Opinion
No. 28770
Decided February 25, 1942.
Appeal — Final order — Accounting decree containing order to carry into effect rights settled — Trustee to liquidate assets may not invest proceeds of sale, when — Third person liable for loss caused by breach of trust, when — Corporation organized to liquidate frozen bank assets for depositors' benefit — Directors must personally account for breach of terms of trust, when — Trust assets — Exchange or barter not included in power to sell.
1. A decree, finding the general equities in favor of a party and ordering an accounting, is a final order from which an appeal may be perfected, although a further provision is included to carry into effect the rights settled. ( State, ex rel. K-W Ignition Co., v. Meals et al., Judges, 93 Ohio St. 391, approved and followed.)
2. It is the duty of a trustee appointed to liquidate assets to proceed as expeditiously as sound business judgment permits. In the absence of specific authorization to the contrary, such trustee has no right or authority to invest the proceeds of sale of such assets in the hope of realizing greater value thereby.
3. A third person, who, although not a transferee of trust property, has notice that the trustee is committing a breach of trust and participates therein, is liable for any loss caused by the breach of trust.
4. Where a corporation is organized for the purpose of liquidating frozen assets for the benefit of former bank depositors, the directors of such corporation must personally account for their participation in any breach of the terms of the trust.
5. The power to sell trust assets does not include or imply the power to dispose of same by exchange or barter.
APPEAL from the Court of Appeals of Cuyahoga county.
The North American Trust Company, a banking corporation, was placed under the jurisdiction of a conservator by the Superintendent of Banks (Section 710-88 a, General Code). A plan for the reorganization of the bank (Section 710-89 a, General Code) involved the paying off of an obligation to the Reconstruction Finance Corporation and a waiver by the bank's depositors of eighty per cent of their respective deposits. To accomplish this, it was agreed that a new corporation, to be known as The North American Mortgage Loan Company, should be organized and certain assets of the bank transferred to this mortgage loan company. This plan enabled the mortgage loan company to secure a new loan from the Reconstruction Finance Corporation sufficient to pay off the bank's obligation to the Reconstruction Finance Corporation and to furnish a liquid condition for the new bank which resulted from the reorganization.
A prospectus outlining the plan was sent to the various creditors of the bank. Quotation from the "Foreword" is made in the opinion.
In outlining the "Capital Structure" it was said in such prospectus:
"The existing constitutional and statutory liability of present stockholders shall continue without modification until five years after the date upon which the bank is licensed to resume normal business. * * * At the end of said period said liability of the present stockholders shall continue as at present except that present stockholders who purchase stock to the extent of 100 per cent or more of the par value of their present stock shall after the expiration of said five-year period be released from all said liability on their present stock, and present stockholders who purchased a lesser amount shall be released to a proportionate extent. For and during the period above mentioned no dividends shall be paid to the owners of shares of the existing capital stock who have purchased stock on the basis of the reduced par value, but dividends declared by the board of directors payable to such holders of the reduced capital stock shall be paid to the corporation hereinafter provided for, and shall be used for the purpose of discharging and paying the loan made by Reconstruction Finance Corporation and for retiring certificates of participation hereinafter provided for should said loan be paid prior to the expiration of the period above referred to."
Under the heading of "Mortgage Loan Company," as amended, it was said:
"It is therefore proposed that a corporation be organized to be known as 'The North American Mortgage Loan Company' to which the bank shall, by proper instruments of conveyance, sell, assign, transfer, and deliver such assets, parts of assets and equities therein, and property now belonging to said bank as may be found by the Superintendent of Banks, or an examiner appointed by him to be ineligible to remain therein and such other assets as may be required to secure a loan sufficient to discharge the present existing obligation to Reconstruction Finance Corporation and an additional advancement from said corporation of cash in order to improve the liquid condition of said bank and make available for its depositors under the provisions of this plan as much cash as possible. The mortgage loan company shall, upon receipt of the proceeds of said loan from Reconstruction Finance Corporation, advance the same to said bank as consideration for the transfer and delivery to it of the assets and property herein provided to be so transferred. This loan shall be and represent an obligation of said The North American Mortgage Loan Company and shall not be a liability of the bank.
"The management of said The North American Mortgage Loan Company shall be vested in a board of directors composed of five members, two of whom shall be directors of the bank and three of whom shall be depositors of said bank who were not, prior to the appointment of a conservator, stockholders therein. Said directors shall receive no compensation except for extraordinary services."
Under the heading of "Certificates of Participation" this prospectus contained the following:
"The North American Mortgage Loan Company shall, as soon as practicable, issue over the signature of the proper officer or officers non-negotiable instruments to be known as certificates of participation, which said instruments shall in no manner be a liability of said bank. Each said certificate of participation shall not bear interest and shall evidence a pro rata interest in the assets transferred by said bank to said mortgage company and shall upon request be delivered to the depositor or claimant of the bank entitled thereto.
"Subject to the payment of the loan from Reconstruction Finance Corporation, said mortgage company shall, as often as in its opinion appears proper, apply cash realized from the liquidation of the assets so transferred to it by the bank together with dividends declared by the directors of said bank and paid to it as hereinbefore provided, in payment of said certificates of participation. Each such application and payment shall be made in pro rata amounts to the holders of said certificates of participation and the crediting of any such payment or payments to an unrestricted account in said bank in the name of the holder of record of any such certificate of participation shall constitute a receipt for the amount or amounts so credited.
