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Barkhausen v. Continental

OPINION FILED JUNE 8, 1953

L.H. BARKHAUSEN AND RANDOLPH BOHRER, INDIVIDUALLY AND TRADING AS THE DOUBLEBY COMPANY, AND HERMAN BRASH, INDIVIDUALLY, APPELLEES,

v.

CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO, A NATIONAL BANKING ASSOCIATION, AS TRUSTEE UNDER A CERTAIN INDENTURE OF MORTGAGE, DATED MAY 1, 1935, APPELLANT. MYRTLE J. EDWARDS, MICHAEL K. IRWIN, ARTHUR F. DUFENHORST, IRVING GOODMAN, FLORA D. SEEFELD, GERTRUDE R. SHERMAN AND ESTHER H. WILETS, BONDHOLDERS ADVERSELY AFFECTED BY ORDER AND JUDGMENT, APPELLANTS.



Appeal by defendants from the Circuit Court of Cook county; the Hon. HARRY M. FISHER, Judge, presiding. Heard in the first division of this court for the first district at the February term, 1953. Reversed and judgment here. Opinion filed June 8, 1953. Rehearing allowed September 15, 1953. New opinion filed October 26, 1953. Released for publication December 1, 1953.

MR. JUSTICE NIEMEYER DELIVERED THE OPINION OF THE COURT.

NIEMEYER, PRESIDING JUSTICE.

Rehearing allowed September 15, 1953

Seven owners of first mortgage leasehold bonds in the aggregate principal sum of $242,500 — approximately 10 per cent of the presently issued and outstanding bonds secured by a certain indenture of mortgage, hereinafter referred to as Mortgage Indenture dated May 1, 1935, between 32 West Randolph Corporation (hereinafter referred to as mortgagor) and Continental Illinois National Bank and Trust Company of Chicago, as trustee (hereinafter referred to as Continental, or defendant), appeal from a summary judgment in a declaratory action by L.H. Barkhausen and Randolph Bohrer, individually and as co-partners doing business as The Doubleby Co., and Herman Brash, individually (hereinafter called plaintiffs), against Continental as the sole defendant, that neither Barkhausen nor Bohrer, individually nor as co-partners, nor Brash, individually, either jointly or severally assumed liability, became liable or is liable for the payment of the principal or interest on the bonds, or any of them, secured by the mortgage indenture, or for the performance of any of the covenants or obligations of the mortgage indenture. They also appeal from an order denying the application of two of their number to be made parties defendant and for leave to file an answer and counterclaim. The defendant, Continental, appeals separately from the judgment.

In the complaint filed May 13, 1952 plaintiffs alleged the execution of the mortgage indenture dated May 1, 1935; that there was then issued and outstanding bonds in excess of the principal sum of $2,300,000, on which interest had been paid in full to and including April 30, 1951; that on January 29, 1946 all the right, title and interest of the mortgagor in the mortgaged property, and all right, title and interest of mortgagor under a certain lease to Oriental Theatre Corporation dated January 1, 1936 and all the equipment and personal property in and about the Oriental Theatre was conveyed to Herman Brash as trustee under a trust agreement of the same date, hereinafter referred to as the Brash trust; that by this agreement it was recited that Brash as trustee was about to take title to the above mentioned property; that the beneficiaries of the trust were Barkhausen and Bohrer, co-partners doing business as The Doubleby Co.; that the interest of the beneficiaries should consist solely of a power of direction to deal with the title to the trust property, to manage and control that property and the right to receive the proceeds therefrom; that the trustee agreed to deal with the trust property only when authorized to do so in writing by the beneficiaries.

It is further alleged that on the same day, January 29, 1946, Barkhausen and Bohrer, doing business as aforesaid, assigned their beneficial interest in the Brash trust to Continental as security for the mortgage indebtedness, and that by written instrument, hereinafter referred to as the assumption agreement, Brash, not in his individual capacity but in his capacity as trustee under the Brash trust, assumed all of the covenants of the mortgagor in the mortgage indenture; that the assumption agreement was executed pursuant to written authority, direction, consent and approval of Barkhausen and Bohrer as beneficiaries of the Brash trust.

It is further alleged that defaults occurred under the covenants of the mortgage indenture on May 1, 1952, in that the instalment of interest on the bonds and the first instalment of the real estate taxes on the mortgaged property for the year 1951, due and payable on May 1, 1952, were not paid on that date and have not been paid up to the date of the filing of the complaint; that it is claimed there has been a failure to deposit the fee rentals under the ground leases; that Continental has notified plaintiffs that if the defaults continue Continental will be obliged to bring foreclosure proceedings joining the plaintiffs as parties defendant thereto, or, in the alternative, seek to recover the entire mortgage indebtedness from the plaintiffs and each of them, individually; that plaintiffs are not liable for the payment of the principal or interest on the bonds secured by the mortgage indenture or for the performance of any of the other covenants of the mortgage indebtedness; that the assumption of the covenants of the mortgage under the mortgage indenture was made by Brash as trustee and not individually; that plaintiffs believe that in the event of foreclosure proceedings, a sale of the mortgaged property will result in a substantial deficiency.

No issue is joined as to any material fact. By its answer Continental denies that the provisions of the mortgage indenture authorize it to represent the bondholders in plaintiffs' action, and alleges that the bondholders are necessary and essential parties to the proceeding and are not properly represented by Continental as trustee; that the bondholders are the real persons in interest and may have other and separate defenses unkown to the trustee and should be made parties defendant.

