Full opinion text
HAINES, J., pro tem. The record in this case is a ponder ous one. The pleadings begin with a complaint on the part of L. P. Feldmeier and others, who are respondents here, to enforce what they deem to be their rights as the holders of mortgage certificates issued by defendant and respondent Mortgage Securities, Incorporated, of Santa Barbara, to ■ which, following the designation adopted in the findings of the trial court we shall hereinafter, for convenience, refer as the “Company”. The defendants include also appellant Security Title Insurance & Guarantee Company, the assignee of certain assets deposited with it to secure the said certificates, to which, following again the designation used by the trial court in its findings, we shall hereinafter refer as the “Depositary”. Sundry recognized holders of mortgage certificates, who are respondents here, were named in the complaint as defendants together with appellant Jane V. Reinert, who figures largely in the case as the claimant of certain further mortgage certificates, purporting to be issued by the Company, but found by the trial court to be void, and County National Bank and Trust Company of Santa Barbara, as pledgee of the certificates last referred to. Three successive additional pleadings designated as amendments and supplements to the complaint were filed. Answers were in due course filed by the Company, the Depositary, Jane V. Reinert, the County National Bank and Trust Company of Santa Barbara and various other defendants. A complaint in intervention was filed by Alice W. Jackson asserting title to one of the mortgage certificates which was answered by the plaintiffs and certain of the defendants. A cross-complaint was filed by Jane V. Reinert in which her claims were set up. A cross-complaint in which the Company and sundry individual certificate holders named as defendants in the plaintiffs’ pleadings joined was filed, in which most of the other parties to the action were made cross-defendants, as were a number of new parties included by order of the court, among whom was Fred D. Jackson and Alice P. Jackson. A further cross-complaint for declaratory relief was filed by the Depositary, in which Jane V. Reinert, Associated Almond Growers of Paso Robles, a corporation, County National Bank and Trust Company and various others were made cross-defendants, and this cross-complaint was later amended. These several cross-complaints were answered by most of the parties named therein as cross-defendants. Sundry parties were served with pleadings and, having failed to respond to them, are in default. We shall not attempt to restate at large the contents of these various pleadings. Suffice it at this point to sa.y that they fill the greater part of the three large volumes making up the clerk’s transcript. We shall, in proceeding to discuss the case, make such allusions to them as the situation requires. The original complaint appears to have been filed in December, 1933, but various delays attended the making up of the issues and bringing the cause to trial, and the trial itself was prolonged and various continuances found necessary so that findings were not signed and filed until October 2, 1937. On the same day the judgment was rendered and on October 6, 1937, entered. From this judgment two appeals have been taken and are now before us, one by the said Jane V. Reinert and the other by the Depositary, Title Insurance and Guarantee Company. The said Mortgage Securities, Incorporated, of Santa Barbara, referred to as the “Company” and the said Security Title Insurance and Guarantee Company, above and hereinafter referred to as the “Depositary”, were, at all of the times here involved, California corporations, the latter being authorized by its articles to transact the business of a title insurance and guarantee company, though there seems to be no evidence in the record as to whether or not it was generally authorized to act as a depositary or trustee. However that may be, there was in fact executed on January 24, 1925, pursuant to a permit of that date issued by the state commissioner of corporations, a contract in the court’s findings and hereafter described as the “Indenture” dated back as of October 6, 1924, between said two corporations, reciting that the Company had assigned to the Depositary certain notes and the debts evidenced thereby, secured by mortgages or deeds of trust and proposed thereafter to assign to the Depositary other notes and the debts evidenced thereby, in each ease to be accompanied by certified guarantees, abstracts of title or policies of title insurance, evidencing that said mortgages or deeds of trust should be first liens upon the property therein described, and also be accompanied by proper indorsements and assignments of the instruments evidencing the security for such notes and debts, with the policies of fire insurance covering the improvements on the properties involved, which insurance the Company covenanted to keep in effect. It was agreed that the unpaid balance in each case should amount to not more than 40 per cent of the appraised value of the property by which the debt should be secured. The purpose of these transactions according to the recital in the Indenture was to facilitate “sales by the Company of parts or shares of said securities to be evidenced by mortgage certificates, each certificate representing such part or share as may be in such certificate described, said certificates evidencing the ownership by such purchasers of undivided parts or shares respectively in said securities”. It was further recited that in executing the Indenture each of the parties respectively represented “all parties in privity with them or either of them”. It was agreed that the Company had executed and would execute assignments of the securities and that the Depositary had accepted and would accept the title thereto “for the benefit and account of the Company and each and every person or corporation that may be or become the owner of an undivided part” of said securities. The Company was to reserve and have the right “to sell undivided parts or shares of said securities and to issue and deliver to the purchasers of such parts or shares, respectively, mortgage certificates each representing a part or share of the whole of said securities equal to the proportion which the purchase price named in the certificate issued therefor respectively is of the total amount of said securities”. The form of mortgage certificate contemplated was set out in the agreement. This form of certificate contained inter alia the following stipulation: “The Company reserves the right to collect the interest of said securities and to receipt therefor, but of the interest money received by it the Company will pay semiannually, on the first days of March and September in every year, to the registered holder thereof, a sum equal to —% of said purchase price from the date hereof until-and thereafter a sum equal to —% of said purchase price, and it shall retain as its own all interest collected on the part or share of said securities represented by this certificate in excess of the part of said interest to be so paid to the registered holder hereof.” Provision was, in the form of certificate, made for the repurchase at certain times and upon certain notice, by the Company from the individual investor at the option of either of any such mortgage certificate or certificates “for a sum equal to