"In the event said certificates of participation are paid in full or retired in accordance herewith before five years from and after the date of resuming normal operations by the bank, or in any event at the end of five years after said date of resuming normal operations, the dividends provided for herein to be paid to the mortgage company shall cease and terminate and the certificates evidencing ownership in said bank shall be free from any of the obligations provided for herein.
"The North American Mortgage Loan Company shall have the right, subject to the payment of the loan from Reconstruction Finance Corporation first to be made, unless such right by Reconstruction Finance Corporation is by it specifically waived, to purchase and retire outstanding certificates of participation for cash or in exchange for assets or property held by it under such terms and for such values as its board of directors may from time to time determine to be just and equitable to the mortgage company and the holders of the remaining outstanding certificates of participation."
Under the heading of "Future Operation the bank was strictly limited as to the kind and amount of investments which might be made with unrestricted deposits. A provision of the contract quoted later provided that money coming into the possession of the mortgage loan company should be deposited in the bank in the commercial department.
After sufficient consents were received, The North American Mortgage Loan Company was incorporated with a maximum number of authorized shares of 250, all of which were to be common shares without par value. The amount of capital with which the corporation was to begin business was $500.
The purpose clause of the corporation was broad, allowing the purchase, sale, exchange, loan and general dealing in real and personal property, including the making of loans.
Thereupon, an agreement was entered into on August 6, 1934, between The North American Trust Company and The North American Mortgage Loan Company, in the "whereas" of which it was provided:
"That, whereas, the bank, with the approval of the Superintendent of Banks of the state of Ohio, has adopted a plan for obtaining a license to resume normal operations, a copy of such plan (hereinafter called 'the plan' with amendments thereto) being hereto attached, marked 'Exhibit A,' and made a part hereof. Such plan requires the execution of a contract between the bank and the mortgage loan company, subject to the approval of the board of directors of the bank and the Superintendent of Banks of the state of Ohio, which contract shall provide for the various duties and obligations of the mortgage loan company, the respective rights of the mortgage loan company and the bank in the trusteed assets, parts of assets, and equities in assets, form of participation certificate, and all other details in connection with the administration of the trust, and the liquidation of the trust property by the mortgage loan company, without, however, intending thereby to limit the authority of the mortgage loan company or its directors, under its charter or under the laws of Ohio relating to corporations * * *."
Under "Definitions" the contract provided:
"The term 'plan' shall mean the 'Plan of The North American Trust Company, Cleveland, Ohio for Obtaining a License to Resume Normal Business,' together with the amendments thereto as approved and adopted, and as set forth in 'Exhibit A' hereto attached and made a part thereof."
For the eighty per cent of their deposits which the creditors of the old bank surrendered, certificates of participation for the transferred assets were issued by the mortgage loan company (Section 710-89 a, General. Code).
Two classes of assets were so transferred, known as class "A" and class "B." The class "A" assets were to become the property of the mortgage loan company, while the new bank was to retain an interest in and possession of the class "B" assets.
In respect of the class "A" assets it was provided in the contract between the bank and the mortgage loan company that:
"The mortgage loan company being the owner of all 'A' assets, shall manage and control all such assets and exercise all rights of absolute ownership therein, subject only to its corporate powers and the provisions of said plan as herein recited, without any right of the bank therein."
The possession of the B assets was to be retained by the new bank and as the provisions in respect of the "B" assets are not material here the same will be omitted, with the exception of reference to that part of the contract which provided that the mortgage loan company might at any time require the bank to sell any of the "B" assets at a price in excess of the bank's interest therein, and that the respective boards of directors were to confer on all matters pertaining to the management and liquidation of the "B" assets.
The provision of the contract for the deposit of monies coming into the possession of the mortgage loan company will be set out in the opinion.
The certificates of participation issued to the depositors of the old bank in lieu of eighty per cent of their respective deposits in the old bank were in the following form:
"Certificate of Participation"Issued by The North American Mortgage Loan Company pursuant to the plan of reorganization of The North American Trust Company, Cleveland, Ohio.
"No............ $ .............
"This is to certify that ............................ is the owner of and entitled to a pro rata interest to the extent of ........................ dollars in and to recoveries from certain assets, parts of assets, and equities in assets formerly owned by The North American Trust Company, now The North American Bank Company, Cleveland, Ohio (hereinafter called the 'bank'), which have been transferred to The North American Mortgage Loan Company (hereinafter called the 'mortgage loan company'), and in and to other income and property coming into the hands of the mortgage loan company in accordance with the plan, as amended, of the bank to obtain a license to resume normal operations.
"This certificate is one of a series of certificates originally issued to depositors and creditors of the bank in lieu of eighty per cent (80%) of their restricted deposits in said bank, as provided in said plan, as amended. Reference is made to the plan, as amended, and to a certain contract dated August 6, 1934, between the bank and the mortgage loan company for a statement of the duties and obligations of the mortgage loan company and other details in connection with the administration of the assets to be liquidated by the mortgage loan company. This certificate shall bear the signature of the president of the mortgage loan company printed thereon, and shall not become valid until signed by the secretary of the mortgage loan company.
