DIETZEL et al. v. ANGER et al.*
Plaintiffs constitute a bondholders' committee, holding as such all of the outstanding bonds of a certain issue of Southern California Realty Corporation, issued under and secured by a trust indenture to a corporate trustee. The bonds made reference to the trust indenture and provided that each bondholder, by accepting the bond, assented to the terms and conditions of the trust indenture. Among those provisions was the following: “All rights of action on or because of the bonds issued hereunder or the interest coupons thereto appertaining and all rights of action under this indenture, are hereby expressly declared to be vested exclusively in the Trustee, except only as hereinafter provided; and such rights may be enforced by the Trustee without the possession of any of the bonds issued hereunder or the interest coupons thereto appertaining. Any suit or proceeding instituted by the Trustee shall be brought in its name as Trustee, and any recovery or judgment shall be for the pro rata benefit of the holders of the bonds issued hereunder and the interest coupons thereto appertaining.” It was further provided that no bond or coupon holder should have the right to institute any suit “upon or in respect of this indenture or for the execution of any trust or power hereof or for the appointment of a receiver or for any other remedy under or upon this indenture” unless notice of default had been given to the trustee and it had refused to sue after the holders of at least 25 per cent. in amount of the bonds had requested suit and had indemnified the trustee. The indenture read in part: “Provided, however, that nothing contained herein shall defeat the right of an individual bondholder to pursue his legal or equitable remedy where his right of action arises out of collusion, fraud, gross negligence or wilful misconduct.” Another provision of the indenture read as follows: “The Trustee is hereby constituted and appointed the agent and attorney of the holders of the bonds and coupons issued and to be issued hereunder for the purpose of making any affidavits or of taking any other steps necessary or proper, under any present or future law, in order to preserve the full lien and priority of this indenture, or to effect a sale of the trust property or to preserve or enforce the liability of the Company and/or any or all of its stockholders in respect of this indenture and/or of the bonds issued hereunder,” etc.
The issuer of the bonds defaulted in certain payments, because of which, and under an acceleration provision of the indenture, the entire unpaid amount of the bonds was declared immediately due. Plaintiffs brought this action against the stockholders of Southern California Realty Corporation, without making any demand upon the trustee to bring the same, contending that the right of action was vested in them and not in the trustee. The trial court decided this issue against the defendants, holding that plaintiffs had the right to sue. This is the only question on the appeal.
It is contended by appellants that the action on stockholders' liability came into being “because of the bonds issued under the trust indenture”; that the present action is one “under or upon” or in respect of said indenture; and that therefore the right of action was in the trustee and not in the bondholders. The language used is susceptible of this construction, for considered alone, and without reference to the relationships created by the trust indenture read as a whole, it would seem to include actions to enforce stockholders' liability. Such liability is not “on the bonds,” but it exists “because of the bonds” under a literal reading of the phrase, for had the bonds not been issued there would have been no stockholders' liability. Whittier v. Visscher, 189 Cal. 450, 209 P. 23. But for reasons which we shall state, we are of the opinion that the right to pursue the present remedy against the stockholders is one that was vested in the bondholders and not in the trustee even though the language used to that purpose indicates an intention that the trustee should have the sole right to sue for the recovery of the debt. For the trustee to be vested with that right, something more was required than a mere recital in the trust indenture that the trustee was so invested. The law does not recognize such a thing as a mere naked right of action. The right to sue goes with some enforceable legal or equitable demand and cannot exist by itself. Nor can the right to sue be reposed by contract in one who has no legal or equitable interest in the right to be enforced. Here the entire title to the debt evidenced by the bonds is in the bondholders. While the title to the security was in the trustee, the bonds were payable to bearer or to the registered owner, and neither before nor after default were the sums evidenced by the bonds payable to the trustee.
Section 367 of the Code of Civil Procedure provides that every action must be prosecuted in the name of the real party in interest. As to the debt, the bondholders were the real parties in interest before they transferred the bonds to plaintiffs and plaintiffs are the real parties in interest as holders of the legal title. Therefore, the right of action is in plaintiffs unless by virtue of the provisions of the trust indenture that right has been vested in the trustee. That it has not been so vested we think is made clear by a reading of the indenture and a consideration of the authorities.
In Mackay v. Randolph Macon Coal Co. (C.C.A.) 178 F. 881, 884, the court was considering the right of a trustee under a bond indenture to file a claim with a referee in bankruptcy on behalf of bondholders. In denying the trustee this right, the court said: “In the present case the trustee under the mortgage is neither the holder nor the payee of the bonds. It clearly could not have maintained an action at law for their collection. We are aware that the fifteenth article of the mortgage authorizes the trustee to collect and recover the principal and interest of the bonds for the owners and holders thereof. This may have reference to their collection by the enforcement of the security. If that is not its meaning, we are of the opinion that it could not confer upon the trustee the right to maintain an independent action upon the bonds. Who may maintain a suit is a matter of law, not subject to be controlled by the private conventions of parties. Hybart v. Parker, 4 C.B.(N.S.) 209; Evans v. Hooper, 1 Q.B.Div. 45; Gray v. Pearson, L.R. 5 C.P. 568; Knorr v. Bates, 14 Misc. 501, 35 N.Y.S. 1060. Parties to a contract cannot confer upon a third party the naked right to sue thereon. Suits, whether under chancery or code practice, must be brought in the name of the real party in interest. The only exceptions to that rule here important are these: (1) The trustee of an express trust may maintain an action in his own name on behalf of the beneficiary. To come within this exception, however, the trustee must be the holder of the property or obligation out of which the action arises. Here, as already pointed out, the trustee under the mortgage is not the holder of the bonds. (2) A person with whom or in whose name a contract is made for the benefit of another may maintain an action upon the contract. The trustee under the mortgage comes within this exception as to the security, but not as to the bonds, for they are not payable to the trustee.”
