Full opinion text
MEEKINS, District Judge. This is a cause in equity, presented to the court October 17, 1930, at New Berne, N. C., one of the eight divisions of this district. After full and careful consideration of the allegations in the bill, the court was of the opinion that a decree should be entered appointing temporary receivers, giving them only technical legal control to the end that the status quo might be maintained, pending an order to show cause why temporary receivers should not be made permanent. Accordingly, the eourt entered the order of October 17,1930. When the bill was presented to the eourt, the court was advertent to, and had judicial knowledge of, certain facts bearing upon the merits of the bill with regard to' the insolvency of the Home Mortgage Company, one of the respondents in this cause, and hereafter called the “Mortgage Company.” The facts above referred to are as follows: There were six corporations in the city of Durham, N. C., known as the “Cobb Group,” and among them was the Mortgage Company. Five of these '.corporations had been placed in the hands of receivers by this eourt in less than sixty days prior to the filing of the bill, October 17, 1930, The five corporations of the'Cobb Group, of which the Mortgage Company was one, making six in all, went into receivership in this eourt by consent. A careful examination into the affairs of each one of the five corporations of the Cobb Group by the receivers appointed by this eourt disclosed that each was hopelessly insolvent. Moreover, all of these corporations, above mentioned, particularly the Atlantic Mortgage Company, and the Mortgage Company, were elosely allied and interlocked, their business being inter-related and greatly confused. At the head of these corporations was James 0. Cobb, who appears to have been the moving spirit of all the six corporations in the Cobb Group, particularly the Atlantic Mortgage Company and the Mortgage Company. As to the connections and activities of James 0. Cobb with the six corporations, particularly the Atlantic Mortgage Company and the Mortgage Company, it is only necessary to consider the testimony of T. L. Broocks and Leon W. Powell, which testimony is set out in the record. T. L. Broocks testified before the special master on November 28, 1930, at page 27 of the transcript of his testimony, with regard to the relationship of James O. Cobb as to the Atlantic Mortgage Company and the Mortgage Company. Leon W. Powell, one of the receivers of the New Hope Realty Company, one of the Cobb Group, testified before the special master, on November 28, 1930, with regard to the connections and activities of James O. Cobb with the Cobb Group, particularly the Atlantic Mortgage Company and the Mortgage Company as appears at page 52 of the transcript of his testimony. During the first week of September, 1930, the fifth corporation of the Cobb. Group, the Atlantic Mortgage Company, went into hands of receivers, and during the arguments before this eourt leading up to the decree for receivers, it was stated, more than once, openly and with, emphasis, that the Mortgage Company had entered into a repurchase agreement with the Atlantic Mortgage Company.whereby the Atlantic Mortgage Company had a then pending claim against the Mortgage Company for $75,000 by reason of the alleged repurchase agreement. During the term of ;the federal court at Durham, the first week' in September, 1930, J. E. Owens, executive vice president of the Mortgage Company, sought an interview with this court, and in that interview stated that he was feárful an application would he made for .receivers for the Mortgage Company by the attorney or attorneys for the Atlantic Mortgage Company, as is disclosed in the record of his testimony. A short time prior to the filing of the bill in this cause, there was carried in the Press of North Carolina, and, so far as this court is advised, never denied, and it also appears in the record of this cause, that the Corporation Commission of North Carolina, the duty of which, among other things, is to enforce what is known as “The Blue Sky Law,” called on the Mortgage Company for a financial statement, and after careful consideration by the commission of the statement furnished by the Mortgage Company, the commission revoked the privilege theretofore given the Mortgage Company to sell its stock in North Carolina and revoked the privilege theretofore given to sell its investment certificates in North Carolina. Full and careful, consideration of the allegations in the bill justified the exercise of the discretion inherent in the court to enter the order of October 17, 1930. Considering the bill and the setting of this cause as shown by the facts which the court was advertent to, and had judicial knowledge of, as set forth above, it is perfectly plain that the court could not do otherwise than enter the order of October 17, 1930. Therefore, the suggestion or argument that such order was “improvident,” because unusual, is met and disarmed by the compelling facts, which stand out like a diagram, and justify the compulsive course of the court in entering the order of October 17,1930. Above every judge the figure of Justice serenely sits holding aloft her seales from which she blows even the dust of prejudice; and every judge, no matter how limited or how great he may be, is bound to do justice. The object of every trial in a court of law or equity is to ascertain the truth of the inquiry by legal testimony and in accordance with law. There should be no delay except that which is caused by taking the time to find the truth. Without taking thé time to find the trutji, trials, in a legal sense, are not as a náil set in a sure''place. Moreover, justice can always' afford to wait until all the evidence is heard. These observations answer any suggestion that the determination of this cause, a most important one to all the parties interested, has been delayed a moment longer than was necessary to find the truth. 'Indeed, the delays, as the record will disclose, have, in each and every instance,-been at the request and instance of the respondents in this cause. The court is of the opinion that no unnecessary delays have occurred; that a matter of such great importance necessarily requires time, investigation, and consideration. This cause came on for hearing while the regular statutory terms of the courts of this district were in session, and more than once the court adjourned in the midst of terms in the various divisions of this district ánd went to the Raleigh division, thus giving this cause precedence over other civil and criminal business of this district. The court is unmindful of any delay in this cause that could in justice be attributed to the court and any intimation to the contrary is unfounded in fact. The court, in the consideration and determination of this cause, has no preconceptions that are not subject to correction by the facts and the law in this cause. The court has earnestly and diligently sought to ascertain the truth as reflected by the merits of the cause. The court only desires to do substantial justice to the parties and to fulfill the demands of the paramount rights of all, equally and alike. A preliminary survey of the controlling factors at issue is important to constructive consideration and requisite to proportionment of the relative rights effected. The Mortgage Company is the principal on bonds aggregating approximately $10,-000,000 