Questions in the instant case were considered by us inMorley v. University of Detroit, 263 Mich. 126 (90 A.L.R. 464), on an appeal from an order denying plaintiff a summary judgment on the pleadings. Upon our affirmance of the order of the trial judge, the case was tried on its merits by the lower court and judgment rendered discharging defendant from liability on certain bonds and coupons in controversy. Plaintiff has again appealed. On account of the importance of the questions involved we have given further consideration to the case. We abide by our former decision.
Plaintiff owns coupons that matured March 1, 1931, and bonds and coupons which became due September 1, 1931. Defendant paid the Fidelity Trust *Page 218 Company, which was trustee under the mortgage that secured the bonds, sufficient amounts to pay all bonds and coupons which matured on both March 1, and September 1, 1931. Payments were made by voucher checks, payable to the Fidelity Trust Company and showing that their purpose was to pay the maturing interest and bonds. Although payments were not made five days prior to the respective due dates as provided in the mortgage or in gold, as also specified therein as well as in the bonds and coupons, they were made on or prior to the due dates of the respective bonds and coupons and accepted by the trustee. No objection was made by the trustee to the fact that the payments were not made in gold specie. In as much as the Fidelity Trust Company was the agent for the bondholders, as hereinafter stated, and accepted the payments as made, no valid objections can be made to either the time or form of payment.
The Fidelity Trust Company closed its doors on or about October 17, 1931, on the order of the State banking commissioner and receivers were appointed. The plaintiff failed to present his coupons and bonds that had become past due and for which payment had been made by defendant to the trustee. He seeks to hold defendant liable on the claim that the bonds were negotiable instruments, that the trustee was merely a depository and defendant's agent, and that defendant was not released from liability through payment to the trustee.
The mortgage securing such bonds provided that mortgagors will "promptly and punctually pay the principal and interest of every bond now or hereafter issued hereunder and secured hereby, at the dates and in the manner specified in such bond or bonds and/or in the coupons, according to the intent and meaning thereof, and will deposit the necessary *Page 219 funds for such purpose with the trustee at least five days prior to the respective due dates."
In case of the redemption of bonds issued and secured by the mortgage deed of trust, the mortgage provided:
"The mortgagor shall deposit with the trustee, to the credit of such bond, designating it by the number thereof, a sum equal to the redemption price, with interest accrued to the redemption date, and in that event, such deposit shall be deemed a full payment of such bond and the coupons belonging thereto as between the mortgagor and the holder thereof. No holder of any bond or coupon covered by a deposit so made shall be entitled to interest on such deposit with the trustee. Upon deposit being made as aforesaid, the bonds and coupons covered thereby shall be excluded from participation in the lien and security of this indenture, and the holder or holders of such bonds and coupons shall look for the payment of such bonds or coupons only to the sums so deposited in the hands of the trustee, and the mortgagor shall in no event be liable upon such bonds or coupons after deposit has been made as herein provided. The sum or sums so deposited shall be held by the trustee to the credit of said bonds and shall be paid by the trustee to the holder or holders upon surrender of such bonds with all outstanding coupons belonging thereto."
It is true that more apt words were used in provisions of the indenture for the redemption of bonds by the mortgagor prior to the date of maturity, upon any interest payment date. It is there expressly stated that the deposit of moneys with the trustee for the redemption of such bonds shall constitute payment and release the mortgagor from further liability to that extent. The failure, however, to use equally effective language as to payment of bonds and coupons, as they mature, does not vitiate the *Page 220 effect of the provision of the indenture obligating the mortgagor to deposit funds with the trustee at least five days prior to the respective due dates for the purpose of paying such maturing bonds and coupons. The mortgagor bound itself in the indenture to punctually pay the principal and interest of every bond according to the terms of the bonds and coupons, and as stated in the indenture, it agreed to "deposit the necessary funds for such purpose with the trustee at least five days prior to the respective due dates." Such deposit was made for the very purpose of payment, and constituted payment. The bonds were negotiable in accordance with the rule laid down inPaepcke v. Paine, 253 Mich. 636 (75 A.L.R. 1205), andMerchants National Bank v. Detroit Trust Co., 258 Mich. 526 (85 A.L.R. 350). The trust indenture unquestionably constituted the Fidelity Trust Company the bondholders' agent, charging it with the duty to obtain payment of the bonds and coupons prior to their due date for the better security of the bondholders. The creation of such agency would not make the bonds nonnegotiable. A negotiable instrument may be discharged when payment is made to the agent of the holder thereof in good faith. Northwestern Mutual Life Ins. Co. v. Blohm, 212 Iowa, 89 (234 N.W. 268); First National Bank of Seattle v.Hessell, 133 Wn. 643 (234 P. 662); Marling v. Nommensen,127 Wis. 363 (106 N.W. 844, 5 L.R.A. [N. S.] 412, 115 Am. St. Rep. 1017, 7 Ann. Cas. 364).