"Payments shall be made pro rata to the holders of participation certificates out of net realization from property in the hands of the mortgage loan company and from dividends on stock of The North American Bank Company in event any such dividends under the terms of the plan, as amended, become payable to the mortgage loan company, subject to prior payment to Reconstruction Finance Corporation and others, as provided in said plan, as amended, and in said contract. All payments made on this participation certificate shall be made at the office of the bank by depositing in the commercial account therein the amount of such payment in the name of the holder of record of this certificate, and upon presentation of this certificate the bank shall endorse thereon the payment so made. Notice of any proposed payment shall be given by the mortgage loan company by publication in a newspaper of general circulation in the city of Cleveland, Ohio, at least three days prior to the payment date.
"In the event, after all participation certificates shall have been retired, any funds or assets or portions thereof shall remain in the possession of the mortgage loan company, they shall be disposed of as may be directed by the Superintendent of Banks of the state of Ohio.
"This certificate may be transferred only by endorsement and surrender of the same to the mortgage loan company for the issuance of a new certificate in the name of the transferee, and this certificate is not and shall not be construed as a liability of The North American Bank Company.
"Dated at Cleveland, Ohio, this .................... day of ........................, 1934.
"The North American Mortgage Loan Company,
"By ........................., President.
"By ........................., Secretary.
"Assignment."For value received, the undersigned hereby sells, assigns, and transfers unto .................................. all his right, title and interest in and to the within certificate, and in and to the property, rights, and interests evidenced thereby.
"Dated this .............. day of ...................., 1934.
"...............................................
"Witness:
".....................................
"No. ................. Original Amount $ ..................
"Distributions -------------------------------------------------------------------- "Date Initials Payment Balance Date Initials Payment Balance --------------------------------------------------------------------
--------------------------------------------------------------------
"Other Distributions"(To be made only after payment in full of participation certificates, and as may be directed by the Superintendent of Banks of the state of Ohio)
-------------------------------------------------------------------- "Date Initials Payment"
--------------------------------------------------------------------
--------------------------------------------------------------------
The mortgage loan company issued certificates of participation in the sum of $1,800,000 to the various creditors of the bank, among whom was plaintiff to whom was issued certificate No. 3183 on which there is a balance unpaid of $2,346.65.
Under the caption of "Payment of Certificates of Participation" the contract provided:
"1. The mortgage loan company shall have the right, subject to the payment of the loan from Reconstruction Finance Corporation first to be made unless such right by Reconstruction Finance Corporation is by it specifically waived, to purchase and retire outstanding certificates of participation for cash or in exchange for assets or property held by it under such terms and for such values as its board of directors may from time to time determine to be just and equitable to the mortgage loan company and the holders of the remaining outstanding certificates of participation.
"2. The mortgage loan company in its sole judgment, subject to its rights as provided in section 1 hereof, shall determine, subject to the repayment of its loan to Reconstruction Finance Corporation, unless said corporation should otherwise consent, the time or times for making distribution on certificates of participation from available funds, notice of which shall be given as provided in said certificates. * * *
"5. When payment of the principal amount of said certificates of participation has been made in the manner as herein provided, any assets remaining in the possession of the mortgage loan company shall be disposed of as the Superintendent of Banks of the state of Ohio shall direct. Any such payment made by the direction of the Superintendent of Banks shall be made in the manner as provided herein for principal payments."
Under the heading of "Duties and Liabilities of the Bank and the Mortgage Loan Company" it was provided:
"1. The mortgage loan company shall conduct its affairs in a manner as provided by law for corporations organized and existing under the laws of the state of Ohio. * * * The mortgage loan company, however, shall from time to time report to the holders of certificates of participation the general condition of the assets of the company, the collection thereon, and the progress of the liquidation thereof."
Under the heading of "Exchange of Assets" the contract provided:
"Subject to the lien of Reconstruction Finance Corporation, the bank may purchase from or exchange with the mortgage loan company, and the mortgage loan company may purchase from or exchange with the bank, subject to their several corporate powers, assets remaining in the bank, or 'A' or 'B' assets transferred to the mortgage loan company, under such terms and conditions as may be determined upon by their respective boards of directors and subject to the approval of the requisite and proper supervisory authority. Such sale or exchange of assets shall only be made to carry out the provisions and spirit of the plan and/or this contract and to promote the liquidation of the mortgage loan company or the solvency of the bank."
The sixth paragraph of Article III of the contract reads:
"All monies coming into the possession of the mortgage loan company on account of mortgage loan company assets shall be deposited, so far as is practicable, in the commercial department of the bank to the credit of the mortgage loan company; provided, however, that the mortgage loan company may transfer from time to time, as it may determine, such amounts or parts thereof to the savings department of the bank, or to other banks or financial institutions as it may find to be to its best interest."
At a special meeting of the stockholders held February 4, 1935, the following directors were elected: J.J. Oman, J.M. Seliskar, Dominick Lusin, John Rakovec, and Joseph Lekan; all of whom were made defendants in this action.
Among the "A" assets transferred to the mortgage loan company were certain defaulted bonds and securities.
The minutes of the board of directors of the mortgage loan company for December 23, 1935, show the following:
"Resolved that the president be authorized to sell defaulted bonds and other stocks to the best interest of the company and to buy other bonds or equities as in his judgment appear to be to the best interest of the company, and report all transactions to the board as made."