owned by thousands of innocent and unsuspecting investors. This multitude of investors is scattered throughout the United States. These bonds are dependent for their security in the main upon underlying subordinate mortgage real estate collateral, as evidenced by deeds of trust deposited with the First National Bank of Durham, N. C., trustee, one of the respondents in this cause, and hereafter called the “Trustee,” under various indentures; there being five in number as disclosed by the record. Some $6,000,-000 of the total of these bonds are guaranteed by the Metropolitan Casualty Insurance Company of New Tork, with official domicile at Newark, N. J. Some $4,000,000 of these bonds are without guaranty from any source and are solely dependent, as to their value, upon the underlying subordinate mortgage collateral, evidenced by deeds of trust deposited with the Trustee, and the responsibility and solvency of the Mortgage Company. It is the legal obligation of the Mortgage Company, under the express conditions of the various indentures, above referred to, to keep the underlying subordinate mortgage collateral free from default and without impairment, and to “syneronize” the same with the outstanding bonds, and to pay promptly the interest and principal, evidenced by the bonds and the coupons attached thereto, as such interest and principal becomes due and payable. It will be seen, therefore, that a trust estate is directly involved in this cause, representing $10,000,000 of bonds which are held by bondholders having no legal representation other than the Trustee and no disinterested protector if the Mortgage Company and the Trustee fail to protect them, and in such failure these bondholders have no recourse other than to appeal to a court of chancery— the warden of trusts and the vigilant legal guardian of the absent, the dependent, and the incompetent. This latter class has the right to rely upon and to invoke the maxim that equity is founded in natural justice, in honesty and right, and properly arises according to what is right and good. The jurisdiction of the federal court of this district has been invoked, and such jurisdiction cannot be denied except the court has no jurisdiction of the parties or the aver-ments of the bill and the proof adduced fail to establish a cause for equitable relief. The Mortgage Company is a North Carolina corporation, formerly having its corporate domicile at Durham, N. C., which is within the territorial limits of this district and therefore within the jurisdiction of this court. Two or three months before the institution of this cause, October 17, .1930, the Mortgage Company removed its domicile to Hiekory, N. C., which is without the territorial limits of this district and therefore without the jurisdiction of this court. The Trustee is a United States banking association, having its corporate domicile at Durham, N. C., which is within the territorial limits of this district and therefore within the jurisdiction of this court. The Trustee in this cause is designated Trustee in all five of the indentures, above referred to, under which these outstanding bonds, above referred to, approximating $10,-000,000, were issued and as Trustee is charged with the important and indispensible obligation of protecting the security and ultimate payment of the bonds referred to and is a necessary party to any action for the administration of the trust imposed upon it as Trustee in connection with the Mortgage Company, and in connection in part with the Metropolitan Casualty Insurance Company of New York, above referred to, as a guarantor of some $6,000,000, of the bonds referred to. ' ; The complainant, a citizen and resident of the state of Virginia, has brought this action against both the Mortgage Company and the Trustee, and as the holder and owner of certain of the bonds, above referred to, of the face or par value of $3,500, issued by and in the name of the Mortgage Company. This cause, as to territorial venue, is brought under sections 52 and 53 of the United States Judicial Code, otherwise designated as sections 11.3 and 114 of title 28 of the United States Code (28 USCA §§ 113, .114), and it is not a cause of action of a local character requiring venue in a particular federal judicial district. This cause of action is based on the alleged insolvency and mismanagement of the Mortgage Company, and upon its default, under the terms of all the trust indentures, above referred to, securing the outstanding bonds above referred to. This action is not brought by the complainant on her own behalf alone, but it is brought by her on her own behalf and on behalf of all other bondholders and is, therefore, a representative suit and should he, and is, so considered and determined. The important facts set out in the record and set forth in the pleadings, decrees, orders, motions, and other proceedings in this cause are substantially, and for the present briefly stated, as follows: 1. October 17,' 1930. There was presented to the eourt the original bill of eomplaint for receivership for the Mortgage Company, duly verified and setting forth various alleged facts of insolvency of the Mortgage Company. 2. October 17, 1930. An order was entered by the court appointing temporary receivers — W. G. Bramham, of Durham, N. C., ‘ and T. L. Bland, of Raleigh, N. C. — with rule to show cause why same shauld not he made permanent, which rule was returnable November 5,1930. 3. October 18, 1930. Subpoenas and order to show cause why permanent receivers should not be appointed served upon the respondents by the United States marshal, or his deputy. 4. October 20, 1930. An order was entered by the court appointing a special master (Charles B. Calvert) aud directing him to employ auditors and to investigate and report to the court as to the solvency or insolvency of the Mortgage Company and such other matters as counsel (both sides) might submit to him. 5. November. 3, 1930. General appearance entered by counsel for both tbe Mortgage Company and tbe Trustee, and after such general appearance was entered respondents moved, through their counsel, to dismiss; - the motion to dismiss being on the merits and filed by both respondents in this cause. This motion was equivalent to a general demurrer to the original bill. 6. November 5, 1930. Supplemental and additional motipn, filed subsequent to general appearance and motion 'to dismiss on the merits on November 3, 1930, as to jurisdiction of the court oyer respondents. These motions were made in open court in the Wilmington division of this district, all parties present — complainant’s counsel and respondents’ counsel — at which time there was.presented to the court, by counsel, for respondents, certain affidavits, followed by lengthy oral arguments by counsel for respondents to dismiss the cause on its merits. 7. November 5, 1930. In open court motion by counsel for complainant for leave to amend the original bill of complaint filed October.,17, 1930, so as to charge mismanage■ment of the Mortgage Company, which motion to amend was made before respondents’ motion to dismiss and the amendment was allowed. 8. November 10,1930. Order of the court allowing complainant’s amendment. 9. November 10, 1930. Order of the court allowing counsel for complainant to take certain testimony in open court on the merits of tlje cause., 10. November 10, 1930. Motion for continuance of the cause by counsel for respondents and motion allowed. 