
    CHEMICAL BANK & TRUST CO. v. PRUDENCE-BONDS CORP. (NEW CORP.) et al.
    No. 246, Docket 22635.
    United States Court of Appeals Second Circuit.
    Argued May 15, 1953.
    Decided Aug. 20, 1953.
    
      Charles M. McCarty, New York City (Geo. C. Wildermuth and Samuel Sil-biger, Brooklyn, N. Y., and Nemerov & Shapiro and Koenig & Bachner, New York City, on the brief), for Prudence-Bonds Corp. (New Corp.) and others, ob j ectors-app ellants.
    Lester Kissel, New York City (Shear-man & Sterling & Wright, Philip A. Carroll, and Hans H. Angermueller, New York City, on the brief), for Chemical Bank & Trust Co., petitioner-appellee.
    Before CHASE, CLARK and FRANK, Circuit Judges.
   CLARK, Circuit Judge.

These appeals arise from the last of the accountings submitted, in connection with the reorganization under former § 77B of the Bankruptcy Act, 11 U.S.C. § 207, of the debtor Prudence-Bonds Corporation, by various banks serving as trustees of the trust funds established to secure the debtor’s eighteen series of Prudence-Bonds. Several of the earlier accountings have been the subject of decision by this court. The final accounting now before us is by the Chemical Bank & Trust Co., as successor Trustee of the fund securing Prudence-Bonds Fifteenth Series. The Bank submitted its account, together with a petition for judicial settlement thereof, in September, 1938. Timely objections were thereupon filed by a bondholder, George E. Eddy, and these were later supplemented and joined in by Prudence-Bonds Corporation (New Corporation), the reorganized debtor, as well as by its reorganization trustee and several additional bondholders. The district court referred these objections — three in number — to the Special Master who had served in a like capacity in the earlier accountings, directing him to take testimony and report on the facts and applicable law.

After hearing fourteen witnesses and examining numerous exhibits, the Master on May 9, 1952, filed a thorough and comprehensive report, including 468 findings of fact and 52 conclusions of law, partially sustaining the first and third objections and fully sustaining the second. In sum, the Master concluded that the Bank had improperly released collateral from the trust fund (mostly in the form of cash) to the extent of $1,-071,404.18, and recommended surcharging it for that amount, plus interest. Upon review of this report, the district court adopted most of the Master’s findings ; but on the basis of its modification of the others, the court dismissed the first objection in its entirety, partially sustained the second objection, and fully sustained the third, and consequently ordered the surcharge to be reduced to $159,216.66, plus interest. Both the Bank and the objectors appeal from the court’s decree, the Bank contending that there should be no surcharge whatever, while the objectors assert that their objections should be sustained in full. In addition, the objectors make certain claims as to the allowance of interest, costs, and expenses which will be discussed below.

The Trust Agreement

The rights and obligations of the debt- or Corporation and the Prudence Company, Inc. — an affiliate of the debtor which guaranteed performance of the debtor’s commitments — on the one hand and of the Trustee on the other are set forth in a trust agreement executed on October 1, 1928, by the Corporation and the predecessor Bank as Trustee. Since the disposition of these appeals turns largely on our interpretation of the release provisions of this agreement, the principal section dealing with that subject, Article I, § 6, is here set out in full:

“Section 6. Substitution and Withdrawal of Securities, Etc. — The Corporation at any time and from time to time provided it is not in default in the payment of interest or principal on any of the bonds issued hereunder may withdraw any bond, note, mortgage, trust deed or other security or certificate of deposit or cash from the Trust Fund, as follows:
“(1) By substituting for the item or items withdrawn, any other security or other item enumerated in Section 1 of this Article, equal in amount or value as defined in Section 4 of this Article I, to the unpaid principal of the bonds, notes, mortgages, trust deeds or other securities or cash withdrawn.
“(2) By written application to the Trustee, for such withdrawal, at any time when the principal amount of the Trust Fund as defined in Section 4 of this Article I may exceed the par value of the Prudence-Bonds issued and outstanding hereunder, but only to the extent of such excess.
“In either such case, the Trustee shall deliver to the Corporation the bonds, notes, mortgages, trust deeds or other securities or cash, so withdrawn with any necessary assignments thereof, provided there shall remain in the Trust Fund after any such withdrawal, bonds, notes, mortgages, trust deeds, or other securities and/or cash in amount or value (as defined in Section 4 of this Article I) not less than the principal amount of Prudence-Bonds then issued and outstanding hereunder, provided, that if any securities deposited in the Trust Fund enumerated in paragraphs (a), (b) or (c) of Section 1 of this Article, shall be in default in the payment of principal for more than 60 days the Corporation shall be permitted to withdraw only such securities deposited under said paragraphs (a), (6) or (c) as shall be so in default, except that the Corporation may withdraw any of the items enumerated under paragraphs (a), (b) or (c) of Section 1 of this Article in connection with the redemption or final payment at maturity, of any such items upon substitution therefor of cash and/or securities enumerated in Section 1 of Article I. The Trustee may accept as conclusive the written statement of any officer of the Corporation as to whether or not any securities deposited in the Trust Fund are in default in the payment of principal or interest.
“Upon the delivery to the Trustee for cancellation of any or all of the Prudence-Bonds secured hereunder, with all unmatured coupons attached thereto, or cash equal to such coupons as are not delivered, or in lieu of such bonds and coupons or cash, a certificate by an officer of the Corporation approved by an officer of The Prudence Company, Inc. that certain of such bonds, with the coupons, if any, belonging thereto, matured at a date earlier than six years prior to the date of such certificate, and have not been presented for payment, the Corporation shall be entitled to withdraw from the Trust Fund, and the Trustee shall deliver to the Corporation, bonds, notes, mortgages, trust deeds or other securities, or cash, enumerated in Article I, equal in amount or value, as defined in Section 4 thereof, to the principal amount of Prudence-Bonds so delivered for cancellation, or represented by the certificate above mentioned.”

