The trial court regarded the important point in this controversy to be whether the receivers or the trustees should collect this collateral. It decided in favor of the receivers upon what it considered the equities of the situation. It found the receivers were not antagonistic in interest to the debenture holders, since their interest in the collateral lay in liquidating it so as to create a surplus beyond the sum required to pay the debenture-holders. Its main reliance was, as is that of the receivers upon this branch of the case, in the fact that the receivers have under their control the organization perfected by the Banking Company through which the collections may be made more efficiently and economically than by the trustees, who at present have neither the facilities, nor the acquaintance, nor the experience, required in the conduct of such a business.
If it were a fact that only the receivers could make use of this organization in collecting this collateral it would affect strongly the equity of the situation. But *Page 654 such is not the fact. The receivers, by direction of the court, may turn over to the trustees all of this organization, and if this were done the principal basis of the order falls. If this course will benefit the collection of the collateral, the court not only can, but no doubt will, make an appropriate order; indeed, it would then be the duty of the receivers to request such order and, upon proper terms, to facilitate its execution. Then the trustees will be in as good position to collect this collateral as these receivers, so far as this organization can aid; and, aside from this, there is no suggestion in the record from which it may be inferred the receivers can collect the collateral better than the trustees. The reasoning which finds in the equity of the case authority for the court's order, assumes that the trust is existent and the possession of the trustees merely suspended for the benefit of those in interest, and when this benefit is secured the full possession and control will pass again to the trustees.
There is a far more serious question involved than which will prove the better collecting agent, receivers, or trustees. For the receivers claim the court had "plenary authority to make such order as to the control, custody, and administration generally of this trust, not in contravention of vested rights, as the best interests of cestui que trustent may, in its judgment, require."
The receivers, as a general rule, can do what the insolvent company could have done; they take its assets burdened with all valid liens and equities against it. Merwin v. Austin, 58 Conn. 22, 34, 18 A. 1029;In re Wilcox Howe Co., 70 Conn. 220, 231,39 A. 163. The trust companies held this collateral under the trust agreements as trustees for the benefit of the debenture-holders. The mortgages deposited with them constituted a trust fund. The Banking Company *Page 655 had, until the debenture-holders were paid, no right over this collateral except that of substitution of collateral of equal value. The receivers had no higher right than the Banking Company had. They could not interfere with, nor be given power to interfere with, the vested rights of the debenture-holders in this collateral, nor could they take or be given possession of this collateral until the debentures were fully satisfied.
When a debtor has deposited collateral with a trustee as security for the payment of his debt, the trustee cannot be compelled to surrender to receivers of the insolvent debtor the collateral until the debt is paid. And after default, if the trust be one to apply the proceeds of the collateral for the benefit of the secured creditor, the trustee is entitled to administer the trust as against the receivers of the insolvent. The authorities are in practical agreement in this doctrine and in its application. In Cooke v. Warner, 56 Conn. 234,14 A. 798, an insurance company had voluntarily deposited with the State treasurer securities in trust for its policy-holders. The company became insolvent, and receivers were appointed. In a suit brought by the receivers claiming these securities, we held that this fund was a trust fund which could not be taken by the receivers from the trustee. Matter of Home ProvidentSafety Fund Asso., 129 N.Y. 288, 29 N.E. 323; Matterof Binghamton G. E. Co., 143 N.Y. 261, 38 N.E. 297;Ruggles v. Chapman, 59 N.Y. 163, 165; Risk v. KansasTrust Banking Co., 58 F. 45; Fidelity Ins.T. S.D. Co. v. Roanoke Iron Co., 81 F. 439;Real Estate Trust Co. v. New Zealand L. T. Co., 93 F. 701; Brady v. Furlow, 22 Ga. 613. This rule rests upon the inviolability of contracts.
The appellees contend that the trust companies, as the holders of the mere legal title, hold the collateral *Page 656 subject to the order of the court as to what is for the best interests of (1) the debenture-holders, and (2) the general creditors. This conflicts with the rule universally laid down, that pledged collateral cannot be taken out of the hands of the pledgee by the court, and if the pledge be upon trust to collect the collateral after default and apply the proceeds to the secured debt, the trustee is entitled to administer the trust as against the receiver of the debtor.
