Slade v. Squier

Laughlin, J.: This is a suit in equity to cancel a bond executed by the plaintiffs to the defendant, Frank Squier, on the 1st day of December, 1906, to secure the payment of the sum of $12,600 and a mortgage to secure the payment of the indebtedness represented by the bond bearing even date therewith upon certain real estate in Block Island, ¡R. I., executed by the same parties and acknowledged on the same day as the bond. Both instruments were, duly recorded in the records of mortgages of real estate in the town of .¡New Shoreliam, ¡Newport county, ¡R. I., in book 3 at page 392. The plaintiffs not only demand a cancellation of the instruments, but that they be discharged of record, on the theory that they constitute a cloud on the title to the premises. The judgment from which the appeal is taken adjudges that the bond and mortgage are void, that they be surrendered by appellant for cancellation, that they be canceled, and commands the appellant to execute a discharge in due form to the end that it may be recorded, and that the record may show that the bond and mortgage have, been paid and discharged of record. The mortgagee executed an assignment in writing of the mortgage on the 3d day of January, 1908, to the defendant Bennett. This assignment was not under seal, but following the signature of the mortgagee is a recital that it was sealed and delivered in the presence of a witness named. It was, however, acknowledged by the mortgagee and not by the subscribing witness. This assignment was also recorded.- The ground upon'which it is sought to cancel, the bond and mortgage is- that they are usurious and void. As I view the case, it is unnecessary to decide whether the evidence is sufficient to sustain the finding that the bond and mortgage are tainted with usury; but if it were necessary to decide that question, I am of opinion that we would be obliged to agree with the referee in the inference which he draws from the evidence. A — 668 — very serious question is presented, however,.as to whether that defense is open to the plaintiffs as against the bank which holds the bond and mortgage, or for which they are held, by an employee as collateral security. There is no doubt, I think, that by virtue of the provisions of sections•5197 and _5198 of the Bevised Statutes- of the United States, the bank, if it be an innocent holder for value, could recover th^principal due ón the bond' and mortgage, even.though the instruments were tainted with usury. (Haseltine v. Central Bank of Springfield, No. 2, 183 U. S. 132; Schlesinger v. Kelly, 114 App. Div. 546; Schlesinger v. Gilhooly, 189 N. Y. 1; Schlesinger v. Lehmaier, 191 id, 69.) A national bank is riot permitted to loan money oil the security of real estate, and this doubtless accounts for the assignment being taken in the name of an employee, instead of in the name of the bank. That, however, does not render the security void or deprive the bank of the right to enforce it; but merely subjects the bank to liability to be called on to account to the government for exceeding its powers. (National Bank v. Whitney, 103 U. S. 99; Logan County Bank v. Townsend, 139 id. 67.) There is no law, Federal or State, which prevents an agent from taking security in his. own name for the benefit of his principal. (Schuyler Nat. Bank v. Gadsden, 191 U. S. 451.) If. the evidence, which - will be considered presently relating to the subsequent assignment by Bennett to the bank, be deemed insufficient to show the execution of a valid assignment of the securities to the bank eo nomine, still I think parol evidence, was admissible to show that this assignment was taken by Bennett for the. benefit of thé bank. The recital in it that it was sealed would doubtless make it a sealed instrument for the purpose of the Statute of Limitations, because that is an admission of the-parties as to the nature of the instrument which they intended to execute; but. such recital, in the absence of a seal, does not riiake the instrument one under seal within the hile forbidding the reception of parol evidence tó show who were the real parties in interest or for whose benefit the instrument was executed, when such evidence is offered in behalf of a third party claiming -an interest, and not in behalf of a party to the instrument, to impeach his own solemn agreement and relieve himself of liability. It is quite likely that the assignee named in the instrument, to whom it Was assigned individually, would not be — 669 — permitted to escape any liability thereon himself by showing that it was intended for the benefit of another, but that is not this case. . He is here endeavoring to show in the interest of his principal that he was acting for the bank, and that it is entitled to the benefit of the protection afforded by the National Banking Act. The serious question arising on this branch of the case, if it were necessary to’ meet and decide'it, would be, I think, whether the evidence shows that there was any valid consideration for the assignment to the bank, which would give it the right to enforce the instruments if void, as between the original parties. If any extension