Article I, § 4, referred to in the above section, provides:

“Section 4. Amount and Computation of Trust Fund. — The aggregate principal amount of the Trust Fund as herein created and determined shall at no time be less than the aggregate principal sum of Prudence-Bonds issued and outstanding.
“In determining and computing the aggregate principal amount of the Trust Fund at any time, there shall be included all securities deposited under paragraphs (a), (b) and (c), Section 1 of this Article, at their face principal amounts irrespective of whether any thereof are overdue or in default as to principal or interest (but less any payment shown to the Trustee to have been made on account of principal thereof), and there shall also be in-eluded all bonds and other securities and cash deposited under paragraphs (d) and (e) thereof at their cash market values as of the date of deposit.”

Section 1 of Article I contains five subsections specifying the various types of collateral authorized by the agreement for the contents of the trust fund. Of these, subsecs, (a) to (c) defined certain types of mortgage bonds, while (d) and (e) referred to more liquid securities such as government bonds and cash. In fact the instant fund contained only bonds and mortgages on improved real estate, covered by subsec. (a), and cash, authorized by subsec. (e). The references in the above-quoted provisions to the securities enumerated in subsecs, (a) to (e) thus apply only to these two types of collateral for purposes of the present appeals.

Certain additional provisions of the trust agreement which bear upon the issues of this case will be quoted or referred to later in this opinion when their context will become clear. We discuss in order first the appeal of the objectors from the dismissal in whole or part of their objections and the refusal to make a larger surcharge against the Trustee as recommended by the Special Master, and second the appeal by the Trustee-Bank from the court’s action in sustaining the objections in part and in making certain surcharges.

I. Objectors’ Appeal

1. From Dismissal of the First Objection. The first objection is addressed to the action of the Bank on December 26,1930, in releasing from the trust fund the Butterick Publishing Company mortgage, on which the principal then due was $887,500, and surrendering it to the debtor in return for this sum in cash. The objectors contend that since other collateral in the fund, namely, the Hillman Hotel Company, Inc., mortgage, was in default of principal for more than 60 days on the date of this transaction, the release of the Butterick mortgage while the defaulted security remained in the fund violated Article I, § 6, of the trust agreement. Pointing out that the Butterick mortgage was not due to mature until March 1, 1935, they assert that its release therefore did not fall within the third proviso of § 6 authorizing withdrawals “in connection with the redemption or final payment at maturity,” even though other collateral may be in default of principal for more than 60 days. The Bank, on the other hand, takes the position that its action was permitted by the “redemption or final payment” clause, interpreting it to mean “redemption before maturity or final payment at maturity.” Both the Master and the district judge agreed with the Bank’s construction, and so do we. The word “redemption” is clearly used in the sense suggested by the Bank in the later Article II, § 6, of the agreement, the heading of which is “Redemption and Discharge Before Maturity.” And only with this interpretation does “redemption” in the phrase at issue retain any meaning, since it would otherwise be a pointless and confusing redundancy.

In pressing this objection on appeal — and also below, according to their assertions — the objectors do not claim the full face of the mortgage, although, as they point out, its payment did provide available cash for some of the releases challenged in the second objection. So, as they say, the ultimate result was that the trust fund “lost not only the Butteriek mortgage, but also all the cash received in substitution for it.” The second objection therefore somewhat overlaps this, but can and will be disposed of separately below. What was actually claimed here, and allowed by the Master, was the sum of $22,187.50, a prepayment fee paid to the guarantor of the Butterick mortgagor for the privilege of early redemption, which the Bank failed to collect from the guarantor. But we think the judge was correct in rejecting the Master’s surcharge of this amount against the Bank. The trust agreement required remittance to the Bank only of payments of principal on fund securities; collections of interest and all other charges could be retained by the debtor or guarantor. The premium here paid to the guarantor was merely consideration for its surrender of the right to receive future interest under the mortgage; it was in effect a reduced prepayment of interest. Our view is not in conflict with the apparent position of the New York courts holding such prepayment fees not to be interest for purposes of the usury statutes. Feldman v. Kings Highway Sav. Bank, 303 N.Y. 675, 102 N.E.2d 835; Lyons v. National Sav. Bank of City of Albany, 280 App.Div. 339, 113 N.Y.S.2d 695. These cases construe such fees as consideration for a new and separate agreement terminating the indebtedness. Since, as we have held, the debtor and guarantor were free to withdraw securities from the trust fund for redemption before maturity, we can see no bar to their entering into a collateral contract to compensate them for the loss in interest income which they will sustain by virtue of such redemption. And whether the payment thus received be deemed in the nature of interest or consideration on a separate contract, it is in any event not principal on the redeemed mortgage and was thus not payable to the Bank.