It is claimed that in accepting the deposits in payment of the maturing bonds and coupons, the trustee was the agent of the mortgagor. The indenture does not so provide. The record is silent as to how the trustee was appointed in the instant case. Neither does it show that when a borrower seeks a *Page 221 loan of large sums of money through the issuance of serial bonds or debentures which he offers to secure by mortgage or other indenture, it is customary for the purchasers or underwriters of the entire issue to select the trustee for the benefit of the bondholders, so that their interests may be properly protected; that subsequently the bonds or debentures are sold to the public who rely upon the fact that a proper trustee is looking after their interests. The trustee acts for the benefit of the bondholders, although it may be given special authority and power under certain conditions to act for the mortgagor and then only for the very purpose of protecting the interests of the bondholders. The insurance policies on all buildings erected upon the property included in the indenture are payable to the trustee for the protection of the bondholders. The trustee gives notice of default, and in order to ascertain whether or not there has been a default, it does not inquire of each holder of the "bearer" bonds whether he has received payment, but simply determines whether the moneys have been deposited with it as trustee in payment of the maturing bonds and coupons. Had the money not been forthcoming on the date when the bonds and coupons became due, it would have been the duty of the trustee to make every endeavor to obtain payment to itself as agent of the bondholders. The trustee is charged with the duty to act in case of default, if directed by 25 per cent. of the bondholders, and under certain circumstances, even without such direction; it further has the right in the event of default to recover judgment against the mortgagor. The right of action for the mortgagor's breach of the terms of the indenture is vested exclusively in the trustee, subject to certain provisions, and under no circumstances may any *Page 222 bondholder institute any action or other proceedings on or under the indenture except in case of the trustee's refusal to perform its duty. The trustee may agree to a modification of the bond or release part of the securities with the consent of 50 per cent. of the bondholders.
The indenture shows beyond any question that the duties of the trustee are for the benefit of the bondholders and adverse to the mortgagor. Reference to the security in the indenture would disclose the duty of the mortgagor to make payments to the trustee in advance of the due dates of the bonds and coupons. This provision is for the security of the bondholders for it enables the trustee who is guarding their interests to have the required moneys on hand for the payment of the bonds and coupons as they become due and to take prompt action in case such moneys are not paid. The indenture was issued for the purpose of securing a series of bonds, there being 1,600 issued, aggregating $1,500,000 under series A, all payable to bearer, unless registered, and others under series B. The mortgagor could not know who held the bonds and coupons. It could not, under the terms of the indenture, refuse to pay the trustee until the bonds and coupons were presented. It was bound to make the payments prior to the due date, and after such payments were made, it could not withdraw them. Although the question involved in the instant case was not presented inArmada State Bank v. Union Guardian Trust Co., 262 Mich. 487, we held in that case that the holders of matured bonds were entitled to the funds deposited with the trustee for the express purpose of paying such bonds. See, also, Gillen v.Wakefield State Bank, 246 Mich. 158. The moneys so deposited were impressed with a trust of which the bondholders *Page 223 were the beneficiaries. The record does not show what proceedings, if any, were taken to recover them.
