June 30, 1941
READING TRUST CO., ET AL.
CLARK, Circuit Judge.
A national bank became a trustee under a mortgage and sold the bonds to the public. Seven years after this transaction (1925-1932) the mortgagor defaulted in two successive installments of interest. The trustee bank followed the Macawber theory of the day and paid the overdue interest itself. Although with no assurance that such theory was shared by the bondholders, they were nevertheless left with rosy dreams of profitable property. The rude awakening followed upon the banking holiday and the insolvency of this bank.
The receiver now claims the repayment of these advances from the bondholders, their substituted trustee and the mortgagor's estate, and the declaration of a lien on the mortgaged property. The learned trial judge felt himself bound by certain decisions of the Pennsylvania courts*fn1 Because of that feeling, he naturally did not stress the reasoning that may have controlled them.In spite of our satisfaction with his result, we believe that the subject may well receive some further mention.
The position of a trustee for bondholders has always been of the "nor good red herring"*fn2 variety. He partakes of the characteristics of both depositary and ordinary trustee*fn3 His label inspires confidence and his indenture attempts excuse*fn4 So his standard of conduct becomes loose*fn5 and requires legislation to give it rigidity*fn6 In the case at bar, we think that the trustee-depositary may be held either for a breach of trust or by way of estoppel by misrepresentation. The breach of trust arises, of course, from an assumption of conflicting interests*fn7 If the trustee expects to be subrogated to the bondholders' rights, its attempting to share the security with them is adverse. If the advances are to be considered loans, the resulting banker-customer's connection between the trustee and the mortgagor is antagonistic to the bondholders. Furthermore, the trustee would always be inclined to place more concern for the marketability of its bonds and its own repute as a judge thereof than the welfare of the bondholders*fn8 If, on the other hand, the terms of the bond indenture here*fn9 or other considerations are felt to preclude a breach of trust, the estoppel seems plain. The erring trustee has not informed its bondholders of their danger and its concealment has brought about their injury.
We may assume that the national bank of the case at bar may invoke a legislative limitation on its power*fn10 That limitation would seem inherent in the proscription against the guarantee of real estate mortgages*fn11 The special capacity theory has been criticized*fn12 and perhaps modified*fn13 At any rate, here also we think estoppel may be used against the plea of ultra vires. The bondholders can no longer make restitution*fn14 It is true that the Supreme Court has favored the exemption of receivers from defenses and claims against their banks*fn15 The reasons of policy therefor are reversed here. The cestuis and the investing public may be set off against the bank's depositors and creditors.
The judgment of the District Court is affirmed.