On the roll call, the following defendants voted for the resolution: James M. Seliskar, John J. Oman, Joseph Lekan, John Rakovec, and Dominick Lusin.
At a meeting of the same board of directors held on January 20, 1936, the secretary reported the purchase of 12 lots of common stock and that it was "moved by J.J. Oman and seconded by Joseph Lekan that the above purchases be approved, and on motion being duly put, all of the directors voted aye and none voted nay, and the motion was declared adopted."
The minutes of the same board of directors for February 3, 1936, show that it was moved by J.J. Oman and seconded by John Rakovec that the purchase of nine lots of common stocks and two lots of securities be approved. The minutes show that all directors voted aye and none voted nay.
The minutes of the same board of directors (reelected) for February 17, 1936, show that the purchase of two lots of bonds was approved.
Various other minutes of the board of directors show further purchases of stocks and securities, with the approval of the entire board of directors.
James M. Seliskar, president of The North American Mortgage Loan Company, testified that he sold securities having a value of $202,101.84 to the brokerage firm of Murfey Blossom Company and with the proceeds purchased the stocks and securities.
On June 8, 1938, Math Shuster, plaintiff below (appellee here), filed his petition in the Court of Common Pleas of Cuyahoga county on behalf of himself and all other certificate holders against The North American Mortgage Loan Company and its directors — James M. Seliskar, Dominick Lusin, Joseph Lekan, John Rakovec and John J. Oman — seeking an accounting of the trust property placed in their hands under the foregoing reorganization plan, contracts, etc., and alleging:
"The diversion of the money of the mortgage company to the purchase of stocks and other securities, instead of the distribution of the same among the certificate holders, was wrongful and the same constitutes a breach of trust on the part of said directors * * *."
The Common Pleas Court dismissed plaintiff's petition. Upon appeal to the Court of Appeals on law and fact, that court made the following findings and decree:
"Findings:
"1. That as to the assets coming into the hands of the defendant The North American Mortgage Loan Company, through transfer from The North American Trust Company pursuant to the provisions of the plan of The North American Trust Company, for obtaining a license to resume normal business and the agreement in writing entered into between the mortgage company and the bank, the mortgage company assumed and has since occupied the position of trustee of a trust of which said assets are the corpus and the holders of the certificates of participation issued by the mortgage company are the beneficiaries.
"2. That under the terms of said trust the mortgage company is not authorized to invest any of the funds derived from the liquidation of the corpus of said trust, in stocks or bonds or in other securities, except insofar as the deposit of funds in a bank or the evidence thereof constitutes a security.
"3. That the defendant mortgage company and the other defendants who were directors of the mortgage company at the time the transactions occurred, have, at various times subsequent to the execution of such transfer and the delivery of said assets to the mortgage company, in violation and breach of said trust invested or caused to be invested large sums of money of funds derived from the liquidation of the corpus of the trust, in stocks, bonds and other securities, whereby they have rendered themselves liable to account to the beneficiaries of said trust for said funds so invested and to reimburse said trust fund for any losses that may have been sustained by reason thereof, which they upon demand have failed and refused to do.
"Decree:
"That the defendants, within thirty days after this decision is journalized, file herein their statement in writing, under oath, showing all amounts derived from the liquidation of the corpus of such trust invested by them in stocks, bonds and other securities, and also showing that bonds, stocks and other securities were purchased by them and the disposition made by them of such stocks, bonds, and other securities, including the dates of acquisition and disposition thereof, with the amounts realized therefrom, and furnish the attorneys for plaintiff a copy thereof; and during the period of thirty days following the filing and furnishing of such statement the defendants shall permit the plaintiff, during the hours the mortgage company is open for business purposes, to inspect the data appearing in the books, records and files of the mortgage company relating to the items which said statement is ordered to reflect, for the purpose of preparing their objections and exceptions, if any, to such statement, which objections and exceptions, if any, shall be filed herein and copy thereof furnished to plaintiff before the expiration of said thirty-day period; and that following the expiration of said thirty-day period and the filing by plaintiff of his objections and exceptions, if any, to such statement, this cause shall stand for hearing upon such statement and the objections and exceptions, if any, thereto, and for the making of further appropriate orders, judgments and decrees. Exceptions noted."
The cause is now before this court following the allowance of a motion to certify the record.
Messrs. Mooney, Hahn, Loeser, Keough Freedheim and Mr. Joseph Krizman, for appellee.
Messrs. Howell, Roberts Duncan, for appellants.
The first question to be disposed of is whether we have before us a final order.
We hold here, as we did in the case of State, ex rel. K-W Ignition Co., v. Meals et al., Judges, 93 Ohio St. 391, 113 N.E. 258, that, where the general equities of the case have been found in favor of the plaintiff and an accounting has been decreed, while a further order of the court will be necessary to carry into effect the rights settled by the decree, such further order is merely auxiliary to or in execution of the decree of the court made on the merits of the case. Therefore, the decree of the Court of Appeals in this case is a final order.
On account of the length of the statement of facts, we epitomize the issue in the following language taken from appellants' brief (omitting references to the record):
"By December 23, 1935, the Reconstruction Finance Corporation loan had been reduced sufficiently so that The North American Mortgage Loan Company was able to negotiate a straight bank loan from The Central National Bank of Cleveland, Ohio, at 3 per cent interest for sufficient funds to pay off their Reconstruction Finance Corporation loan in full.
