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November 29, 1939


The opinion of the court was delivered by: KIRKPATRICK

Sur Plaintiff's Motion for Judgment on the Pleadings.

KIRKPATRICK, District Judge.

The facts, as they appear from the pleadings, are as follows:

 The Reading National Bank, now in liquidation under the plaintiff as receiver, owned a mortgage in the amount of $75,000, securing an issue of 75 one thousand dollar bonds. The bank sold the bonds to the public and thereafter acted as trustee for the various bondholders in collecting interest from the mortgagor, distributing it and generally servicing the mortgage. The mortgagor defaulted in the payment of interest, but the Bank continued to pay the bondholders their interest, dipping into its own or other trust funds to do so, until it had paid out $4,500 in this way. The bondholders knew nothing of the default nor where the money which paid their interest had come from. With things in this shape, the bank failed and was taken over by the Comptroller of the Currency, and some time thereafter the plaintiff was appointed receiver. The mortgage was foreclosed and the mortgaged premises bought in by the Berks County Trust Company, in trust for the bondholders. During his administration of the Bank's affairs the receiver collected $2,150 additional interest from the mortgagor. Also, prior to foreclosure, as mortgagee in possession, he collected $410, being rental of the mortgaged property, but during that period taxes in excess of that amount accrued and have not been paid.

 The claim of the plaintiff is that, as receiver of the Bank, he is entitled to be reimbursed in the amount of $1,939.96, which represents the amount advanced by the Bank to the bondholders out of its own funds ($4,500) less the interest subsequently collected from the mortgagor ($2,150) and the rentals ($410.04). It is conceded that the receiver is entitled to retain the $2,150 interest collected from the mortgagor. The defendant's position is that the receiver is not entitled to retain the $410.04 rentals, because they do not represent net rent over and above taxes, and that he is not entitled to reimbursement for the balance of $2,350 ($4,500 minus $2,150), being the portion of the interest, which the Bank paid out of its own funds, not received from the mortgaged property.

 The question thus presented may be stated as follows: Where a trustee makes payment of income from its own funds, as if received from particular investments, without notice to or knowledge of the beneficiaries that the income from the investment is in default, may it recover such advancements from the beneficiaries (either the individual bondholders or a substituted trustee who has taken over the trust investment)?

 Under the law of Pennsylvania, it plainly may not. See Media-69th St. Trust Company's Trust Mortgage Pool Case, 329 Pa. 587, 197 A. 918, 115 A.L.R. 869; In re Klein's Estate, 326 Pa. 393, 190 A. 882; Klein et al. v. Adams 31 Berks County Law J. 241 (the last case being one which arose under this identical mortgage and trust.) The two cases first cited arose upon states of fact not distinguishable from that presented by the present case in any material particular. The decisions are controlling and I am bound by them.

 In Com. Trust Co. of Pittsburgh v. Atwood, 78 F.2d 92, the Circuit Court of Appeals for the Third Circuit apparently held otherwise. However, under Erie R.R. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487, if the question were again presented to the Circuit Court of Appeals, that Court, in view of the Pennsylvania decisions (rendered since the Atwood case), would be bound by the law of Pennsylvania. Judge Schaeffer, in his opinion in the Berks County case, thought that the Atwood case could be distinguished from the one before him (which is also the present fact situation) on the ground that the beneficiaries in the Atwood case were merely holders of participation certificates and had no direct right of action against the mortgagor in case of default. In other words, he thought that they did not lose so much in the way of substantial and practical rights by being kept in ignorance of the default by the trustee, and that therefore the same considerations of policy which require that, in a case of this kind, the trustee be held for payments out of his own pocket did not apply. I doubt that this is a difference upon which the cases, can be distinguished, because, even if that policy is the whole foundation of the rule, it is almost as important for participation certificate holders to know of a default in the underlying mortgage as it is for direct holders of mortgage bonds. At any rate, it is not necessary to attempt to draw a distinction. The Pennsylvania cases are controlling and the question stated above is answered in the negative.

 I agree with the contention of the defendant that the plaintiff is not entitled to reimbursement to the extent of $410.04 from the rent collected by him during the receivership. He would be entitled, no doubt, to any net rentals remaining after performance of the trust duties, which included the general servicing of the mortgage and the payment of taxes. With unpaid taxes outstanding in excess of the rentals in hand, he is not.

 It appears that all parties to this action have stipulated to the allowance of the sum of $325.66 as trustee's compensation, to which the Court now gives formal approval.

 I am also of the opinion that the receiver is properly entitled to an allowance out of the trust estate for counsel fees incurred by him in rendering his accounting and obtaining a proper discharge from the trust, which, of course, includes the present proceeding. It is suggested that the amount of this counsel fee can be agreed upon. In the event that the parties find themselves unable so to agree, the Court will proceed to fix the amount.

 An order for judgment may be prepared and submitted in accordance with the foregoing opinion.


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