2. From Dismissal of the Second Objection in Substantial Part. The second objection challenges the propriety of the Bank’s releasing from the trust fund as excess collateral a total of $1,-045,250 in cash in twelve separate payments between October 31, 1930, and August 17, 1931, as follows:

October 31, 1930 ......$ 12,500.00

November 29 ......... 30,616.63

December 22 ......... 2,333.33

December 27 ......... 47,833.34

February 26, 1931 .... 416.70

April 27 ............ 525,450.00

June 8 .............. 42,300.00

June 8 .............. 372,566.66

June 17 ............. 3,475.00

July 20 .............. 2,258.34

July 27 .............. 1,408.32

August 17 ........... 4,091.68

$1,045,250.00

Release of these amounts was claimed to be unauthorized by the trust agreement because collateral in the fund was in default of principal for more than 60 days. The fact that these payments were made is undisputed. And the district judge agreed with the Master that the Hillman Hotel Company, Inc., and Elmhurst-Hampton Holding Corporation mortgages were in such default during this period; the court held the former to be in default of principal for more than 60 days between October 1, 1930, and May 27, 1931, and the latter at all times here relevant after May 21,1931. The Bank’s challenge to the resulting conclusion that each of the enumerated releases was thus unauthorized will be considered below. Here, however, we are concerned with the court’s holding reducing the full $1,045,250 surcharge ordered by the Master to $142,500 on the ground that there was “a clear day” from June 4 to June 8, 1931 — during which period collateral in the fund not in default of principal for more than 60 days equalled or exceeded the principal amount of outstanding Prudence-Bonds — thus exonerating the Bank from liability for earlier unauthorized releases.

This “clear day” doctrine was originated in connection with earlier Prudence-Bonds trust fund accountings by the Special Master, whose report in the present case describes it as follows:

“In the other accountings in this proceeding, the doctrine of the ‘last clear day’ came into being and was applied. If, during the administration of the trust, all mortgages and other securities in the trust fund became in good standing, that is to say, were not in default in the payment of principal, and the aggregate principal amount of the bonds outstanding did not exceed the aggregate principal amount of the trust fund, and the trust fund otherwise complied with the trust agreement, it was held that no ascertainable diminution of the trust fund resulted from prior withdrawals and substitutions of trust fund collateral, however unauthorized they may have been.” of the due date of the first premium payable after termination of the waiver and of the amount of premiums payable. Sufficient notice within the provisions of this regulation will be deemed to have been given when such letter reaches the insured’s last address of record, and the failure of the insured to furnish a correct current address at which mail will reach him promptly shall not be grounds for a further extension of time for payment of premiums under this paragraph: * *

The broad question now presented is whether the aggregate principal amount of the trust fund between June 4 and 8 exceeded that of the outstanding Prudence-Bonds of this series. We had occasion to define what constituted such an excess under an essentially similar release clause in President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465, 470, certiorari denied 324 U.S. 866, 65 S.Ct. 916, 89 L.Ed. 1422. We there said: “In this context, the word ‘excess’ means the amount by which (a), (b) and (c) securities not in default, taken at their face value, plus cash and (d) and (e) securities, taken at their then market value, exceeds the principal amount of all then outstanding Corporation bonds.”

Adopting and applying this definition, the Master found no clear day in June, 1931, or at any other relevant time. The principal amount of Fifteenth Series Prudence-Bonds outstanding on June 4 was $4,651,600. On the same day, the highest principal value of the trust fund (after deposit on that day of a $400,000 mortgage) was $5,093,900. Of this amount, however, the Elmhurst-Hampton mortgage was then in default of principal for more than 60 days; and the Master also properly found that two other mortgages, those of the Brooklyn Parking Terminal and Van Cortlandt Sporting Club, totalling $556,083.34 in principal amount, were in default for 60 days or less. Deducting all of the defaulted mortgages under the above definition of “excess,” the Master concluded that the nondefaulted collateral in the trust fund on June 4 had a principal value of only $4,377,816.66 — $273,783.34 less than the then amount of the outstanding bonds.

The judge disagreed with the Master’s interpretation of the requisite excess under this trust agreement. Noting that the agreement in our earlier case did not contain the 60-day clause in the third proviso of Article I, § 6, of the present trust agreement, he held the definition of “excess” in that ease inapplicable here. Instead, he ruled that excess for purposes of the clear-day doctrine was to be computed by taking into account all securities in the trust fund not in default for more than 60 days. By thus computing the principal amount of the fund, the judge found that it exceeded the principal of the outstanding bonds between June 4 and 8 by $282,300, and that there was therefore a clear day during this period. The surcharge which he actually allowed of $142,500 was based on the difference between this amount thus available for release and the amounts in fact released from June 8 to August 17. The question now before us is whether it was error for the judge to include securities in default for 60 days or less in his computation of the value of the trust fund.

