As I interpret the order of the court from which this appeal was taken, no attempt is made thereby to substitute the receivers of the Middlesex Banking Company for the original trustees, either as custodians of the pledged collateral before collection, or as custodians of the proceeds thereof after collection, or in the distribution of the proceeds under the terms of the trust contracts. It does not authorize the receivers to take the pledged collateral out of the hands of the trustees, except as may be necessary for the collection of the principal when due; and the receivers are required to return the net proceeds of such collections to the trustees for the account of the bondholders entitled thereto. In the *Page 662 meantime the trust companies are protected by the receivers' bonds. In other words, the organization maintained and controlled by the receivers is, by order of the court, constituted a bonded collection agency for the trustees, both as to interest and principal, upon a finding by the trial court which conclusively establishes the fact that the trustees must otherwise create some similar agency for that purpose at unnecessary expense either to the bondholders, to the unsecured creditors, or to both.
A proper understanding of the real scope of this order differentiates it very plainly from Cooke v. Warner,56 Conn. 234, 14 A. 798, where the receivers of an insolvent life insurance company attempted to take the possession, control and distribution of the statutory deposit required of life insurance companies out of the hands of the State treasurer, who was, by the statute, made the trustee of that fund for the benefit of policy-holders. I fully agree with the rule laid down in the cases relied upon by the trustees, that pledged collateral cannot be taken by receivers out of the hands of the pledgee, and that if the pledge be upon trust to see to the application of the proceeds of the collateral after default, the trustee is entitled to administer the trust as against the receivers of the debtor. In my opinion the order in question does not conflict with that rule or with the general principle of the inviolability of contracts which lies behind it.
The finding in this case shows that the ministerial details of the collection of interest and principal cannot, in any event, be attended to by the trustees themselves, and that they must either utilize for that purpose the already existing agency, or create one capable of operating in other States. This order, therefore, leaves the trustees in the custody of the collateral except as it must necessarily be transmitted to third persons in *Page 663 other jurisdictions for the purpose of collecting the principal; it takes out of their hands the collection of the interest which must, in any case, be collected in part through agents; and it provides proper security for the return of the net proceeds of all collections to the trustees, leaving them to execute the trust so far as it is possible for them to do so at all. No doubt the trustees could, under the terms of the trust, employ the receivers and the organization which they maintain and control to do the very things which the order requires the receivers to do; and the principal question before us is whether a court of equity, conducting a general administration in receivership proceedings, has power to compel the trustees to do so, when the fact is that such a course will result in a large saving for the benefit of either the bondholders, the unsecured creditors, or both.
It seems clear that the order, as I interpret it, does not deprive the bondholders of any contract right, unless it can be said that the order attempts to substitute the discretion and judgment of the receivers for the discretion and the judgment of the trustees in the matter of collection of the collateral. I do not think that under the circumstances of this case the order is open to objection on that ground. An examination of the contracts shows that they leave little room for the exercise of discretionary powers on the part of the trustees. The trustees had nothing to say as to the validity or value of the collateral deposited with them; and they were bound to accept substituted collateral of like contract value whenever tendered by the Banking Company. After default they have no right to sell the collateral (with the exception of the collateral deposited with the Middletown Trust Company under a separate contract or contracts to secure reserve value of so-called income bonds) at less than its face value *Page 664 with accrued interest, without the consent of the Banking Company, to whose rights in this regard the receivers have succeeded. Upon failure to make sale of the collateral, the trust companies are required to collect the collateral in such manner as they deem best for the interest of the holders of the bonds belonging to the series secured thereby. This provision seems, at first sight, to confer considerable discretionary power; but in view of the prohibition against a sale for less than face value and accrued interest without the consent of the Banking Company or its successors in interest, the right to "collect" should not be construed as including a right to compromise any disputed or doubtful collateral by accepting less than its face value in full payment, without a like consent. The trustees, acting independently, are in effect limited to a collection by foreclosure in case of a breach of condition; or to a collection of interest and principal according to the terms of the debtor's obligation. As to the proceeds of collection, they are trustees, not only for the bondholders, but, in respect of any surplus, for the Banking Company and for the receivers as its successors in interest. The obligation to collect is mandatory, and I think it requires the trustees to collect according to the terms of the debtor's obligation, and does not authorize them, without the consent of the receivers, to waive a default, or, as already stated, to compromise any collateral for less than its face value. In other words, the independent discretionary powers of the trustees under these contracts, when analyzed, are restricted to the manner of collection; and the only possible interest which the bondholders can have in the matter is that the trustees should select the most effective and least expensive method of collection. In these receivership proceedings it is the right and duty of the court to protect the interest, or the possible interest, *Page 665 of unsecured creditors, without impairing the contract rights of secured creditors; and it would be a strange thing if the Superior Court, having jurisdiction over the subject because engaged in a general administration of this estate, could not control the discretion of these trustees as to the manner of collecting the collateral, so far as to prevent them from unnecessarily wasting the trust fund in their hands.
