author: Emery, V. C.

text:
    Clifford K. Jeffray v. Thomas H. Towar et al.
    [Filed October 3d, 1902.]
    1. A customer opened at the same time two accounts with a broker—one in his individual name and the other in his name as trustee. The individual account was a speculative one, and the trustee account was chiefly a loan account. The former was a continuing one, while the latter was settled twice and reopened for a third time. In a suit by a beneficiary of the trust estate against the broker for an accounting, evidence examined, and held sufficient to show that the broker had notice that the deposits in the trust account were trust property.
    2. Where a person deposits money in his own name as trustee to an amount not exceeding the sum he is chargeable with as trustee, and which amount is not identified or accounted for by him, the law presumes, in the absence of any evidence, that the money deposited consisted of property originally belonging to the trust funds, or that the deposit constitutes a fund substituted for trust funds taken, and this presumption is effective not only as against the depositor, but also as against the depositary, unless he is a tona fide depositary without notice.
    3. A debt due a depositary on the individual account of a depositor cannot be set off against a balance due on the depositor’s account as trustee, when the depositary had actual or constructive notice of the trust.

      Heard on bill, answer, replication and proofs.

      Mr. Sherrerd Depiie, and Mr. Wilkie (of the New York bar), .-for the complainant.

      Mr. Charles II. Ilartshorne, and Mr. Weed (of the New York '.bar), for the defendant Towar.
   Emery, V. C.

The complainant, Clifford K. Jeffray, for whom Timothy T. Dwight, now deceased, held funds in trust, files this bill against Dwight’s administrator and Thomas H. Towar for an accounting and. for the-recovery from Towar of a portion of the trust .funds, or the proceeds thereof, which are alleged to be retained by him.

Towar, from the year 1884 to the year 1889, inclusive, carried on the business of a stock broker in New York City, and during those years Timothy T. Dwight was one of his customers. Towar .carried two accounts with Dwight on his books, one headed “T. T. Dwight,” the other “T. T. Dwight, Trustee.”

The main dispute in the case is whether the defendant has a right to set off the balance due to him on the individual account .against the balance due from him on the trustee account. The two accounts were opened at the same time,, and it was claimed by defendant, in his answer, that, at the time of opening the two accounts, there was an express statement by Dwight to him that any funds or securities in either account should be a margin -or security for the other account, and that both funds were Dwight’s own funds, and it was further claimed that all the .subsequent transactions with Dwight were had in reliance on this statement. Hpon the argument it has not been claimed that proof of any such statement or of any express agreement 'has been made, but it is claimed that the evidence in relation to the circumstances of opening the accounts and to the dealings between the parties, during the running of the. accounts, shows satisfactorily that there was such an agreement that the accounts -were held as margin for each other, and that this agreement was valid, because Towar had no notice that the funds or the securities placed by Dwight to the credit of the trustee account were held by Dwight in trust for complainant, or were not Dwight’s individual property. The complainant, on the other hand, contends (1) that there was no such agreement of set-off between Dwight and' Towar, but that the trustee account was entirely separate from the individual account, and (2) that the funds in the trustee account were derived from funds held by Dwight in trust for complainant; that Towar had notice that the funds were trust funds, and that any agreement for set-off, even if made, was illegal and invalid as against complainant. The circumstances under which the accounts were opened and the status of the accounts will require statement in detail, and were as follows: Previous to April 1st, 1894, Dwight, who was the surviving executor and trustee under the will of Timothy Dwight,, and who had trust funds in his hands, had on deposit with a broker (Mr. Larned) $7,000, which belonged to the Timothy Dwight estate, the original source of the trust fund of complainant, the same being a loan to Mr. Larned, upon which interest was charged and paid. Larned says that he understood the-money on loan was held by Dwight as trustee. Larned, at the-same time, carried for Dwight a regular broker’s account, upon which he purchased and sold stocks, holding the stocks purchased as security for this account. On April 1st, 1884, the amount due Lamed on the personal account was $16)371.48, to secure which he held stocks of the value, as Larned no-w swears, of about $2,000 more. There is uncertainty about the-value of some of the stocks, and defendant claims that, at that time, there was a shortage in values of about $321.48. Mr. Larned being about to retire from business and desiring to close the accounts, Dwight applied to Towar to carry the accounts, and, as Towar says, he had one or more .conversations with Dwight about the transaction, and the substance of' the conversation was that

“Dwight said that Mr. Larned was going out of business; that he had an account there with some stocks and bonds in it; could I take the stocks over and carry them for him, to which I said E could and would be glad to do so, and did so.”