11. November 15, 1930. Special appeal by counsel for respondents to Circuit Court of Appeals on the interlocutory order entered October 17, 1930, appointing temporary receivers, and as to order entered October 20, 1930, appointing special master, both ■ orders being without notice, which appeal was allowed by the court, and on the next day, November 16, 1930, the appeal was heard by the Circuit Court of Appeals. 12. November 20, 1930. Nunc pro tunc order entered by the court appointing temporary 'receivers on the amended bill, after hearing in open .court on the merits, the same ’ to be operative as of the date of November 5, 1930, referred to in No, 6 above, and on which occasion the court denied respondents’ motion to dismiss, and so forth. 13. November 24,1930. Order entered by the court modifying previous order .to take testimony in open court eliminating the privilege theretofore given counsel for the complainant to call officers of the Mortgage Company, and compel the production of its books and other records and allow the complainant and respondents to take testimony in open court. 14. November 24, 1930. Examination in open court of O. M. Hutchinson, resident manager of the auditing firm of Haskins & Sells; that firm at the time was in the process of making an audit of the books and other records of the. Mortgage Company, under the direction of the court; the filing and admission of evidence and various statements with regard to the audit and the tender by counsel for complainant to counsel for respondents of certain other witnesses. 15. November 24,1930. Motion by counsel for respondents to stay and vacate certain proceedings; opinion of the court and memorandum of facts as part of order overruling supersedeas; petition for appeal by respondents from nunc pro tunc order, dated November' 20, 1930, referred to in No. 12 above; • citation and order allowing appeal to the Circuit Court of Appeals; and answer of respondents to the bill. 16. November 26, 1930. Order of Circuit Court of Appeals denying application for stay of proceedings and appeal from nunc pro tune order, and so forth, entered November 20, 1930, referred to in No. 12, above. 17. November 28, 1930. Taking of testimony on merits begun by special master with counsel for complainant and respondents present and participating. 18. November 29,1930. Protests and objections by counsel for respondents to proceedings of the special master and motion to vacate and stay his proceedings,- which motion was denied. 19. December 1, 2, and 3, 1930. Taking of testimony by special master on the merits, counsel for complainant and respondents being present and'participating. The respondents offered testimony of various officers of the'Mortgage Company. 20. December 2, 1930. Order entered by the court at New Berne, N. C., on motion of respondents to produce witnesses in open court on December 6, 1930, in the Raleigh division.. Motion allowed. 21. December 4, 1930. Reports, exhibits, and testimony taken before special master filed. 22. December 6, 1930. Testimony taken in open 'court in the Raleigh division by respondents pursuant to order entered by the court allowing the production of certain- testimony in open court under date of December 2, 1930, above referred to in section 20. 23. December 6, 1930. Interlocutory order entered by the court appointing temporary receivers after hearing on merits. 24. December 10, 1930. Petition for appeal by counsel for respondents from order of December 6, 1930, and order allowing appeal. ' 25. December 27, 1930. Pinal hearing in open court on the merits with regard to making temporary receivers permanent; all counsel for both complainant and respondents being present and participating. 26. December 27,1930. Motion by counsel for respondents to take further testimony. 27. December 27,1930. Motion by counsel for respondents requiring complainant to file additional or increased bond for costs and damages. 28. December 27, 1930. Motion to stay proceedings. 29. December 27, 1930. The three motions, above referred to, were taken under advisement by the court. 30. December 27, 1930. Oral argument at length by counsel for complainant and by counsel for respondents on the merits of the cause and submission of the cause to the court. 31. January 23,1931. Nunc pro tunc order allowing admission of affidavit as basis to take depositions, which affidavit was presented to the court December 27, 1930, and the motion based on the affidavit was taken under advisement by the court, as stated in No. 29 above; the affidavit being admitted subject to the restrictions set out in the order, January 23, 1931, above referred to. Upon the entering of the nunc pro tunc order respondents abandoned the taking of depositions and made no further motion to take further testimony. Before a detailed discussion of the various technical motions to dismiss and to stay, some of which were made the basis of certain premature interlocutory appeals to the Circuit Court of Appeals, it is obviously important that there should be a complete understanding of the merits of the cause. If this cause, for any substantial reason, is not well founded in equity and does not demand substantial relief, looking to the broader and larger consideration of justice, apart from mere technical complaint, on the one hand, and mere technical defense, on the other hand, then its dismissal or retention is of small consequence to a court of chancery, endeavoring to administer its duty with impartial and serious performance within the sphere of its requirements. In this particular cause it is proper — in fact requisite — to bear in mind that the respondents were immediately advised, by service of subpoenas and rule to show cause, after the order was entered on October 17, 1930, above referred to, that a very short time was fixed under the rule to show cause as to whether the order should be made permanent and that the court was always open to the respondents to move to vacate or modify the order, even before the date set down in the rule to show cause. Moreover, it is undisputed in the record that the temporary receivers of the court appointed in the first instance, October 17, 1930, have exercised only a technical legal jurisdiction over the Mortgage Company and the Trustee. The temporary receivers have interfered in no way with the usual administration by the regular officers of the business of the respondents in this cause, except as to the disbursements of funds and the audit directed by the court under the supervision of the special master. Therefore the temporary receivers- together -with the efforts of the special master have, for the first time, established a definite statement of. the assets and liabilities of the respondents to the end that all parties interested have been protected and therefore benefited in the premises. Hereinafter the court will consider the technical aspects and the exercise of its judicial discretion in the order of October 17, 1930, appointing temporary receivers, and the lack of merit in many of the contentions of the respondents with regard thereto according as they appear to the court. The propriety of the court has been repeatedly challenged by the respondents with regard to the order appointing, without notice, the special master and in the direction given him. The original bill charges, with considerable detail, the insolvency of, the Mortgage Company. The main issue raised on the original bill