said purchase price, together with the registered holder’s share of all interest accrued on the securities from the date of this certificate, less all payments made prior to the consummation of said purchase to any registered holder of this certificate ... on account of collection of principal or interest under any of the securities ... ” . The Indenture went on to provide that each certificate issued in accordance with its terms “must be authenticated over the signature of an officer of the Depositary” and that the form of authentication should be substantially as follows: “Authentication “This certifies that the within is one of a series of first mortgage certificates issued by Mortgage Securities, Incorporated of Santa Barbara, under the escrow agreement therein referred to, and that as depositary under said escrow agreement, the undersigned holds the securities referred to in the within certificate in the proportion of One Hundred Ten Dollars of said securities for each One Hundred Dollar interest as represented by this certificate; said securities being held in accordance with and subject to the terms and conditions of said agreement. “Security Title Insurance and Guarantee Company “By--- ‘ ‘ Assistant S ecretary. ’ ’ The Indenture provided that: “The depositary shall keep a book of registry and account which will show at all times the names and addresses of the persons to whom, the time when, and the purchase price for which, all Mortgage Certificates are issued in accordance with this agreement; and the aggregate amount of the purchase price named in Mortgage Certificates outstanding at any one time shall not exceed the sum of Two Hundred and Fifty Thousand Dollars. “It will be the duty of the depositary to authenticate, on demand of the company, Mortgage Certificates as described herein in conformity with the terms and conditions of this agreement. ’ ’ The Company was, by the further terms of the Indenture entitled to present to the Depositary for cancellation any mortgage certificates previously issued and authenticated and to issue and have authenticated in their place others in lieu of those so surrendered. By the terms of the Indenture (article VI) the Company reserved to itself, so long as it was not in default the right and power: “ (a) To collect the interest of said securities and to receipt therefor. “(b) To decide when and how any provision of any of said securities shall be enforced and of enforcing it accordingly. “(c) To extend or change the time of payment of any of said securities. “(d) To substitute or exchange other securities for the securities deposited with, or for money paid to, the depositary, as provided for in the next Article. ’ ’ With respect to the substitution of securities the Indenture provided as follows: “If the company, for any reason, desires to exchange any of said securities, substituting others therefor, written notice of its desire shall be given to the depositary, and the company shall deposit with the depositary other securities of such amounts as may be necessary, provided that after such substitution is completed the aggregate unpaid principal amount due on all secured notes, which shall constitute the collateral security for the Mortgage Certificates, shall not at any time be less than one hundred ten (110) per cent of the aggregate par or face value of the Mortgage Certificates issued and outstanding; and of like kind, similarly assigned, similarly protected by fire insurance, and accompanied by Certificates, Guaranties or Abstracts of Title or Policies of Title Insurance evidencing that said mortgages or deeds of trust are first liens upon the property therein described and do properly secure the payment of the notes described therein respectively, provided, however, that no security shall be accepted by the depositary in consummation of any such substitution or exchange, unless the same shall be of such class and character that the company might at the time invest its capital or accumulations therein consistent with the laws which shall be then in force in this State as well as with the laws now in force therein; thereupon the company shall be entitled to make the desired exchange and substitutes, receiving such written transfer or conveyance from the depositary as may be necessary to transfer to the company complete title to the securities so withdrawn. Said securities so substituted shall be and become subject to the provisions of this agreement, the securities so withdrawn being thereafter not subject to the provisions of this agreement or of any certificate issued thereunder. ’ ’ All securities deposited from time to time by the Company with the Depositary were to be accompanied by schedules giving certain detailed information about the same and it was agreed (in article VII) that: “At the time of the deposit of such securities covered by any such schedule, there shall be filed therewith an affidavit to be appended to said schedule or schedules and signed by the President or Vice President and Secretary or Assistant Secretary of the company, to the effect: “1. That the said securities are, in the opinion of said officers absolute securities for the amount then owing thereon; “2. That no interest is delinquent upon any securities and that all taxes and assessments and charges of every kind against the property described in such securities, which are due and payable, have been paid; “3. That the indebtedness then owing upon each of said securities, as set forth in said schedule, is the correct amount of said indebtedness, and it is the bona fide debt for full value received; “4. That an appraisement of the property encumbered by said securities has been made by the appraiser appointed herein, or his successor, and that the property is ample and sufficient security for the then unpaid and outstanding principal amount owing thereon.” The Company reserved the right, subject to the approval of the corporation commissioner to name its own appraisers. The Company agreed in the event that securities deposited by it should go into default, that it would upon certain notice substitute others “so that the total unpaid and outstanding principal amount of the securities shall, at all times be not less than one hundred ten (110) per cent of the face or par value of all of the outstanding Mortgage Certificates”. The Indenture stipulated (in article X) that the happening of any of the following events should constitute a default on the part of the Company: “ (1) The failure of the company to pay at its office in Santa Barbara, to the registered holder of any of said Mortgage Certificates out of the interest received, the sum or amount to which said registered holder is entitled in accordance with the terms of the certificate held by him, such failure continuing for a period of ten (10) days after the date on which said sum should be paid in accordance with the terms of said certificate and after written demand on the company and notice to the depositary by said registered holder that said payment be made. “ (2) The failure of the company to purchase any of said Mortgage Certificates when required by the registered holder thereof, in accordance with the terms of said certificates, said failure continuing for a period of ten (10) days after written demand on the company and notice to the depositary by said registered holder. “(3) The failure of the company to fully and promptly perform every or any obligation imposed upon