author: Mr. Justice Friend

text:
    Maude Bamber Bergman, Appellee, v. Avenue State Bank, Appellant.
    Gen. No. 38,288.

      Opinion filed April 7, 1936.
    Rehearing denied April 23, 1936.
    Herrick, Vette & Peregrine, of Chicago, for appellant.
    Harris F. Williams and Sydney L. Blankstein, both of Chicago, for appellee.
   Mr. Justice Friend

delivered the opinion of the court.

Defendant appeals from a judgment rendered in favor of plaintiff for $973.35 and interest. There is substantially no dispute as to the following facts:

Norris & Kenly, a stock and bond brokerage firm, in payment for some stock standing in the name of William E. Bache, which one Sutherland had brought to them for sale for the account of Bache, issued and delivered to Sutherland a check for $973.35, drawn on Guaranty Trust Co. of New York, bearing date November 29, 1930, and payable to the order of William E. Bache. Bache died September 29, 1930, but Norris & Kenly had no knowledge of his death when the check was issued.

The check was brought to Harry A. Bergman, plaintiff’s husband, by one S. M. McCormick, who resided at the hotel where Bergman was employed as clerk. The check bore an indorsement “William E. Bache,” and McCormick, on delivering the check to Bergman, also indorsed it in blank, with the understanding that Bergman would put the check through his wife’s account for collection and out of the proceeds retain $250 which McCormick owed him and turn the balance over to McCormick.

Plaintiff, a depositor in defendant bank, indorsed the check and delivered it to defendant December 1, 1930, for collection and credit to her account, and asked to-be advised when it had cleared in order that she might draw against it. Defendant bank indorsed and forwarded the check to Continental Illinois Bank & Trust Company, its collecting agent, for collection, and was credited therewith. The Continental Bank indorsed and forwarded the check to Chase National Bank, in New York, for collection and credit to its account, and December 4, 1930, the Chase Bank received payment from the drawee, Guaranty Trust Co. of New York, through the clearing house, and credited the Continental Bank with the proceeds.

December 5, 1930, plaintiff was advised by defendant bank that her check had cleared and that she could draw against it, but the bank was not informed that plaintiff proposed to pay the proceeds or any part thereof to McCormick. On the same day plaintiff, by several checks, withdrew all but $250 of the proceeds of the $973.35 check, and turned over to McCormick the amounts so withdrawn, some by check and some in cash. Thereafter McCormick disappeared.

December 13, 1930, Egbert Robertson, attorney for Norris & Kenly, notified defendant bank that the indorsement of the payee was a forgery, and on the same day defendant, and also Mr. Robertson, so notified plaintiff. Norris & Kenly demanded that the drawee, Guaranty Trust Co., recredit their account to the extent of the amount paid Bergman on the check, Guaranty Trust Co. demanded that Chase National Bank reimburse it and Chase National Bank demanded reimbursement from the Continental Bank, which in turn demanded reimbursement from the defendant bank, the check being returned in each instance. Thereafter the defendant bank demanded reimbursement from plaintiff, and on January 15, 1931, charged the amount against plaintiff’s account and shortly thereafter surrendered the check to her.

Prior to January 14, 1931, defendant bank held plaintiff’s note for $300 and certain stock as collateral thereto. January 13, 1931, the bank wrote plaintiff that unless settlement was made the stock would be sold and her account charged. Plaintiff thereupon called at the bank and authorized sale of the stock. Plaintiff then knew of the demand by the Continental Bank for reimbursement from defendant bank. After selling the stock and charging plaintiff’s account, defendant reimbursed the Continental Bank. Plaintiff continued to carry her account with defendant bank until November, 1931. Monthly statements and vouchers were given her, for which receipts were taken with an agreement on her part to notify the bank of any error or irregularity within 10 days. No written notice was given by plaintiff, although she says she objected verbally, but defendant bank contends that no such objection was made. September 17, 1934, plaintiff filed suit, claiming* that defendant, by making the charge against her account, converted her money. The court rendered judgment in plaintiff’s favor for $973.35, from which defendant appeals.

It must be conceded that William E. Bache, the payee named in the check, had been dead for some time when the check was issued. "Under section 1 of the Negotiable Instruments Act (Illinois State Bar Stats. 1935, ch. 98, ¶ 21) an instrument payable in money, in order to be negotiable, “must be payable to the order of a specified person or to bearer,” and a “specified person, ’ ’ in contemplation of law, must be an existing person capable of indorsing the instrument and of being a party to a contract. “Paper cannot be made payable to a dead man.” (8 Corpus Juris 172.) Therefore, when an instrument is made payable to one not in existence the instrument is void and no one can acquire any rights thereunder. It was so held in United States v. First Nat. Bank of Coffeyville, 82 Fed. 410 (Kansas). In that case a pension check to Mary L. Beard was issued after her death. A grandson forged her indorsement, and after indorsing the check himself deposited it with the defendant bank, withdrawing part of the proceeds. The bank sent the check to another bank for collection, and through various collection banks it was finally presented to the government and the proceeds were remitted through collection channels to the bank of deposit. Some two years later the forgery of the payee’s indorsement was discovered, and the United States instituted suit against defendant bank. The court allowed recovery, saying (pp. 411, 412):

“The issuance of the check to said Mary L. Beard after she was dead was an act utterly void, and the check' itself was absolutely void, and no act of any one could breathe into it the breath of life, or make it of any value whatever. When the defendant bank took the check . . . it devolved on it to know who was the legal holder . . . and it paid the money out at its own risk, and peril. . . . The loss sustained is by reason of its own neglect in paying the check. It has received from the government ... . the amount demanded in this suit and there is no reason in law or equity why it should not be held responsible and reimburse the government in the amount paid out.” To the same effect was Wayman v. Torreyson, 4 Nev. 124. Under both of these decisions the instrument was held to be absolutely void. It would logically follow that no one can acquire any rights under a void instrument, and, having procured money without right, plaintiff in the instant case was liable to refund it.

Plaintiff takes the position, however, that after payment of the check by the drawee bank to the defendant, and by defendant to plaintiff, who in turn paid it out to a third person, the drawee bank was estopped to recover from defendant, and defendant bank was in turn estopped to recover from plaintiff. Several cases are cited to sustain this position. The first of these is National Council of the Knights & Ladies of Security v. Hibernian Banking Ass’n, 137 Ill. App. 175, wherein plaintiff drew a death benefit draft to its own treasurer, payable “on presentation of certificate No. 32004 . to James Kane, properly released.” Kane, who was named in the draft as payee, was in fact one Regent, who by fraudulent means had induced plaintiff to issue a certificate insuring the life of James Kane, his alleged brother, and naming Frank Kane beneficiary. Thereafter Regent made proof of the death of James Kane and plaintiff issued the draft to Regent, believing he was Frank ICane. The defendant indorsed the draft and sent it to its correspondent, the First National Bank at Topeka, which presented it to the Central National Bank of Topeka, the drawee bank, which in turn presented it to the plaintiff, who paid it to the drawee bank, which in turn paid it to the First National Bank, which remitted it to the defendant collecting bank and the defendant collecting bank thereupon paid Regent, the person from whom it received the draft for collection. The maker sued the collecting bank and was allowed to recover, the court holding that before paying the draft it was its duty to satisfy itself as to the authenticity of all signatures.

In Bank of Williamson v. McDowell County Bank, 66 W. Va. 545, another case cited by plaintiff, the drawee bank had paid the check to the collecting bank, who thereupon paid the proceeds to its depositor, the plaintiff. The court held that the drawee “plainly should have been estopped to recover because of causing the collection bank to change its position by its (drawee’s) act.”

In commenting upon Bank of Montreal v. Rex, 38 Canada S. C. 258, a note in 12 A. L. R. 1107 contains the following:

“Since the bank was merely collecting agent and did not pay over the money (to its depositor) until it had received it (from drawee) the drawee was es-topped to reclaim the money from it (the collecting bank). . . . ”

(p. 1111) “Where the money is paid to a bank which took the paper for collection and paid over the money only after receiving it from the drawee, the drawee cannot recover back the money so paid, although the collecting bank had endorsed it . . . Commercial & Savings Bank Co. v. Citizens National Bank (Ind. App.), 120 N. E. 670. . . . In Pennington County Bank v. First State Bank, 110 Minn. 263, where the check was forwarded for collection, with a request for advice as to whether or not it was honored, and payment made by the forwarding bank only after notification that it was good, the drawee was denied recovery.