of time was given to pay the indebtedness, as security for which the agreement wgs made, it has not been very clearly or satisfactorily shown. I am of opinion that a new trial should be granted, and that the action should not be tried until other parties are brought in, and, therefore, it becomes unnecessary to decide the merits of this point. Prior to the 3d day of January, 1908,'the defendant Squier was indebted to the American Exchange National Bank in a sum in excess of $12,000 on notes, both as maker and as indorser. The defendant Bennett was at that time employed by the bank as discount clerk. It appears by the testimony of the assistant cashier of the bank that the defendant Squier applied to him for an extension of time within which to pay his indebtedness to the bank and an extension of time for the payment of indebtedness due to the bank from the Meers Artificial Leather Company and the Manufacturers’ Mercantile Company, in which he was interested as a stockholder and' otherwise, and that the witness agreed that the extension would be granted provided Squier deposited additional collateral security and agreed to indorse notes of said companies in renewal of those due or about falling due, upon which he was not then liable; that it was thereupon agreed that Squier should assign the bond and mortgage in question to the defendant Bennett for the bank, which was the coui'se pursued by the bank in taking such security in numerous other transactions and that Squier then sent the bond and mortgage to the bank and its attorneys drew the assignment which Squier executed and delivered to the cashier,, who turned the papers over to the appellant whose duty it was to take charge of such securities for the bank. The defendant Bennett testified, in substance, that there were no negotiations with Mm concerning the assignment of — 670 — the bond and mortgage to him; that he received them as an employee of the bank and as additional security for the indebtedness of the defendant Squier to the bank; that after the bond and mortgage were' received by him he executed and duly acknowledged . an assignment thereof in blank and delivered it to the cashier or "another officer or agent of the bank and that the papers were subsequently returned to him, put together and held as' security for the indebtedness of the defendant Squier to the bank. ’ The defendant' Squier, although named as a.party defendant, w'as riot served. At the commencement of the action plaintiffs obtained a preliminary injunction, enjoiriing appellant from transferring the bond and mortgage, with an order to show cause why it should not be continued pending the action. . On the return day of the order to show cause, June 19, 1908, the appellant stipulated that, he was then the owner and holder of the mortgage. On the 26th day of June, 1908, the attorneys for the plaintiffs and appellant entered into a stipulation, in writing, with respect to the payment of interest- and taxes, without prejudice, and appellant therein stipulated that he would not assign the bond and mortgage, and both stipulated that the issues between them in the action be forthwith referred to a referee. named in the stipulation. On the case being opened before the referee counsel for the appellant moved to dismiss the complaint on the ground that the trustee in bankruptcy of the defendant Squier was a necessary party but had not been joined. The court denied the motion, upon the ground .that it did not appear that Squier had been adjudicated a bankrupt and suggested that the only question with respect to the parties that could arise was on account of the'plaintiff’s failure to serve Squier. On that point counsel for the appellant informed the referee that liis client had agreed to raise no question on account of the absence of the defendant Squier. ^Tlie reference then proceeded. The motion was renewed at the close of the plaintiffs’ case and denied. The defendant offered in evidence a certified copy of the adjudication in bankruptcy against "Squier, made on the 12th day of March, 1908, in the United States District Court for the eastern district of Mew York, which was before-the commencement of the action. This was objected to as irrelevant and immaterial, and the- objection was sustained and appellant duly — 671 — excepted. The evidence, however, showed without objection that Squier had been adjudicated a bankrupt. His trustee in bankruptcy was summoned as a witness and refused to produce certain papers, upon the ground that he was a necessary party to the action and that the judgment demanded would affect the interests of the estate of the bankrupt. The trustee in bankruptcy was not made a party, and the case proceeded to judgment in the absence of Squier or the trustee in bankruptcy and of the bank. The appellant makes the point that the case should not have been tried without the presence of the trustee in bankruptcy. This objection was, I think, well founded, and was one of which the court should have taken notice upon attention being drawn thereto, even without a formal motion. The undisputed evidence, shows that the bond and mortgage were not sold outright, but