it or assumed by it under the terms, and in accordance with the provisions of this agreement, said failure continuing for a period of thirty (30) days after written notice thereof or in regard thereto given by the depositary to the company.” It is provided that in case of a default, and upon certain notice from the Company to the Depositary, the Company “shall relinquish and be divested of all its rights and powers specified and reserved under article VI hereof” (that is, its right to collect interest, to make determinations respecting the enforcement of the secured obligations deposited, to extend the times for the payment thereof and to substitute other securities for those deposited), “and of any interest it may have in said securities” (with certain exceptions not of present importance), “and the Depositary shall, in such ease be vested with all the rights and powers of the Company so relinquished by it and shall hold the securities as herein described for the account and benefit of the Company and the registered holders of the mortgage certificates then outstanding hereunder as their respective interest may appear, and the Depositary and not the Company shall be the agent of the Company and the registered holders of said certificates for the purpose of collecting the interest accruing on said securities and of discharging, satisfying, enforcing, foreclosing and extending or anticipating time of payment of any and all of said securities. The Depositary shall, in such case, enforce and have the right to enforce, all the provisions of any of said securities and all and any other things that may be for the benefit and account of, or for the protection of the interests of the Company and the registered holders of said certificates. “As any money comes into the hands of said Depositary by virtue of the power vested in it, as described in this paragraph, the Depositary shall pay said money to the registered holders of said mortgage certificates and to the Company as their interest respectively may appear ...” Other provisions (contained in article XIV of the Indenture) that have been considerably discussed in the briefs are as follows: “The Company covenants and agrees to hold and save the Depositary free and harmless from all loss, cost, damage or expense occasioned by reason of the performance of any and all acts which may be performed by the Depositary in accordance with the terms of this agreement, so long as such acts are performed by said Depositary in good faith and with due diligence. “The Company agrees that it will pay from time to time the reasonable compensation of the Depositary for all services rendered hereunder. “The Depositary shall be under no obligation to pass upon the validity of the securities deposited with it or of the validity of any Policies of Insurance, Certificates, Guaranties or Abstracts of Title, part of or accompanying said securities, as to their binding force upon the companies or persons issuing them. “The Depositary may conclusively rely upon the affidavit referred to in Article VII hereof as being filed by the Company with the securities deposited and will not be required to obtain any further evidence concerning such securities. ‘ ‘ The Depositary does agree, however, that it will promptly notify the registered holders of Mortgage Certificates issued in accordance with this agreement of its actions in case of any default hereunder as defined in Article X and its reasons therefor. “The Depositary shall not be responsible in any manner whatsoever for any recitals or any statements of fact herein contained, all of which are made solely by and on behalf of the Company; nor for the validity of this agreement; nor shall it be liable in any way for the consequences of any breach on the part of the Company of the covenants herein contained. “Unless and until an event of default, as defined in Article X, shall have happened, the Depositary shall be under no obligation to collect the principal sums of said securities as they respectively mature, or to present any claims therefor against the estates of any deceased, bankrupt or insolvent debtors thereunder, or to collect any fire insurance that may be payable for the destruction by fire of any buildings or improvements on lands covered by said securities, or to do or to refrain from doing any other act or thing whatsoever in relation to said Certificates, Guaranties, Abstracts of Title and Securities, so deposited, unless and until it shall be requested so to do in writing by the Company a reasonable time before it shall be required to take such action requested by the Company.” It was agreed that: “The Depositary, by the execution of these presents, accepts the duties and conditions herein set forth and imposed upon it, and agrees to hold the said securities in accordance with the terms hereof, and to perform its duties and offices as set forth herein in accordance herewith, and to regulate its acts and deeds accordingly.” While there were numerous other provisions in the Indenture we think the foregoing a sufficient recital of its contents for our present purposes. The said Indenture was executed in behalf of the Company by one William S. Porter as its president and one Winsor Soule as its secretary and by the Depositary by the same William S. Porter as its vice-president and one E. S. Porter as its assistant secretary. According to the findings of the trial court, as soon as the corporation commissioner’s permit, hereinbefore referred to, had issued, the Depositary began the exercise of its functions as contemplated by the above recited Indenture and continued to do so until June 4, 1932, when it gave to the Company a notice of default “and has ever since last mentioned date continued in the exercise as hereinafter set forth, of its functions and powers as ‘Depositary’ pretending to act under said Indenture and permit and none other”. The court found that from the date of the organization of the Company, which occurred in 1922, until February 11, 1930, the said William S. Porter was its president, and one Fred D. Jackson its vice-president; that on that date Jackson succeeded Porter as president and continued as such until January 8, 1934; that Porter and Jackson owned all the common stock of the Company and together dominated and controlled its affairs from the time of its organization until February 11, 1930, after which and until January 8, 1934, Jackson dominated and controlled its business and affairs. According to this finding Porter, as a vice-president of the Depositary, was manager of its Santa Barbara office until he was transferred to Los Angeles late in 1928 or early in 1929, and up to the time of his transfer the business of the Company was conducted within the Santa Barbara office of the Depositary, and, indeed, Porter continued to be a director of the Company until 1932. According to the findings a large number of certificates known as first mortgage certificates were from time to time issued by the Company, certified and authenticated by the Depositary and sold for cash then paid to the Company “in the amount in each case equal to purchase price of each certificate, by the various purchasers who were in each certificate named and to whom they were in each instance sold and issued respectively”. A schedule of them numbered I headed “Valid Certificate Holders” is set out in the findings and it is found that subsequently and during the year 1933 all of the certificates