee, could enforce, even though it was declared to be for the benefit of all the holders of the bonds, just as the mortgage or deed of trust could be enforced only by the trustee, although likewise given for the benefit of all holders of the bonds.
This case is obviously very different from the case of Putnam v. Pittsburgh Railways Co., 330 Pa. 210, so heavily relied upon by plaintiff, wherein the collateral contract, under seal, was annexed to and made a part of the mortgage. It provided: "Pittsburgh Railways Company . . . . . . for value received, does hereby guarantee to the holder or registered owner of each of the seven hundred and fifty (750) bonds secured by the foregoing indenture of mortgage (Italics ours) . . . . . . the prompt payment by (the mortgagor) of the principal and interest of the said bonds (Italics ours) as the same shall become or be made due and payable, according to the terms of said bonds and the foregoing mortgage." It will be observed that the guarantee thus given was to the owner of each bond, whereas the guarantee in the case before us was a guarantee to the Pennsylvania Company as trustee under the mortgage, for the benefit of the holders of bonds secured by the mortgage. In his opinion in the Putnam case, Mr. Justice STERN expressly pointed out that, under the wording of the obligation in that case, "the trustee would not in any event have the right to institute" any suit on that obligation, whereas it is clear in the case before us that the trustee and only the trustee was intended to have the right to sue. Furthermore, the guarantee in the Putnam case was obviously a guarantee of the payment of interest on each of the bonds, whereas in the case before us the guarantee was clearly of the payment of interest on the mortgage as a whole.
The sole question that remains is whether the third party beneficiary rule, as applied in this state, entitles the individual bondholders to maintain suit, notwithstanding the clear intention of the parties to the contrary.
In McClelland v. Casualty Co., 322 Pa. 429 (1936) in a per curiam opinion the Supreme Court said: "The effect of that case (Commonwealth v. Great American Indemnity Company, 312 Pa. 183), which adopted the rule promulgated by the Restatement of Contracts, Sections 133, 135, 345, in accordance with the existing law in the majority of States of the Union, was to overrule Greene County v. Southern Surety Company, 292 Pa. 304. . . . . ."
Section 133 of the Restatement of the law of Contracts provides:
"(1) Where performance of a promise in a contract will benefit a person other than the promisee, that person is, except as stated in Subsection (3): (Italics ours)
(a) a donee beneficiary. . . . . .
(b) a creditor beneficiary. . . . . .
(c) an incidental beneficiary. . . . . .
"(3) Where it appears from the terms of the promise in view of the accompanying circumstances that the purpose of the promisee is to benefit a beneficiary under a trust and the promise is to render performance to the trustee, the trustee, and not the beneficiary under the trust, is a beneficiary within the meaning of this Section."
Under the usual mortgage deed of trust, the debtor shortly before each interest due date, pays the interest due thereunder in a lump sum to the trustee, and, from the money so paid it, the trustee in turn, on or after the due date, pays the interest due to each of the bondholders. This is the practice universally followed, and it is clear that in the present case all parties intended to provide merely that, if the debtor failed to make such lump sum payments to the trustee, the defendant would make them. Therefore, under Subsection (3) above quoted, the right to sue the defendant is in the trustee and not in the several bondholders. For this reason, the demurrer is sustained.
FINAL JUDGMENT
Mar. 6, 1939. Demurrer in the above having been sustained the Court now enters judgment for the defendant.
Plaintiffs appealed.
Errors assigned were the action of the court below in sustaining the affidavit of defense raising questions of law and the entry of judgment for defendant.
Henry B. Coxe, Jr., of Barratt Coxe, for appellant.
William A Schnader, with him Jerome L. Markovitz and Gilbert J. Kraus, of Kraus Weyl, for appellee.
Argued October 3, 1939.
The judgment of the court below is affirmed on the opinion of President Judge OLIVER.