Another case cited by plaintiff is Citizens’ Nat. Bank of Odessa v. San Angelo Nat. Bank (Tex. Civ. App.), 19 S. W. (2d) 388, from which plaintiff quotes the following excerpt:

“Where bank endorsed forged check ‘previous endorsements guaranteed’ for the purpose of sending it through regular banking channels for collection, the drawee bank, which received and paid the check in due course of business and did not discover the forgery for 25 days after payment, had the burden of alleging and proving that the collecting bank had not paid out the money to endorsers before it received notice of the forgery. ’ ’

In substantially all the cases relied on by plaintiff it appears that the original signature of the maker was forged, and not the indorsement as in the instant case. It is a well established rule that if a bank pays a check purporting to be drawn on it by its depositor, but on which the maker’s signature is a forgery, the bank must stand the loss and cannot look to prior holders for reimbursement. This rule is based on the presumed negligence of the drawee in failing to meet its obligation to know the signature of its correspondent, and that if the drawee on presentment of a check pronounces it valid, and pays it, it is a payment in neglect of the duty which the law places on the bank, and it must suffer the result of its negligence. In the case of a forged indorsement, however, the drawee bank has no means of checking or knowing the validity of indorsements by persons who are strangers to it, and therefore, if after payment it develops that there was a forged indorsement, the drawee bank has a right to look to the one to whom payment was made or to the indorsers after the forged one, for reimbursement. In Bank of Williamson v. McDowell County Bank, 66 W. Va. 545, previously cited, the opinion is not based on estoppel by reason of the changed position of the collecting bank through having parted with the proceeds. The actual holding in that case is that a drawee bank which pays a check on which its depositor’s signature is forged as maker cannot recover from the collecting bank, even though the latter may have been guilty of negligence in talcing the check without proper inquiry. Bank of Montreal v. Rex, 38 Canada S. C. 258, also previously cited, involved checks on which the makers’ signatures were forgeries, and it was held that having paid the checks the drawee could not look to the collecting bank unless the collecting bank still had the funds. The quotation from 12 A. L. R. does not disclose whether the forgery ivas that of the makers ’ signatures or of an indorsement, but an examination of Commercial & Savings Bank Co. v. Citizens’ Nat. Bank (Ind. App.), 120 N. E. 670, therein discussed, shows that the maker’s signature and indorsement were forged and that the drawee bank therefore could not recover, since it was bound by the approval of its depositor’s signature. Citizens’ Nat. Bank of Odessa v. San Angelo Nat. Bank, supra, also involved a forged original signature, and not an indorsement. The same is true of First State Bank & Trust Co. of Canton v. First Nat. Bank of Canton, 234 Ill. App. 39, cited in plaintiff’s brief. We think these citations are not applicable to the situation before us, for the following reasons:

Ordinarily a bank is acquainted only with its own depositors, and it should not be held to know or have any means of knowing makers of checks on other banks or indorsers prior to its depositor, either as to their signatures or their financial stability. On the other hand, one who takes a check presumably knows, or has the means of knowing, the person from whom he takes, and if he is in doubt as to the identity, signature or financial responsibility of such person, he may refuse to accept the instrument. A bank in the exercise of proper precautions may assume responsibility for verification of signatures of its depositors, but it cannot in addition thereto be called on to assume responsibility with respect to acts of outside parties. Knowing its depositor, a bank can with reasonable safety accept for deposit, and give credit for, a check drawn by an unknown person and containing unverified indorsements, for the bank can go back to the depositor in case the item should prove of no value, the depositor and prior holders having in turn the right to look to their successive transferors until the infirmity is reached, thereby fixing the loss where it should be as between the parties — on the one who took the check without proper knowledge of the one from whom it is accepted. These conclusions are sustained by abundant authority.

Section 23 of the Negotiable Instruments Law (Illinois State Bar Stats. 1935, ch. 98, ¶ 43) expressly provides that no rights can be claimed under a forged signature. Sections 65 and 66 of the act provide that an indorser warrants to all subsequent holders, am'ong other things, the following:

1. That the instrument is genuine and in all respects what it purports to be.

2. That he has a good title to it.

3. That all prior parties had capacity to contract.

4. That he has no knowledge of any fact which would impair the validity of the instrument.

In 7 Corpus Juris 692, section 420, the rule is stated thus:

“A bank which pays out money on a forged instrument may recover the same from the person who receives the money, provided, of course, the bank has suffered some injury or loss in consequence of the forged indorsement. ’ ’

In Brady on Bank Checks (2nd ed.), sec. 167, the author says:

“The same principles which permit a drawee bank to recover from a collecting bank the money paid on a check bearing a forged indorsement, permit the collecting bank to recover in like manner from a prior party. ’ ’

Applying sections 65 and 66 of the Negotiable Instruments Act to the facts of this case, we think that plaintiff, by her indorsement, warranted to the bank, among other things, that she had a good title to the check, and since her claim rested on a forged indorsement, it would follow that she had no title at all, and therefore her warranty was breached, with the result that the bank could look to her for the funds wrongfully received.

Defendant’s counsel say that “the only Illinois case we have found involving a forged indorsement, and decided after adoption of the Negotiable Instruments Law, is State Bank of Chicago v. Mid-City Trust & Savings Bank, 295 Ill. 599, decided in 1921, and the same case in the appellate court, 232 Ill. App. 186, on appeal from a second trial after remandment by the Supreme Court, which case fully supports our position. ’ ’ From this case it appears that Samuel J. Lumbard, an attorney, issued a check on the State bank payable to James Glen, whose son forged the payee’s indorsement thereon, had the bank stamp “Accepted” thereon, and deposited the check to his account in the Mid-City Bank which indorsed it to an intermediary bank, and it was paid through the Clearing House by the State Bank, drawee.' Some time later the forgery of the payee’s indorsement was discovered, and the check was returned by the State bank, drawee, to the Mid-City Bank, with demand for reimbursement, which was refused. Suit was thereupon instituted. The Supreme Court held that plaintiff bank (drawee) by writing its acceptance on the check when presented by payee’s son, did not as a matter of law accept the check, because there was no effective presentment for, or request, for acceptance, the son being a stranger without right and that the stamping of “Accepted” was therefore void and without effect. Nevertheless defendant contended that payment of the check by the drawee bank constituted an acceptance under the Negotiable Instruments Act, and that having “accepted” the check, the bank could not go back to its indorser for reimbursement. The court held that payment was not acceptance,■ saying (p. 603):

“Under this statute the payment of a check on a forged indorsement, stamping it paid and charging it to the account of the drawer do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee.” The declaration in that case alleged that plaintiff bank (drawee) had accepted the check, and plaintiff’s action was thereby predicated on its liability as acceptor to the payee, as true owner of the check. In consonance with the Supreme Court’s holding that the check had not, as a matter of law, been accepted, the court remanded the cause for a new trial and on remandment the declaration was amended, eliminating all allegations as to the acceptance of the check. The Appellate Court in 232 Ill. App. 186, after reciting the earlier history of the case and what the Supreme Court had said, namely, that if these allegations respecting acceptance were stricken, the declaration would still state a cause of action against defendant, gave judgment for plaintiff, and the case was again taken to the Supreme Court on petition for certiorari, which was denied, thereby making the Appellate Court’s decision final. Thus by denial of certiorari the Supreme Court gave its final approval to a holding permitting the drawee bank to recover from the forwarding bank the amount paid upon a check bearing a forged indorsement of the payee.

Other jurisdictions have supported this doctrine. In Jones Bros. v. Citizens’ Nat. Bank, 106 Okla. 162, 233 Pac. 472, plaintiff received a check on which the payee’s indorsement was forged, indorsed and deposited it in the defendant bank for collection, and the check was paid by the drawee through the clearinghouse. Upon discovery of the forgery, the drawee charged the defendant bank, which in turn charged plaintiff, its depositor. Plaintiff sued for conversion, as did the plaintiff in this proceeding, but the court, relying upon the forgery section of the Oklahoma Negotiable Instruments Law, which corresponds substantially to our section 23, held that the charge against plaintiff’s account was properly made and that plaintiff could not recover.

New York courts have frequently held to the same effect. In Egner v. Corn Exchange Bank, 86 N. Y. S. 107, an employee of the maker of the check forged the indorsement of the payee and procured cash thereon from plaintiff, who indorsed and deposited the check with defendant bank, which presented it to the drawee bank and received payment. On discovery of the forgery, the check was returned by drawee bank to defendant and by it to the plaintiff with demand for payment. Plaintiff reimbursed the defendant bank, as demanded, and thereafter brought suit alleging payment under mistake of fact. Recovery was refused, the court saying (p. 108):

“The defendant credited the plaintiff with the amount of the check upon the faith of his.'indorsement thereon, he thereby guaranteeing the genuineness of the prior indorsement, and, upon proof tif the forgery of the first indorser, had a right to demand and collect the amount from any indorser of the check prior to its own.”

The opinion in the foregoing case was filed after the New York Negotiable Instruments Law became effective, the pertinent portions of which are substantially the same as those in Illinois.

In Geering v. Metropolitan Bank, 156 N. Y. S. 582, under facts similar to those in Egner v. Corn Exchange Bank, supra, the court, assuming the forgery to be established, said:

“It is quite -clear that plaintiff acquired no title to the checks and can claim nothing on their account. This is the effect of section 42 of the New York Negotiable Instruments Law.” In that ease the court also said that by indorsing the checks for deposit plaintiff guaranteed the validity of the prior indorsers, including the one alleged to have been forged.