"The North American Mortgage Loan Company, about this time, had on hand among the assets received from the bank certain defaulted bonds and securities which it was deemed advisable to sell and convert into more productive securities. On the above date, by proper action of the board of directors, the defendants-appellants, the president of The North American Mortgage Loan Company was authorized to sell these defaulted bonds and securities and to buy other bonds or equities as appeared in his judgment to be for the best interest of the company, and to report all transactions to the board as made.
"Pursuant to this authority the president of The North American Mortgage Loan Company proceeded to sell the defaulted bonds and to purchase other securities, in each instance reporting the same to the board of directors, the defendants-appellants herein, who all approved the action. These transactions were handled through brokerage houses and because of the unlisted nature of the bonds and securities being sold, and in order to secure the purchases of the new securities pending such sale, certain other assets of The North American Mortgage Loan Company were pledged with the brokers to secure the account pending realization from the sale of the defaulted, unlisted securities which were being sold. This pledge of assets to secure the brokers' account appeared in the statement of the assets and liabilities of The North American Mortgage Loan Company published as of September 3, 1937.
"It is on account of the reinvestment of the funds realized from the sale of these defaulted bonds and securities in other more productive securities that the plaintiff-appellee brought this action.
"The plaintiff-appellee contended that the purchase of any securities with the funds received from the sale of the defaulted bonds was ultra vires and in violation of the provisions of the plan and contract for the reorganization of the bank and payment of the participation certificate holders. It is contended that under the plan and the contract the defendants appellants as officers and directors of The North American Mortgage Loan Company had no authority to engage in the transactions shown by the evidence and that their only authority was to sell the assets received from the bank and pay over the cash proceeds realized therefrom in payment of the participation certificates. The plaintiff-appellee makes no claim and there is no evidence in this case of any bad faith, fraud or self-dealing on the part of the defendants-appellants in the reinvestment of these funds as shown by the evidence. The sole claim of the plaintiff-appellee is that these transactions were unauthorized and that being so unauthorized, they constitute a breach of trust, rendering the defendants liable to account to the plaintiff for any losses which may have arisen by reason of these rtansactions.
"The Court of Appeals found that under the plan of reorganization of The North American Trust Company and under the contract between The North American Trust Company and The North American Mortgage Loan Company that The North American Mortgage Loan Company became the trustee of a trust of which the assets transferred to The North American Mortgage Loan Company were the corpus and the participation certificate holders were the beneficiaries. The Court of Appeals further found that under the terms of the trust The North American Mortgage Loan Company had no authority or power to invest any of the assets derived from the sale of stocks, bonds and other securities in other stocks, bonds and securities and that the defendants-appellants, The North American Mortgage Loan Company and the officers and directors thereof, in investing funds realized from the sale of defaulted stocks, bonds and other securities had committed breaches of trust rendering them liable to account to the beneficiaries of the trust for funds so invested and to reimburse the trust for any losses on account thereof and ordered the defendants-appellants to account to the plaintiff-appellee for all such amounts."
Appellants then state the question presented as follows:
"The question presented in this case, as presented both in the trial court, the Court of Appeals and in this court, is as previously stated in this brief whether or not the defendants-appellants have committed a breach of trust by reinvesting the funds received from the sale of the defaulted bonds instead of immediately distributing the proceeds to the participation certificate holders."
Commenting upon the foregoing question, appellee states:
"We agree with this statement with the following exceptions. The plaintiff has never claimed that cash received from liquidation must be immediately distributed; but he has claimed that whenever distributed such cash must by the terms of the trust be distributed either to the creditors of the mortgage company or to the certificate holders and that the diversion of such cash from the creditors and the certificate holders to the stock market was a breach of trust.
"The question therefore narrows itself to this: Did the trustee breach its trust by purchasing securities with cash received from the sale of trusteed assets?"
Appellants admit that "The complete liquidation of all the assets and distribution of the proceeds was the ultimate object of the plan," but contend that the authority to reinvest the funds realized from the sale of the defaulted securities is to be found in the corporate charter of The North American Mortgage Loan Company, the contract between The North American Trust Company and The North American Mortgage Loan Company, as well as the reorganization itself, and that the mortgage company was vested with authority "to reinvest the proceeds realized from the sale of assets in other assets so as to produce the greatest possible return to the certificate holders." In short, appellants, without saying so in so many words, seek to have the certificate holders treated as stockholders of a corporation authorized to buy, sell and exchange securities. Clearly, these certificate holders may not be treated as stockholders. They are beneficiaries of an express trust.
Much stress has been put on the wording of the contract where, after providing: " The mortgage loan company being the owner of all 'A' assets, shall manage and control all such assets and exercise all rights of absolute ownership therein," it is said: "Subject only to its corporate powers and the provisions of said plan as herein recited, without any right of the bank therein." In the first "whereas" of the contract, after referring to the duties of the mortgage loan company in respect of "the administration of the trust, and the liquidation of the trust property by the mortgage loan company," the following words were added: "Without, however, intending thereby to limit the authority of the mortgage loan company or its directors, under its charter or under the laws of Ohio relating to corporations * * *."
