Thayer v. National Real Estate Trust Co.

97 A. 604, 10 Del. Ch. 242, 1914 Del. Ch. LEXIS 13

• Court: Court of Chancery of Delaware
• Decided: February 27, 1914
• Status: Published

Opinion

The Chancellor.

The court is called upon in this case to decide who are entitled to participate in the distribution of the assets of this insolvent corporation. Practically all the moneys obtained by the receiver were derived from the “thrift department” and are, therefore, moneys paid into that fund by holders of thrift certificates, or as they are more correctly called the instalment first mortgage certificates. Both-by the charter of the company and the certificates issued by the company, the company was obliged to set aside and keep separate and apart from other moneys of the company, the sums paid by holders of these certificates, and could not us.e such money for any other purpose than the fulfillment of the contracts of the company in the “thrift department,” subject, of course, to the right of the company expressly stated in the charter, to withdraw from the fund amounts forfeited for the defaults of certificate holders. This obligation of the company to keep this fund intact impresses the fund with a trust in favor of the holders of thrift certificates, and none others are entitled to participate in a distribution thereof. It matters not that the payments are called “advances,” or even loans to the company: They were payments made weekly by numerous persons into a common fund to be invested by the company for the benefit of those who contributed to it. General creditors have no cause of complaint, because they had full notice of all the conditions and methods of operation as shown by the charter, whereby the company undertook to receive from numerous persons small sums and invest the aggregate amount for the benefit of those who so paid. That this money belongs only to the holders of thrift certificates is conceded by all who have appeared by counsel in the cause. The real difficulty arises as to who of the holders of thrift certificates are entitled to the fund.

Under the third clause of the contract contained in the certificates, moneys paid by a certificate holder might have been forfeited in cases of defaults for five weeks. This was a privilege of the company and required some affirmative action on its part, for a forfeiture did not result automatically from default in making payments. Whether the company had declared a forfeiture, or not, the certificate holder had a right to resume payments within three months from the date of the last payment, and if he so resumed he was automatically reinstated as a certificate holder in good standing. As he had a right to resume, a tender of money would be as effective as an actual payment. This interpretation is drawn from the agreement to waive a recision, and treat the requirement fixing time of payment as having been waived, in case of a resumption of payment within three months. The policy and practice of the company accorded with this interpretation, for holders of certificates were encouraged and invited to resume payments even after the lapse of more than three months, and, indeed, at any time however long the period of suspension.

It is difficult to reconcile paragraphs two and three, and the above interpretation of paragraph three is adopted independent of paragraph two. It is adopted as being the fairest and most liberal to the defaulters and without injustice to any non-defaulters. If a certificate holder had been reinstated by resumption of payments and subsequently for another period of three or more months there had been a suspension of payment by the certificate holder, the company might then have terminated the agreement and the holder have been entirely shut out. The company could waive the right to rescind for non-payments. It could also rescind for defaults, and did, in fact, frequently exercise this right by declaring numerous certificates to have been lapsed, meaning thereby forfeited. It kept two files, one containing the live certificates and the other the lapsed certificates. Whenever it rightly exercised the privilege of terminating a contract on account of default, its action was final; and whenever it did not do so, the certificate was in force notwithstanding a suspension of payments and however long the period of suspension. Inaction of the company kept alive certificates however long the defaults.