We think it was. The situation seems to us to be controlled by both the ruling and the rationale of President and Directors of Manhattan Co. v. Kelby, supra, 2 Cir., 147 F.2d 465, involving the Fifth and Ninth Series Prudence-Bonds. .The variance in the third proviso of the “release” clauses, there providing for withdrawal of the mortgage securities “in default in the payment of interest,” and here for withdrawal of such securities “in default in the payment of principal for more than 60 days,” was succinctly expressed by the Master as an allowance here to the collateral in default of “an incubation period of 60 days.” But he added quite properly: “However, this incubation period did not change the formula for arriving at ‘excess’; the defaulted collateral was no less excludable from the required residue, after the withdrawal, because the default was not then 60 days old.” Nevertheless, Judge Inch overruled the Master on this point to hold that under the “release” clause here “a ‘defaulted’ security is one ‘in default in the payment of principal for more than 60 days’ and a default for any lesser duration appears to me to be immaterial.” This, we think, was error.

The rationale of the Kelby case is not based upon the isolated language of the release provisos, but is an interpretation of the entire provision in its purpose and intent construed as part of an entire contract. So the reasons for the interpretation stressed by Judge Frank in his opinion are based upon clauses and provisions found elsewhere in all the respective trust agreements. In fact, the first reason, 147 F.2d at page 470, stresses a provision also found in the agreement here: “Article I, § 2, provides that each bond and mortgage of type (a) delivered to the trustee as part of the trust fund must be accompanied by an affidavit of a corporation officer that it is not in default as to payment of principal or interest.” His second reason is based on Article II, § 2, relating to the authentication and issuance of Corporation bonds, which provides that so long as the Corporation shall not have been in default for a period of eighteen months, it shall have the right to issue, and the Trustee must authenticate, Prudence-Bonds in any maturity, provided that there are proper securities in the trust fund to match those issued. This provision is substantially the same as the requirement of the second proviso of the release clause, Article I, § 6. It is true that the agreements there contained a condition not found here for the deposit of securities of matching maturities with those to be authenticated, which served additionally to show the strictness of the requirement for good securities in the trust fund. But there is nothing here which suggests any modification in the requirement there found that the Corporation bonds could not be issued in amounts not matched by cash or (d) or (e) securities, plus the face amount of (a), (b), and (c) securities not in default. As Judge Frank says: “For to construe this provision to permit bonds to be authenticated and issued against (a), (b), or (c) securities which were in default would be to impute to the Corporation and the Bank an intention which verges on dishonesty, and it is therefore an interpretation not to be adopted unless (as is not the case here) no other is possible.”

Judge Frank continues: “The Bank, however, contends that, when an installment of the principal of a mortgage is in default, the quantum of the default, for purposes of the release clause, must be limited to that installment. We cannot agree. We think that, as the Master held, the clear intention was that, for this purpose, if one installment went unpaid when due, the entire amount of the principal of that mortgage should be regarded as in default.”

He then takes up the argument of the Trustee-Bank based on the provisions of § 4 of Article I (see quotation above) for the computing of the (a), (b), and (c) securities at their face principal amounts, “irrespective of whether any thereof are overdue or in default as to principal or interest.” He says, 147 F.2d at page 471: “But were this true, the release clause would in all circumstances permit the substitution of mortgages in default for undefaulted mortgages or cash. Such an interpretation would lead to so unreasonable a result that it should not be adopted if avoidable. It is avoidable: (1) The reference in the release to Article I, § 4, was, we think, intended merely to say that (a), (b) and (c) securities should be taken at their face amount, and (d) and (e) securities at their market value. (2) That reference in the release clause to Article I, § 4, is preceded by a reference to securities ‘authorized by Section 1 of this Article,’ and obviously that section called for the deposit of securities not in default. (3) That portion of the second sentence of Article I, Section 4, which states that (a), (b) and (c) securities are to be taken at their face amount regardless of whether or not they are in default is to be read in association with the first sentence, and also with the provision of Article II, Section 1 (which provides that the aggregate principal amount of the Corporation’s bonds at any time outstanding shall not exceed the principal amount of the trust fund and shall not exceed $5,000,000); therefore we think that that portion of the second sentence of Article I, Section 4, was meant, first, to protect the Corporation against demands for additional collateral, if (a), (b) or (c) collateral were in default or (d) and (e) securities declined in market value; and second, to define the rights of the Corporation to make collections under Article I, § 5.”