These phrases do not appear in the plan submitted to the depositors. But even if they did, it would make no difference. The contract itself as well as the plan and the order of the Common Pleas Court approving the plan and contract all show conclusively that the mortgage loan company did not have the right of absolute ownership. Appellants in their brief and argument refer to the mortgage loan company as a trustee for the holders of the participation certificates. And it is not to be overlooked that the Common Pleas Court in authorizing the contract placed each of the directors under a bond of $10,000. As against the bank, the mortgage loan company was, of course, the absolute owner. So also for the purposes of the Reconstruction Finance Corporation loan.
It is argued that the Reconstruction Finance Corporation insisted on the wide purpose clause of the mortgage loan company. However, we find nothing in the record on this subject. Suffice it to say that while the Reconstruction Finance Corporation had a right to dictate the terms on which it would loan money to the mortgage loan company it had no power to interfere with the rights of the depositors and furthermore, after its loan was paid, had no further interest in the situation.
Especially in view of the dual purpose of the corporation, we are unable to see in the above-quoted language any authority for the investment of the proceeds of the sale of assets which the mortgage loan company held for liquidation.
If the purpose clause of the mortgage loan company was considered a part of the authority of the trustee, why then was it found necessary to amend the plan by adding to the original the following paragraph:
"The North American Mortgage Loan Company shall have the right, subject to the payment of the loan from Reconstruction Finance Corporation first to be made, unless such right by Reconstruction Finance Corporation is by it specifically waived, to purchase and retire outstanding certificates of participation for cash or in exchange for assets or property held by it under such terms and for such values as its board of directors may from time to time determine to be just and equitable to the mortgage company and the holders of the remaining outstanding certificates of participation."
The plan further provided:
"Subject to the payment of the loan from Reconstruction Finance Corporation, said mortgage company shall, as often as in its opinion appears proper, apply cash realized from the liquidation of the assets so transferred to it by the bank together with dividends declared by the directors of said bank and paid to it as hereinbefore provided, in payment of said certificates of participation. Each such application and payment shall be made in pro rata amounts to the holders of said certificates of participation and the crediting of any such payment or payments to an unrestricted account in said bank in the name of the holder of record of any such certificate of participation shall constitute a receipt for the amount or amounts so credited." (Italics ours.)
It was also provided in the contract that: "All monies coming into the possession of the mortgage loan company on account of mortgage loan company assets shall be deposited, so far as is practicable, in the commercial department of the bank to the credit of the mortgage loan company; provided, however, that the mortgage loan company may transfer from time to time, as it may determine such amounts or parts thereof to the savings department of the bank, or to other banks or financial institutions as it may find to be to its best interest." (Italics ours.) The amended plan provided that interest at the rate of two and one-half per cent per annum would be paid on savings deposits.
With these careful limitations upon the use of the proceeds of sale of assets, it is not reasonable to infer that after all it was not necessary for the mortgage loan company or its directors to follow the plan of liquidation and distribution, but that instead the mortgage loan company might sell any of the assets and in the discretion of its board of directors invest in other securities to the end that it was hoped, as claimed by appellants, "to produce the greatest possible return to the certificate holders."
Not only do we find no authorization for any investment or speculation, but on the contrary we do find the following language in the plan:
"In analyzing the following plan it should be borne in mind that the depositor and creditor is not being requested to sacrifice any value that he may now possess in the assets and property of The North American Trust Company, and that he is merely being requested to permit a division of said assets and property for the purpose of insuring a solvent, sound and liquid bank."
As stated in 40 Ohio Jurisprudence, 200:
"Quite generally, a corporation may take the title to property. Even if the corporation has not the capacity in the particular case to take the title, the trust will not fail because of that but a new trustee will be appointed."
Whether the mortgage loan company was qualified to do a trust business (Section 710-150, General Code) need not be inquired into here. The record shows that in cause No. 412093 in the Court of Common Pleas of Cuyahoga county, in a proceeding brought under Section 710-89 a, General Code, the court found, according to its journal entry:
"It appearing to the court that The North American Mortgage Loan Company, by and with the approval of the Superintendent of Banks of the state of Ohio, has been duly incorporated under the laws of the state of Ohio to liquidate the assets to be turned over to The North American Mortgage Loan Company for liquidation, as provided in said plan as modified * * *."
Section 710-89 a, General Code, clothes the Court of Common Pleas with jurisdiction to authorize trust or participation certificates in assets set aside for the payment thereof.
There was filed in cause No. 412093 an application for authority for the bank to resume business, in which a part of the relief asked for was a show cause order as follows:
"Third — Why said The North American Trust Company should not turn over and deliver to The North American Mortgage Loan Company the assets, parts of assets and equities therein, as shall have been designated by the Superintendent of Banks of Ohio as undesirable to be retained in said The North American Trust Company for the purpose of liquidation of the same by The North American Mortgage Loan Company and the distribution of the funds arising from such liquidation in the manner and for the purposes mentioned in said plan as amended." (Italics ours.)
In the journal entry of the Court of Common Pleas made on the foregoing application it is recited: "It appearing to the court that The North American Mortgage Loan Company, by and with the approval of the Superintendent of Banks of the state of Ohio, has been duly incorporated under the laws of the state of Ohio to liquidate the assets to be turned over to The North American Mortgage Loan Company for liquidation, as provided in said plan as modified, and that a contract has been prepared between the trust company and the mortgage loan company defining the duties of the respective parties thereto, said contract between the trust company and the mortgage loan company is hereby approved by this court * * *.