To determine what certificates are in force and, therefore, entitled to participate in a division of the “thrift fund,” the action of the company must be considered, and the two files ■kept by the company and the books and records of the company are the best, evidences of the attitude of the company towards the individual certificate holders. This was the view of the Master.' It presents a clear and logical test. This view is not unjust or injurious to those certificate holders who have not defaulted at all, or who have resumed payments after defaults. The contrary is urged by the solicitor who represented those not in default. It is said by him that the fund for distribution is insufficient to pay in full all those not in default, and so those who have not kept their agreement to pay instalments regularly should not participate in the distribution and so thereby decrease the amount available for payment of the claims of those who have kept their contracts with the company. Another reason for this view is the practice of the company to withdraw from the “ thrift fund” moneys paid into it by defaulters, this being done when the certificates were declared lapsed. But these reasons are not convincing. The company had a right to withdraw from the “thrift fund” moneys paid in by defaulters and use such moneys for the general purposes of the company. This was part of the agreement between the company and the holders of its certificates, and non-defaulters had no right to object to such withdrawals, or to the uses made by the company of moneys so withdrawn. If a defaulter be reinstated by resumption of payment after the moneys had been withdrawn by the company from the fund, then it was the duty of the company to restore to the fund the amount so withdrawn.

As the result of a special inquiry made of the Master upon a re-reference to him, it appears from his supplemental report, that the sums of money paid into the “thrift department,” and which sums were subsequently at various times withdrawn therefrom by the company by reason of the failure of holders of certificates to continue payments thereon, were all restored to the “thrift fund” in cases where defaulting certificate holders resumed payment. In other words, when a defaulter resumed payment the company, as in duty bound, restored to the “thrift fund” all moneys which it had previously rightly withdrawn from that fund.

This supplemental report also makes it clear that none of the moneys which were paid into the “thrift fund” were removed therefrom illegally, and that the reason why the “ thrift fund” is not now sufficient to pay in full all the claims of holders of- certificates in good standing is unimportant in deciding to whom the money in hand for division belongs.

Non-defaulters have no right to complain that the company reinstated any defaulter, provided it refunded to the “thrift fund” all moneys withdrawn from it by reason of a default, and, as appears above, it did so refund. If there had been no withdrawal of money paid in by a defaulter, then a reinstatement could do no injury to non-defaulters, because in case of a recision for default the moneys paid in by a defaulter would have belonged to the company and not to those holders of certificates who had not defaulted. It is true, every reinstatement increased the number of participants in the present distribution; but the right to rescind belonged to the company and not to certificate holders; and the moneys of defaulters belonged to the company, and not to non-defaulters. So in either aspect there is no injustice done by reinstatements.

So, too, every one whose certificate has been rescinded by the company, or by it declared to have “lapsed,” is excluded from having a share of the “thrift fund,” provided he made default for more than three months prior to the appointment of the receiver. The company had a right to rescind after five weeks’ default, but must reinstate a defaulter upon resumption within three months. Therefore, three months of grace should be allowed within which a resumption could be had. The receiver was appointed May 16, 1912.

The conclusion of the matter, then, is this: Those holders of certificates whose certificates were treated by the company as alive are allowed to participate in the distribution, whether in default or not, and however long the default in making payments may have continued; and those holders of certificates whose certificates were treated as rescinded, or lapsed, will not so participate, provided they be in default for more than three months before the appointment of the receiver, i. e., prior to February 12, 1912.. The Master has reported schedules of the certificates classified in this way, one containing the names of those whose certificates were treated by the company as live and the other those whose certificates were treated as lapsed.

It remains to consider the rights and responsibilities of those claimants who have borrowed moneys from the company, based on their payments to the company as holders of thrift certificates. About one hundred holders of such certificates borrowed money from the “thrift department,” the aggregate thereof being about twenty-five hundred dollars. Concerning them the following questions arise: (1) To what time should interest be charged against them? Clearly to the date of the receivership and not later. (2) How should their shares be calculated? After collecting all the assets of the company and paying the costs of administration, the net amount for distribution will be then ascertained. Then add to this amount every sum borrowed by certificate holders who have proved their claims, and whose certificates have not been lapsed by the company, with interest thereon. This latter sum is the one for division. Then, having ascertained the aggregate amount of those entitled to participate in the fund, the percentage of the amount applicable to each certificate will be calculated. From the amount due each claimant, based on this percentage, deduct the amount due from him on account of the loan made to him and interest. In brief; add to the net fund for distribution all the moneys due from all those who have borrowed from the “thrift fund,” principal and interest to the date of the receivership, and having ascertained the percentage due to the claimants deduct from each claimant the amount of principal and interest due from him.