Judge Frank goes on to consider other details of the trust; but enough has been said here to show that the conditions of interpretation in the two cases are essentially the same. As he says, 147 F.2d at page 472, “the release clause, as we have construed it, expresses the agreement’s dominant purpose in the light of which its other provisions to which the Bank refers must be interpreted,” that dominent purpose being “that the trust fund was equally to secure all the bonds.” This construction makes the entire agreement consistent and avoids “an intention which verges on dishonesty.” It accords to the 60-day default provision the intent to assure speedy elimination of stale defaulted securities, rather than to increase the assets subject to withdrawal. And it avoids the anomaly of the district court’s view, which requires the writing into this negative restriction of an affirmative grant neither stated nor implied. The anomaly of such agreement-making appears the greater when we recall that there is no provision for a “clear day” in the trust itself; the principle is developed only as one of guidance to a court of equity in doing equity between the parties. As a creature of equity it is not naturally to be expanded sharply by remote implications deduced from an agreement touching other matters entirely.

Since this seems to us a reasonable construction of the trust along lines already established by this court we need not examine in detail other claims made by objectors to show that there occurred no “clear day,” but only the recurring dark and cloudy ones. We should notice, however, their contention that the releases of cash in question did directly violate the third proviso of the release clause. It is pointed out several times in the Kelby case, supra, 147 F.2d at pages 469, 470, 473, that all three conditions of the release clause must be fulfilled before the Bank was justified in making the releases. This proviso is explicit in saying that “if any securities” so deposited in the trust fund are in default in the payment of principal for more than 60 days “the Corporation shall be permitted to withdraw only such securities * * * as shall be so in default.” The words we have italicized seem to make the requirement beyond dispute. Since there were such securities in default — first the Hillman Hotel mortgage and then the Elmhurst-Hampton mortgage, as discussed in the first point of the Trustee’s appeal below — the particular security in default alone could be eliminated at the time each of the releases in question was made.

The trial judge has objected to this as a barren formula determining simply the order of withdrawal; thus he says that if the Elmhurst-Hampton mortgage had been withdrawn first, then immediately thereafter the excess cash could have been taken. But this seems to overlook the purpose, namely, that the fund be made “sweet” by covering the defaulted bonds before other withdrawals could be made. Here, as the Master found, there was no cash excess; and the defaulted mortgage could be withdrawn only by appropriate substitution of proper securities. The proviso would then fulfill its intent in the elimination of defaulted securities in accordance with the dominant purpose of the arrangement to protect all bonds issued. For this reason, also, the cash releases were therefore improper and the Master was correct in surcharging the Bank as Trustee for them in the sum of $1,045,250, plus interest.

It may be noted that the Bank urges vigorously a settled construction of the trust agreement made and acted upon by the parties at the time, contrary to our conclusion and in accord with the view of the district judge. But the parties were the Trustee and the debtor corporation ; overlooked entirely are the bondholders for whom the protective provisions were drawn.

3. From Rulings as to Interest, Expenses, and Costs. The objectors also appeal from certain rulings of the court allowing interest on the amounts surcharged at 3 per cent only and only certain of the costs, while disallowing expenses to them. The Master had found that the Trustee was not guilty of fraud or bad faith “except as gross negligence may be said to be bad faith”; on this basis he recommended the interest award at the reduced rate. He also recommended that the Trustee be required to pay the costs of the proceeding, together with reasonable allowances for expenses, including counsel fees. The court struck out the findings of “gross” negligence, and then allowed interest at 3 per cent and disallowed expenses. In his decision the judge did provide that the Bank should pay the costs of the proceeding Later when a bill of costs was presented, he struck out the item for compensation of the Special Master (together with two other items not here disputed) and divided the remaining costs by one-half, allowing a total of $1,183.12. The objectors assert that both expenses and costs should be allowed, together with interest on the surcharges at the rate of 6 per •cent per annum.

We are not inclined to upset the joint findings of good faith made below. The Trustee does appear to us negligent, whether we apply further descriptive adjectives or no; but it was not itself receiving the money or refusing to disgorge, as in Dabney v. Levy, 2 Cir., 191 F.2d 201, certiorari denied Levy v. Dab-ney, 342 U.S. 887, 72 S.Ct. 177, 96 L.Ed. 665; cf. Dabney v. Chase Nat. Bank of City of New York, 2 Cir., 201 F.2d 635. The events happened back in the halcyon days of high finance before the legal responsibilities of indenture trustees had been judicially defined. Looking now at these matters by wisdom of hindsight we should not attempt to enforce penalties based on a standard unrealistically high for the era. At any rate, we do not think the conduct of the Bank such as to require the full measure of exaction or deprive the court of its discretion to allow interest at the lesser rate. President and Directors of Manhattan Co. v. Kel-by, supra, 147 F.2d at page 479, note 33, and cases there cited.