It was said in American Exchange Nat. Bank v. Yorkville Bank, 204 N. Y. S. 621, that:

“It is well settled, too, that identically the same principles which render the collecting bank liable to the drawee bank also give the collecting bank a remedy over against those from whom it received the checks, and upon the faith of whose indorsement and responsibility it took them, and those persons likewise have a remedy over against their own prior indorser ‘until the wrongdoer is finally made to pay. ’ . . . The chain of liability thus runs back through and according to the chain of indorsements. ’ ’

In Stein v. Empire Trust Co., 148 App. Div. 850,133 N. Y. S. 517, a depositor placed a check for collection and the trust company receiving the deposit credited the same. Later, upon discovery that a prior indorsement had been forged, it charged back the amount against the depositor, and the court held that the charge was proper, saying (p. 519):

“If the trust company had paid the same to the plaintiff, it could have compelled him to refund the amount received. ’ ’

Defendant calls onr attention to a note in L. R. A. 1916 E at p. 539, entitled “Right of Drawee of Check to recover money paid on forged indorsement, ’ ’ which contains the following statement:

“The rule is that a drawee is entitled to recover from a party obtaining money from it on a check where there is a prior indorsement on the check that is forged. The exceptions are cases where the drawee is negligent . . . and where the paying bank is guilty of laches, and where it is estopped by reason of some action on its part. The rule that a bank is required and bound to know its depositors’ signatures does not apply to the signature of an indorser.” And counsel say that some 35 cases representing 15 States, the federal courts and Ontario are cited, and annotated, and excerpts reproduced therefrom, all reaching the conclusion stated in the foregoing excerpt.

Upon oral argument, and by her brief, plaintiff seeks to sustain the judgment upon the authority of National City Bank of Chicago v. National Bank of the Republic of Chicago, 300 Ill. 103. That case is cited as authority for the proposition that there can be no recovery by the drawee bank after it pays the check to the collecting bank and-after the latter pays it out to the plaintiff who had deposited the check for collection only and who parted with the proceeds upon obtaining payment from the collecting bank. Counsel for plaintiff say that this case is “decisive of the issues in our case.” A check for $629.80, dated January 4, 1915, had there been drawn on the National City Bank of Chicago, payable to the American Sheet & Tin Plate Co., to whom it was mailed. One Andrew H. Manning stole the check from the mail box, erased the name of American Sheet & Tin Plate Co. and inserted his own name as payee. He then took the check to Barnett Bros, in Chicago, and after indorsing it tendered the check in payment of some jewelry purchased from them. As a matter of precaution, and not knowing Manning, Barnett Bros., before parting with the jewelry, sent the check by messenger to the drawee bank to see if it would be paid, and the bank said it would be and accepted it. Thereupon Barnett Bros, delivered the jewelry to Manning, who absconded. Barnett Bros, then deposited the check with its bank, the National Bank of the Republic, who in turn presented it to the drawee bank for payment, and the drawee bank paid the check to the National Bank of the Republic. Thereafter, the drawee bank returned the check to the maker, who notified it that the check was a forgery, whereupon the drawee bank voluntarily credited the account of the maker with the amount of the check and demanded reimbursement from the National Bank of the Republic, which was refused, whereupon the drawee bank, the National City Bank, brought suit against the National Bank of the Republic to recover the amount of the check. The question presented was whether there could be a recovery by the drawee" bank from the collecting bank under section 62 of the Negotiable Instruments Act. The trial court rendered a judgment in favor of the drawee bank, which was affirmed on appeal and taken to the Supreme Court on a certificate of importance. The Supreme Court reversed the judgment of the appellate and circuit courts, and held that the drawee bank alone was liable. Some seven or eight pages of plaintiff’s brief are devoted to a discussion of this case and the quotation of excerpts from the opinion. We think, however, that the decision involved only one question, namely, the effect of the certification by the drawee bank of a check on which, before certification, there had been an erasure of the name of the original payee and a substitution of a different name. The- indorsement in that case was the actual indorsement of the substituted payee who tendered the check on purchase of some jewelry. Barnett Bros., before making the sale, took the check to the drawee bank for certification, and the bank formally accepted it by proper writing on its face and returned it to Barnett Bros., who closed the sale and indorsed and deposited the check in its bank, which collected it from the drawee. The sole question involved was the effect of the acceptance, and the court held that under section 62 of the Negotiable Instruments Law the acceptance bound the drawee to pay the check when presented according to the tenor of its acceptance, the drawee admitting thereby the existence of the payee and his capacity to indorse. The court held that since at the time of its acceptance the check on its face was payable to the substituted payee, it was the check as it then read which the drawee undertook to pay, not the check- as originally written, and that having by acceptance undertaken to pay the check as altered it was bound to do so as against a subsequent holder for value. The question of a forged indorsement was not involved in that case, the indorsement being the genuine indorsement of the payee. The bank by its acceptance undertook to pay the check to the particular payee designated therein, and having so undertaken it could not refuse payment when presented, nor could it after making payment recover the same from the collecting bank which acquired the check after acceptance.

From what has been said herein, we conclude that there can be no doubt as to the right of the party making the payment to recover from the one to whom payment was made. If, in addition to assuming responsibility for verification of signatures of its depositors, banks were called upon to also assume responsibility for the acts of other persons, the safety of deposit banking would be greatly jeopardized, and if each holder could not come back to his predecessor in such case, the unknown risk of prior infirmities would greatly curtail the circulation of commercial paper and make impossible the conduct of deposit banking as it is generally conducted. Plaintiff accepted this check at the suggestion of her husband, who took it from McCormick, who was unknown to her. By accepting the forged indorsement and depositing the check in the defendant bank for collection, she warranted that she had good title, and since in fact she had no title by reason of the forgery there was a breach of her warranty, and the bank is entitled to look to her for the funds wrongfully received.

Various other points are raised, but the foregoing-question is in our opinion decisive of the case and it is unnecessary to discuss the other errors assigned. In view of the fact that there is substantially no dispute as to the facts, it will be unnecessary to remand the cause. Therefore the judgment of the circuit court is reversed, and judgment entered here in favor of defendant and against plaintiff for costs.

Reversed and judgment here for defendant and against plaintiff for costs.

Scanlan, P. J., and Sullivan, J., concur.


source: Caselaw Access Project

license: Public Domain

text:
    Leah Passman, Appellant, v. Nathan Budnizky and Joe Horwitz, Appellees.
    Gen. No. 38,298.

      Opinion filed April 7, 1936.
    Rubenstein, Haggenjos & Monarch, of Chicago, for appellant; Walter Monarch, of counsel.
    Shaffer & Freedman, of Chicago, for appellees; Abraham Miller, of Chicago, of counsel.
   Mr. Justice Friend

delivered the opinion of the court.

Plaintiff sued defendants as indorsers on a promissory note for $1,250, secured by a purchase money junior mortgage on real estate. The cause was tried by the court without a jury, resulting in a judgment for defendants, from which plaintiff prosecutes this appeal.

The cause was tried upon the following stipulated facts:

“1. On June 1st, 1928, Isadore Schwartz and Lena Schwartz, his wife, executed and delivered to defendants their principal promissory note in the sum of Twelve Hundred Fifty ($1,250.00) Dollars, secured by a certain purchase money junior mortgage or trust deed recorded in the Recorder’s Office of Cook County, Illinois, as Document No. 100-13529, subject to a first mortgage encumbrance recorded as Document No. 8989377, securing an indebtedness of Seven Thousand ($7,000.00) Dollars. Maturing July 29, 1930.
“2. That Nathan Budnizky and Joe Horwitz, the defendants herein, thereafter endorsed said note and negotiated the same before maturity, for good and valuable considerations to them in hand paid.
“3. That on or about August 28, 1930, said first mortgage trust deed, recorded as Document No. 8989377, securing an indebtedness of $7,000, herein-above described, was released of record, and one Florence Reuss then and there executed a subordination of lien, wherein and whereby it is recited that she is the legal holder and owner of the indebtedness secured by trust deed recorded as Document No. 10043529, and that by said instrument of subordination it is recited that the lien of the trust deed recorded as Document No. 10043529, which was given to secure the note dated June 1st, 1928, was made subordinate and inferior to that certain trust deed recorded as Document No. 10718003, dated July 24, 1930, being a new first mortgage incumbrance, securing an indebtedness of Six Thousand ($6,000.00) Dollars. Maturing July 24, 1935.
“4. That the subordination of said lien was endorsed on the reverse side of the note attached to plaintiff’s statement of claim, and that said subordination was without the knowledge or consent of the defendants herein, Nathan Budnizky and Joe Horwitz, endorsers.
“5. That proper statutory notice of dishonor was given defendants to charge them as endorsers.” By the same stipulation the parties have agreed that the controverted question of law presented by the foregoing facts is as follows:
“Does the subordination of the lien without the consent of the endorsers on the note dated June 1st, 1928, attached to the plaintiff’s statement of claim, release the endorsers, it having been made without their knowledge or consent, or do said endorsers still remain liable on said instrument.”

Plaintiff advances two grounds for reversal of the judgment in favor of defendants:

(1) The Negotiable Instruments Law is exclusive in its scope in determining the manner of discharge of parties secondarily liable upon a promissory note, and

(2) A surety on a secured obligation is not discharged by reason of any act of the creditor affecting the security only, unless he has been prejudiced thereby, and then he is discharged only to the extent to which he shows he has been injured.