were merely assigned as collateral security. It necessarily follows, therefore, that the assignor, and, after his interest passed to a trustee in bankruptcy, the trustee in bankruptcy, was interested in this litigation, and that his interests might be seriously prejudiced by the judgment which was demanded and which has been entered. The trustee in bankruptcy had the right to redeem this security by paying the indebtedness to the bank, and even though Squier was indebted to the bank, as found by the referee, in excess of the value of these securities, still the estate in bankruptcy is affected, in that after judgment herein the bank would be entitled to file a claim for the entire amount of the indebtedness without any deduction on account of the security. Although the judgment would not be binding upon the trustee, yet, since it compels the delivery up of the bond and mortgage for cancellation and their actual cancellation, and the execution of a discharge in such form that the record will show that the mortgage has been satisfied and .discharged, it is manifest that the trustee could do nothing with the securities without another action, in which he would be obliged to'call upon the court to cancel the action which the court by this judgment has directed. The trustee in bankruptcy is entitled to be heard on the question as to whether or not this was a usurious transaction before this bond and mortgage are canceled or the record thereof is affected. Of course, as between the appellant and the plaintiffs, they could by stipulation, if the court saw fit to hear the case piecemeal, have had a decree which would — 672 — have determined the questions as between themselves, and would have left the rights of other parties unaffected, but that was not done. The court has taken jurisdiction of the action and has directed the entry of a judgment that necessarily affects property and property, rights of the trustee in bankruptcy, The court should, when attention was drawn to the fact that a trustee in bankruptcy had been appointed who had succeeded to Squier’s rights,, have stayed the trial of the action and have directed that the trustee in bankruptcy be. brought in - as a party defendant, for the issue could not be. determined without prejudice to his rights, and furthermore, any judgment between the- plaintiffs and the appellant would have been abortive, as it would not be an adjudication upon the entire issue, but it would' as has been done in form cancel the securities and the' record thereof and it would be Cl effectual for that purpose as between the parties to- the action, and yet the securities would'remain valid and subsisting as between the trustee in bankruptcy and the plaintiffs. (Cook v. Lake, 50 App. Div. 92; Mawhinney. v. Bliss, 124 id. 609; Steinbach v. Prudential Ins. Co., 172 N. Y. 471.) I am also of opinion that the bank was a necessary ‘party to the action and that the appellant has no interest in the - subject-matter thereof. It is not concluded by the stipulation of the defendant Bennett that he was- the holder and owner of the bond and mortgage. His official position was not such that he .was authorized to spéak for the bank on that question, and the agency or trusteeship evidenced by his'acceptance of the assignment, 'does, not give him . such authority, where, as here, it appears that a formal assignment transferring the legal title to the bond and mortgage was executed by him in blank and was intended for the bank and was delivered to and retained by it. If he had not executed such an assignment, perhaps the bank would be bound by a judgment against him, for he would be deemed to have held the bon,d and mortgage as agent or trustee for the bank, but'that is not the case as presented by this record, for here he appears to have parted with all of his interest in the bond and mortgage. The assignment to the bank was not recorded and this was doubtless for the same reason which led the bank to take the assignment from S.quier in the name of Bennett: Of course, innocent third parties dealing with Bennett - in the cir — 673 — cumstances would be protected; but Squier knew that the bank was the real party in interest and when it further appeared that the legal title had passed to it, as between the parties, as well, the bank should have been made' a party defendant. The case presented, therefore, shows that a judgment has been entered canceling a bond and mortgage and the record thereof on the service and appearance of a party who has no right, title or interest therein, and when it appears that there are two other known parties, within the jurisdiction of the court interested, the one as the holder of the legal title as security, and the other as the owner of the equity of redemption, who have not been brought in as parties and, therefore, the judgment is not binding upon either of them, and yet -it interferes with their property in a -manner quite prejudicial to their interests. It_ follows, therefore, that the judgment should be reversed and a new trial granted, with costs to the appellant to abide the event. . Ingeaham and Houghton, JJ., concurred; McLaughlin, J., dissented.