and the amended bill was therefore the financial status of the Mortgage Company and the management of the same. A statement of account as to the assets and liabilities of the Mortgage Company was not only desirable but necessary. Under rule 59 of the New Equity Rules (28 USCA § 723), promulgated by the Supreme Court of the United States, November 4, 1912, governing the appointment of a special master by a District Court of the United States, there is ample authority for the action taken appointing and 'directing the special master to fully investigate the financial status of the Mortgage Company and the conduct of the Trustee with regard to ¿he exercise of its duties under the various trust indentures. How otherwise could the court be reliably informed as to the solvency of the Mortgage Company, except by reference to an examiner or special master? It can hardly be seriously contended, or even seriously suggested, that such an inquiry would be feasible, in open court, under the direct supervision of the court. It is so obvious that it is unnecessary to undertake to justify it by argument and the court therefore pretermits discussion of the point except to say that under Equity Rule 46 (28 USCA § 723), providing for taking testimony in equity cases in open court, it is laid down: “Except as otherwise provided by statute or these rules.” If in the same order the special master was directed to investigate and report as to the other matters submitted. by respective counsel in this cause, all such matters must have been, and as the proceedings now establish, eo-related and germane to the general fact as to the solvency or insolvency of the Mortgage Company and as to the management thereof. Later the court will dispose of the contentions of the 'learned counsel for the respondents that the proceedings of the special master were in any proper sense ex parte, and the legal authority of the court, in the appointment and designation of authority of the special master. While the original appointment and direction to- the special master as contained-in the order of October 20, 1930, above referred to, was without notice, the special master, from the beginning of his service in this cause, as the record will show, has not only continuously given notice, in advance, sufficiently in advance, of all his proceedings to all the parties in interest, as is fully substantiated in the exhibits to his report, marked therein as “Master’s Exhibits, Morning Session, December 1, 1930, from A to F-l,” but in a formal notice of his official and open hearing to take testimony1, dated November 26, 1930, addressed and served upon counsel for complainant and counsel for respondents, the special master said as follows: “I-shall..on Friday, November 28, 1930, at 10 o’clock,- A. M., at my office, in the Southern Fire Building, Durham, ■N- C., hold a hearing as Special Master for the purpose of taking testimony as to the solvency or insolvency of the Home Mortgage Cpmpany, and such other matters alleged in the Amended Bill of Complaint, and the answers thereto, as counsel for either party in said cause shall then request and submit, subject to my authority as aforesaid.” In response to this notice of the special master all parties to this cause fully participated, as the record will show, in all the hearings of the special master, on the merits of the cause, on the following' dates, respectively : November 28, 1930, and December 1, 2, and 3, 1930, and at the sessions of the special master, on December 2 and 3, counsel for respondents on their behalf, as the record will show, produced, as witnesses, officers of the Mortgage Company and examined them as to the merits of this cause and filed before the special master certain exhibits to the testimony offered by them, which exhibits are made a part of the special master’s report filed in this cause. It is not only proper but necessary that the court must consider the merits of this cause upon the testimony taken in open court, under Equity Rule 46, and the exhibits filed therewith. Moreover, the exceptions filed to the right of the special master to act by counsel for the respondents are without merit for the reason that the respondents fully participated and legally acquiesced in all the proceedings of the special master, and as the special master has filed with his report all the testimony taken before him, with all the exhibits filed therein, the court will consider such testimony and exhibits as a part of the evidence in this cause, and the report of the special master, as advisory aid to the court in determining the facts of this cause. The testimony so taken by the special master was taken under and by virtue of authority provided by the New Equity Rules, viz., rules 46, 59, 60, 61, 62, 63, 64, 65, 66, and 67 (28 USCA § 723) which rules are binding on all the District Courts of the United States. As to the question of the solvency or insolvency of the Mortgage Company, the same is not to be answered solely by reference to the ability of the Mortgage Company to meet its own requirements and liabilities apart from its fixed liabilities to take care of the periodic interest payments, and maturing principal payments on the $10,000,000 outstanding bonds and to refinance or reimburse the Trustee for all defaults, in the underlying subordinate mortgage collateral required by the trust indentures to syneronize at all times with' such outstanding bonds.- The Mortgage Company is likewise obligated upon $212,000 collateral trust gold notes, issued through tho Union Trust Company of Maryland, Trustee, under which there has been a substantial default in collateral and payment to the Trustee. In tho testimony of O. M. Hutchinson, of the auditing firm of Haskins & Sells, and the exhibits thereto, taken and filed in open court, at the hearing on November 24, 1930, it is established that there exists default in the subordinate collateral under each trust and that the total in all the trusts is as follows : Mortgage loan notes, secured by deeds of trust, current and not over 30 days past due, $5,092,673.13. Thirty days past due, $784,049.21. Sixty days past due, $672,987.62. Ninety days (over) past due, $1,270,261.-55. On which deeds of trust have been foreclosed, or in process of foreclosure, $1,504,-026.70. The witness explained in his testimony that his reference to “past due” meant past due after the grace period of 30 days. It will he seen, therefore, that as a matter of fact, the respective figures of defaults should be stated as follows: Sixty days past due, $784,049.21. Ninety days past due, $672,987.62. Over 120 days past due, $1,270,261.55. Foreclosures, or in process of foreclosure, $1,504,026.70. These calculations have reference to October 17, 1930, the date the order appointing temporary receivers, above referred to, was entered. It will be seen from a careful consideration of the figures above set forth that the total of the defaults, extending over 60 days past due, including trust foreclosures and in process of foreclosure, amount to $4,799,-739.60, out of a total subordinate underlying collateral in all tho trusts of $10,073,159.29. The detailed figures as to the subordinate mortgage collateral is given by reference to the total and the defaults in the exhibits prepared by the auditor and admitted in evidence at the hearing in open court on November 24, 1930, and before the special master November 28, 1930, and are filed and made a part of the