The appellees further contend that the order appealed from neither interferes with the vested rights of the trustees in this fund, nor with their possession, since it merely provides the means of liquidating it, and then places it in the hands of the trustees for the benefit of the debenture-holders. Let us see, first, some of the things the trustees agreed to do under the trust agreements. They agreed to act as trustees of this fund, and to hold and administer the collateral in accordance with the terms of their agreements. They agreed to certify as to each debenture upon it. They agreed, upon default, to collect this collateral and apply the proceeds, less their expenses and charge for services. They hold the assignments of the mortgages under agreement not to record them until default is made. Upon default the trustees have the right to perfect their title and thus protect the debenture-holder and carry out the trust. What did the order of the court do? It gave the receivers the right to compel the trustees to deliver to them, the receivers, the possession, for collection, of every mortgage and assignment held by the trustees. This would strip the trustees of the evidences of title to the trust fund. It forbade the trustees to perfect their title by recording the assignments as directed by the trust agreements. It took from the trustees the right of collecting the collateral. It gave the receivers power to deduct from the proceeds of the *Page 657 collateral the expenses of collection and a reasonable sum for their own services, and then ordered the balance returned to the trustees. It required the trustees to accept other collateral substituted in place of that held by them, as and when the receivers might elect. It practically gave the receivers power to collect at their discretion, by giving them power to compromise claims by consent of the court. During the period of collection the trustees are deprived of the possession vested in them under their trust agreements. When the trustees are prevented from getting the abstracts of title and the necessary papers to facilitate collection, forbidden to record the assignments and to collect the collateral, plainly these are interferences with the trustees in the performance of their trust. When the receivers compromise claims and pay their own expenses and services out of the collected collateral, the collateral is depleted in ways contrary to the trust.
Whether or not this course will benefit these funds is of no pertinency. The sole question is, does it breach the contract between Banking Company and trust companies? If a court may in this case take property held in trust out of the hands of the trustees, administer it through a receiver, and turn the net proceeds back to the trustees, it may do this in every instance where property is placed in the hands of a trustee to secure a debt. And it would seem to follow that every agreement of lien or pledge may be similarly breached with impunity. The order, in our judgment, impairs the contract created by the trusts.
It is also questionable whether, so far as the absent and unwarned debenture-holders are concerned, this order constituted "due process."
In one part of their brief the appellees say the authority of the trustees under the trust agreement ceased upon the naming of the receivers, and their *Page 658 authority can be only such as the court may now give them. This method of abolishing a trust is, we think, so new as never to have received judicial approval. A court of equity has control of trusts and trustees; it may, for cause, displace a trustee appointed by contract or otherwise, and name another in his stead. It may not order a receiver to act as and for a trustee. When the trustee is carrying out the trust it may not limit the exercise by the trustee of his powers under his trust agreement; it may restrain an abuse of his power, but it cannot control the exercise of the legal discretion vested in him under the trust agreement.
The receivers further contend that, although the trust agreements provide for a default in the payment of principal and interest and a sale thereafter, the default in contemplation was one to occur while the Banking Company was a going concern and not one occurring after insolvency. They find support for this claim in the terms of the agreements: "but no sale thereof shall be made at a less rate than the face value with accrued interest of said collateral, except upon the written consent of said Banking Company, its successors and assigns"; and in the provision that the trustee "shall not in any case be liable for any act or omission, except for bad faith, in the execution of its trust." From these provisions the receivers insist that the right to sell or collect this collateral never arose, since there was no default prior to the receivership, and no right to sell had then matured, and the receivership suspended the contract between the banking and trust companies.
If it be true that under the trust agreements this collateral was placed in the hands of the trustees without furnishing them the means of protecting the debenture-holders by collection of the collateral upon the insolvency of the debtors, perhaps a court of equity *Page 659 might give the trustees power to collect. But it could only act upon application to the court to secure its aid in administering the trust. No such application was before the court. Taking the collateral from the trustees and turning it over to the receivers to collect is a very different procedure from that of invoking a court of equity to assist the trustee to administer his trust. The right of the trustee to collect after insolvency was not, upon this theory, suspended; it never arose.
But we think the agreements are not susceptible of this construction. It would be singular if a business of such magnitude and age should make the trust agreements, upon the faith of which the Banking Company's bonds were sold, incapable of affording protection to their holders in the common contingency of insolvency. The nature of the business and the salability of these bonds required such a provision. So long as the Banking Company met its financial obligations, there was no reason why it should not retain the record title to the collateral and collect the income. When it was in default, either as a going or an insolvent concern, it was imperative, in the interest of the debenture-holders, that the trustees should have the power to collect both the income and principal of the collateral. Then the necessity arose for having the right to record the assignments and the right to compel the Banking Company to deliver the abstracts of title and other papers relating to the collateral. The agreements give this power and do not limit the default to that of a going concern; with these broad provisions there was no occasion to specify whether the default referred to was that of a going or an insolvent concern.
But the appellees regard a part only of these agreements. They do provide that sale may not be made at less than the face value with accrued interest, except *Page 660 upon the written consent of the Banking Company or its assigns. They further provide that in case the trust company "shall fail to make such sale on the aforesaid terms, it shall proceed to collect such collateral in such manner as it shall deem best for the best interests of the holder of the bonds of said series." These provisions may be construed together. So read, we think they provide that the trustee shall, in the first instance, secure the consent of the Banking Company or its assigns, the receivers, and if this is not secured, then the trustee is not confined to a procedure by foreclosure, but may collect the collateral "in such manner as it shall deem best for the best interests of the holder of the bonds." Under this broad power the trustee has the right to compromise claims according to its best judgment as such trustee, using due care and good faith.