included in that schedule were sold to the plaintiffs (respondents here) who now own them. Other certificates found to have been similarly issued for full value are contained in a second schedule numbered 1-A and headed “Schedule of Other Valid Certificate Holders”. These latter certificates stand on the same basis as those described in the first schedule, except that they have not been assigned to the plaintiffs-respondents. It is found that as respects the certificates listed in the said schedule I the plaintiffs-respondents exercised their option in manner and form as provided in the Indenture to require the Company to purchase “the part or shares of said securities represented by said various certificates for a sum equal to the respective designated purchase prices of said various certificates . . . together with the registered owners’ shares of all interest accrued on the securities from the sale of said respective certificates . . . ” It is found that, though duly notified of the exercise of this option the Company failed to repurchase any of said certificates and is in default for such failure, in consequence of which the Depositary, as above stated, served upon it on June 4, 1932, a notice of such default, as well as of its default, also found to exist, in the nonpayment of interest in accordance with the terms of the certificates and agreement. The finding is that the Company admitted the default and that, with its consent, the Depositary entered upon its duties as provided for by the Indenture in case of such default. In one of its further findings the trial court sets forth a further schedule entitled " Schedule II”, in which, with respect to each of the mortgage certificates still outstanding, there is noted its face value, which, except in the case of certain certificates issued to one Jane V. Reinert, hereinafter to be referred to, is the price for which it is found to have been sold by the Company, and there is also noted the date when it issued, the total amount of the certificates outstanding on that date, the figure which would represent 110 per cent of that amount and the aggregate par value of the securities on that date on deposit with the Depositary to secure the then outstanding issue of certificates. The effect of this appears to be to show that there were always securities on deposit sufficient in par value to meet the requirements of the Indenture that they amount to not less than 110 per cent of the amount of the outstanding certificates, had they in fact been all first mortgages or first trust deeds as the Indenture contemplated, but the actual fact as found and also shown on this schedule is that a large proportion of the securities deposited was made up not of first mortgages and first trust- deeds, as stipulated, but of second trust deeds or of the vendors’ rights under executory contracts of sale of land, which latter were in at least a few instances subject to prior encumbrances. If all these were left out of account, the securities deposited would fall largely below the requirements. The trial court’s finding is that, except for the said Reinert certificates, all the outstanding certificates were bought in good faith and for full value and that the purchasers were not aware of any deficiencies in the deposits of collateral required by the Indenture under which their certificates issued. It is found that “no collateral securities or assets was, or were at any time deposited with or held by said Depositary as security for said certificates, other than the collateral mentioned and shown in said schedule except such collateral as was deposited and withdrawn prior to June 4, 1932, without any record thereof being made or kept, but said collateral so deposited and withdrawn without any record thereof being made or kept did not at any time provide or constitute either by itself or combined with all other collateral on deposit, collateral either in amount or character, sufficient to secure the valid outstanding certificates as required by the terms of said Indenture and Permit”. Among the mortgage certificates listed as valid was one numbered 441 in the sum of $2,000 in the name of Jane V. Beinert. As to it no dispute arises, but the trial court found invalid certain others numbered 444 to 450; both inclusive, purporting to have been issued to her and now amounting in the aggregate face value to $52,150.00. As to this latter group of certificates, the trial court’s findings 17 to 28, both inclusive, reveal a devious series of transactions, as to which that court’s view can hardly be stated without quoting somewhat extensively from what is there said about them. These findings include, inter alia, the following: “17. The Court finds the facts and conditions governing the issuance of the so-called Beinert Certificates Nos. 444 to 450, inclusive, purporting to be issued to Jane Y. Beinert and embraced in said schedule, to be as follows: that on and for months prior to September, 1931, during which months the so-called Beinert Certificates Nos. 444 to 450, inclusive, (purporting to have been issued to Jane Y. Beinert and embraced in said schedule) were issued, defendant Mortgage Securities, Inc. of Santa Barbara, referred to herein as the defendant ‘Company’ had incurred serious deficits in its operations and was in imminent danger of bankruptcy; that on and prior to September 25, 1931, said corporation was indebted to the County National Bank and Trust Company of Santa Barbara and the First National Trust and Savings Bank of Santa Barbara in sums amounting in the aggregate to approximately $80,000.00, unsecured, and also in various sums owed to individuals amounting in the aggregate to more than $10,000.00, all unsecured; that on or about said date, demand was made on said defendant ‘Company’ by executive officers of said County National Bank and Trust Company of Santa Barbara and said First National Trust and Savings Bank of Santa Barbara for payment of said indebtedness due to said banks, respectively, and thereupon a conference occurred on or about September 25, 1931, in the City of Santa Barbara, California, between directors Wm. S. Porter, Fred D. Jackson, and others of the board of directors of defendant ‘Company’, at which meeting the indebtedness of defendant ‘Company’ to its various creditors herein referred to was discussed, but said ‘Company’ was unable to pay said indebtedness, or any part thereof, or to make any adjustment satisfactory to said banks, or either of them, at said conference, or at a meeting of the board of directors of said defendant ‘ Company’ which occurred on the morning of September 28th, 1931, with directors Fred D. Jackson, Wm. S. Porter, and Winsor Soule and Donald W. Montgomery present at said meeting. “The Court finds that after said conference of September 25, 1931, said Fred D. Jackson without notice to any of the other officers or directors of said defendant ‘Company’ caused one J. F. Ewing to execute an agreement between said defendant ‘Company’ and said J. F. Ewing purporting to be an executory contract to purchase from said ‘Company’ at the price of $54,465.80, nineteen parcels of real property of defendant ‘Company’, which nineteen parcels of real property were practically all of the unencumbered assets of defendant ‘Company’. “The Court finds that said morning meeting of the board of directors of defendant ‘Company’ of September 28, 1931, was recessed to the afternoon of that same day, at which