He further says:

“I was requested to open two accounts, one for Timothy T. Dwight .and one for Timothy T„ Dwight, Trustee, which I did, charging Mr. Dwight with some $16,000, and crediting Mr. Dwight, Trustee, with $7,000, giving Larned & Company a check for the difference.”

This check, dated April 1st, 1884, was given by Towar to the -order of Larned for $9,333.98, and upon the receipt of this check the securities carried by Larned for Dwight’s account were delivered to Towar’s agent, who delivered the check. Towar .at once opened on his books two accounts, the “T. T. Dwight” .account, in which the first entry was a charge

100 Pullman,
“To Cash 100 Ont. & West.
100 Canton,
from B. P. L., Jr., $16,371.48.”

In this amount was included $37.50 as commission on the ■purchase or taking over of the stock. On the same day another account with “T. T. Dwight, Trustee” was opened on the books, with a credit of $7,000. Towar had been at one time a partner of Larned’s, and Dwight had then kept an account there, but Towar says that, prior to the time when he had the transaction with him in regard to opening an account, he had no knowledge of any account being kept with Larned. There is no evidence that Towar knew Dwight was carrying two separate accounts with Larned. So far as Towar’s books directly show, the two accounts have been kept entirely separate, and have no connection with each other. Dwight’s individual account was never .a closed account, from the time it was first opened up to the time of his death, in July, 1899, and, at that date, the amount clue to Towar on this account was over $37,000, arising on the balances due upon purchases and sales of stock by Towar for Dwight and interest. The stocks purchased were (as appears by Towar’s books and the accounts rendered to Dwight) held as security for his personal account, and at the time of Dwight’s death the value of these stocks was only $11,000, leaving a deficiency of about $26,000. Dwight died insolvent. The trustee account was closed twice, and its course was as follows: After being opened on April 1st, 1884, with a credit of $7,000, it was increased, by subsequent deposits of cash and credits of interest, to $9,942.37 on April 1st, 1885. By a cash draft of $10,500, made on the trustee account on May 4th, 1885, not only was the entire balance drawn out, but the trustee account was overdrawn to the extent of $4,364.04. Previous to this overdraft, however, and on May 2d, as appears by a pencil memorandum on the account, fifty-eight shares of bank stock, then worth about $7,000, were held to the credit of the trustee account. Between May 13th and June 30th, 1895, twenty-six of these shares had been sold for $3,552.49, and the proceeds credited to the account, and on July 2d, 1885, Dwight, by a check for $790.64, signed by him as trustee and drawn upon a trustee account kept in bank, settled the overdraft and balanced the account. At the time of this settlement of the overdraft thirty-two shares of bank stock, delivered in May before the Overdraft, were still held by Towar, and continued to be held by him until January 20th, 1886, when they were delivered to Dwight. ■ From July 2d, 1885, up to this return of the bank stock, no deposits or drafts Avere made on the account, and the account was closed, except for this memorandum of securities held. At the time the trustee account Ayas closed, on July 2d, 1885, the indebtedness on the individual account was $8,826.55, and the shortage in the margin on the individual account was $926.55. On October 1st, 1885, with an indebtedness of $8,961.87, the shortage was only $37, and on January 20th, 1886, the date of the delivery of the securities‘still credited to the trustee account, the indebtedness had increased to $17,134.96, and the stocks held for the individual account were, according to defendant’s evidence, worth only about $500 more than the1 amount of the indebtedness on this account. From this date—January 20th, 1886—the trustee account was closed, and no securities or deposits were held for its credit until November 5th, 1886, when it Avas opened by a cash deposit of $1,200. The state of the individual account at the different periods during this interval, at which accounts were rendered by Towar and tire margin values of the stocks held for the credit of the accounts, is important, and they were as follows:

Jan. 20, 1886........Debit $17,134.96 Margin $527.54
April 1, “ “ 11,614.65 “ 735.35
May 3, “ “ 20,114.65 Shortage 1,114.65
July 1, “ “ 20,634.28 Margin 1,553.22
Oct. 1, “ “ 16,087.16 “ 5,375.34

showing that during the whole of this time the securities belonging to the individual account and the personal security of Dwight were the only securities for the individual indebtedness. On November 12th, 1886, the trustee account was again opened by a cash deposit to its credit of $1,200, which remained on interest to January 1st, 1887. Another deposit of $10,000 cash was credited on January 29th, 1887, and, after the purchase of about $4,000 worth of railroad bonds, which were delivered at once, the balance of the account ($7,338.95) was drawn out on February 4th, 1887, and the trustee account was entirely closed for the second time. The status of the individual account, as rendered during this second running of the account, with the margin of stock values, was as follows:

Jan. 1, 1887........Debit $15,805.13 Margin $1,419.87
Feb. 2, “ ........ “ 16,005.13 “ 1,294.87

On February 19th the trustee account was again opened by a cash deposit of $750, the indebtedness on Dwight’s individual account being at this time $18,055.13, and the margin $1,944.87, or $700 more than when the account was closed on February 4th, 1887. On April 27th, 1887, 'there was the further large deposit of $21,561.47. The proofs- satisfactorily establish that these two deposits, together with a subsequent deposit of $98.54, made on December 1st, 1887, were of funds which Dwight held in trust for the complainant, Jeffray. These funds belonged to Jeifray, who came of age in August, 1886, under the will of his grandfather, Timothy Dwight, of whom T. T. Dwight was the surviving executor and trustee. Nnder an agreement with Jéifray, made shortly after he came of age, and which was reduced to writing and delivered in April or May, 1887, these funds were to be held for Jeifray and invested by Dwight, the income to be paid to Jeifray during their joint lives, and on Dwight’s death the title to the principal became vested in Jeifray. Dwight proceeded to invest the larger portion of the funds in interest-bearing securities, and between April 27th and May 2d, 1887, railroad bonds to the amount of $14,000 at par, and running in value from par to $1.1214, were purchased, as also $3,000 in railroad bonds at $0.92. These bonds were all delivered to Dwight on' May 2d, 1887, and his receipt as trustee was signed on the trustee account in the books. The cost of these bonds was $17,968.64, leaving about $4,000 still uninvested to the credit of the trustee account. On April 1st, 1887, Dwight’s indebtedness on his individual account was over $22,500, with a stock margin of $1,855.71, but by July 1st, the individual debit was $22,822.40, due mainly to the depreciation in value of stocks purchased after January 1st, 1887. The trustee account then had a cash balance of $4,263.49, and the three railroad bonds purchased on May 2d were, on June 21st, 1887, noted on the trustee account as returned to Towar. From this date—July 1st, 1887-—the amount of indebtedness on the individual account has steadily' increased to over $30,000, and the shortage to over $20,000. The balance to the credit of the trustee account at Dwight’s death, in 1899, was about $20,000, with interest from January 1st, 1898, and at that time Towar also held to. the credit of the trustee account two.bonds of $1,000 each, and a bond of $1,000 to the credit of the individual account. All of the bonds purchased by Towar for Dwight on the trustee account in April, 1887, and delivered to him, were subsequently, and from time to time, returned by Dwight to Towar and sold for the credit of the trustee account, the proceeds going to the general credit of the account, or for the purchase of other bonds, which were also subsequently sold and credited to the account. Over $5,000 of additional cash deposits were also made by Dwight to the credit of the trustee account, and about $3,250 of this has been satisfactorily shown to have been derived from the income of the trust fund. The only other credit to this trustee account, which does not seem to have arisen from the deposit of trust funds or from the proceeds of sale of securities purchased therefor, is a deposit of nine shares of New York and New Haven Railroad Company stock. Five of these were deposited May 21st, 1891, and sold on the same day for $1,149.38, which was credited to the account, and at that time the credit to the trustee account was $9,336.89, and the debit of the individual account was over $27,000, and the margin of this account was short about $18,000. Four shares of the New York and New Haven Eailroad Company were received on October 18th, and sold on October 19th, 1893, and the proceeds—$763—credited to the trustee account, which at that time had a balance of about $15,000, while on the individual account there was due to Towar over $30,000, and the margin was short over $17,000. These nine shares of stock have not been identified as being part of the original trust funds, or the proceeds of them, but complainant claims to be entitled to the benefit of their deposit in the trustee account, as funds or securities substituted or provided by the trustee to replace securities taken by him from the trust fund. The original trust fund, held by Dwight as trustee for JefEray, amounted to $27,629.46, and the trustee had funds or securities belonging to the trust, other than those deposited with Towar, or the proceeds of this deposit, and amounting in value to over $6,000. Not only has the trustee or his administrator failed to account to his cestui que trust for the principal originally deposited with Towar, or the proceeds thereof, but he has also failed to account for over $1,000 of the trust fund or securities other than that originally deposited with Towar, or the proceeds thereof. Some of the latter securities have been disposed of by the trustee, and the deposit of the New York and New Haven Eailroad Company shares to the credit of the trustee account should, under these circumstances, be taken as constituting them part of the trust funds, either as the actual proceeds of the original trust property, or as funds replaced or substituted by the trustee. It is claimed by defendant that $5,201.06 credited as cash deposits in the trustee account have not been shown to have been trust funds, but the account and books of the trustee, .which are evidence against defendant upon this question of identification, show that all of these cash deposits which were made previous to July, 1900, amounting to about $3,250, were derived from the income of the trust funds. The accounts in the trustee’s books are broken of£ at this date, and there is no satisfactory evidence as to the actual source of the subsequent cash deposits, amounting to about $2,000. But the trustee having admittedly in his hands at least this amount of the trust estate, which has never since been otherwise accounted for or identified, and having deposited the amount in the account which did contain the trust funds, it must, in the absence of proof that they did not arise from other sources, be presumed that they were either original trust funds, or funds substituted by the trustee for trust funds taken. And this presumption, thus arising, as to the character and origin of these unidentified funds'or securities deposited in the account, is effective, not only against the trustee depositing them in the trustee account, but against Towar, who claims under the trustee account, unless he is a bona '/ide purchaser without notice.