The provision for a default upon failure to pay interest or principal for a specified period is not exclusive; a default of necessity occurs immediately upon the Banking Company's becoming insolvent and the appointment of receivers. The theory of the appellees seems to be that the receivers are administering the trust, not acting outside of it. If the trustees may not compromise claims, we do not see how another official, acting under and through the same agreement of trust, may. Sixty per cent of their collateral was deposited under the Columbia Trust Company agreements. The Middletown Trust Company is the successor of the Columbia Trust Company by appointment of the court which named these receivers. Why should a court of equity take the collateral from the trustee of its own choosing, who is without fault, and hand it over to receivers of its choosing, for the purpose of having it collected?
Two cases are the main reliance of the receivers. The first, Miles v. New South B. L. Asso., 95 F. 919, does hold that receivers, under circumstances *Page 661 such as are present in this case, may, by order of court, take possession of collateral held by a trustee and collect the collateral and hold the same as a separate fund subject to the trust under which the trustee held. We think this case is against authority, and certainly against settled principle. The second, Girard TrustCo. v. McKinley-Lanning L. T. Co., 135 F. 180, held the trust agreement gave the trustee no power to administer the assets in case of general insolvency; basing this construction chiefly upon the fact that the agreement of trust made no provision for payment to the trustee for its services in administering the trust after insolvency. In this case there is provision for paying the trustee.
There is error, the judgment and order are reversed, and the Superior Court is directed to render judgment in favor of said trust companies in accordance with this opinion.
In this opinion THAYER, BEACH and BENNETT, Js., concurred.
"A failure to pay any installment of interest due by the terms of any bond, or any portion of the principal thereof, when due, continuing for ninety (90) days after written notice served by mail postpaid or otherwise, on said Banking Company by the shall constitute a default on the part of said Banking Company within the terms and meaning of this agreement, and the whole of the series to which said bond belongs shall thereupon become due, and said may sell at public or private sale, the whole or any part of the collateral deposited with it for the series to which such bond belongs; but no sale thereof shall be made at a less rate than the face value with accrued interest of said collateral except upon the written consent of said Banking Company, its successors or assigns; and in case said shall fail to make such sale on the aforesaid terms, it shall proceed to collect such collateral in such manner as it shall deem best for the interest of the holders of the bonds of said series; and the proceeds of such sale or collection, after meeting the reasonable expenses thereof, including reasonable charges of the said for its services in such sale or collection, shall be applied in payment of the unpaid interest and principal of said series of bonds, ratably and without preference or priority in favor of any bond of said series as against any other bond of said series, the surplus, if any, to be delivered to the said Banking Company, its successors or assigns.
"The notice to the Banking Company in this section provided to be given, shall be given by said within ten (10) days after written request by the lawful holder of any bond secured by this agreement, or coupon thereof, which has been presented for payment and remains unpaid."
"Whenever said Banking Company shall make default in the payment of the principal or interest of any bond, it shall, at the request of said , forthwith deliver to the said all abstracts of title and all other papers in its possession or under its control relating to the collateral deposited with said for the series of bonds to which such defaulted bond shall belong; but until such default only the notes, bonds, assignments, mortgages and deeds of trust hereby guaranteed by said Banking Company to be first liens on real estate shall be deposited with said as collateral for any series of bonds."
The provision in reference to default in the Middletown Trust Company agreement was as follows: —
"If the Banking Company shall fail to pay any matured bond, contract, or coupon, secured hereunder, within ten days after proper presentation and demand for payment, according to the terms thereof, or shall fail to perform any of the obligations imposed upon it by the terms of any bond, contract, or coupon, so issued, or by the terms of this Agreement, such failure on the part of the Banking Company shall constitute a default.
"Upon any such default of payment by the Banking Company under the terms of this Agreement, the Trustee may at its option, call upon the Banking Company for all Abstracts of Title, and other papers, relating to the collateral held by it under this Agreement, and may sell all, or any part thereof, or make such other disposition thereof for the benefit of the holders of those outstanding bonds or contracts under which the default occurred, as in its judgment will yield the best results to the holders of such bonds or contracts; but no such sale or other disposition of collateral shall be made except after ten days' notice, in writing, to the Banking Company."
The agreements also provided: —
"Any collateral deposited with said by said Banking Company under this agreement may at any time be withdrawn by said Banking Company on its depositing with said other collateral in substitution for and equal in amount to the collateral withdrawn; and all the provisions of this agreement shall apply as well to such substituted collateral as to collateral originally deposited."
"Whenever said Banking Company shall surrender to said any bond issued under this agreement, said shall deliver to said Banking Company such collateral as said Banking Company may select from the collateral deposited for the security of the series to which said bond belongs equal in amount, as counted at the time of deposit, to such surrendered bond, and thereupon said bond shall be canceled by said and returned to said Banking Company."
"The Banking Company shall at all reasonable times in business hours have the right to inspect the collateral deposited by it under this agreement with said , and at all reasonable times in business hours the Official Examiner of any State or Territory of the United States shall, upon the written permission of said Banking Company, have the right to inspect the collateral deposited with and held by said under this agreement."