afternoon meeting representatives of said two banks were to be present and it was anticipated said representatives of said banks would insist upon being made members of the board of directors of said defendant ‘Company’, in order that said banks might exercise control over said ‘Company’ and its affairs in the interests of said banks as creditors of said ‘Company’. “The Court further finds that said Fred D. Jackson on said 28th day of September, 1931, without notice to the other officers, or directors of defendant ‘Company’ and without notice to either of said banks, caused said Certificates Nos. 444 to 450, inclusive, known as the Jane Y. Reinert certificates, to be issued and the entries in the ten accounts hereinafter mentioned in Finding 20 hereof to be made, all as hereinafter set forth and found and on said day in the interval between said morning and afternoon sessions of said board of directors of said defendant ‘Company’, caused said pretended agreement with J. F. Ewing to be filed and deposited with defendant ‘Depositary’ as collateral under said Indenture and thereupon caused defendant ‘Depositary’ to certify and authenticate and thereupon on said day defendant ‘Depositary’ did certify and authenticate, under its corporate seal in the form provided by said Indenture, First Mortgage Certificates in the aggregate sum of $68,500.00 purporting to be issued by defendant ‘Company’ to Jane V. Beinert, which said certificates included those designated as Nos. 444 to 450, inclusive, mentioned above and in said Schedule II.” ‘‘18. The Court further finds that at and prior to the time of the execution of said pretended agreement of sale said J. F. Ewing was a personal employee of Fred D. Jackson and that nothing was paid down, nor expected to be paid at any time, upon the said contract; that said Jackson represented to said Ewing and it was understood and agreed between them, that said Ewing was signing and he did sign said contract merely as an accommodation and without expectation or intent of being called upon to make any payments thereon, and the Court finds that said contract and the whole thereof was fictitious and sham; that said property covered by said pretended contract included all the unencumbered real estate and substantially all of the unencumbered assets of defendant ‘Company’ and was carried by the defendant ‘Company’ on its books at its cost which was $51,501.50. No title certificate, or other evidence of title was procured or filed or deposited with said ‘Depositary’ as to the title of any of the real property covered by said pretended agreement filed and deposited, as aforesaid, with the defendant ‘Depositary’. That an appraiser was procured by said Fred D. Jackson, named W. C. Paulton, to make and furnish and who did make and furnish a pretended appraisement in writing of said nineteen parcels of real property covered by said agreement, representing said nineteen parcels of real property to be of the value of and purporting to appraise said property at $115,000.00, and said Fred D, Jackson caused the same to be deposited with said ‘Depositary’ at or about the time of the pretended issuance of said certificates. That said Paulton was not a disinterested appraiser ; that he was at that time indebted to defendant ‘Company’ to the extent of several thousand dollars; that said certificates were certified and authenticated in the form provided by said Indenture in the office of ‘Depositary’ in the City of Santa Barbara, California, by an assistant secretary of defendant ‘Depositary’ at the request of said Fred D. Jackson, while the Santa Barbara executive manager of said defendant ‘Depositary’ was absent from the said office of ‘Depositary’; and that at and prior to the time of the pretended certification and authentication of said alleged certificates, as aforesaid, said Santa Barbara executive manager of defendant ‘Depositary’ had been and was ordered by the executive officers of defendant ‘Depositary’ in charge of the principal office of defendant ‘Depositary’ in the City of Los Angeles, California, and who had control and supervision of said Santa Barbara office, not to certify or authenticate any more or additional First Mortgage Certificates issued or sold by defendant ‘Company’ because and on account of the unstable financial condition of defendant ‘Company’; that the executive manager of defendant ‘Depositary’ in charge of its Santa Barbara office was not informed and did not learn of the issuance, certification and authentication of said certificates, or any of them, or of the deposit of said fictitious and sham agreement of sale to secure payment thereof until some weeks thereafter and William S. Porter, who was at that time executive vice-president of defendant ‘Depositary’ and who had his headquarters in the Los Angeles office of defendant ‘Depositary’ in Los Angeles, California, and who was also at the time a director of defendant ‘Company’ first learned, or was informed of the issuance and authentication of said certificates by defendant ‘Depositary’ and the deposit with said ‘Depositary’ of said fictitious and sham agreement of sale about three weeks after September 28, 1931, but, upon the discovery by said Santa Barbara executive manager and said Los Angeles executive officers of defendant ‘Depositary’ of the issuance and authentication of said certificates and of the nature of the pretended collateral deposited to secure payment thereof, to-wit: said fictitious and sham agreement of sale, no demand was made by ‘Depositary’ upon any person, or persons, for, and nothing was done, and no steps of any kind were taken by said executive officers or by defendant ‘Depositary’ to procure the cancellation of said certificates, or any of them, or of its authentication on the same, or on any of them, at any time, and no notice of the issuance or authentication of said certificates, or of the deposit of said fictitious and sham agreement of sale, was given to any of the holders and owners of any of the other outstanding First Mortgage Certificates issued by defendant ‘Company’ and authenticated by defendant ‘Depositary’, and nothing was done in reference to said pretended collateral, to-wit: said fictitious and sham agreement of sale, except that said ‘Depositary’ did, on or about May 4, 1932, procure the execution and deposit with it of the promissory notes and trust deeds to secure same, hereinafter mentioned in Finding 31 hereof. “19. The Court further finds that no statement or reference was made in the minutes of the defendant ‘Company’ to the Jane V. Reinert transaction in any of its aspects, nor was the said transaction or Jane Y. Reinert herself referred to either in the conference of the directors or the defendant ‘Company’ on or about September 25, 1931, or in the meeting of the board of directors held in the morning of September 28, 1931, nor at the meeting following the recess, in the afternoon of September 28, 1931, and that although the deposit of said Ewing contract and the issuance of said Reinert certificates had been accomplished immediately prior to the afternoon meeting of the board, the said representatives of said banks present at the afternoon meeting were not advised of the transaction nor did they learn of the same until late in the year 1931 in the month of December when, upon their suspicion being aroused, an audit of the books and records of defendant ‘Company’ by independent auditors was made at their instance. Said