special master’s report. These figures or calculations have not been challenged in any of the proceedings at any time or anywhere. On page 114 of the transeri.pt of the testimony of J. E. Owens, executive vice president of the Mortgage Company, is the statement that those foreclosures amount to about $1,500,000. Tested by the cardinal rule as to the insolvency of a corporation, that is, whether it is able to meet its present and maturing obligations, in the usual course of business, with the use of-an honest credit, it appears that the liabilities of the Mortgage Company exceed $545,000, as of October 17,1930, according to the testimony of O. M. Hutchinson, of Haskins & Sells, taken before the special master, December 2 and 3, 1930, page 216 of the transcript of his testimony. This liability does not include liability on the outstanding bonds and collateral trust notes. The same witness (Hutchinson) testified at tho same time as follows: “Miscellaneous assets comprising notes and accounts receivable aggregating $216,000.00, most of which are doubtful of collection, or, in any event, the amount to he realized from that group of assets is unknown.” The indebtedness of the Mortgage Company, other than outstanding bonds and collateral trust notes, according to the testimony of J. E. Owens, executive vice president of the Mortgage Company, is $337,000 as shown in the transcript of his testimony taken before the special master, page 78, at the hearing of December 2, 1930. In a prepared statement made by the auditors and an exhibit to the testimony taken in open court on November 24, 1930, and likewise an exhibit filed with the special master’s report, it is established by the testimony in this cause that in addition to the current liabilities now existing there would he an additional requirement for the fiscal year beginning November 1, 1930, and ending Ocher 33, 1931, of $385,514.52 over all expected or anticipated assets of the Mortgage Company. In other words, a deficit of that amount is shown by the testimony of the witness (Hutchinson) of Haskins & Sells, taken in open court on November 2’4, 1930, and reference is made to “Exhibit Estimate” filed therewith. The testimony of the same witness (Hutehinsoii) before the special master, as appears at page 217, transcript of his testimony, December 2, 1930, and “Exhibit Estimate” filed with the special master’s report, is to the same effect. This requirement of over $385,514.52 is in addition to the present total liabilities, excluding outstanding bonded -indebtedness, which is admitted by J. E. Owens, executive vice presidenkof the'Mortgage Company, to be over $300,000, and, as stated by the auditor, exceeds $500,000. It is in the affidavit, made by J. E. Owens, executive vice president of the Mortgage Company, and offered by counsel for respondents on the merits at the first hearing, in open court, Wilmington division of this district, November 5, 1930, that the financial necessities and difficulties of the Mortgage Company had been such at times in the past that it had been compelled to borrow from “outsiders” securities acceptable to banks for discount or for use as collateral in order to meet the obligations of the Mortgage Company. It appears also that the securities borrowed from “outsiders” to tide over pressing emergencies, had not, on October 17,1930, the date of the original interlocutory order, in this cause, appointing temporary receivers, been returned to the “outsiders.” When a so-called $10,000,000 corporation is reduced to the necessity of such methods, it is reasonably certain such corporation is insolvent. Moreover, such method is reckless mismanagement when kept secret or withheld from all and each of the parties in interest. It is established in the record that the existing liabilities of over $300,000, admitted by J. E. Owens, executive vice president of the Mortgage Company, have been standing for nearly a year, most of them for a period of over a year, to say nothing as to the amount pointed out by Hutchinson, the auditor, who places the liabilities of this class or character at $500,000. It appeal’s in the record, transcript of testimony of J. E. Owens, executive vice president of the Mortgage Company, taken before the special master, December 2, 1930, pages 131 and 132, that the Metropolitan Insurance Company of New York, domiciled at Newark, N. J., as guarantor of the interest and principal of over $6,000,000 of the outstanding bonds of the Mortgage Company, has advanced $128,560 to cover matured interest and principal payments, and S. W. Strauss and Company of New York has advanced $100,000 for the same purpose. It also appears in the record that $50,000 of the amount deposited with the trustee was diverted to the use of the Mortgage Company. In this connection the court has considered the testimony of T. M. Gorman, assistant trust officer of the First National Bank of Durham, the Trustee. See page 70 of the transcript of his testimony taken before the special master November 28, 1930. From the record testimony taken before the special master it appears that the accounts receivable of the Mortgage Company have long since matured and are impossible, or at least in most part doubtful, of collection. In the testimony of O. M. Hutchinson, of Haskins & Sells, taken in open court, on November 24, 1930, at page 18, he gives his opinion as an auditor, as to the affairs of the Mortgage Company, and says that it is insolvent. The special master who had the fullest opportunity to know the financial condition of the Mortgage Company says in his report that it is “hopelessly insolvent.” The court, after a review of all the evidence before it, can arrive at no other reasonable conclusion. The amended bill supplements the particular allegation in the original bill as to the insolvency of the Mortgage Company with particular allegations of mismanagement thereof. The present management, or reorganization management, has been in charge of the affairs of the Mortgage Company since January 29,1930, and J. E. Owens, executive vice president of the Mortgage Company, claims to have effected a substantial reduction as to the overhead expense. It is well to pause here and analyze the claim. The former president of the Mortgage Company, J. O. Cobb, received a salary of $12,000 annually. J. E. Owens, executive vice president of the Mortgage Company, now receives a salary of $10,-000 annually. Owens in his testimony, page 75 of the transcript taken before the special ipaster, December 2, 1930, says: “Since February 1, 1930, through October 1930, a net reduction in overhead and operating expenses of approximately $100,000.00 had been effected when compared with a similar period for the .year 1929.” The statement sounds well and would be pleasing but for the test that must be applied. It will be seen that against this claim the evidence in the record shows that a large volume of mortgage business was done in 1929, which was previous to the year when Owens was called to the management of the Mortgage Company. Owens took charge January 29, 1930. The indentures in evidence in this cause, by their respective dates, show that over $2,-000,000 was placed or loaned by the Mortgage Company, subsequent to February 1, 1929. $1,000,000 in addition was placed subsequent to November 1,1928, while the total mortgage business • of the Mortgage Company since Owens took charge as executive vice president and headed the management, having