Upon the principal point decided, namely, that parties cannot, by contract, confer upon one of their number or a third person the naked right to sue alone, the holding in the Mackay Case was approved in Fitkin v. Century Oil Co. (C.C.A.) 16 F.(2d) 22, and in In re A. J. Ellis, Inc. (D.C.) 242 F. 156. It is true that in these cases it was also held that the authority of the trustee was confined to the mortgage security by the provisions of the trust indentures, although this was not true in the Mackay Case. That fact, however, does not detract from the soundness of the views expressed as to the fallacy of the trustees' claim that they could sue without possessing any semblance of title to the debt. It was also held in the cases of In re United States Leatheroid & Rubber Co. (D.C.) 285 F. 884, and United States Trust Co. v. Gordon (C.C.A.) 216 F. 929, that bondholders whose bonds were secured by a trust mortgage were creditors, notwithstanding the right of trust mortgagees under the mortgage, and that the mere fact that the trustee held legal title to the security did not necessarily make it in equity a creditor with respect to the debt itself. A trustee was allowed to file a claim in bankruptcy on behalf of bondholders in the case of In re International Match Corporation (D.C.) 3 F.Supp. 445, 447, where the covenant of the indenture was that the trustor would, in the event of default, pay to the trustee for the benefit of the bondholders the whole amount of the unpaid secured debt. The opinion in that case does not, as appellants contend, overrule the previous cases, but it does distinguish them. As to the right of a trustee holding the legal or equitable title, it was said: “It is entirely clear that parties, by their agreement, may not decide who shall be the proper party to bring proceedings at law, in equity, or in bankruptcy, to enforce a contractual obligation; the common or statutory law, itself, determines this procedural question.” The trustee was allowed to file a claim as express trustee for the debenture holders and it was assumed in the opinion that the bondholders might also file claims, but the trustee's right was said to follow its status as a payee of the debt in case of default, which the court held gave it a clear legal claim as a creditor. The facts of the instant case do not bring it within the holding in the International Match Corporation Case, because the trustee here was not the payee either before or after default in the bonds and therefore could not stand in the position of a creditor.
In Allan v. Moline Plow Co. (C.C.A.) 14 F.(2d) 912, it was held that bondholders could not maintain an action to set aside allegedly fraudulent transfers of property by the debtor, because the right to sue had been vested by the terms of the indenture in the trustee; in Carson v. Long–Bell Lumber Corporation (C.C.A.) 73 F.(2d) 397, the right of bondholders to sue for a receiver, to prevent waste and for other equitable relief, was denied upon the same ground. The indenture in each case made the sums due under the bonds payable to the trustee. We would not question the applicability of these cases upon which appellants rely if the indenture we are considering had named the trustee as payee of the notes, but as it did not, section 367 of the Code of Civil Procedure is controlling.
Unless is was a creditor or the assignee of a creditor, the trustee could not sue on stockholders' liability. Herman v. Hecht, 116 Cal. 553, 48 P. 611. It is said by respondents that the trustee is the assignee of the creditors and that it could sue for that reason. The most that can be claimed for this position is that it was attempted to vest in the trustee a right of action to sue on the debt in the absence of any agreement that it held even a legal title to the debt. If it can claim only as assignee of this naked right, it has, under the authorities we have cited, no power to sue.
By the provisions of the indenture which we have quoted, the trustee was appointed agent and attorney of the bondholders with the power, among others, “to preserve or enforce the liability of the company and/or any or all of its stockholders in respect of this indenture and/or the bonds issued hereunder,” etc. This provision did not invest the trustee with any interest in the bonds or the debt represented thereby, nor did it deprive the bondholders of the right to act as principals, notwithstanding the agency of the trustee. If it be conceded that authority was originally conferred upon the trustee to bring an action to enforce the liability of the stockholders of the company, its agency in that behalf was not coupled with an interest and must be deemed to have been revoked when the plaintiffs, holding legal title to the bonds, elected to sue in their own behalf. Civ. Code, § 2356; Boehm v. Spreckels, 183 Cal. 239, 191 P. 5.
There is nothing in the views we have expressed which is in conflict with the many cases cited by appellants in which it has been held under similar bond indentures that the trustee had the sole right to sue in all matters relating to the security, and we refrain from discussing those cases, since they are distinguishable in principle.
The judgment is affirmed.
SHINN, Justice pro tem.
We concur: HOUSER, P. J.; DORAN, J.