audit was begun on or about December, 1931, and was completed on or about January-, 1932. The circumstances and facts as to the issuance of Certificates Nos. 444 to 450, inclusive, known as the Jane Y. Reinert certificates, in so far as the deposit of the Ewing contract and the entries made closing the ten accounts referred to in the next succeeding finding, and the contemporaneous issuance of the said Jane Y. Reinert certificates, together with the transfer to said Jane Y. Reinert of certain trust deeds, were set forth in the report made by said auditors and the said representatives of defendant County National Bank and Trust Company of Santa Barbara, and of the First National Trust and Savings Bank of Santa. Barbara, read said audit either in the month of December, ■1931, or in the month of January, 1932. Neither the eon- ■ tents, nor the result of this audit, or the report thereof, made by said auditors were furnished to the certificate holders, nor were they or any of them informed of the pretended issuance and authentication of said Reinert certificates, or of any of them, or of any of the facts and circumstances connected with the issuance of said Reinert certificates, or any of them. “20. The Court further finds that upon the 28th day of September, 1931, and immediately preceding the issuance of said Reinert Certificates Nos. 444 to 450, inclusive, there were upon the books of the defendant ‘Company’ a series of uncertain and questionable accounts, 10 in number, each with a separate account number, seven of which were in the name of Associated Almond Growers of Paso Robles. Some of these accounts purported to be debit accounts and some purported to be credit accounts. These ten accounts included two accounts carried on the books of defendant ‘Company’ at the direction of Fred D. Jackson in fictitious names, and one account in the name of Jackson’s wife, Alice P. Jackson; that Fred D. Jackson had an interest in some of these accounts and that upon the said 28th day of September, 1931, and in anticipation of the action of the bankers hereinabove referred to, the said Jackson, who was president both of defendant ‘Company’' and defendant Associated Almond Growers Company of Paso Robles, did order and procure a journal entry to be made upon the books of the defendant ‘Company’ purporting to transfer the entire net credit balance amounting to $125,000 purporting to exist against the Mortgage Securities Company as a result of said 10 accounts, to said Jane Y. Reinert, and did thereupon enter to her credit the amount of $53,000.00 in accounts receivable, that is, trust deeds and mortgages belonging to the defendant ‘Company’, and $68,500.00 in mortgage certificates including said Certificates Nos. 444 to 450, and thus did at that time obliterate and close said accounts, as they stood before the said journal entry of September 28, 1931. “21. The Court finds that up to the said 28th day of September, 1931, and prior to said journal entry there had been no transactions between the defendant ‘Company’ and said Jane Y. Reinert entered or shown in any of the books, records or papers of said defendant ‘Company’, except in one instance as hereinafter noted in this finding, that the said Jane V. Reinert and her husband, Neis P. Reinert, were old personal friends, and business associates of the said Jackson from a period running back at least as early as 1918, and that the said Neis P. Reinert and the said Fred D. Jackson were at the time of the trial, and had been continuously for seven years or more, vice-president and president, respectively, of the Associated Almond Growers of Paso Robles. “The Court further finds that said Jane Y. Reinert did not at any time ever purchase any mortgages or deeds of trust of the defendant ‘Company’. The Court finds that at no time did the said Jane Y. Reinert ever purchase or pay for any mortgage certificates, except one certain mortgage certificate No. 441 of the par value of $2,000.00, which was issued and sold for cash paid to it at the time, by or on behalf of Jane Y. Reinert on said 25th day of September, 1931. “22. The Court further finds that the said Jane Y. Reinert executed a general power of attorney to Duncan P. Jackson, son of Fred D. Jackson and associated with Fred D. Jackson in the office of the defendant ‘Company’, on the 20th day of September, 1931, in the County of Santa Barbara; but no conference occurred and no understanding or agreement was ■ had or made between the said Jane Y. Reinert and the said Fred D. Jackson, or the defendant ‘Company’, or said Duncan P. Jackson on that occasion, or upon any other occasion regarding any financial relationship, or any financial transactions, personal, or otherwise, between the said Jane Y. Reinert and the said defendant ‘Company’. No Demand upon defendant ‘Company’ was ever made by or on behalf of Jane Y. Reinert for money, evidence of investment, or of any financial transaction between herself and the said defendant ‘Company’ either before September 28, 1931, on that date, or at any time thereafter, nor was any statement, report, or accounting ever furnished or made to her before September 28, 1931, or on said date, or thereafter up to the beginning of this action. ‘ ‘ The Court further finds that no interest was ever actually paid to Jane Y. Reinert, or to any one else, purporting to have accrued, or which did accrue, upon said ten accounts, or any of them, referred to in Finding 20, nor did said Jane Y. Reinert actually pay at any time to the defendant ‘Company’ any sum or sums, except for Certificate No. 441, the sum of $2,000*00, or make any deposit whatsoever with the defendant ‘Company’, nor did she ever loan any money to the defendant ‘Company’. “23. The Court finds that the so-called Reinert Certificates Nos. 444 to 450 turned up in the spring of 1933 when they were used by Fred D. Jackson as collateral for a loan to said Jackson which had been made by the County National Bank and Trust Company of Santa Barbara to him in 1930, and there they remain. “24. The Court finds that Certificates Nos. 444 to 450, inclusive, purporting to have been issued to Jane V. Reinert were not, nor was any one of them issued for cash or for other consideration, but each and all of them were issued for a pretended cancellation of certain purported mutual open and current book accounts, mentioned above, which prior to the journal entry of September 28, 1931, referred to in these findings, appeared to exist upon the books of the defendant ‘Company’ between the defendant ‘Company’ and the Associated Almond Growers of Paso Robles, N. F. Thompson, Thomas B. Jones, and Alice P. Jackson, both N. F. Thompson and Thomas B. Jones being fictitious names; and the Court finds that the credits purporting to exist or shown upon said 10 accounts against the said defendant ‘Company’, were shown by the books of defendant ‘Company’ as resulting from purported transactions extending over a period from the year 1927 to the early part of 1931, inclusive. “25. The Court further finds that said certificates so issued to Jane V. Reinert, as stated in the preceding finding, were, and each of them was issued at a time when there was insufficient collateral on deposit with the defendant ‘Depositary’ to permit the issuance of any of said certificates, to-wit: Nos. 444 to 450, inclusive, in accordance with and as required by the terms of the Indenture and Permit, nor has there at any time been sufficient collateral