"The management of said The North American Mortgage Loan Company shall be vested in a board of directors composed of five members, one of whom shall be a director of the present bank, one of whom shall be a stockholder and not a director of the present or reorganized bank, and three of whom shall be depositors of the present bank who were not, prior to the appointment of a conservator, stockholders therein. Said directors shall receive no compensation except for extraordinary services, and each shall give a bond in the sum of $10,000 to be approved by the court. * * *
"It is further ordered, adjudged, and decreed, that stock purchased by present stockholders in the bank, as reorganized shall, for a period of five years from and after the bank is licensed to resume normal business, be pledged with The North American Mortgage Loan Company for the benefit of the holders of certificates of participation in pursuance of said plan, without intending to impose upon The North American Mortgage Loan Company any liability thereon except as pledged, in an amount equal to the par value of the stock now owned by such stockholders, otherwise the stock purchased in the reorganized bank by present stockholders, or others, shall not be pledged. In event the constitutional and statutory liability of present stockholders is not imposed within said five-year period, or in event the certificates of participation provided to be issued in said plan have been paid or retired within said period, said stock so pledged shall be returned to the respective owners thereof, except that stock so pledged may be transferred by the mortgage loan company [by] order of court [or] by operation of law or to permit a stockholder of the bank as reorganized to qualify as a member of its board of directors." (Italics ours.)
Not only the plan and the contract but the order of the Court of Common Pleas of Cuyahoga county show clearly that a trust was created for the purpose of liquidation and distribution of proceeds to the holders of the certificates of participation.
In the absence of the arrangement made in this case, it would have been the duty of the Superintendent of Banks to take possession of this unsound or insolvent bank (Sections 710-89 and 710-91, General Code) and to proceed under Section 710-95, General Code, to liquidation, and as the insolvency of this bank took place prior to the amendment to Section 3, Article XIII of the Constitution of Ohio, effective July 1, 1937, the double liability of stockholders was in effect. Under Section 710-75, General Code, it was the duty of the Superintendent of Banks to enforce this individual liability of stockholders.
The mortgage loan company was created to act in a dual capacity, i. e., owner and trustee. In its own right as a corporation, it was first to borrow funds from the Reconstruction Finance Corporation and pledge the assets which it held as trustee for the certificate holders as security for the repayment of this loan. There was, therefore, necessity for the purpose clause of the corporation in dealing with these securities for the purpose of borrowing from and repaying to Reconstruction Finance Corporation. But after the Reconstruction Finance Corporation loan was satisfied, the authority to treat these assets as the absolute property of the corporation ceased, and from that point on the mortgage loan company was to hold the assets as trustee for the certificate holders.
"If property is transferred to a corporation partly for its own use and partly in trust for others, the corporation has capacity to administer the trust." 1 Restatement of Trusts, 267.
To be a trustee, it is necessary that the person (natural or corporate) have capacity to take title to the property. 40 Ohio Jurisprudence, 195 et seq.
For the purpose of paying off the Reconstruction Finance Corporation loan, it was necessary that the mortgage loan company have the power to sell. As stated in 40 Ohio Jurisprudence, 417, "there is no power presumed to exist in him [trustee] to sell the trust res." See also 1 Restatement of Trusts, 501.
The "plan," which was specifically made a part of the contract, provided that "the management of said The North American Mortgage Loan Company shall be vested in a board of directors composed of five members * * *." There was nothing said in the plan about the directors or the corporation having the right to exercise all its powers given by its charter in respect of handling or managing the assets once they became freed of the obligation to the Reconstruction Finance Corporation. The purchases in question did not take place while the Reconstruction Finance Corporation loan was unpaid. (The loan from the Central United National Bank has not been questioned.)
As between the bank and the mortgage loan company there was merely a contract relationship; as between the mortgage loan company and the Reconstruction Finance Corporation there was merely a contract relationship; but as between the mortgage loan company and the certificate holders who were the equitable owners of the assets held by the mortgage loan company (subject to the payment of the Reconstruction Finance Corporation loan) there was the relationship of trustee and beneficiaries, and when the contract refers to "the administration of the trust" it is referring to the trust created by the plan submitted to the depositors and the Court of Common Pleas, the contract made in pursuance of such plan, and certificates of participation.
Counsel for appellants have argued that the mortgage loan company had the right to exchange assets, and that while the transactions under question took the form of sales and purchases, they amounted in substance to exchanges. The complete answer to this claim is that the only exchange of assets authorized by the plan and contract is specifically limited to (a) transactions between the bank and the mortgage loan company and (b) to the exchange of assets for certificates of participation.
As held by this court in the cases of City of Cleveland v. State Bank of Ohio, 16 Ohio St. 236, and Taylor v. Galloway, 1 Ohio, 232, the power to sell does not include the power to exchange. See, also, 63 A. L. R., 1003, annotation; 1 Restatement of Trusts, 509 m; 2 Scott on Trusts, 1035, Section 190.9.
While the facts are not on all fours with the instant case, the reasoning of Smith et al., Trustees, v. Fuller et al., Assignees, 86 Ohio St. 57, 99 N.E. 214, is helpful here.