June 6, 1952 plaintiffs moved for a summary judgment, supporting their motion by the affidavit of the plaintiff Bohrer stating that on December 5, 1945 he and Barkhausen, doing business as The Doubleby Co., submitted a written offer to purchase the equity of mortgagor in the mortgaged property, and the Oriental Theatre lease hereinbefore mentioned, for $140,305.50, wherein it was stated that upon the consummation of the purchase or shortly thereafter, Barkhausen and Bohrer, the purchasers, will cause the property to be conveyed and transferred to the plaintiff Brash, as trustee, under a trust to be known as the Brash trust, for the benefit of the purchasers, who as beneficiaries thereunder shall pledge their beneficial rights with the Continental, as trustee, as security for the performance of the covenants of the mortgage indenture; that in January 1946 the purchase price was increased to $165,000, the offer was accepted and the transaction consummated by the conveyances mentioned in the complaint.

Affiant further states that on April 15, 1946 an involuntary petition for reorganization was filed against mortgagor by representatives of the bondholders whom Continental represents in the present action, in the United States District Court for the Northern District of Illinois, Eastern Division; that affiant and his coplaintiffs were joined as defendants in the action; that the petitioning bondholders alleged that the transaction with Barkhausen and Bohrer violated the Illinois Statute of Frauds and Bulk Sales Act because Barkhausen and affiant had not personally assumed the covenants and obligations of the mortgage indenture and because the assumption by Brash, as trustee and not individually, added nothing to the bondholders' security; that after extended hearings the special master to whom the matter was referred issued his report in September 1948, finding that neither Barkhausen nor affiant (Bohrer), individually or as co-partners doing business as The Doubleby Co., or Brash, individually, either jointly or severally assumed liability, became liable or is liable for the payment of the principal or the interest on the leasehold bonds, or any of them, secured by the mortgage indenture of May 1, 1935; that this report was approved by the court on March 31, 1949.

June 16, 1952 defendant filed its motion, supported by affidavits, to strike plaintiffs' motion for summary judgment and the supporting affidavit. June 17, 1952 defendant's motion to strike was overruled, but the motion and affidavits in support thereof were permitted to stand as a reply to the affidavit in support of the motion for judgment. On the same day the court found that the defendant, as trustee, fairly and adequately represents the bondholders; that opportunity to intervene and appear in the proceeding had been tendered in open court to counsel for the bondholders' committee and counsel for individual bondholders present, and no such intervention had been made. Defendant's request that the bondholders be made parties was denied. The motion for summary judgment was taken under advisement and briefs ordered to be filed on or before June 23, 1952. On June 25, 1952 two of the bondholders appealing filed their petition stating that they owned bonds in the aggregate principal sum of $151,000; that plaintiffs Barkhausen and Bohrer are personally liable for the payment of the unpaid bonds and all indebtedness secured by the mortgage indenture; that any judgment or determination in the pending suit that plaintiffs were not personally liable would necessarily affect the rights of petitioners and the remaining holders of bonds and interest coupons described in the trust deed; that Continental does not properly represent the interests of petitioners or remaining bondholders; that it is not by the terms of the trust deed obliged to defend this action unless indemnified to its satisfaction; that it has not been so indemnified, and that defendant asserts in its answer that it is not properly the representative of the bondholders. These bondholders asked to be made parties defendant and be given leave to file their answer and a counterclaim. Their request was denied. June 27, 1952 the court announced its decision, holding that plaintiffs had not assumed and were not liable for the payment of the bonds secured by the mortgage indenture. Judgment was entered July 1, 1952.

The powers and duties of Continental as trustee are clearly defined. The mortgage indenture provides: All rights of action under the mortgage indenture may be enforced by the trustee; upon the happening of certain "events of default" therein defined, the trustee may, and upon written request of holders of not less than 25 per cent of the principal amount of bonds then outstanding, shall accelerate the principal of the bonds; in the event of default the trustee may, without any action on the part of any bondholder, institute such suit or suits in equity or at law to enforce and protect any of its rights and the rights of the bondholders; no bondholder shall have any right to institute any proceeding for the foreclosure of the mortgage indenture or have any other remedy thereunder unless, after notice and request of the holders of not less than 25 per cent of the principal amount of bonds outstanding to take action or institute suit or proceedings and the offering to the trustee of security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred therein or thereby, the trustee shall have refused or neglected to act on such notice, request or indemnity.

Neither in defendant's answer nor in the petition of the bondholders to be made parties defendant are any facts alleged to warrant the conclusions of the pleaders that Continental did not and could not adequately represent the bondholders. There is no showing of any defense to plaintiffs' suit not urged by Continental. Neither is there any charge that Continental refused or neglected to take any action requested by the bondholders. The provision in the mortgage indenture for security and indemnity to the trustee is solely for the benefit of Continental and has been waived. Without requesting or getting such security or indemnity Continental has defended against plaintiffs' suit and discharged its obligations to the bondholders with fidelity and ability. Immediately upon the institution of suit Continental notified certain officers of a bondholders' committee, including some of the bondholders appealing, of the filing of the suit, sought the cooperation of the bondholders and at all times kept them advised of the proceedings herein. Moreover, some of the bondholders appealing, or their attorneys, were in court at all hearings had herein. As early as June 12th — the first hearing on plaintiffs' motion for summary judgment, and thereafter, the court, with plaintiffs' counsel concurring, stated that any bondholder wishing to intervene would be permitted to do so. No bondholder has intervened. No conflict of interest between Continental and the bondholders is shown. Plaintiffs' suit put in issue their liability for the payment of the mortgage indebtedness. Continental, like the bondholders, takes the position that plaintiffs are liable.

The exceptions to the rule that bondholders and other trust beneficiaries are necessary parties, is stated in White v. Macqueen, 360 Ill. ...


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