The court’s disposition of the matter of expenses and costs we find more troublesome. Such issues are normally within the discretion of the trial judge, which we are loath to disturb. Disallowance of expenses, i. e., substantially of counsel fees, may well follow the ruling on interest and rest on the finding of an absence of bad faith. But that measure of grace made all the more natural the court’s first ruling that the Bank should bear the costs of the proceedings. Vv^e do not understand why the judge retreated from this position; the record vouchsafes no reason. It may well be that upon survey of the judgment he was impressed with the smallness of the award he was making against the Trustee as compared to that recommended by the Master. The Master had allowed nearly the entire amount claimed by the objectors, a total of $1,071,464.18, plus interest, while the court allowed a total of $159,216.66, plus interest — a substantial defeat for the objectors. Our judgment restoring the award to nearly that allowed by the Master would seem to leave no ground for denying costs and to make the reduction of the award by the full expense of its recovery substantially unjust. Ordinarily “costs shall be allowed as of course to the prevailing party unless the court otherwise directs.” F.R. 54(d). We think the direction otherwise here without justified grounds. Duke Power Co. v. Greenwood County, 4 Cir., 91 F.2d 665, 677-678, affirmed 302 U.S. 485, 58 S.Ct. 306, 82 L.Ed. 381; Gold v. Gold, 2 Cir., 187 F. 273, 274; Broffe v. Horton, 2 Cir., 173 F.2d 565, 566. As to the Master’s compensation, taxable by the court, under F.R. 53(a), “the amount thereof shall be a taxable cost against the unsuccessful party.” Civil Rule 5 of the United States District Courts for the Southern and Eastern Districts of New York; cf. N.Y.C.P.A. § 1518; Ex parte Peterson, 253 U.S. 300, 315, 40 S.Ct. 543, 64 L.Ed. 919. We hold, therefore, that the Trustee must pay the entire taxable costs of this proceeding, including the compensation of the Special Master.

II. The Trustee-Bank’s Appeal

1. From the Partial Sustaining of the Second Objection. This is the Bank’s attack on the surcharges for the releases of cash which we have discussed above under the objectors’ appeal from the dismissal in substantial part of their second objection. The Bank challenges any surcharge, denying that any security was in default and relying upon certificates of nondefault given by the debtor to it.

Of the two mortgages found to be in default, the Hillman Hotel and the Elm-hurst-Hampton mortgages, the first in the face amount of $675,000 became in default upon the nonpayment of $11,000 of principal due August 1, 1930, and, as found by the Master, remained so to the Bank’s knowledge until May 27, 1931. Upon this finding the first six releases of cash from October 31, 1930, through April 27, 1931, were improper. To this the Bank makes several answers. Relying upon its conclusion — rejected by us above — that a default of 60 days or less was immaterial, it asserts that the default did not actually occur until January 2, 1931; and the 60-day period of grace would thus afford protection for the first five releases. The basis for its contention is that the mortgage actually did provide for the payment of installments of principal on January 1 and July 1. But the property was a summer hotel deriving most of its income in the summer, and by a rider to the mortgage it was provided that the January installment would be deposited with the guarantor (the Prudence Company) on the preceding August 1. Failure to comply with this promise was surely a default in the mortgagor’s obligations, as appears to have been settled in other Prudence cases, e. g., Prudence-Bonds Corp. v. State Street Trust Co., 2 Cir., 202 F.2d 555, 560. The Bank makes other claims: that the guarantor did collect the interest due August 1 and inadvertently failed to claim the principal due, and that the amount actually collected must be held by the guarantor in trust to satisfy the requirement of payment on the principal. None of these, it seems to us, can affect the basic and controlling fact that the mortgagor was not meeting its obligations as required.

To avoid the sixth or very substantial release of cash on April 27, 1931, the Bank contends that the default was cured by its sale on that date of the default to the guarantor for $11,000, together with a “junior participation” in the mortgage. The latter was an agreement by the Bank to accord the guarantor a participation in the mortgage to the extent of $11,000 in all respects junior to its own interests as trustee. But it could make no sale even before default, In re Prudence-Bonds Corp., 2 Cir., 102 F.2d 531, 534; and this seems only a plan whereby some one other than the obligor makes good the mere amount of the default in order to obtain a release and a weakening of the protection of the trust fund to the extent of the amount withdrawn, $525,450,000. Again the basic fact of the mortgagor’s default remains.

The Bank also relies on a written expression of opinion by Prudence counsel that the transaction would be effective to erase the default and permit withdrawal of excess collateral; it cites Article Y, § 1, of the trust agreement, protecting it from liability for action taken by it in good faith in accordance with the opinion of counsel. It did not, however, actually rely on this opinion, since it sought the advice of its own counsel, who replied hesitantly that, although “this method of curing the default in the Hillman Company mortgage is not expressly provided for in the Trust Agreement and is perhaps not the most satisfactory method from the Trustee’s point of view,” yet he thought “that the risk which you run in complying with the Prudence Company’s request is slight.” So dubious a backing for so dubious a method favoring the guarantor, whose interest adverse to the bondholders was perfectly clear, can hardly be considered a good-faith reliance upon the opinion of the guarantor’s counsel. In fact the debtor itself had suggested to the original trustee some two years earlier with regard to this provision of Article V, § 1, that “if an opinion of counsel is necessary, it should be the opinion of your counsel.”