first effected the reorganization referred to, placed only from 60 to 75 loans during his administration so far as appears from his testimony at page 98 taken before the special master, December 2, 1930, of a total of over 3,000 loans placed by the Mortgage Company since May, 1928, to January 29, 1930. It seems that Owens does not recognize the difference between a liquidating and a going concern. Obviously the expense of the former is necessarily greater than the latter. It is in the record that prior to the so-called reorganization of the Mortgage Company, subsequent to January 29, 1930, that the deeds of trust, aggregating in amount over $1,000,000, subordinate collateral in the various trusts securing outstanding bonds had been foreclosed by the direction of the Mortgage Company without the consent of the Trustee and “bid in” by the New Hope Realty Company, now in receivership in this court, without paying the purchase money. While no deeds were given to the purchaser by the Trustee, the deeds of trust so foreclosed were not refinanced as required by the terms of the various trust indentures. No purchase price was paid to the Trustee, as above stated, and by a contract between the Mortgage Company and the new Hope Realty Company the rents and profits of the foreclosures were collected and used for the general purposes and uses of the Mortgage Company. Subsequent to the management of J. E. Owens, executive vice president of the Mortgage Company, and the reorganization thereof, a like course was followed, except the contract with the New Hope Realty Company was canceled on account of its financial •difficulties and the Realty Sales Corporation was organized by J. E. Owens, executive vice president of the Mortgage Company, for the purpose of substituting it in the place of the New Hope Realty Company as a nominated bidder, so to speak, which Realty Sales Corporation had a total capital stock of only $400, and no actual assets. Owens made no disclosure to the Trustee of his arrangement as to the foreclosures, either as to the New Hope Realty Company or the Realty Sales Corporation until after this action was brought and a few days before he was offered .as a witness in this cause. It will appear that the rents and profits received by the Realty Sales Corporation from foreclosing deeds, of trust were used to pay the salary of an officer of the Mort,-gage Company, amounting to $400 a month, and the balance for the general uses of the Mortgage Company. The court in careful examination of the ■method used in conducting the business of the Mortgage Company, and the disregard of the explicit terms of the trust agreements under which it operates, amounting in fact and in law to a diversion of the trust property, being, as it is, a party to the trust, ean conceive of no worse form of mismanagement of the affairs of the Mortgage Company, savoring as it does of a fraud upon the bondholders and other innocent creditors. But were these transactions not sufficient to warrant, indeed demand, the protection of a court of equity, the evident unmoral business conception of the executive officer of the Mortgage Company, J. E. Owens, is fully established by the testimony of T. L. Brooeks, formerly an officer of the Mortgage Company, which testimony was taken before the special master on November 28, 1939, and is corroborated by James O. Cobb, in his testimony before the special master, formerly president of the Mortgage Company, as will ' appear from the record of the testimony taken before the special master on December 2, 1930. The testimony of these two witnesses, just above named, established the fact that Owens, in his official capacity as executive vice president of the Mortgage Company, desired, and suggested his desire to his subordinate officers of the Mortgage Company, the destruction of a solemn contract showing a liability of the Mortgage Company to the Atlantic Mortgage Company of $75,000, on the plea that as between the Atlantic Mortgage Company and the Mortgage Company it would be better for the Atlantic Mortgage Company to be sacrificed. Upon these facts the court has little hesitation in reaching the same conclusion as the witness O. M. Hutchinson, of Haskins & Sells, who testified that the Mortgage Company is insolvent and concurs in the recommendation of the special master that the Mortgage Company is hopelessly insolvent; that the Mortgage Company, under its former and present management, was and is grossly mismanaged and because of the gross mismanagement and insolvency of the Mortgage Company it should be placed in the hands of permanent Receivers. It was argued at the final hearing, December 27, 1930, on the merits in this cause, by counsel for respondents, that while the witness Brooeks and the witness Cobb testified as to the conversation of Owens, the executive vice president of the Mortgage Company, concerning the destruction or suppression of the repurchase agreement the court should take the testimony of Owens, who denied the statement of Brooeks and Cobb, on that point, for that (a) Brooeks was a discharged employee of the Mortgage ..Company, • therefore resentful toward it, which resentment accounted for his testimony with regard to the proposed destruction by Owens of the repurchase agreement, and (b) that Nick Jones, one of the employees of the Mortgage Company, was said by Broocks to have been present when the conversation with regard to destroying the repurchase agreement took place, and that Jones, being offered by the Respondents, stated that he was not present when such conversation took place, if it did, and the point was made by counsel for respondents that the testimony with regard to the destruction of the repurchase agreement was “a stand-off.” Counsel for respondents seemed to lose sight of the fact that Broocks was corroborated (reluctantly) by Cobb, who was offered as .a witness. Concede, for the sake of the argument, that Broocks asserted the conversation and Owens denied it, and that Cobb did not corroborate Brooeks. In ' this state of the record it would be necessary to weight the human factors involved in the equation. Beyond peradventure it must be conceded that the incentive of a discharged, or even a disgruntled, employee of the Mortgage Company would not be so compelling to perjury as would be the incentive of Owens, assuming that either committed perjury. When it comes to assigning a motive for speaking falsely, it is apparent that Owens had the .stronger motive, stronger than Broocks, because if he had admitted the conversation with respect to the destruction of the repurchase agreement and for the reason assigned, that would have been tantamount to his complete destruction not only with regard to his present position in the Mortgage Company, which pays him $10,000 a year, but with regard to any possible future employment by any reputable and outstanding business concern. With the statement of Brooeks, corroborated by the statement of Cobb, the court is impelled to conclude that the conver sation took place, as related by the witness Broocks, with regard to the proposed destruction of the repurchase agreement as suggested, by Owens. It may be argued that Jones testified that he was not present when the conversation took place, as testified by Brooeks. Careful scrutiny of the testimony of Jones leads to but one possible conclusion, to wit, that it is negative testimony. Jones is in the position of the witness who did not