From all the evidence in the ease relating to the circumstances of the opening of the two accounts in April, 1884, and of the dealings of the parties in relation to them up to the time when the trustee account was opened for the third time, on February 18th, 1897, and complainant’s money deposited therein, I conclude that no agreement, either express or implied, for the set-off of the two accounts, or that the cash balance in the trustee account should be held-as a margin or security for the individual account, has been made out as existing at that time. On the contrary, the accounts during that interval were treated as entirely independent accounts, and the trustee account was closed out and reopened without any apparent connection with the margin or the individual account. The strongest evidence, from the accounts themselves,’ that the trustee account was not to keep good the individual account is that, on January 20th, 1886, when the indebtedness on the individual account was $17,134.96, and the margin was only $527.54, the securities belonging to the trustee account, then worth $3,782, and which had been held since July, 1885, were delivered to the trustee, and that no deposits, of either cash or securities, to the trust account were made until November 12th, 188G, although in the meantime and on May 3d, 1886, there was a shortage on margin of $1,114.65. The second opening and closing of the trustee account and its last reopening do not seem, on the face of them, to have any connection with the state of the margin on the individual account, or to afford any evidence of an implied agreement for set-off. On the contrary, the dealings of the parties in reference to the two accounts, up to the last time of opening the trustee account, would seem to justify the conclusion that, up to this-date, they were distinct and independent accounts, not connected with or handled together.' TJp to this time, also, the individual account had been a purely speculative, and not an investment, account, while the trustee account, on the contrary, had been, in the main, a cash account, or loan of money from “Dwight, trustee/7 to the broker, and not a deposit of funds for investment. The principal deposits made to the credit of the trustee account up-to and-including February 18th, 1887, were by checks of “T. T. Dwight, trustee/7 on the Corn Exchange Bank, in which Dwight' had a trustee account. These checks were $1,200, November 5th, 1886, and $10,000, January 29th, 1887, and $750, February 18th, 1887. From the time, of the opening of the two accounts statements of the two accounts and memoranda of purchases and sales were submitted by Towar at frequent intervals, and these-were separate and distinct statements of the accounts rendered, to “T. T. Dwight, trustee/7 as they appeared on the books, and the receipts for cash and securities paid into the trust account were given to “T. T. Dwight, trustee/7 during the continuance-of the account. The status of the parties and of the accounts at the time of the last opening of the trustee account, in February, 1887, and the question of Towar’s knowledge, at that time, that the trustee account was of funds not held by Dwight for himself personally, but in trust for others, is of importance in-the case, for I think the status of the accounts and the dealings'of Dwight and Towar, after the shortage of margin on the individual account began, in June or July, 1887, by reason of the depreciation of stocks purchased early in 1887, does show that they both, while still keeping the accounts, as to form, in the same separate condition as before, did so carry them on that there was an obvious connection or relation between them, under which cash and investment securities were brought in by “T. T. Dwight, trustee/7 and the trustee balance increased as the losses of T. T. Dwight’s individual speculative account increased. This conduct in reference to the accounts might, perhaps, be sufficient, .as between Dwight and Towar, to warrant an inference of an 'implied agreement to set off the balance on the trustee account ..against the losses on the individual account, but the real question, and the vital question in the case, is whether, before and .at the time when this treatment of the accounts commenced -or during its continuance, Towar had notice that the trustee .account was not Dwight’s individual funds, but was held by him in trust for others. If he had such-notice, or was so put upon inquiry as to be chargeable with notice, then, undoubtedly, no .agreement of set-off of the two accounts, whether express or implied, would be valid. When the trustee account was opened ■for the third and last time, and before any shortage in the individual account occurred, the further facts bearing on the question of notice were these: The account was reopened by a check ■of $750, signed by T. T. Dwight, trustee, to order -of Towar, on February 19th, 1887, which was endorsed for deposit to 'Towar’s account, but not by Towar himself. It has not been proved that Towar himself saw this check. On April 27th a •deposit of $21,561.47, being the principal source of the funds now in dispute, was made. This deposit was from funds held in trust for Jeffray, and was derived from the payment of a mortgage held by the trustee. The manner in which the deposit was made by the trustee with Towar does not appear. This fund was not carried as a cash balance or loan with the bankers, but the entire amount (about $22,000), with the exception of .•about $4,000, was, as above stated, at once invested in railroad bonds, interest-bearing securities of the class generally recognized as investment, and not speculative, securities. Under the trust ■deed Dwight was authorized to purchase them.