In support of the first contention plaintiff relies on the Negotiable Instruments Act (ch. 98, ¶ 141, sec. 119, Cahill’s Ill. Rev. St. 1933), which prescribes the manner in which a person secondarily liable on a negotiable instrument may be discharged. It is argued that the several grounds enumerated in the act exclude all other grounds, and that since none of the grounds mentioned operates as a discharge of defendants, they remained liable as indorsers. Fleming v. Gannon, 267 Ill. App. 163, is cited as being a case precisely in point. Action ivas there brought by plaintiff against several defendants to recover some $6,000 in interest on certain real estate bonds executed by the defendants. The bonds were part of a $50,000 issue, payable to bearer, executed by the defendants and secured by their trust deed to Cosmopolitan State Panic as trustee, conveying real estate. The trust deed provided that if the time of payment of bonds be extended by the holder thereof for any time the grantors should be held thereby to consent to such extension and should, notwithstanding the extension, continue liable on the bonds to the holder thereof and for the payment of same at the time mentioned in the extension agreement. On the face of each bond appeared the following :

“The liability of the undersigned hereon shall, under all circumstances whatsoever, continue in its original form until the principal and interest are paid in full. ’ ’ Subsequently, defendants conveyed their interest in the real estate to persons who agreed to pay the bonded indebtedness. Upon maturity the bonds were paid by the trustee bank and sold by it without notice to or consent of the defendants to a trust company which agreed to subordinate the lien of the bonds to the lien of others secured by the same trust deed. Through further transfers plaintiff finally acquired possession of the bonds. Defendants were held liable. The court cited the Negotiable Instruments Act relied on by plaintiff herein, specifying the manner in which persons primarily liable may be discharged and the several ways in which a person secondarily liable may be discharged, and concluded that there was nothing done with the bonds and interest coupons after they had been subordinated which caused the defendants to be released from the payment thereof. It is evident, however, that the provision hereinabove quoted, fixing the liability of defendants “under all circumstances whatsoever . . . until the principal and interest are paid in full” was the basis for the court’s conclusion, and any statements in the case with reference to the discharge of persons secondarily liable were, in view of the express provisions of the trust deed, not applicable to the facts therein and merely dicta. The note in the instant proceeding contains no such provision.

The note sued on herein was dated June 1, 1928, and payable on or before June 1, 1931. It was secured by a purchase money junior mortgage on real estate, and was subject to a first mortgage maturing July 29, 1930. When defendants indorsed and delivered the note to the holder thereof they had a right to expect that when the first mortgage became due it would be paid and released. In that event the junior mortgage securing their note would then become a first mortgage lien on the property, and would presumably be ample security for the payment of the note. It may be assumed from the stipulation of the parties that the first mortgage was paid at maturity, because it was released of- record on August 28, 1930. The junior mortgage then became a first lien on the real estate, and the holder of the note had no right to do anything which would impair or reduce the value of the security or increase the risk of the indorsers. However, by subordination agreement the holder of the note in effect exchanged a first mortgage security for a second mortgage security of doubtful or no value, under existing real estate conditions. It is well settled law that where the holder of a note secured by a mortgage impairs the security he holds, without the knowledge or consent of the indorser, it operates as a discharge of the indorser from further liability. The rule is thus stated in 8 Corpus Juris 377, section 558:

“The indorser is not liable, however, where his rights have been prejudiced by dealings between the holder and the maker, or by the acts of the holder, and he is discharged, under certain circumstances, by an extension of time for payment granted by the holder to a prior party.”

In 8 Corpus Juris 620, sec. 861, it is said:

“Indorsers are released if the security is impaired by the act or negligence of the holder to the injury of the surety or indorser, as where there is an improper sale of collateral or an improper appropriation of the proceeds by the holder. So it has been held that an indorser or surety on a note may be discharged by the holder’s failure to record a mortgage given to secure the note, whereby the benefit of the mortgage security is lost, except where the filing was, by agreement, not to be made until necessary.”

The facts in Rogers v. School Trustees, 46 Ill. 428, are strikingly similar to the case at bar. In that case the holder of a note secured by a first mortgage permitted the same to become a second lien on the property. Judgment was entered against the sureties, but reversed by the Supreme Court, which said (p. 433):

“It appears that the lands embraced in the mortgages were amply sufficient in value to have more than discharged the indebtedness. They were also the first and superior liens on the land, the subsequent creditors having procured their mortgages subject to this incumbrance. It also appears that Price, the principal in the new note, had become insolvent, and the debt, if paid, would have to be by the other parties to the note. That appellant is, therefore, injured, there can seem to be no doubt.
“Had there been no release of these mortgages, the sureties, upon paying voluntarily, or being compelled to pay the debt, would have been subrogated to the rights of the creditor, and could have enforced the lien in equity, and had the money, thus paid, refunded to them. But by their satisfaction and the release of the lien, other innocent parties have acquired rights that operate to cut off their remedy against the land; and to this the sureties never gave their assent, nor do we see that they have ever ratified the action of the township treasurer. In this they have been deprived of important rights.”

In placing reliance upon the provisions of the Negotiable Instruments Act, plaintiff treats this instrument as an ordinary promissory note. It was, however, more than that, for it was secured by a purchase money junior mortgage and involved, not only the personal liability of the maker but also the collateral security, being a real estate mortgage. In that situation, it was the duty of the holder to use due care with reference to the collateral so as not to prejudice the rights of the indorsers or deprive them of their right to subrogation. Such rights are not provided for by the Negotiable Instruments Act, but rather are governed by the law in force prior to the adoption of the act.

In 8 Corpus Juris 612, sec. 850, it is said:

“Independent of statute, a person secondarily liable on a bill or a note is discharged by any act which discharges a surety under the general rules governing the relationship of principal and surety.” This rule of law is approved in Prudential Ins. Co. v. Bass, 357 Ill. 72, where it was stated (pp. 77, 78):
“Section 119 provides for the discharge of persons secondarily liable, but the act makes no provision for the discharge of anyone primarily liable on an instrument other than such as may result from the discharge of the instrument itself as provided in section 118. Section 195 of the act provides: ‘In any case not provided for in this act, thé rules of the law merchant shall govern.’ There is no specific provision in the statute dealing with the precise question here presented, therefore section 195 applies, and we are remitted to its provisions. In other words, the case is governed by the law as it existed before the passage of the Negotiable Instruments act. Isaac v. Van Hoose, 171 La. 676; Jefferson County Bank v. Erickson, 188 Minn. 345.”

When the subordination agreement was made between the parties, converting the first mortgage to a second mortgage,, real-éstate values had become materially affected by the depression, and second mortgages had practically no value whatsoever. By subordinating the first mortgage security, the holder of the note practically destroyed whatever security defendants then had. By the stipulation of the parties it is admitted that the makers of the note did not pay the same, and we may assume that they were not able to make payment. This left defendants without recourse to the makers and without any security. The resulting damage sustained by them is obvious. Where the rights of a surety have been materially prejudiced it is not necessary for him to show that he had been injured in order to be discharged from liability. (Cohen v. Rossmoore, 225 N. Y. App. Div. 300.) In Shreffler v. Nadelhoffer, 133 Ill. 536, it was held to be a rule universally recognized by the courts that “a surety has a right to stand on the strict terms of his obligation, when such terms are ascertained.” Quoting from an opinion by Mr. Justice Story in Miller v. Stewart, 9 Wheat. 681, the court said:

“ ‘It is not sufficient that he may sustain no injury by a change of the contract, or that it may even be for his benefit. He has a right to stand upon the very terms of his contract; and if he does not assent to any variation of it, and a variation is made, it is fatal. And courts of equity, as well as law, have been in the constant habit of scanning the contracts of sureties with considerable strictness. ’
“The rule laid down by Mr. Justice Story has been repeated and adopted by this court in numerous decisions. Field v. Rawlings, 1 Gilm. 581; Waters v. Simpson, 2 id. 570; Reynolds v. Hall, 1 Scam. 35; People v. Moon, 3 id. 123; Governor v. Ridgeway, 12 Ill. 14; Ryan v. Trustees of Shawneetown, 14 id. 20; C. & A. R. R. Co. v. Higgins, 58 id. 128; Stull v. Hance, 62 id. 52; People v. Tompkins, 74 id. 482; Cooper v. People, 85 id. 417; Mix v. Singleton, 86 id. 194; Phillips v. Singer Mfg. Co., 88 id. 305; Dodgson v. Henderson, 113 id. 360; Trustees of Schools v. Sheik, 119 id. 579; Burlington Ins. Co. v. Johnson, 120 id. 622; Vinyard v. Barnes, 124 id. 346. In many of these cases we have said that the contract of a surety is to be strictly construed, and that his liability is not to be extended by implication, and such has long been the settled law in this State.”

We think that what we have said disposes of plaintiff’s second contention, namely, that “a surety on a secured obligation is not discharged by reason of any act of the creditor unless he has been prejudiced thereby and then only to the extent to which he shows he has been injured.”

Holding as we do that the liability of defendants herein is governed by the law of suretyship rather than by the statute, because the note was secured by a mortgage which involved the question of preserving the security for the benefit of the indorsers and their right of subrogation thereto, and that their rights were materially affected by the destruction of the security, we conclude that the court properly discharged defendants from liability on the note. The stipulated facts sufficiently show that they were prejudiced, and proof of the exact extent of their injury was not necessary under the circumstances shown by the facts in this case.

The judgment of the municipal court is affirmed.

Judgment affirmed.