hear the clock strike. The record shows, however, that Broocks- was not an interested or biased witness and that he was corroborated by Cobb. The court, now, after particular examination of the evidence in this cause, apart from, and independent of, the special master’s report, which is fully and completely supported and justified by the evidence, will take up and consider technical questions of jurisdiction, legality and propriety of its proceedings, and the equitable rights of the parties involved in this cause. As to the question of jurisdiction over the parties as an essential attribute of the federal jurisdiction in the premises : Even if the Mortgage Company were the sole respondent in these proceedings, and it were admitted that it had its judicial corporate residence and domicile at Hickory, N. C., which is without the territorial limits of this district, and therefore without the jurisdiction of this court, it cannot avail itself of such a plea to the jurisdiction of this court, after a general appearance by counsel and the filing by them of motion on the merits to dismiss, equivalent to a demurrer to the merits of the cause. The entry of general appearance and motion to dismiss on the merits were made November 3, 1930, prior to the date to show cause set down in the order of October 17,1930 — or three days before the date of the hearing to show cause why the temporary receivers should not be made permanent. There is no inhibition in the federal procedure of suing a respondent in a jurisdiction other than that in which the respondent resides or has its corporate domicile. The right to be proceeded against, outside of its corporate domicile, is a personal privilege, which may be waived; and a general appearance in the action, and pleading therein to-the merits, constitutes such a waiver. In Lively v. Picton et al. (C. C. A.) 218 F. page 401, it is laid down: “Piling by a corporation defendant of a general demurrer and motion to set aside an order appointing a receiver, unless limited, constitutes a 'general appearance.’ ” See Lee v. Chesapeake & Ohio Ry. Co., 260 U. S. page 653, 43 S. Ct. 230, 67 L. Ed. 443. In Armstrong v. Langmuir (C. C. A.) 6 F.(2d) 369, page 370 thereof, it is laid down: “A special appearance and motion to dismiss for lack of personal jurisdiction cannot be coupled with a motion upon the merits.” In Interior Construction & Improvement Co. v. Gibney, 160 U. S. page 217, Mr. Justice Gray speaking for the court at page 220, 16 S. Ct. 272, 273, 40 L. Ed. 401, it is laid down: “Defendants who have appeared generally in the action cannot ever object that they were themselves inhabitants of another district.” Blount v. Kansas City Southern Ry. Co. (D. C.) 5 F. (2d) page 967. Panama R. R. Co. v. Johnson, 264 U. S. page 385, 44 S. Ct. 391, 68 L. Ed. 748; Hupfeld v. Automaton Piano Co. et al. (C. C.) 66 F. page 788; Edgell et al. v. Felder (C. C. A.) 84 F. pages 69 and 70; Gulf Smokeless Coal Co. v. Sutton et al., 35 F.(2d) 433, page 438, opinion by Judge Parker, Fourth Circuit. But the jurisdiction of this court does not turn upon the corporate domicile of the Mortgage Company and upon its waiver of the privilege to be sued in the Western Federal Judicial District of North Carolina, and for the reason that the First National Bank of Durham has its corporate domicile within the Eastern Federal District of North Carolina and therefore within the jurisdiction of this court, and is the Trustee named in all of the trust indentures involved in this cause, and therefore is a necessary and indispensible party to this cause, for that its active participation is necessary and indispensible to the proper administration of the trusts and that no effectual relief could be granted on the bill, or by equitable regard to the rights of. the parties without the jurisdiction over the bank, as such Trustee. Under sections 52 and 53 of the United States Judicial Code, otherwise designated as Sections 113 and 114 of title 28 of the. United States Code (28 USCA §§ 113, 114), the Trustee being a necessary party to this cause, the jurisdiction of this court, over the cause and over the parties, is absolute. It has been earnestly argued by counsel for respondents that under the express limitations of the trust indentures in this eause the complainant, an individual bondholder, is estopped from bringing suit; that the right of action is circumscribed and restricted under such trust indentures, which are the contracts under which all bonds were issued and that each bondholder has acquired bonds under such conditions; that these restrictions and conditions are for the mutual benefit of all the bondholders and therefore not within the general inhibitions of the law to restrictions upon general rights of action, to wit, the indispensible right of resort to the courts of the country for the assertion of common rights of the person and to property. The counsel for the respondents mainly relied upon the ease of Allan v. Moline Plow Co., Inc. (C. C. A.) 14 F.(2d) page 912. It is obvious that to understand a legal adjudication one must first understand clearly the facts upon which it is made. Judicial action is the determination of facts as well as law and the application of law to the facts. In the Moline Case, supra, the facts are essentially different from the facts in this eause. The Moline Case involves the setting aside of conveyances and the collection of debts. There are a number of other eases, dealing with like restrictions in trust agreements, under which bonds or notes have been issued, when such limitations have been upheld. A careful examination, however, of all this line of cases shows that they were actions to collect debts, such as coupons and bonds, notes, or foreclosure proceedings, where the bond or note holder had restricted action of foreclosure or vested such power in the discretion of a Trustee. In this eause, the complainant is not suing for a debt, evidenced by her bonds; she is not asking for a foreclosure of a mortgage or of a deed of trust or of an indenture of trust. She is asking only the aid of a court of equity to safeguard and administer her equitable rights, together with the equitable rights of all other bondholders in the trust property. The application for a receiver for the Mortgage Company does not conflict in any wise with any of the lawful restrictions of the trust indentures involved in this cause. In the Moline Case, at page 916 of 14 F. (2d), it is laid down: “These provisions were not written into the trust agreement for the benefit and protection of the Illinois Company, but for the-benefit and protection of the note holders.” Applying this reasoning to this eause, it is sound to so construe the restrictions in the trust indentures for the benefit and protection of the bondholders — to appoint a receiver for a defaulting company, to safeguard and legally administer the trust estate for the benefit of the bondholders, under all the restrictions and conditions of the trust agreement. The attention of the court has been especially directed to the decisions of the late Justice Pitney while he was Vice Chancellor of New Jersey in the widely cited case, known commonly as the Reinhardt Case. [See Reinhardt v. Inter-State Telephone Co., 71 N. J. Eq. 70, 63 A. 1097.] No one can carefully consider that case, not only from its diction, but from its invincible logic also, and not see its application to this cause as the correct adjudication