Surcharge for the first six releases being thus established, we turn to the situation as to the Elmhurst-Hampton mortgage, default in which has been held established below to support the surcharges for the remaining six cash releases from June 8 through August 17, 1981. This mortgage in the amount of $190,000 was divided by an ownership agreement into a senior participation of $160,000, denominated a first mortgage .and held by the Trustee in the trust fund, and a junior participation of $30,-000, held by others. In March, 1931, the attorney for the junior owners, wishing to foreclose because real estate taxes due November 1, 1930, and interest on the mortgage due March 1, 1931, remained unpaid, sought through an officer of the debtor and the guarantor consent of the senior owner as required by New York law. So this officer, on behalf of the Trustee as senior owner, gave this consent in writing, together with authorization and instructions to foreclose the junior participation. On March 26, 1931, a summons and complaint and lis pendens ■of an action of foreclosure in the name of the Bank as trustee and the junior ■owners against the mortgagor (who was not served) and others, including an intermediate transferee, who was notified, were filed in the office of the appropriate county clerk. Thereafter a title search showed that this transferee had itself transferred the record title to one Bortz by deed recorded on March 12, 1931. Consequently supplemental service was made on Bortz on May 12, 1931. The Elmhurst-Hampton mortgage provided that the whole of the principal sum should become due at the option of the mortgagee on default for 20 days in the payment of interest, but that written notice must be given of such acceleration of the principal. The Master has held that such notice was therefore not given until May 12, 1931.

At the hearings below the officers of the Bank denied all knowledge of these steps and no actual knowledge was brought home to them. It is true that on August 8 the attorney for the junior owners procured release of the mortgage papers by the Bank to him for the purpose of the action; but this was after all but the last cash release. The foreclosure went through, the premises were sold at foreclosure sale on October 9, 1931, and the junior owners received a small balance on their mortgage. The Bank did have knowledge of the defaults in payment of interest during the period covered by the cash releases from March 1 to October 20, 1931, because of the monthly collection statements it received early each month from the debtor. And the “certificates of non-default” which we discuss below were carefully limited to exclude reference to the interest defaults. On these facts both the Master and the district judge, albeit by somewhat different routes, held the Bank for the six releases made during the period of the default of this mortgage. The Bank challenges all the routes to this conclusion.

There are several theories urged in support of the result reached below. The one most extensively reasoned by the Master is that from the standpoint of the Trustee’s obligation, the time when the power to call the principal became operable determined the time of default. Although the judge rejected this ground, holding that default in obligation as to the principal did not occur until an actual call was made, the rationale of the Master appears to be sound. He argues that the power to call the principal and the power to draw down excess of collateral are both powers in trust, to be more strictly construed as between trustee and beneficiary than between the property owner and his mortgagee. We have recently had occasion to hold that indenture trustees, assuming the high obligations of a trustee to the investing public, should be held to a standard of conduct required of such fiduciary. Dabney v. Chase Nat. Bank of City of New York, 2 Cir., 196 F.2d 668, 671. So here, when the Trustee learned that collateral for the protection of its beneficiaries was in a weakened condition because of a default in the assumed obligation of the mortgagor, and it could proceed at once to protect its fund by taking legal steps to enforce the obligation, should it be able not merely to stand by, but also to weaken its fund by releasing cash? A negative answer seems more consistent with the obligations of a trustee. Moreover, it makes for the more coherent scheme of operation of the trust, for it avoids all question, such as occurred here, as to just when a call occurred and when its duty to protect its fund became critical. In fact, the Court of Appeals has so ruled against a company issuing guaranteed first mortgage certificates. Fisher v. Title Guarantee & Trust Co., 287 N.Y. 275, 280, 281, 39 N.E.2d 237. Judge Inch’s distinguishing of this case on the ground that “Principal became due ipso facto upon a failure to pay interest” is not sound, for N.Y. Real Property Law § 254(2), McK.Consol.Laws, c. 50, treats mortgage clauses such as the one in question as granting only an option of call and the case shows neither call nor action to foreclose the mortgage.

Judge Inch concluded that the institution of the foreclosure on March 27 was a sufficient act of acceleration of the principal, so far as concerns the Trustee, and that notice to the titleholder was not required to fix rights against the latter. Here again, having regard to the fiduciary obligations assumed by the Trustee, the conclusion seems sound. The debtor and the guarantor were its agents for collection of the amounts due on the collateral in the trust fund, and they had the power and the duty to institute or authorize foreclosure in the name of the Trustee, as they did here. Had the Bank by its own officers started foreclosure, that would have been a call of the principal surely sufficient to put it on notice that its collateral was in default. When the same action is taken for it by its authorized agents, the result should be the same.

Finally our conclusion above, that there was no “clear day” and that mortgages in default as to interest or for less than 60 days still cannot be used in computing excess collateral, leads to the same result. We have already ruled that there was no excess collateral justifying the large withdrawals of June 8, 1931; and the grounds taken by us in supporting the Master and reversing the trial court on this issue require the result reached below unless, indeed, the certificates of non-default, so strongly relied on by the Bank, grant absolution.