Scanlan, P. J., and Sullivan, J., concur.


text:
    In re Estate of Edith R. McCormick, Deceased. Louis S. Adam and Peter Demetry, Appellants, v. Chicago Title and Trust Company, Appellee.
    Gen. No. 38,314.
    Opinion filed April 7, 1936.
    G. E. Beerly and Edward H. S. Martin, both of Chicago, for appellants.
    Cutting, Moore & Sidley, of Chicago, for appellee; Merritt C. Bragdon and Howard Neitzert, both of Chicago, of counsel.
   Mr. Justice Friend

delivered the opinion of the court.

Louis S. Adams and Peter Demetry, plaintiffs, the latter being assignee of one John Ponis, seek to recover payments made under a certain instalment real estate contract alleged to have been executed May 29, 1926, in violation of the Illinois Securities Law (Illinois Revised Statutes, Cahill, 1925, ch. 32, ¶ 254 et seq.). Both the probate court, and the circuit court on appeal from the probate court, disallowed the claim, and this appeal followed.

Two questions are presented for determination:

(1) Whether an instalment real estate contract in the usual form, for the sale of a specific lot or parcel of land in decedent’s subdivision, constitutes the sale of a security of Class “D” under the Illinois Securities Law, the seller having failed to comply with any of the requirements of the law relating to the sale and offering for sale of a security or investment contract, and

(2) Assuming that the transaction comes within the terms of the Illinois Securities Law, whether plaintiff’s action is barred by section 40 of that law, which provides that all civil actions to recover money or for other purposes under the securities law, or based upon any of the provisions thereof, must be commenced within five years after the commission of the act complained of.

The contract in question is not essentially different from the ordinary instalment contract for the sale of real estate. The purchaser agrees to pay for the lot described therein a certain specified sum, part thereof on the execution of the contract and the remainder in monthly instalments of a designated amount, or more, each payable on or before a certain day in each and every month until the entire amount is paid. The vendors agree that if the purchaser shall perform all the agreements provided to be performed by him, the vendors will cause to be conveyed to the purchaser by a trustee’s deed all the right, title and interest of Chicago Title & Trust Company, as trustee, in and to the specific parcel of land therein described. The purchaser thus had the right, at his option, to pay up the entire balance of the purchase price at any time and thereupon secure a deed to the property. The agreement further provides for certain specific restrictions on the use of the property, including the kind of trade or business to be conducted thereon, the nature, height and use of any building to be erected on the property, the materials of which it shall be constructed, and restrictions relating to the keeping of livestock on the premises. The contract further provides that the vendors will install certain public improvements without expense to the purchaser, including sewers, water and gas mains, pavements and sidewalks, and to plhnt trees and shrubbery in the public parks and streets of the subdivision. The agreement expressly provides that the vendors do not agree to resell the property for the purchaser. It is thus a simple contract for the sale of a specified parcel of real estate on the instalment plan, containing the usual provisions of such contracts for the purchase and sale of lots in subdivided territory and containing the usual restrictions and provisions employed in agreements of that character.

Plaintiffs ’ counsel state that there are conflicting decisions by the second and third divisions of the Appellate Court for this district upon the question whether the transaction and contract on which the claim is based comes within the provisions of the Illinois Securities Law, and they rely solely on Prohaska v. Hemmer-Miller Development Co., 256 Ill. App. 331, which they say is at variance with McCormick v. Shively, 267 Ill. App. 99. In the Prohaska case the contract provided for the sale of certain real estate in South Dakota, under which the purchaser had agreed to pay $8,000, one-third in cash and the balance as thereinafter provided in the rider attached to the contract, and to pay all taxes and assessments levied on the land. The attached rider provided that the vendor should harvest all crops upon the land during the life of the contract, and that the net profits therefrom should be applied to the purchase price of the land. The vendor also agreed, during the years 1925 and 1926, to break, seed, cut and thresh, and pay for all labor. The court held the contract subject to the Blue Sky Law, pointing out that the purchaser could not pay the balance of the purchase price out of his own funds but only out of the net profits of the activities of the vendor in raising and harvesting crops of alfalfa on the land, and that the contract was thus a highly speculative investment or gamble on the part of the purchaser. Since plaintiffs rely principally upon this decision, we quote therefrom at length, as follows (p. 338):

“By the terms of the contract the company is to convey the land described to plaintiff on receipt by it of $8,000, one-third of which sum ($2,666.66) plaintiff is to pay in cash. He does not promise to pay the balance ($5,333.34) at any time out of his own funds, and, indeed, there is no provision allowing him to pay any part thereof out of his own funds. Said balance can only be paid as provided tin the rider attached hereto,’ and from the rider it appears that ‘the company agrees during the calendar years 1925 and 1926 to break, seed, cut and thresh and pay for all labor without cost to the purchasers,’ — using a certain mentioned alfalfa seed, and that ‘the Company shall harvest all crops upon said land during the life of this agreement and the net profits therefrom shall be applied to the purchase price of the land and interest.’ What the life of the agreement may be depends upon the net profits from said crops in the first and succeeding years. In the meantime plaintiff is to be charged interest at 5% per annum on said balance or whatever part thereof remains from time to time unpaid, and is also to pay all taxes, etc., levied upon the land; and also the expense of hail insurance. . . . The contract discloses a highly speculative investment, or gamble, on plaintiff’s part. If the crops for the years 1925 and 1926 should be sufficiently large to pay or liquidate said balance of $5,333.34, accrued interest, taxes, etc., plaintiff would presumably make a large profit, but if the crops should be small or unprofitable in the years 1925 and 1926 and in the succeeding years, it is apparent that it would be to plaintiff’s financial advantage to cease planting any crops and to cease paying the taxes, etc., in which event the company could forfeit the contract, and plaintiff would lose said initial payment and all subsequent disbursements. ’ ’

In the Prohaska case the court cites several Minnesota decisions and one from North Carolina to sustain its conclusion. In State v. Evans, 154 Minn. 95, defendants were indicted and charged with the crime of selling an “investment contract” without a license. The contract was set forth in full in the indictment, and by its terms defendant agreed to sell certain lands in the State of Texas for $2,500, payable in monthly instalments. The court, in commenting on the agreement, said that there was no express obligation on the part of the purchaser to pay or to buy, and that the contract contained none of the usual provisions for furnishing an abstract of title or for examination of title; that the agreement in these particulars was similar to the contract in the Prohaska case, under which plaintiff was not required to pay the balance ' of $5,333.34, but that the same was payable only out of the net profits from the crops of the land which during the life of the contract the company was to harvest.

In Kerst v. Nelson, 171 Minn. 191, the agreement provided that the purchaser should be entitled to the use and possession of the land subject to certain, reservations and restrictions mentioned, and that if the buyer elected to take possession the seller was to continue cultivating the vineyard and harvest and market the crops, upon the same terms and conditions as if the buyer had not taken possession. A trustee was named to receive and disburse money collected for the crops produced, and they were to be marketed in such manner and at such prices as the seller in his discretion should deem advisable. After deducting the cost of delivering and collecting, balance was to be divided one-half to the seller and one-half to the buyer, and if the fund was not sufficient to cover the expenses the deficit should be made up by the seller provided the buyer was not in default. During the life of the contract the seller’s agricultural experts should have the exclusive control of managing, planting, cultivating and caring for the land, and after the termination of the contract, should the buyer so elect, the seller would continue to cultivate, harvest and market the crops for an additional period of time upon such terms as might mutually be agreed. The Appellate Court in the Prohaska case said that the provisions in the Minnesota contract were similar to those enumerated in the Prohaska proceeding with reference to the control by the seller of the harvesting and marketing of crops and the restriction upon the buyer to assign the contract without the seller’s consent. It was contended in the Minnesota case that “the contract was nothing more nor less than one for the sale of land, and hence not within the purview of the Blue Sky Law, ’ ’ but the Minnesota court differentiated ordinary real estate contracts from the transaction there involved by saying (p. 195):

“In our own decisions we have said that the purpose of the statute is to prevent offers to the public of investment contracts evidencing a right to participate in the proceeds of a venture before the securities commission ascertains whether there is something tangible behind it. This is such a venture and should pass inspection by the commission before the public is solicited to invest money in the contracts appellants propose to sell. . . .
“In view of the ingenuity of those who seek to induce men and women to put their money into far-off speculative enterprises over which the investor has little or no control, and in view of the paternalistic character of Blue Sky Laws, it should be the policy of the courts to refrain from hampering the State officials in the performance of their duties by placing a narrow construction on such laws. This enterprise is within the spirit of the law as well as the letter, and we hold that appellants had no right to injunctive relief.”

In State v. Agey, 171 N. C. 831, on which comment is also made in the Prohaska case, an agent of a Tennessee corporation which had purchased large tracts of land in Georgia was engaged in North Carolina in making sales of small portions of the land under written contracts signed by numerous purchasers, and was indicted for violation of the Blue Sky Law of North Carolina, the company not having been licensed in that State. One of the questions raised was whether the making of the contracts came within the purview of the statute, and after a lengthy discussion that question was decided in the affirmative. The contracts made with purchasers provided that the company would sell them a tract of land for a fig orchard and the company would set out certain fig cuttings and cultivate, prune and take care of the bushes for five years, with certain indefinite guarantees as to the quality of the bushes at the end of that period. Title in the tract was to remain in the company until the purchase money was fully paid. The North Carolina court commeiited on the transaction, as follows (p. 836):

“The State has a right to require that when such propositions are offered to our people there shall be an investigation as to the reliability of the company, the character of its promoters and managers, and the nature of its business and the amount of its assets, and that it shall not offer its stock, its investments, its ‘evidence of property,’ until the Insurance Commissioner has examined into its reliability and assets and issued license to such company to do business in this State.”