From an examination of the schedule of lapsed certificates it appears that several certificates were irregularly rescinded. For instance, the certificate of Edward Campbell had been declared “lapsed,” or rescinded, on May 15, 1912, though he had made a payment within five weeks of the date of such recision. His claim should not be disallowed if objection be made thereto based on lapsing or attempted recision. This same principle applies to the claims filed by William H. Dutton and Pearl M. Ford, respectively.

Schedule two of the Master’s report includes claims of persons, holders of certificates, who have paid instalments on their certificates in advance of May 13, 1912, which date was the Monday next before the appointment of the receiver. They are, of course, all entitled to participate. The Master properly raised the question whether the amounts so paid in advance, which to that extent constitute overpayment, should be repaid in full to those persons named in the schedule, treating the overpayments as being entitled to priority. This question was not discussed by counsel, and there is nothing in the certificates, or on the record that throws any light upon the subject; but it seems manifestly just and fair that those who have overpaid and thereby made a greater contribution to the “thrift fund” than they need have done—and would not have done had they anticipated the collapse of the company— should be reimbursed in full. These overpayments, therefore, will be allowed and an order will be made for their payment before distribution of the fund is made.

Schedule five in the Master’s original report includes the names of certificate holders who have procured collateral loans from the company and have continued to pay on their certificates, and in fact have paid instalment thereon in advance of May 13, 1912. For the reasons above stated concerning those in schedule two, the amounts overpaid should be credited to the certificate holders so overpaying, and inasmuch as they have all borrowed money from the company, the amounts of the overpayments will be credited as a payment on account of the loans. It has already been explained hereinabove how the certificate holders who have obtained collateral loans are to be treated in the distribution, and the same principle, of course, applies to those in this schedule, after their overpayments have been credited on the amounts borrowed by them.

The claim of the administrator' óf John Eves is based on a certain promise in writing, made by the company, called a “full paid 5 per cent, first mortgage participating certificate,” dated February 4,1909. By it the company agreed to pay John Eves six hundred and thirty dollars on February 4, 1914, with interest.at five per cent, per annum, and the claim is for six hundred and thirty dollars with interest from February 4, 1912. The administrator also claims a preference in the distribution. It is not clear upon what matter the claim for preference is based, 'either from anything in the instrument itself, or from any fact stated or argument advanced. Without specifically referring to the terms of the contract, it does appear by a reasonably fair inference that the holder of the certificate could look to the “thrift fund” for payment of the amount due him. The references to the “thrift fund,” and the source and object of it, can mean only this, and no other explanation of those references is necessary. It is clear, however, that there is nothing in the contract which gives any priority of payment to the holder of this certificate over those persons who have contributed to the “thrift fund” and are entitled to participate in the distribution thereof, and no reason is urged, or appears, for such a claim of preference or priority. This claim will receive its proportionate share of the assets distributed. Interest will be allowed on the claim down to the same date as is allowed to other claimants against the “thrift fund.”

On the general subject of allowing interest on the claims filed, it is sufficient to say that as there are no priorities and as the fund for distribution is insufficient to pay the principal of the claims in full, it is immaterial whether interest be allowed and added to the claims, or not. The only result of so adding to the amount of the claims would be to reduce the percentage applicable to the claims without increasing the net result to those among whom the distribution is made.

The foregoing conclusions are based on the assumption that the moneys for distribution came from the “thrift fund.” If, on the other hand the receiver has collected moneys from any other sources, the amount so received should be treated as part of the “thrift fund,” because of the obligation of the company under its contracts with the certificate holders to maintain the “thrift fund” intact. Of course, even the “thrift fund ” must be subject to deduction for costs of the receivership.

Let an order be entered accordingly.