Burbank v. Buhler

The opinion of the court was delivered by Nicholls, C. J. The notes to which the plaintiff refers in his petition are two of the five joint and several notes which Joseph Buhler, Fred G. Ernst and Felix Ernst, Jr., individually and as members of the commercial partnership of Ernst & Co., of which they were the partners executed on the 10th of January, 1887, before Collens, notary, to secure a loan of twenty-five thousand dollars made to them by plaintiff, Burbank, and which they secured as to payment by special mortgage on certain property described in the act before Collens, the title of which stood in the names of the three mortgagors. In order more effectuaaly to secure the payment of these notes the mortgagors bound themselves in their said capacities to cause all the buildings and improvements to be insured and kept insured against the risk of fire up to the full amount, and up to the final payment of the promissory notes, in capital, interest, and to transfer and deliver to the mortgagee until then the policy or policies of such insurance. The evidence shows that fire policies were taken out by the mortgagors under the stipulation just mentioned and were transferred to and held by him. These policies were not only a protection and security in aid of the payment of the plaintiff’s debt in its entirety and the extinction of the mortgage on the property, but also a protection to the owners of their property rights therein. Each one of these three mortgagors was interested in these policies — that they should be taken out, and being taken out, they [47] should be transferred to the plaintiff and held by him as collateral security for the extinguishment of the notes and mortgage. Joseph Buhler died in 1895, his death carrying with it the dissolution of the partnership of Ernst & Oo. The property mortgaged had at that time very valuable improvements upon it and the value largely exceeded the amount of plaintiff’s debt. The mortgage debt had at that time been reduced to ten thousand dollars. Joseph Buhler not only then held his interest in the properties of the firm, but the firm owed him additionally a large amount. Buhler left a minor heir, the defendant in this suit, and those having charge of her affairs thought it to be to her interest to at once disconnect her interests from those of the firm. A settlement between the parties was accordingly made by judicial authority, under and through which Fred G. Ernst and Felix Ernst, Jr., acquired her interest in the firm and assumed to pay all its outstanding liabilities, one of the liabilities so assumed being this balance of mortgage debts due to Burbank. It is needless to enquire why matters were left in this particular shape as to this debt. There was certainly no apprehensions felt on account of it by the friends of the minor assembled in family meeting, who recommended this particular course, the plaintiff himself being one of the members at the meeting. The debt was small; the property securing it was largely in excess of the amount of the debt, and the minor stood additionally secured from danger by the personal assumption of the two Ernsts and by the stipulation originally agreed upon, that fire policies should be taken out and transferred to and held by Burbank as collateral. This latter fact minimized any damage resulting from leaving this debt outstanding. Fred G. Ernst and Felix Ernst, Jr., upon acquiring the entire property formed a new firm under the name of Ernst & Co., and continued in the business of millers, keeping up their business relations with, the plaintiff, who loaned them large amounts of money, some of which they secured by special mortgage on the Julia street mill property, which they by reason of their purchase of the Buhler interest, then owned in its entirety, but part of which was left unsecured. From the time of this sale to the two brothers Ernst, up to the institution of the present suit, the defendant seems to have been ignored by all parties, but affairs suddenly (by reason of the destruction by fire of the buildings on the mortgaged property) took such shape as to make her legal position in the premises a matter of very great concern to the plaintiff. By [48] the destruction, of the buildings on the mortgaged property by fire, it became evident to the plaintiff that his interests had become jeopardized. At the time of this fire Burbank held as collateral security policies issued against loss by fire of the buildings on the mortgaged property to an amount of about twenty thousand dollars, which Ernst & Oo. had taken out; they holding besides these additional policies to a large amount on the same buildings. These policies with one or two exceptions were collected and as collected the amounts realized were received or turned over to the plaintiff. The particular policies which he held as collateral realized a little over nineteen thousand dollars. Besides this amount Burbank received moneys from the other policies. Instead of applying the moneys so received to the extinction of the outstanding balance of the mortgage notes executed on January 10th, 188 Y, Burbank felt himself legally warranted in disposing of them as he thought best. He accordingly on receipt of the moneys collected from these policies would return to the Ernsts particular notes, which he himself selected as those which had been paid, though the moneys received and in manner such as to leave outstanding and unpaid the mortgage notes of January 10th, 188Y, which stood secured as to payment by the first mortgage on the property. Part of this money was used in paying a second mortgage indebtedness and part (some $15,000) in paying unsecured indebtedness. Fred G. Ernst and Felix Ernst received the notes which were so returned, no objection being made, but giving no consent, other than such consent as might be inferred from silence and