of the law upon the particular subject matter at issue here. It is, however, suggested by counsel for respondents that under the terms of the trust indentures involved in this cause a right of action is restricted to a proceeding only through the Truste'e, or at least a prior demand upon and a refusal of action by the Trustee, as a prerequisite to individual action of a bondholder for protection of his or her rights as such bondholder. If the particular bondholder in this cause, bringing this action for herself, and for all the other bondholders, were asking for action under the terms of the trust indentures, that contention might have some force, but this cause is not such a ’ proceeding. Here the action is not to collect interest or principal on any bonds but -an application for a receivership for one of the parties, the Mortgage Company, now in default, under the trust agreement. Besides, under the amended bill in this cause acts Of the Trustee are alleged which place it in an antagonistic attitude towards the rights of the complainant and other bondholders. -Under such a state of pleadings the Trustee is properly made a party defendant. In the ease of Brown v. Denver Omnibus & Cab Co. et al. (C. C. A.) 254 F. 560, page 567, it is laid down: “The rule that, in general, courts can deal with bondholders only through their trustee, is a rule of convenience, to facilitate the conduct of the suit, and must give way whenever the trustee occupies a position prejudicial to the interest of the bondholders.” It is strange to the court, in this cause, that the particular Trustee, representing the interests of the bondholders', under the spirit and terms of the trust indentures, should have taken a partial position, particularly after the hearings by the special master and his report making no findings against the Trustee which reflect upon it, and recommending receivership for the Mortgage Company to administer the trust in accord and in connection with the Trustee and in strict compliance with the terms and conditions of the various trust indentures. In Farmers’ Loan & Trust Co. v. Northern Pac. R. Co. (C. C.) 66 F. pages 169 and 174, it is laid down: “It is asserted that by this provision the bondholders have expressly agreed that except under peculiar circumstances of request and neglect to sue which do not exist, their rights shall be protected and enforced only by the trustee. I cannot assent to this contention. The provision is restricted to suit by the bondholders to foreclose the mortgage, or to enforce the bonds except through the instrumentality of the trustee, but cannot, I think, be applied to a ease where suit has been brought by the trustee, if the conditions would justify a court in admitting the bondholders to intervene. They do not by this provision conclude themselves against the subsequent assumption by the trustee of hostile position or against its violation of duty.” . In Lowenthal v. Ga. Coast & P. R. Co. (D. C.) 233 F. 1010, at page 1013, it is laid down: “If it appears that the trustee refuses and neglects to act, or stands in a hostile position, or has assumed a position prejudicial to the interest of the cestui que trust, the rule is put aside and the cestui que trust admitted to represent his right, because in such case the trustee has not or cannot fully and faithfully represent them.” The court has hereinbefore dealt with some of the facts that were before it when the order of October 17, 1930, appointing temporary receivers, was presented and signed. Under the plain law on the subject the court has, upon a proper showing, the legal jurisdiction, to proceed without notice in the appointment of temporary receivers. In Taylor v. Easton (C. C. A.) 180 F. 363, and at page 367, it is laid down: “The appointment of a receiver without notice is entirely a matter of judicial discretion. The power to make the appointment without notice is inherent in a court of equity. It follows logically that want of notice does not affect the validity of the appointment, in reference to whether it be void, but merely concerns it as being the proper or improper exercise of sound and judicial discretion. An abuse of such discretion would merely render the appointment erroneous, subject to only direct and not collateral attack.” The court has heretofore stated the reason compelling the order of October 17,1930, without notice, appointing temporary receivers. It was doné on a verified bill, giving many detailed transactions that called for prompt and exceptional action to protect the large interests of absent bondholders and other interests from certain detailed acts of the officers of the Mortgage Company. Of some of these matters the court had convincing judicial knowledge because of certain other closely associated judicial proceedings with the Mortgage Company and referred to heretofore, which judicial proceedings were in this court and conducted by this court in respect to receivership for corporations of allied interests and identical mismanagement with that of the Mortgage Company. Besides, the respondents had notice that they could contest the order without notice appointing temporary receivers on the return date thereof, to wit, November 5, 1930. Again the respondents had the right to appear at any time, upon five days’ notice, under Equity Rule 29 (28 USCA § 723), and move to vacate the order vdthout notice, appointing temporary receivers, October 17, 1930. This the respondents did not do, but entered a general appearance, after notice, on November 3, 1930, and after they had presented their defense on its merits, at least in part, on November 5, 1930, at Wilmington, in this district. The legal effect of this general appearance, after notice, was a waiver of the right to except to the order, without nojiee, dated October 17,1930. In Supreme Council of Royal Arcanum v. Hobart (C. C. A.) 244 F. 385, and at page 390, it is laid down: “After appearing and being heard before the hearing appointed for April 21st, and after having obtained thereby the modifications effected by the decrees of April 17th and April 20th, we could hardly regard the defendant as in a position to claim that any omission of due notice to it .in the proceedings has seriously prejudiced its rights.” Subsequently this court, upon the amended bill, and after due notice, and appearance, and presentation of certain matters on the merits, by the respondents, signed a nunc pro tunc order, supra, again appointing such temporary receivers, and after such notice .and hearing. Again, after the submission of the matter on its merits, before the special master, and the filing of the special master’s report, this court, on the merits, on December 6, 1930, appointed temporary receivers on the merits as then presented, open to such modification or such order as might be proper after final hearing and argument of the cause, which was then set for December 27, 1930. The order of October 17, 1930, signed after full consideration of the allegations in the bill and in the circumstances heretofore • set forth, was the exercise of not only sound judicial discretion, hut was proper and prudent. There may exist a want of proper judicial discretion in failure or refusal to act, where the facts demand action, as there may be an abuse of sound judicial discretion in precipitate or reckless action. The battle of life is to the strong, the free, the diligent, and the brave. Even so, the administration of law is not in