on deposit to permit the issuance of the said certificates, or of any of them. “26. The Court finds that the said Ewing contract was deposited and said certificates last mentioned were issued while defendant ‘Company’ was insolvent and known by Fred D. Jackson to be insolvent and at the instance of said Fred D. Jackson and that the issuance of said purported certificates was procured by said Fred D. Jackson and was done in the full knowledge of Fred D. Jackson as agent of the said Jane Y. Reinert, of all the facts herein set forth bearing upon the infirmity and invalidity of said certificates and with the full knowledge that said certificates were issued without payment of cash or other consideration and without the support of collateral required by the Permit and said Indenture. “27. (The Court finds that the action of Fred D. Jackson in procuring the pretended execution of the so-called Ewing contract and its deposit as collateral with the defendant ‘Depositary’, was done and made to the prejudice and damage of the creditors of the defendant ‘Company’, its stockholders and the holders and owners of said valid certificates.) “28. The Court finds that the said Jane V. Reinert had no right or title ór interest or property in or to said Certificates Nos. 444 to 450, inclusive, or in any of them.” The trial court went on to find that between the late fall of 1931 and the spring of 1932 the executive officers of the Depositary, having discovered that these Reinert certificates had been issued and authenticated and the fictitious Ewing contract deposited as collateral for the same, instituted an investigation of the condition generally of the collateral in the Depositary’s hands as security for the Company’s outstanding certificates and discovered that instead of having exclusively first mortgages and first deeds of trust as required by the Indenture and corporation commissioner’s permit there were really on hand numerous executory contracts of sale and “insufficient collateral of the character required” by said contract and permit, upon which the outstanding certificates could have issued. Thereupon it is found that, though the Company was not indebted to the Depositary it was required by the latter, on or about May 4, 1932, to execute to the Depositary and did execute to it, its own promissory notes for $51,015.32 payable on or before three years after that date with interest, and to execute, to secure the same, a deed of trust covering the identical property involved in the purported Ewing contract, all as further collateral security for the mortgage certificates; and that the Depositary also required the Company for the same purpose, to execute sixteen further promissory notes in favor of it—the Depositary—aggregating $33,412.17 and to execute deeds of trust to secure them affecting the properties covered by sundry of the executory contracts of sale theretofore delivered to the Depositary as collateral for the certificates. It may be gathered from the findings that the Depositary proceeded to foreclose these latter sixteen trust deeds; for it is found that it took title to all of the property described therein and has since collected the rents, issues and profits thereof and claims to hold the title to the land as security for the outstanding mortgage certificates. It is found that, though the Depositary became aware of all the facts concerning the Reinert and Ewing transactions prior to May 4, 1932, it failed to notify the holders of the valid certificates of any of them but instead issued, both on June 4, 1932, and on October 13, 1932, communications to the certificate holders representing that it held policies of title insurance with each item of collateral deposited with it, showing the same to be secured by first mortgages or first trust deeds, though such was not the fact. It is found that the Depositary knowingly permitted the Company to issue to various of the plain tiffs-respondents ’ assignors mortgage certificates after it had knowledge that the same were not secured by the collateral required by the Indenture or by the state corporation commissioner’s permit, and that all this was done in order to induce the purchasers to buy the mortgage certificates. It is found that the Depositary never made any accounting of the collateral in its hands to the certificate holders except as it did so in court after the present action was instituted. The findings proceed to detail all of the property, real and personal, derived from the Company and now in the hands of the Depositary, all of which is found to be subject to a lien for the benefit of valid certificate holders as of date September 21, 1936. This consists of $32,-270.44 in cash, a considerable number of trust deeds, certain other items of personal property, and numerous parcels of real estate found to be derived from foreclosure by the Depositary. There are various other particulars in which the Depositary is found by the trial court to have been guilty of irregularities and to have fallen short of performing its duties. It is found to have failed to keep records of securities deposited and withdrawn, to have failed to secure the deposit of sundry schedules, appraisals and affidavits, and, when it surrendered collateral deposited with it, to have failed to keep any record of the schedules, appraisals or affidavits that it did get when it originally received the securities so surrendered. It is found to have allowed sundry notes and deeds of trust purporting to be deposited with it as collateral to remain in the actual custody of the Company. It is found, in foreclosing securities in its hands, in certain instances not to have required.cash from.the purchaser but to have permitted him to execute trust deeds for .the purchase money to the Company and then to have taken assignments of these from the Company. It is found to have brought about the termination of the rights of purchasers under executory contracts of sale, irregularly deposited with it as collateral, and then, instead of itself realizing cash for the lands, to have instigated the making by the Company of new contracts of sale for the same land to new purchasers and irregularly and outside of any authority from the corporation commissioner, to have accepted as collateral a redeposit of these new executory sales contracts. It is found without authority to have applied to its own use, of funds received by it as Depositary, an aggregate of $2,375, and, likewise without authority, to have paid from such funds to its attorneys the sum of $450. There are many other matters embraced in the findings but we do not find it necessary to detail them. The trial court concluded inter alia, as matters of law, that under its agreement with the Company and the permit issued to the Company by the corporation commissioner upon the issuance and sale of the Company’s mortgage certificates and the Depositary’s authentication of them the latter “became a trustee of and for the holders of valid certificates’’; that the effect of the Depositary’s action was to represent, guarantee and warrant to the bona fide purchasers of such certificates that it held collateral for the same in accordance with the terms of the above recited Indenture; and that, in that it did not hold the same, it violated its terms and thereby became chargeable, together with the Company, with the total purchase price paid by the bona fide purchasers of the certificates found to be valid, with