The test here is not the measure of duties of directors to a corporation and its stockholders but the duties of a trustee to beneficiaries of a trust.
Section 8623-55, General Code, provides in part:
"All the capacity of a corporation shall be vested in and all its authority, except as otherwise provided in this act or in the articles in regard to action required to be taken, authorized or approved by shareholders, shall be exercised by a board of directors of not less than three persons, which shall manage and conduct the business of the corporation."
The code of regulations of The North American Mortgage Loan Company provides:
"The directors and officers of the company shall at all times conduct the affairs of the company in such manner as to carry out the letter as well as the spirit of the plan for reorganization of The North American Trust Company; and also as to any contracts entered into pursuant to the plan and as a part of the reorganization of The North American Trust Company."
The law applicable to the defendants is illustrated by the following quotations:
In 4 Pomeroy, Equity Jurisprudence (5 Ed.), 170, Section 1062, it is said:
"Under the general obligation of carrying the trust into execution, trustees and all fiduciary persons are bound, in the first place, to conform strictly to the directions of the trust. This is in fact the cornerstone upon which all other duties rest, the source from which all other duties take their origin. The trust itself, whatever it be, constitutes the charter of the trustee's powers and duties; from it he derives the rule of his conduct; it prescribes the extent and limits of his authority; it furnishes the measure of his obligations. * * * A trustee can use the property only for the purposes contemplated in the trust, and must conform to the provisions of the trust in their true spirit, intent, and meaning, and not merely in their letter. If, therefore, through nonfeasance he omits to carry the trust into execution, or through misfeasance he disobeys the directions of the trust, he renders himself in some manner liable to the beneficiary whose rights have been thus violated.
"Trustees, in carrying the trust into execution, are not confined to the very letter of the provisions. They have authority to adopt measures and to do acts which, though not specified in the instrument, are implied in its general directions and are reasonable and proper for making them effectual. This implied discretion in the choice of measures and acts is subject to the control of a court of equity, and must be exercised in a reasonable manner."
At page 179 of the same volume, Pomeroy says: "Wherever there is any bona fide doubt as to the true meaning and intent of provisions of the instrument creating the trust, or as to the particular course which he ought to pursue, the trustee is always entitled to maintain a suit in equity, at the expense of the trust estate, and obtain a judicial construction of the instrument, and directions as to his own conduct."
In addition to the remedy suggested by Pomeroy, we have in Ohio the Declaratory Judgments Act, Section 12102-1 et seq., General Code.
In 4 Pomeroy, Equity Jurisprudence (5 Ed.), 227, Section 1079, a breach of trust is defined as follows:
"It might be supposed that the term 'breach of trust' was confined to wilful and fraudulent acts which have a quasi-criminal character, even if they have not been made actual crimes by statute. The term has, however, a broader and more technical meaning. It is well settled that every violation by a trustee of a duty which equity lays upon him, whether wilful and fraudulent, or done through negligence, or arising through mere oversight or forgetfulness, is a breach of trust. * * *
"The term therefore includes every omission or commission which violates in any manner either of the three great obligations, already described: of carrying out the trust according to its terms, of care and diligence in protecting and investing the trust property, and of using perfect good faith. This broad conception of breach of trust, and the liabilities created thereby, are not confined to trustees regularly and legally appointed; they extend to all persons who are acting trustees, or who intermeddle with trust property."
In Duckett v. Mechanics' Bank, 86 Md. 400, 403, 38 A. 983, 39 L.R.A., 84, 63 Am. St. Rep., 513, it was said: "There can be no dispute that as a general principle all persons who knowingly participate or aid in committing a breach of trust are responsible for the money and may be compelled to replace the fund which they have been instrumental in diverting. * * * There is in such instances no primary or secondary liability as respects the parties guilty of, or participating in the breach of trust; because all are equally amenable."
In 2 Restatement of Trusts, 972, it is said:
"A third person who, although not a transferee of trust property, has notice that the trustee is committing a breach of trust and participates therein is liable to the beneficiary for any loss caused by the breach of trust."
In 3 Scott on Trusts, 1767, it is said:
"Any officer who knowingly causes the corporation to commit a breach of trust causing loss to a trust administered by the corporation is personally liable for the loss to the beneficiaries of the trust."
Under the terms of the plan and contract approved by the Court of Common Pleas in cause No. 412093, the mortgage loan company had the following options with respect to the use of the proceeds of sale of the trusteed assets:
(a) To reduce the indebtedness to Central United National Bank;
(b) To deposit same in the reorganized bank; either in the commercial department or as a savings account at 2 1/2 per cent per annum interest;
(c) To deposit same in another bank or financial institution;
(d) Subject to the payment of the Reconstruction Finance Corporation loan, to apply same in pro tanto amounts to the payment of certificates of participation by depositing the cash in an unrestricted account in the bank;
(e) To purchase certificates of participation as provided in the amended plan; and
(f) To distribute the proceeds of sale to certificate holders (subject to payment of any prior lien).
The doctrine of expressio unius est exclusio alterius applies.
We agree fully with the findings and decree of the Court of Appeals. Accordingly, the decree of the Court of Appeals is affirmed.
Decree affirmed.
WEYGANDT, C.J., WILLIAMS, MATTHIAS, HART and ZIMMERMAN, JJ., concur.