Appeal from the District Court of the United States for the Eastern District of Pennsylvania; Guy K. Bard, Judge.
Before BIGGS, MARIS, and WOODBURY, Circuit Judges.
From the stipulation of facts entered into by counsel in this case it appears that on October 1, 1930, one Pearlman and his wife executed a trust agreement in which they agreed to transfer certain of their assets to the appellant Hardt, as trustee, for prompt liquidation and equal and ratable distribution among their creditors. Reed, the appellee, is the duly appointed receiver of a successor to one of Pearlman's creditors, a national bank, which had participated in this trust agreement.
In the trust instrument Hardt was given broad general powers of administration over the trust estate. He was given "as full power and authority concerning the same as he would have if he were the absolute owner thereof", and "Without limiting the generality of the foregoing" he was specifically given the power "To borrow money*fn1 as Trustee and to pledge any item or items constituting directly or indirectly part of the Trust Estate, for any purpose connected with the management of the trust which he may deem proper." He was also given power "To transfer to the name of Trustee or of his nominee any item or items constituting directly or indirectly part of Trust Estate."
One of the assets assigned and transferred to Hardt according to the terms of the trust agreement was a policy of insurance on Pearlman's life written in the sum of $100,000 by the Sun Life Assurance Company of Canada, and in the trust agreement it was specifically provided that Pearlman's failure to pay any premium on this policy as it fell due should constitute an "event of default". With respect to events of default the trust instrument provided: "In addition to any and all other rights and privileges herein given to Trustee, Trustee shall have the right at any time in case of an event of default as herein defined, to expose the Trust Estate, or such part thereof as then remains undistributed, at public or private sale, with or without notice to Pearlman or Mrs. Pearlman, and sell the same for the best price obtainable thereat, and Trustee shall have the right representing such of Creditors as wish to join therein, to purchase the same or any part thereof without any equity of redemption on the part of Pearlman and/or Mrs. Pearlman."
It appears that at some time subsequent to the assignment and transfer of the life insurance policy to Hardt as the trust agreement required, Pearlman stopped paying the premiums due thereon, and, in order to reinstate the policy without a medical examination of the insured, it became necessary under the terms of the policy that a premium thereon be paid by February 4, 1934. Faced with this situation it was agreed by all of the creditors who were parties to the trust agreement that the policy should be reinstated and that the necessary premiums should be paid by the trustee from funds contributed therefor by each of the creditor parties in the proportion that each of their claims bore to the total of all claims. Accordingly the trustee paid the premium and each of the creditors, including the appellee's predecessor, contributed its proportionate share thereof.
In order to reinstate the policy again without a further physical examination of the insured, it became necessary to pay another premium on or before May 4, 1936. In anticipation of this premium date Hardt, the trustee, called a meeting at his office for April 14, 1936, of all the creditors who had participated in the trust agreement for the purpose of discussing a policy with regard to Pearlman's life insurance. Reed's predecessor was duly notified by letter of this meeting and of its purpose but neither he nor any representative of his attended. A majority of the creditors, however, did attend and at it, according to the stipulation of facts: "It was agreed by all of those present that the said policy should be reinstated by the payment of the necessary premium of $9,799.19 on May 4, 1936, and that the cash therefor should be secured as before by contributions from each of the creditor parties in the propertion that each of their claims bore to the total of all claims. It was further agreed that if any one of the creditor parties should not contribute its proportionate part of the premium, the other parties would pay the share of the defaulting party and thereafter the defaulting party's interest in the policy would consist only of its portion of the then existing cash surrender value of the policy, and that this would not be paid to the defaulting party until the death of the insured."
The trustee promptly notified the receiver by mail of the above action taken by the creditors and asked the receiver "whether or not you desire, on behalf of the Commercial National Bank, to contribute its pro rata share of the cash needed to reinstate the policy of the Sun Life Assurance Company of Canada." The trustees paid the premium which fell due on May 4, 1936, and on July 28, following, the receiver informed the trustee by letter that the Comptroller of the Currency "instructs us we are to make no advance of Trust Funds for payment of these premiums." Consequently the bank's pro rata share of the premium was paid by the other creditors in accordance with the agreement reached by them at the meeting of April 14, 1936.
On July 15, 1938, the trustee wrote the then receiver for the bank that another meeting of Pearlman's creditors would be held at his office on July 20, 1938, "for the purpose of discussing plans regarding the insurance on the life of Martin M. Pearlman." The receiver replied to this letter stating that there had been "no change in the position of the bank as to its unwillingness to advance any further funds on this account", but he nevertheless attended the meeting and at it offered to sell the bank's interest in the policy to each of the creditors there present, or to the trustee. According to the stipulation of facts, he then claimed that the bank's interest in the policy was "its proportionate share of the cash surrender value thereof prior to the payment of the said premium of May 4, 1936." No one accepted his offer.
The trustee paid the premium which fell due immediately after this meeting (August 3, 1938) by obtaining a loan on the policy from the Sun Life Assurance Company, and thereafter annual premiums were paid by the same means on March 6, 1939, March 1, 1940, and February 28, 1941. On March 11, 1941, Pearlman died and on May 14, following, the Sun Life Assurance Company of Canada paid to the trustee in settlement of the claim under the policy the face amount thereof less the total of the loans outstanding against it.
The question at issue is whether, on the above facts, the receiver is limited to the bank's pro rata share of the cash surrender value of the policy as of the time just prior to the payment of the 1936 premium, or whether, on behalf of the bank, he is entitled to his full pro rata share of the proceeds of the policy, less only the amount of his share of the premium which was paid by the other creditors, with interest. The court below answered this question in favor of the receiver and we agree.
In the court below, according to that court's memorandum opinion, the appellant's principal contention was that the agreement of all the creditors in 1934 to advance the arrearage of premiums then due, and the payment by them of their contributions according to their agreement, constituted a sale of the policy to the trustee as the representative of all the creditors, such sale being in accordance with the provisions of the trust agreement respecting sales of trust assets after an "event of default" by the debtor. The district court cut the ground from under this contention by saying that there was nothing in the facts to support the conclusion that there had been a sale of the policy and we regard that court's conclusion as sound.
The transaction of 1934 was a simple one. Pearlman having defaulted in his obligation to pay the premiums on his policy of life insurance as they fell due, the trustee was faced with the question of whether to pay the premiums himself and keep the policy in force or to fail to pay the premiums and let the policy lapse. Instead of choosing between these two alternatives himself he consulted with the creditors and they chose the alternative of keeping the policy in force and, to do so, advanced, or, to use the terminology of the stipulation of facts, "contributed", the necessary funds to the trustee. There is no hint or suggestion of a sale in this transaction. Since it appears to have been comtemplated from the outset that all contributions would eventually be repaid, the transaction was simply a loan by the creditors to the trustee. As such the benefit thereby resulting - the continuance of the policy in ...