interest thereon at seven per cent per annum from December 1, 1931; that Such holders of valid mortgage certificates are entitled to a first lien on the assets deposited with the Depositary to satisfy so far as may be the sums due them; that said Depositary is under obligation to liquidate the assets in its hands under the court’s supervision and make pro rata payments to the said purchasers from the proceeds of the liquidation; that, as against the Company, the Depositary is entitled to compensation for its services to the extent of $10,000 and to a lien for that sum, with interest, on the assets in its hands junior and subordinate to the lien of the mortgage certificate holders for the amounts due them, and to a judgment against the Company for any deficiency in said compensation that may result from the liquidation of the assets and the application of the proceeds as ordered by the court; and also to have included in its judgment against the Company a further amount equal to such sums as such Depositary may be itself required to advance to satisfy any deficiency in the proceeds to be derived from liquidating the said assets in the amounts due the valid certificate holders, with interest thereon; that except for the said certificate 441 for $2,000 Jane V. Reinert is not the owner or holder of any valid mortgage certificate or certificates of the Company and that such certificates 444 to 450, both inclusive, are void; that the Depositary is also entitled to such additional compensation for carrying through the liquidation as may be hereafter allowed by the court; that the Company is entitled to any proceeds of the liquidation of the assets, if such there be, after satisfaction of the sums due to the valid certificate holders and the Depositary respectively; that in addition to the cash sums in its hands from deposited assets, the Depositary is chargeable with the $2,825 applied to its own uses and paid to its attorneys between June 4, 1932, and September 21, 1936; that all cash in the Depositary’s hands from deposited assets, including said $2,825, should be ordered immediately paid by it to the valid certificate holders in the respective amounts set out. The judgment entered pursuant to these findings provided in detail for putting the court’s determination into effect; calling for a further accounting by the Depositary within thirty days thereafter to bring its statements of assets held by it up to date, directing it to proceed with the liquidation, foreclose upon delinquent securities, and make sales of assets subject to supervision by the court, for completing which liquidation it was allowed a period of four years, during which time the holders of valid certificates were to be entitled to interest on balances from time to time unpaid of the amounts due them. The Depositary is required at intervals to account to the court for its proceedings taken to carry out the liquidation and the court reserves the right to terminate the period allowed for liquidation at any time for failure to properly and diligently'- conduct the same. At the end of the liquidation or its earlier termination by the court the Company and the Depositary are made unconditionally-liable for any sums remaining unpaid upon the indebtedness to the holders of valid certificates and judgment is to be entered thereon for any such deficiencies accordingly upon which execution is to issue on the order of the court. The Reinert Appeal. Mrs. Beinert attacks the judgment on various grounds, asserting that the findings of fact are not supported by the evidence; that the conclusions of law are not supported by the findings of fact; that the judgment is against law; that she is entitled to relief in equity and that the judgment should be reversed with instructions to the trial court to enter judgment in her favor. With respect to the consideration claimed to have been given by Mrs. Beinert for the issuance of the certificates other than that numbered 441 to her, she relies on the testimony of the said Fred D. Jackson and that of one George Giovanola, one of the firm of Giovanola & West, auditors, appointed by the trial court, given with relation to his audit, as well as upon her own testimony given in the form of a deposition. The books of the Company and the audit made by the Giovanola & West firm show, to use the language of counsel for this appellant “ten accounts carried under the contract section of the system of bookkeeping employed by the Company. These ten accounts consisted of seven accounts carried in the name of Associated Almond Growers of Paso Bobles, one account carried in the name of Thomas Jones, one account carried in the name of N. F. Thompson, and one account carried in the name of Alice P. Jackson.” The Company books, insofar as entries made prior to September 28, 1931, are concerned, do not, otherwise than such light as the use of those names may be thought to shed on the matter, show the sources of the bulk of the money deposits carried in these ten accounts, through which, during the several years in which, up to that time, they were carried, there appears to have passed an aggregate of no less than $536,-395.03, though no such amount was ever in the ten accounts taken together, on deposit with the Company at any one time. Some items, indeed, are of clearly ascertainable origin, as, for example, that during the time the accounts were kept there was credited to them a net aggregate of $19,515.46 as interest, in addition to which it is made to appear that in the Alice P. Jackson account there was included a credit of $8,010.00, of which $3,500 was salary accrued to Fred D. Jackson as an officer of the Company, $3,960 from the sale of 36 shares of stock apparently belonging either to Fred D. Jackson or to Alice P. Jackson, and $550 on account of certain funds collected for A. P. Jackson. With relatively minor exceptions, however, the source of the large sums that were deposited in the Company’s bank account and credited to these ten accounts cannot be ascertained from anything entered on the Company’s books prior to September 28, 1931. According to the books the net credit balance in favor of the several customers in whose names these accounts were carried was, as of September 28, 1931, $133,770.50. The claim made by appellant, Jane V. Reinert, before the trial court and on this appeal is that, except for the item of salary of Fred D. Jackson, just referred to, and the other two items above specified from the Alice P. Jackson account, and an interest that Fred D. Jackson claims to have had in the account carried in the name of Jones, which excepted items will be hereinafter discussed, all of the credits carried in these ten accounts are derived from initial deposits of her own moneys made by her or in her behalf with the Company, increased by the Company’s operations in handling these funds for her. The system of bookkeeping employed by the Company is thus described in the opening brief of Mrs. Reinert’s counsel: “The Company maintained in its bookkeeping system a master contract receivable account. This account carried the total balance due to the Company on outstanding deeds of trust, mortgages, and contracts. In other words the balance appearing in the master contract receivable account represented the total amount of deeds of trust, mortgages and contracts owned by the Company. As credit balances appeared on the accounts under which the Reinert funds were kept, the control contrac