Authority for these certificates is found in the last sentence of the second full paragraph of Article I, § 6, supra: “The Trustee may accept as conclusive the written statement of any officer of the Corporation as to whether or not any securities deposited in the Trust Fund are in default in the payment of principal or interest.” Certificates were furnished when the releases were requested, and an issue has been made of their adequacy. The debtor’s letter asking for the first release, that on October 31, 1930, contained no statement; those for the releases between November 29, 1930, and April 27,1931, contained statements advising the Trustee that “none of the securities deposited in the Trust Fund are in default in the payment of principal or interest for sixty days or more”; while those for the releases between June 8 and August 17, 1931, omitted any reference to “interest.” Both the Master and the district judge found that the Bank did not accept these statements as conclusive. It had full knowledge of the default in the Hillman mortgage which we have set forth above; and it had full knowledge of the default in interest on the Elmhurst-Hampton mortgage from March 1 on and that the entire principal was and had been callable since March 20, 1931. Such exculpatory provisions should be “strictly construed,” Prudence-Bonds Corp. v. State Street Trust Co., supra, 2 Cir., 202 F.2d 555, 563, citing 1 Restatement, Trusts § 222 (1935); and such knowledge might in any event be sufficient, whatever the notices. But it is apparent that on the construction we have given the trust agreement, the notices were quite inadequate ; they left unmentioned the essential feature of the status of the interest payments. We need not consider their adequacy, therefore, had the issue actually been one turning only on securities in default for 60 days.

2. From the Sustaining of the Third Objection. The third objection involves the Bank’s acts on six different occasions from February 23 to December 9, 1932, in accepting bonds of this series for cancellation in lieu of cash collected by the debtor on account of principal on mortgages in the trust fund. The Master recommended a surcharge on the last three items only because they alone occurred after May 1, 1932, the date on which the debtor defaulted in the payment of principal of this series of bonds. And as to one of these items he allowed $500 only because the foreclosed premises were ultimately restored to the trust fund at that cost. The total surcharge he recommended on this objection was $3,966.68.

Judge Inch upheld the Master on this allowance, but ruled further that the objection should be sustained also as to the first three items, since the Bank had notice on or about January 2, 1932, to the effect that the maturing bonds would not be paid when due. It is true that an. “event of default,” upon which certain rights such as acceleration of the maturity date of all issued bonds might turn, would not occur until eighteen months after such principal default; but the trust agreement makes a clear distinction between a default and an event of default. Article IV, § 1, and Article V, § 1. In President and Directors of Manhattan Co. v. Kelby, supra, 147 F.2d at pages 478, 479, we held that the trustee there should not have accepted bonds for cancellation after this notice of default; and the Bank’s attempts to distinguish that case are not persuasive. In addition, as Judge Inch points out, the cancelled bonds were those only authenticated after receipt of the notice and never issued or sold to the public. Hence this was merely a device to permit the debtor to retain cash which it should have deposited in the trust fund. We agree with the judge when he says: “The Bank, as Trustee, should not have countenanced these transactions.”

The court therefore correctly increased the surcharge under the third objection by $12,749.98 to a total surcharge of $16,716.66.

3. From Denial of the Defense of Partial Restoration. Between July 20, 1931, and November 10, 1931, the debtor restored to the trust fund $19,375 without withdrawals therefor. For this amount the Bank claims credit. But the Master declined to allow it for lack of a showing that the amounts restored had any connection with the cash released. Various other trust transactions occurred thereafter and were in part supported by the deposited bonds; thus new bonds to the amount of $46,900 were authenticated between December 3, 1931, and October 31, 1932. There would be no reason for allowing restoration to the losses here only thus to promote a deficit elsewhere in the fund and the Bank does not show that this would not result.

Summary and Direction. The result of our holdings explained above is that the Bank’s appeal is rejected, while on the objectors’ appeal the judgment stands except in two particulars. We have ruled that the second objection must be sustained in full and the Bank surcharged for all the twelve cash releases from October 31, 1930, through August 17, 1931, together with interest on each at 3 per cent from the date when it was made; and we have further ruled that the Bank must pay all the costs of this proceeding, including the compensation to the Master.

Accordingly on the Bank’s appeal the judgment is affirmed; on the objectors’ appeal it is reversed for the additional awards here directed. 
      
      . Central Hanover Bank & Trust Co. v. President and Directors of Manhattan Co., 2 Cir., 105 F.2d 130; Manufacturers Trust Co. v. Kelby, 2 Cir., 125 F.2d 650, certiorari denied 316 U.S. 697, 62 S.Ct. 1293, 86 L.Ed. 1766; Brooklyn Trust Co. v. Kelby, 2 Cir., 134 F.2d 105, certiorari denied 319 U.S. 767, 63 S.Ct. 1330, 87 L. Ed. 1717; President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F. 2d 465, certiorari denied 324 U.S. 866, 65 S.Ct. 916, 89 L.Ed. 1422; Prudence-Bonds Corp. v. State Street Trust Co., 2 Cir., 202 F.2d 555.
     
      
      . The original trustee for this series was the United States Mortgage & Trust Co., which merged with the successor Trustee on June 29, 1929.
     
      
      . Alternatively they claim a surcharge of the interest on the Butterick mortgage to its maturity date, less an adjustment of interest on the releases covered by the second objection for this same period and up to the same amount; at 6% interest, the result would be very nearly the same as the amount allowed by the Master.
     
      
      . I.e., “maturing during the six months’ period immediately preceding or the three months’ period immediately following and including the maturity day of the Prudence-Bonds then requested to be authenticated.”
     