inaction. They assign as their reason for not objecting that, knowing that they themselves owed all the notes, it was a matter cf indifference to them which notes should be extinguished; that it did not occur to them that the defendant had any interest or concern in the matter; that had they realized that she had, objection would have been made and the notes would have been returned. What we are called on to consider in this case is not what the situation is as between the plaintiff and the two Ernsts, not what these parties, either separately or together, would have been warranted in doing.were they alone to be affected, but what the situation is as between the plaintiff and the defendant, whose interests have been, or will be, vitally affected by the course which has been pursued, to which she has given no consent and about which she has not been consulted. It is very true that there are cases wherein it has been held that an imputation of payment made [49] between a creditor and his debtor is not subject to the control of third persons, or even of parties more or less concerned in the resulting1 situation, but we have to deal here with special conditions and circumstances, which call for special examination. The defendant can not be classed as a third party to what has taken place in this matter; she has been and is so connected legally with the plaintiff, and the brothers Ernst, as to entitle her to question the validity and legality of the action by which her interests have been sacrificed. Persons are much more free to act in their dealings with each other when their own interests, alone are to be affected, than they are when the interests of persons other than themselves will be made to suffer. In Griffin vs. His Creditors, 6 Rob. 224, this court said: “We are referred to the rules laid down in the Code for the imputation of payments when two debts are of the same nature and equally onerous. Those rules which are to govern in the settlement of accounts between a debtor and his creditor cannot clearly be enforced to the prejudice of third persons.” We find it declared in Dalloz and Verge Codes Annotés, under Art. 1255 C. N. (No. J) : “Les tiers intérressés ne sauraient étre lies par l’imputation que le créancier a fait á leur prejudice.” (J. G. obligations 2024, V. Art. 1848.) It becomes necessary, therefore, to ascertain what rights the defendant had in this matter and how far plaintiff was justified in ignoring them. While Buhler, Fred. G. Ernst, and Felix Ernst, Jr., were all bound, as was the first partnership of Ernst & Co., for the debt evidenced by the notes executed in the act before Collins, each of these individuals was, separately, directly interested therein, and Burbank, as the creditor holding the notes, was bound to recognize and protect that interest. The collaterals furnished were given to Burbank for the protection''of a particular debt in the payment of which not only Burbank and the two Ernsts were concerned, but also the defendant, plaintiff neither acting alone nor in concert with the two Ernsts could legally divert the collaterals when once placed in his hands for a specific purpose to some other object. The Ernsts in obtaining these policies and placing them as collaterals in the hands of the plaintiff, were not acting in their interests alone, but for and on behalf also of the defendant, and the plaintiff knew this when he accepted the col-laterals given for that purpose. Neither he nor the Ernsts were at liberty to change their destination without defendant’s consent. Art. [50] 3170 of the Code, referring to the duty of a pledgee, says that “if the credit which has been given in pledge becomes due before it is redeemed by the person passing it, the creditor by virtue of the transfer which has been made to him shall be justified in receiving the amount and in taking measure to recover it. When received, he must, apply i-t to the payment of the debt due to himself1 and restore the surplus, should there be any to the person from whom he held it in pledge.” , What debt must he apply it to ? Evidently to the debt for which it was given him in pledge to pay. The interest of the defendant in 'the Julia street property was transferred to Fred. G. Ernst and Felix Ernst, Jr., charged with the obligation assumed by them of paying the plaintiff and of carrying out the obligation contracted by the mortgagors in the act before Collins of taking out fire policies on the property secured by the mortgage. This obligation they carried out, and defendant had a right to suppose that the plaintiff would respect her rights in the premises. Had they not taken out the policies, the defendant would have been entitled to have done so herself. (C. C. 213); to have held the policies not only for plaintiff but for her own protection in the premises. When the Ernsts obtained and gave them as collateral to plaintiff, it was his duty to hold them for defendant’s protection as well as his own. (Baldwin vs. Thompson, 6 La. 179; Gay vs. Blanchard, 32 Ann. 505.) Had defendant paid the notes, it was plaintiff’s duty to have had control of the collaterals and to have either turned them over to the defendant or hold them for his security and benefit. He has diverted the collaterals which had been placed in his hands for the security of a specific mortgage debt to the payment of unsecured debts due him by the Ernsts for an amount larger than was sufficient to have paid the debt for which the policies were given to him as collaterals. Under such circumstances the debt as between the plaintiff and the defendant must be held to have been paid. The diversion of the collaterals carried with it as its result the obligation of the plaintiff to credit the debt to the amount diverted. (Bullet, Miller & Co. vs. Hewit, Norton & Co., XI Ann. 327.) We think the judgment is correct. It is hereby affirmed. Rehearing refused.