It is suggested that the court, having control of its receivers, should require them to allow the trustees to use, for the purpose of collecting the collateral, the organization which the receivers maintain and control. Undoubtedly the court might have so ordered in the exercise of its discretion. But it has not done so; perhaps because of the possible difficulties which might result from putting three different managements in charge of the organization. Moreover, the trustees have not asked the court to permit them to make use of the receivership, and if they had done so, they must, upon familiar principles, have taken the benefit of the receivership upon such terms as the court, in the exercise of a legal discretion, might see fit to impose. The trustees are standing upon their contract right, and they must face the fact that they cannot be permitted to exercise their contract rights in the manner for which they are contending, without unnecessary impairment of the trust fund, and without actual or possible injury to their cestuis que trustent. That being so, I think, as already stated, that the trial court was justified in controlling the exercise of the trustees' discretion in the limited way in which this order does, for the purpose and with the effect of more effectually preserving the rights of the bondholders themselves, as well as of the unsecured creditors.
It is urged that the unsecured creditors cannot possibly have any interest in the collateral because it *Page 666 does not exceed in value the face of the bonds secured thereby; but the noninterest-bearing collateral was deposited at eighty-five per cent only of its face value, and the income from the interest-bearing collateral is presumably larger than the interest on the bonds issued against it; so that it cannot be said that as a matter of law there is no possible surplus for the unsecured creditors.
Objection is made to other matters contained in the order, some of which are incidental to the principal issue already decided. For example, the order forbidding the trustees to record their assignments of mortgages is a necessary one, when it is once determined that the collateral shall be collected through the receivers; and the same is true of the denial of the trust companies' prayer that the receivers be required to turn over to the trustees all abstracts of title, papers and other memoranda relating to the collateral.
It is said that the order provides for withdrawals and substitutions of collateral in the judgment of the receivers; and that is true, though in a very limited sense, because it is restricted to a substitution of a better security, on the same land, for a worse, and is apparently intended to apply only to those cases where collection in full cannot be made. Nevertheless, the appointment of receivers in general administration of the estate of the Banking Company has all the effect of a default, as defined in the contracts, in fixing the right of the holders of each series of bonds to have the proceeds of the specific collateral, then held by the trustee to protect that series, applied in payment thereof; and I think this paragraph of the order should be modified by inserting a phrase equivalent to that found in paragraph six of the order, so that if any such substitution is necessary, it shall be upon the consent *Page 667 of the interested trust company, or upon order of the court or a judge thereof.
The ninth paragraph of the order, which is also objected to, was added to enable the receivers to meet unforeseen contingencies; and as limited by its own terms I think it does not purport to confer upon the receivers any general discretionary powers, or any discretionary powers at all, which are larger in character and effect than those above referred to.
With the modifications of the order as suggested, the trustees will be fully protected by the orders of the court.
I think there is no error.