In the Prohaska case the court quoted with approval the definition of the word “securities,” as taken from 37 Corpus Juris, p. 275, as follows:

“The term ‘securities,’ as used in these laws (Blue Sky Laws), means written assurances for the return or payment of money, except where special definitions are given by the statutes. ... It means the investment of funds in a designated portion of the assets and capital of a concern, with a view of receiving a profit through the efforts of others than the investor; and in this sense includes what are termed ‘security’ or ‘investment’ contracts or ‘speculative securities.’ ”

The decision which plaintiffs’ counsel says is in conflict with the Prohaska case is McCormick v. Shively, 267 Ill. App. 99, decided in 1932. The contract there involved was held not subject to the Blue Sky Law. It provided for the sale of certain real estate in Mexico upon specified term payments at definite periods of time and the giving of a deed upon final payment. The agreement contained a reservation to the • effect that after the payments had been made, and the deed given, the vendor should have for a period of 15 years a one-half interest in all growing crops, timber, oil, gas mines and materials on or under the property. A power of attorney attached to the contract granted to the vendor the right for a period of 18 months to explore, drill and mine the property and to do certain other things in connection with its use, all at the vendor’s expense. The court pointed out that there was no definite agreement or understanding that the vendor should develop the property, and that it was merely given the right to do so at its election, and, in distinguishing that decision from the Prohaska case, said (p. 104):

“In the case of Prohaska v. Hemmer-Miller Development Co., 256 Ill. App. 331, it appears that the vendor under the contract agreed to do certain things, among which was the harvesting of the crops upon the land during the life of the Agreement and an application of the profits to the purchase price of the land. There is no obligation in the case at bar on the part of the vendor to do anything other than to deliver a deed upon the payment of the purchase price. ’ ’

The difference between the contracts in the Prohaska case and the McCormick v. Shively case, supra, is thus clearly pointed out in the last sentence of the foregoing quotation, and we think there is no conflict whatever between the cases, but on the contrary they are in entire harmony. In the Prohaska case the agreement was held to be within the Illinois Securities Law because it was highly speculative and included a profit sharing venture, while in the McCormick case the opposite result was reached because the vendor merely had the option but was not required to conduct a profit sharing enterprise. The same test was applied in both eases.

Plaintiffs seek to distinguish the McCormick case by arguing that the court was there dealing solely with the definition of the term “investment contract,” and not with the meaning of the word “security,” within the purview of the Blue Sky Law. In this contention they are evidently in error, however, for in the opening paragraph of the court’s opinion in the McCormick case it was said that plaintiff brought her action “claiming that the defendant had sold her a certain investment contract, which was one of the class of securities enumerated in the Illinois Securities Law, . . . and that the defendant had not complied with any of the requirements of said law relating to the sale and the offering for sale of such a security or investment contract. ’ ’

Blue Sky Laws now in force in most of the States have been frequently designated as paternalistic in their nature, and, as said in Stewart v. Brady, 300 Ill. 425, which held the Illinois Securities Law constitutional, “the clearly indicated purpose of the legislature was to protect the public from deceit and prevent fraud in the sale and disposition of stocks, bonds and other securities within the State.”

In State v. Ogden, 154 Minn. 425, it was contended that defendant did not violate the Securities Act because he had only sold real estate, but the court found that he was really selling securities instead of real estate, and designated the purpose of Blue Sky legislation by saying, “The paternalistic purpose of the statute is to prevent offering to the public, not land contracts, but investment contracts, evidencing a right to participate in the proceeds of a venture.”

In Creasy Corp. v. Enz Bros. Co., 177 Wis. 49, the purpose of the Blue Sky Law was stated in the following apt language (p. 53):

“It may be argued that in one sense every contract is a security, because it guarantees to the parties thereto something of value. But as before stated, the Blue Sky Law was enacted for the purpose of protecting against the sale of worthless money obligations and not against entering into other contracts where service is to he rendered, as here, or other obligations are incurred that do not partake of the sale of securities, or of a sharing in either the capital or profits of a company.”

There is nothing in the contract before us to indicate that the purchaser had in any sense invested in an enterprise analogous to those considered in the cases hereinbefore cited. Within the terms of the agreement plaintiffs could at any time pay the balance of the purchase price and receive title to the specific parcel of land purchased. At all times after the execution of the contract they had the right to acquire and own the specific real estate, and nothing more, and the subsequent proceeds of that property belonged to them. They had no interest whatever in any of the other lots in the subdivision or in any property belonging to the vendors or the proceeds thereof. No cases are cited bringing the ordinary real estate contract within the scope of the Securities Law. Sales of real estate have at all times constituted an important part of the total business transactions of this and other communities, and if the legislature had desired to include ordinary sales of real estate in the Illinois Securities Law it would have been a simple matter for them to have done so. Since such contracts are not specifically included in the Act, we must conclude that it was not the intention of the legislature to make them subject to Blue Sky legislation.

In view of our conclusion that the agreement between plaintiffs and decedent and her associates does not come within the purview of the Illinois Securities Law, it is unnecessary to discuss or determine whether, under section 40 of the Illinois Securities Act, plaintiffs ’ action is barred.

Therefore, for the reasons stated herein, the order of the circuit court disallowing plaintiffs’ claim is affirmed.

Affirmed,

Scanlan, P. J., and Sullivah, J., concur.


text:
    William L. O’Connell, Appellant, v. David S. Horwich, Appellee.
    Gen. No. 38,445.
    Opinion filed April 7, 1936.
    Norman C. Barry, of Chicago, for appellant; M. P. Ainsworth and S. J. Cotter, both of Chicago, of counsel.
    Levy & Schmetterer, of Chicago, for appellee.
   Mr. Justice Friend

delivered the opinion of the court.

William L. O’Connell, as receiver of Sheridan Trust & Savings Bank, brought suit against defendant to recover on a check for $804, dated April 1, 1931. The court found the issues against plaintiff, and this appeal followed.

In October, 1930, defendant was appointed as attorney for the Haegele Ice Co., to represent it in the sale of its assets to the Maginnis Ice Co. The directors of the Haegele Ice Co. passed a resolution, which was introduced in evidence, appointing defendant as trustee, who together with William Haegele, president of the company, was to collect all of the corporate assets and deposit them in a bank account to be designated as “David S. Horwich, Trustee.” The funds in the account were to be withdrawn on the joint signatures of William Haegele, president, and the defendant, as trustee. It was contemplated by the resolution that checks be drawn on the funds of the company for the purpose of paying accounts, notes, money due under contracts and other obligations, as ordered by the board of directors of the Haegele Ice Co., either on specific or general order, and the signature of the president, William Haegele, on any check was to be conclusive upon defendant as to the validity of the authorization by the board of directors of the company for the execution of such check by defendant, as trustee. The resolution also provided that defendant should not be required to look to the purpose of the expenditure and should not be personally liable to the corporation or any stockholder or creditor or other person dealing with the trustee.

After the resolution was passed the accounts payable and receivable were settled by Haegele and defendant, and it then became necessary, preliminary to distributing the remaining funds on hand to the common stockholders of the corporation, to pay the preferred stockholders the amounts represented by their respective certificates. Haegele was the individual owner of a large block of preferred and common stock of the corporation and had pledged this stock as collateral security for Ms individual notes at the Sheridan Trust & Savings Bank. As additional security he had also pledged 20 shares of preferred stock of the Lake Zurich Creamery Co., which was owned by the Haegele Ice Co. The personal loans to Haegele were made at different times and separate collateral notes were executed by him covering the particular collateral deposited on each loan. When the Haegele Ice Co. was ready to pay its preferred stockholders, Haegele advised defendant that the preferred stock owned by him had been pledged as security for a debt at the Sheridan Trust & Savings Bank. Thereupon defendant immediately commumcated with the bank, learned that A. R. Patterson, an assistant cashier, had charge of the Haegele accounts, and made an appointment to meet him at defendant’s office. Defendant then explained to Patterson the extent of his authority, the manner in which the affairs of the Haegele Ice Co. were being liquidated, and exhibited to him the resolution of the board of directors of the Haegele Ice Co., dated October 27, 1930. Patterson read the resolution and subsequently arranged to deliver up, for $2,800, the preferred stock which the Sheridan Trust & Savings Bank held.

Having thus retired the preferred stock, Haegele and defendant proceeded to pay the common stockholders their distributive shares of the balance on hand, which amounted to 50 cents for each share of common stock.