In view of the above considerations, can it then be said that the mortgagor, in depositing the funds with the trustee for payment in accordance with the terms of the indenture, was doing so to its own agent for its own benefit, and then still remained liable to each and every bondholder who neglected to present his bonds or coupons at maturity or within a reasonable time thereafter? The bond itself, while a negotiable instrument, states that it is one of a duly authorized issue of the series and designation indicated on its face, all issued and to be issued from time to time in accordance with the mortgage indenture to which it makes reference for the amount of the bonds which may be outstanding, a description of the property mortgaged, the nature and extent of the security created, and the rights of the holders of the bonds with respect to such security. It further refers to the mortgage to show how the bond may be declared due and payable prior to its maturity in case of certain events of default specified in the mortgage. It further refers to the University of Detroit as the mortgagor and states how, at the option of the mortgagor, the bonds may be redeemed on any interest date prior to maturity. The bond states that it is payable at the office of the Fidelity Trust Company, that the Fidelity Trust Company is trustee of the issue, and further provides that neither the bonds nor coupons are valid until authenticated by the signature of the trustee on the certificate attached to the bond. As stated in our former opinion in Morley v. Universityof Detroit, 263 Mich. 126 (90 A.L.R. 464), it is generally known by investors in this class of securities that *Page 224 it is the duty of the trustee to collect payments and make distribution among the bondholders. The bonds are negotiable instruments. The trustee was the agent of the bondholders to collect payments for them.
We find that the adjudicated cases are not in accord and that each one of them presents a factual situation somewhat different from that in the case at bar. See 90 A.L.R. 464. Notwithstanding the cases cited in opposition to our view, we are impressed with the reasoning in Manchester v. Sullivan,112 Conn. 223 (152 A. 134); Masonic Widows' Orphans' Home Infirmary v. Title Insurance Trust Co., 248 Ky. 787 (59 S.W. [2d] 987); Fidelity Columbia Trust Co. v. Schmidt, 245 Ky. 432 (53 S.W. [2d] 713); McCormick v. Johnson,134 Kan. 153 (4 Pac. [2d] 421); Hall v. Goldsworthy, 136 Kan. 247 (14 Pac. [2d] 659); The Inn At South Palm Beach, Inc., v.Jacobs, 115 Fla. 486 (155 So. 835), in all of which it was held that the trustee was the agent of the bondholders, or that the mortgagor was released from further obligation upon paying the trustee. In Hall v. Goldsworthy, supra, the court, in holding that the mortgagor was released, said (p. 252):
"It is contended that the court erred in its conclusion that the bondholders must bear the loss, if any, with respect to the payment of $167.31 to the Guarantee Title Trust Company, which had become insolvent before distribution of the fund had been made to the bondholders. In other words, it is contended that the payment of the money to the trust company did not constitute a payment on the indebtedness, but was merely a deposit. The solution to this question is found in the construction of the instrument. The note is made payable at the office of the trust company. The names of the bondholders are not disclosed. The company is the trustee. *Page 225 The trustee has the power, on payment of the indebtedness, to release and discharge the mortgage lien, and, in event of default, to maintain an action to foreclose the mortgage. It is more than a depository. It is in fact the plaintiff in this case. The bondholders are not parties. They are relying upon the terms of the instrument vesting the trustee with the power to enforce the obligation. It hardly seems consistent to permit the trustee to maintain an action to enforce collection and at the same time charge the mortgagor with the failure of the trustee to distribute the fund to the bondholders. In the case of McCormick v. Johnson, 134 Kan. 153 (4 Pac. [2d] 421), this court held that the payment of the fund to the trustee relieved the mortgagor of the responsibility of the distribution of the fund. While the language of the trust deed in the case cited is much stronger with reference to payment than the language contained in the trust deed under consideration, yet there is a similarity in the two instruments and they attempt to reach the same end. It appears that the plain intent of the parties was to vest the trustee with the power to receive payment and to make distribution thereof. Under such circumstances we are compelled to hold that the payment of the money to the trustee relieved the mortgagor from further responsibility, and that the bondholders must look to the trustee for the distribution of the fund."
The judgment of the lower court is affirmed, with costs to defendant.
NELSON SHARPE, C.J., and NORTH, FEAD, WIEST, BUSHNELL, and EDWARD M. SHARPE, JJ., concurred with BUTZEL, J.