In the forepart of April, 1931, an agreement was made with the Sheridan Trust & Savings Bank by which it agreed to deliver up 402 shares of common stock of the Haegele Ice Co., as well as the 20 shares of preferred stock of Lake Zurich Creamery Co., in consideration of the payment of $804. To consummate this transaction a check was drawn on Foreman-State National Bank where defendant, as trustee, had the account, payable to William Haegele, individually, and signed by him as president of Haegele Ice Co., jointly with defendant, as trustee. The check was thereupon immediately indorsed by Haegele as payee to the order of the Sheridan Trust & Savings Bank, and arrangements were made to have the bank’s messenger deliver the collateral to defendant’s office and at the same time call for the check in payment of the indebtedness. The ihessenger delivered the 402 shares of common stock, but failed to bring the 20 shares of Lake Zurich Creamery Co. stock. Defendant thereupon telephoned the bank and was told to deliver the check to the messenger, and at the same time was assured that the bank would deliver the 20 shares of Lake Zurich Creamery stock as soon as it could be located. In the meantime the bank held up deposit of the check because the Lake Zurich Creamery stock could not be located. Several months later the bank closed its doors, and Ernest Ridgeway was appointed receiver. Some eight months thereafter Ridgeway found the check among the records of the bank and attempted to put it through for collection, but in the meantime payment thereof had been stopped. After an investigation of the facts relative to the issuance of the check, Ridgeway evidently abandoned the claim. Thereafter plaintiff became successor receiver, and some three and one-half years after the check was issued he instituted this proceeding against defendant, individually, to recover the amount of the check.

The resolution under which defendant acted as trustee follows:

“Resolved: That all moneys obtained by virtue of the contract dated October 10,1930, between this Company and Thomas B. Maginnis, be deposited in an account to be designated as ‘David S. Horwich, Trustee’; that all moneys obtained through collection of the accounts receivable outstanding in favor of The Haegele Ice Company, and all other moneys obtained from any source whatsoever, secured for the account of The. Haegele Ice Company, be deposited in the account to be designated as ‘David S. Horwich, Trustee’; that William Haegele, President of the Corpo7 ration, and David S. Horwich, Trustee as aforesaid, be authorized, empowered and directed to adjust, compromise and release any claim or claims, whether upon accounts receivable, notes receivable, or otherwise, in favor of The Haegele Ice Company, and to deliver proper releases, quittances and receipts on behalf of The Haegele Ice Company in connection therewith; that the President, William Haegele, jointly with David S. Horwich, Trustee, be empowered to draw checks on the account of ‘David S. Horwich, Trustee’ (for the benefit of The Haegele Ice Company) for such accounts payable, notes payable, contracts payable and other obligations and expenses, as ordered by the Board of Directors of The Haegele Ice Company, either on specific order or general order, and the signature of the President, William Haegele, on any check drawn on the account of ‘David S. Horwich, Trustee, ’ shall be conclusive upon David S. Horwich as to the validity of the authorization by the Board of Directors of the Company for the execution of such check by David S. Horwich, Trustee; David S. Horwich Shall Not Be Required To Look to the purpose of the expenditure so made from said trust account, and shall have no personal liability to the Corporation, any stockholder or creditor thereof, or any person dealing with the Trustee.”

The principal question presented for determination is whether defendant, who was admittedly acting in the capacity of a trustee, can be held personally liable for the amount of the check involved. It is plaintiff’s principal contention that when a trustee enters into a contract it becomes his personal undertaking, and if he wants to protect himself from personal liability he must stipulate that he is not to be held personally responsible and that the other party has to look solely to the trust estate. This is undoubtedly the rule laid down in the cases cited by plaintiff. (Schumann-Heink v. Folsom, 328 Ill. 321; Wolf v. Schiff Trust & Savings Bank. 276 Ill. App. 527; Allegheny Tank Car Co. v. Culbertson, 288 Fed. 406.) However, we think that the transaction between defendant and the Sheridan Trust & Savings Bank, through its assistant cashier, Patterson, as disclosed by the undisputed evidence, amounted to a stipulation on the part of the bank that it would not look to defendant personally for payment of the check and that the bank’s subsequent action so indicates. It is undisputed that the bank had been specifically advised that defendant was not personally liable and had no interest in the affairs of the corporation, except as trustee; that he was signing checks only under the terms of the resolution of the board of directors of the Haegele Ice Co. The resolution had been exhibited to the bank, and Patterson, its assistant cashier, had read it and was familiar with its contents. An examination of the document shows that all funds of the Haegele Ice Co. were to be deposited to the special account of defendant as trustee. The resolution provided that as trustee he was instructed to collect all the assets of the corporation and deposit them in an account and to draw against the funds so collected by checks signed by himself, as trustee, together with William Haegele, president of the corporation. That the bank evidently understood the relationship of defendant with the Haegele Ice Co. is further indicated by the fact that when the preferred stock held as collateral by the bank was delivered up to defendant it was paid by a check for $2,800, similarly executed by defendant, as trustee, and by William Haegele as president of the corporation. At the time of this first transaction, and before delivery of Haegele’s preferred stock to the defendant, the bank certainly knew that it was dealing with defendant as trustee; otherwise it is difficult to conceive why it would turn over to him stock issued to Haegele and standing in his name. And when it delivered to him 402 shares of Haegele’s common stock, accepting in payment the check for $804, it undoubtedly also knew that defendant was issuing that check in his capacity as trustee, and that they were dealing with him as such. Patterson, having read the resolution, was also apprised of the fact that the resolution exempted defendant from personal liability to the corporation, as well as to “any person dealing with the trustee. ’ ’

We think the rule of law which requires a trustee, in order to protect himself from personal liability for his contractual undertakings, to stipulate that he shall not be held personally responsible, was complied with in this instance when the bank, with full knowledge of the authority of defendant as trustee and of his limited responsibility as such, accepted these checks and turned over to him stock held as collateral to Haegele’s personal loans. It impliedly agreed to deal with defendant as trustee and to look to the funds under his control and not to him personally for payment. Since the receiver here is in no better position than the bank would have been, he is likewise bound by the knowledge which the, bank had of defendant’s status as trustee and of its implied consent to deal with him solely as trustee.

Defendant’s affidavit of merits sets up a total failure of consideration for the check, based upon the loss of the Lake Zurich Creamery stock, and it is urged on behalf of plaintiff that the defense is unavailing, since defendant proved only a partial failure of consideration. In view of our conclusion as to the principal contention in the case, we deem it unnecessary to discuss this point.

It is further urged that the court erred in admitting in evidence a copy of the resolution adopted by the Haegele Ice Co. under the authority of which defendant was acting as trustee. No cases are cited to support the contention, and we know of no reason why the resolution should not have been admitted, inasmuch as the defense interposed is based upon the contents and substance of the resolution and the undisputed evidence shows that the bank was familiar with its contents and defendant’s authority thereunder.

We find no reversible error and therefore the judgment of the municipal court is affirmed.

Affirmed.

Scanlan, P. J., and Sullivan, J., concur.


text:
    City of Chicago, Appellee, v. Iroquois Steel and Iron Company, Appellant.
    Gen. No. 38,610.
    Opinion filed April 7, 1936.
    Lee D. Mathias, of Chicago, for appellant.

      William H. Sexton, Corporation Counsel, and Michael L. Rosinia, Prosecuting Attorney, for appellee; Martin H. Foss, Assistant Corporation Counsel, of counsel.
   Mr. Justice Friend

delivered the opinion of the court.

Defendant, a dealer in scrap iron and steel, was found guilty and fined $100 in the municipal court of Chicago upon a charge of conducting the business of a wholesale junk dealer without having first procured a license under section 3705 of the municipal code. Defendant prosecuted an appeal to the Supreme Court on a certificate by the trial judge that the validity of a municipal ordinance was involved. The Supreme Court stated, however, that “the appeal involved the construction of the ordinance as to whether it is applicable to appellant’s particular business rather than as to its validity” (City of Chicago v. Iroquois Steel & Iron Co., 361 Ill. 330) and transferred the cause to this court for determination.

The complaint filed in the municipal court charges defendant with conducting, operating and carrying on the business of a wholesale junk dealer on the premises known as 4634 Roosevelt road, Chicago, without having first obtained a license to do so, in violation of sec. 3705 of the municipal code. To sustain this charge the city called as a witness one Thomas Walsh, a license investigator, who testified that he visited defendant’s premises on May 21, 1934, and there "saw some cars loaded with scrap iron and steel and also several carloads of iron and steel, unloaded; that the ;men were putting the scrap iron and,steel in a baling machine and making bundles of it; that defendant’s place of business is located on a lot with a frontage of about 100 or 150 feet, and a depth of 300 feet or more, with a switch -track in the ■ yard and a large derrick located therein; that he met a man there who seemed to be in charge of the office, and asked him whether they had a junk license and that the man told him that their lawyer said they did not need a junk license to run their business, because they were not in the junk business; that they were handling only old iron, grading and sorting it, and buying and selling it in large quantities. On cross-examination, Walsh testified that he did not see any loose or baled rags or loose or baled waste paper or other paper or bottles or any old rubber on the premises, and that he did not see any wagons or junk peddlers in the yard and did not know how defendant transacted its business, to whom it sold or from whom it bought.

. Benjamin J. Tansey, another witness called on behalf of the city, testified that as a building inspector he had examined the records of the building department but could find no application for junk license made for or on behalf of defendant, at any time.

At the conclusion of this evidence defendant moved the court to find in its favor. The motion was overruled, and thereupon defendant called Samuel Gordon as its witness. He testified that he had been defendant’s employee for about 10 years, as assistant office manager, and was familiar with all its business; that its premises had' a frontage of 150 feet on Roosevelt road, with a depth of more than 300 feet; that on it is situated a railroad siding, or switch track, capable of holding four railroad cars which can be loaded or unloaded at the same time; that the type and character of the business conducted by defendant on the premises is the buying of iron already sorted, and grading and preparing the same for market; that defendant had a “shears” on the premises for cutting up the iron in suitable sizes for various foundries and mills; that defendant’s sales were in large quantities only, 500 pounds and over; that it did not handle any rags, rubber, brass or any other metal aside from iron, nor deal in waste paper, used rubber, bottles or any of the items or articles commonly designated as junk; that defendant dealt only in iron, of various sorts and grades, and steel, exclusively; that it bought iron and steel from junk dealers in carload lots and in large quantities, and was not in the junk business; that it did not buy any merchandise from minors, nor from adults except as heretofore stated, and that it did business with the Chicago Screw Co., who was engaged in manufacturing bolts and screws for automobiles'; that defendant is known as a wholesale distributor of scrap iron and that its shipments were as large as fifteen cars at one time. Upon this evidence the court found defendant guilty of violating the city code.

In its brief filed in the Supreme Court defendant makes six points. Under the Supreme Court decision hereinbefore referred to all questions pertaining to the power of the city to enact the ordinance involved, the validity of the ordinance, and the power of the city to tax, license and regulate the character of business in which defendant is employed, are eliminated from consideration, and the principal question that we are called on to determine is whether this ordinance is applicable to defendant’s particular business. ■ Defendant relies principally upon City of Chicago v. Northern Paper Stock Co., 337 Ill. 194, for reversal of the judgment. In that case defendant was fined for operating the business of a junk dealer without a license in violation of section 3512 of the municipal code of 1922, as amended. It appears from the opinion that defendant there occupied a three-story building, 80 feet wide by 180 feet long in Chicago, and was engaged in buying sorted rags and paper in bales by loads from dealers in those commodities. It opened the bales, removed foreign substances therefrom, further sorted the rags and paper according to quality, graded them and made them up in new bales and then sold them to mills in carload lots weighing 15 to 16 tons, save that smaller quantities, not less than 500 pounds, were • sold to local mills and delivered by-trucks. In discussing the question whether that particular business came within the terms of the regulatory measures of the ordinance, the Supreme Court said (p. 198):

“The question whether a certain business comes within the municipal power to tax, license and regulate, granted by statute, must be determined by the general character and scope of the business. (Commonwealth v. Farnum, 114 Mass. 267; Commonwealth v. Ringold, 182 id. 308; Eastman v. City of Chicago, 79 Ill. 178.) Sub-section 95 of section 1 of Article 5 of the Cities and Villages act designates junk stores and yards as the .subjects which, under the grant of power, may be municipally regulated. The business of dealing in junk is a recognized commercial enterprise. In conferring upon cities and villages the power to tax, license and regulate junk stores, the General Assembly doubtless contemplated that the power would be exercised with respect to places of business commonly known and understood as such. The added power enabling a city or village to forbid a junk store buying or receiving any article from a minor without the written consent of his parent or guardian enforces this conclusion. . . .
“Without a statutory grant of power, the commonly accepted meaning of a junk store cannot be extended by ordinance to include the business of buying rags and paper from dealers in large quantities, sorting and grading them according to quality, and selling them to mills and factories, usually in carload lots. In such a business the materials are not collected, held or sold in the manner practiced by one operating a junk store or yard. A business does not come within the terms of a regulatory measure when the reason for the regulation does not exist. (Com monwealth v. Ringold, supra; 2 Words and Phrases, (2d ser.) p. 1273.) The reasons requiring junk stores to obtain licenses do not apply to a business such as is conducted by the appellant, and that business does not come within the grant of power to a city to license junk stores and yards. ’ ’

In West Side Metal Refining Co. v. City of Chicago, 140 Ill. App. 599, defendant was fined for carrying on the business of a junk dealer without first having-obtained a license so to do. The evidence there disclosed that it was engaged as a dealer at wholesale and buying new and old metals in large quantities of not less than 500 pounds up to carload lots; that it refined about one-fourth of all the metal so purchased and sold the same to foundries at wholesale; that it had no dealing’s with peddlers and did not deal in old bottles, rags or articles of a kindred character. The evidence clearly indicated that its business was that of a wholesale dealer. The court characterized the purpose of the ordinance as follows (p. 602):

“The creating of ordinances such as the one under discussion is an exercise by the city council of the police power, and such ordinances are enacted because of the likelihood, grounded on experience, that junk may have been stolen or pilfered, and for protection against such larcenies, the traffic is regulated by ordinance; and as said in City of New York v. Vanderwater, 113 N. Y. App. Div. 456, so we say: ‘It seems clear that the general character and scope of the business of the defendant does not fall within the description of a dealer in junk. There is a radical difference between the buyer of great masses of metal weighing-tons at a time, . . . and one who may buy old bottles, scraps or pieces of metal, slush, old rope and the like, which might readily be pilfered or stolen and carried away secretly to be sold by the culprit. It is the business of this character which is to be licensed. ’ ”

The court in West Side Metal Refining Co. v. City of Chicago, supra, referred to City of Chicago v. Reinschreiber, 121 Ill. App. 114, wherein it was held that one who bought and sold old and new bottles exclusively was not a dealer in junk, and said that if one who deals exclusively in old and new bottles is not a junk dealer, “By what process of reasoning does one who deals in old and new metals, refining one-fourth of such metals, become a junk dealer or the keeper of a junk store?” In the Reinschreiber case, supra, it was said that the statute authorized the licensing and taxing “of second-hand and junk stores” to “forbid . purchasing or receiving from minors without the written consent of their parents or guardians . . . where inducements are liable to be held out to minors to steal material in order to sell it at such stores, ’ ’ and a junk store was defined in that case to be “a place where ‘junk’ is dealt in,” and junk was defined as “worn out and discarded material in general that may be turned to some use; especially old rope, chain, iron, copper, parts of machinery, and bottles gathered or bought up by tradesmen called junk dealers; hence, rubbish of any kind, odds and ends. ’ ’ The court concluded that defendant’s business could not be properly described as that of a junk dealer, and said (p. 118):

“He buys old bottles, to be sure, as well as new, but he deals in nothing else. He is not a buyer or seller of old and worn-out or miscellaneous materials.”

In City of Chicago v. Lowenthal, 146 Ill. App. 570, affirmed in 242 Ill. 404, the city brought action for an alleged violation of the junk shop ordinance. Defendant was a large dealer, principally in car lot quantities, in old and new metals, rubber and rags at wholesale. He did not procure a license to keep a junk shop, because he claimed not to be, in the language of the ordinance, “exercising, carrying on, or engaging in the business of keeping a junk shop, or what is commonly called a junk shop.” In discussing whether or not defendant came within the ordinance, the Appellate Court said (p. 571):

“The court below agreed with him, and so do we. The case is not distinguishable from West Side Metal Refining Co. v. City of Chicago, 140 Ill. App. 599. We are of the same opinion as when that case was decided.”

The city argues that there is need for supervision by the public authorities of establishments such as defendant’s, in order to cope with the enormous present day traffic in stolen automobiles and accessories, and also because of the nuisance factor present in large establishments where much noise is made by the knocking to pieces of old automobiles and where auto parts are piled up in high stacks in yards, furnishing fire hazards. We quite agree that there is need for supervision by the public authorities of junk shops and junk dealers within the meaning of the statute, but the evidence in this case discloses that defendant was not in the junk business within the commonly accepted definition of that term, as laid down by the foregoing authorities. It purchased iron and steel from dealers in carload lots and in large quantities only. It did not buy from minors, nor from adults except in large quantities, and was apparently carrying on a legitimate wholesale business in sorted iron scraps. It did not deal in rags, rubbish, brass or other metals, aside from iron, or of material of a miscellaneous character. Nor is the argument convincing that defendant’s business required supervision because of fire hazards. We think this proposition is refuted by the mere statement thereof.

After a careful consideration of the authorities cited by both parties, we are of the opinion that the Northern Paper Stock Co. case, supra, is precisely in point and controlling. The only difference between the two cases is that in the case at bar the material handled was scrap iron and steel, whereas in the other case defendants were dealers in assorted rags and paper. In both cases sales were made to mills in carload lots or other large quantities, and purchases were made in the same manner. According to the evidence in the instant case defendant did not purchase from junk gatherers; it dealt in iron of various sorts and grades, and steel, exclusively, and bought from junk dealers in carload lots and in large quantities only. If the ordinance in the Northern Paper Stock Co. case, supra, was not applicable to that defendant’s particular business, it would logically follow that the ordinance is not applicable to defendant’s business in this proceeding, because the business of both defendants was similar with reference to the manner in which they purchased and disposed of the merchandise in which they were dealing. Scraps of new iron and steel left from manufacturing processes, and iron and steel recovered from buildings being wrecked and from parts of automobiles cut to sizes to meet the specifications of steel mills and foundries, are not junk within the provisions of the ordinance and under the decisions cited.

For the reasons stated we think the judgment of the municipal court should be reversed and it is so ordered.

Reversed.

Scanlan, P. J., and Sullivan, J., concur.