These bonds so purchased were all delivered to Dwight on May 2d, 1887, and he receipted for them on the account in the books as “T. T. Dwight, trustee.” On April 1st the individual debit was over $22,500, but the stock margin was over ’$1,800 (nearly ten per cent.), and it does not appear that there was any shortage up to the time of the delivery of the bonds. The immediate investment of the trustee account fund in securities of this character and their delivery to Dwight, on his receipt as trustee, taken in connection with the circumstances above referred to, indicating that the trustee account was, in fact, a. separate and distinct account, and in no way connected with) Dwight’s personal account, were sufficient, I think, to put Towar' on inquiry as to the funds so invested being funds held in trust-The importance of directing the present inquiry as to notice to the-time when the fund was thus invested will appear from the fact that all these identical securities thus purchased for investment by Toivar for Dwight, trustee, were subsequently, as the shortage of the individual account increased, brought in to the credit of the trustee account and sold, the proceeds going to the general, credit of the account, or for the purchase of other bonds of like-character, which were also subsequently sold and credited to the-account. In this manner the entire original purchase for the-“trustee” account have been again turned into cash or delivered to Towar for the credit of the same account. While these securities were thus being gradually returned by the trustee, and the balance due on the trustee account increased, the broker’s attention was further directed to, the character of the trustee account by the fact that bills of exchange were regularly purchased by' him for Dwight for the purpose of sending abroad. These bills-were sent to complainant by Dwight as the income of the fund.. The first of these drafts was on August 31st, 1887, for £100,. followed on July 9th, 1888, by a draft for £120, and'thereafter,, from February, 1889, drafts averaging about $350 were sent quarterly and reguarly up to the close of 1893, after which time-they were sent semi-annually until April, 1896, when defendant declined to make any further drafts against Dwight’s trustee-account because of the shortage on his individual account. The entire amount of these foreign drafts was $13,261.04. Twenty-four of them (or of the duplicates) have been produced. Most of them are drawn to the order of Towar, and' of these many were endorsed by him personally “Pay to the order of T. T.. Dwight, trustee.” There is a further fact bearing, as it seems-to me, upon the question of actual notice. This was the irregular, or at least unusual, manner of' securing the balances due on the personal account. It is now claimed' that these-balances, which were continually increasing, as the1 stocks held as margin fell in value, were indirectly secured1 by- increasing the funds and securities held for the credit of the othef and the trustee account. And although these balances are large, continually increasing, and finally absorb the entire amount with which the other account commenced (about $20,000), there is no writing or document between the parties to show that the large debt on the personal account is intended to be secured by the trustee account. Written evidence, either on the accounts themselves or otherwise, that the trustee account was security for the personal account, would prove misapplication of the trust funds so far as Dwight is concerned, and his failure to provide it might be explained. But Towar’s adoption of what .seems to me an unusual, and certainly hazardous, method of securing the large debt due, on the personal account, without anything in writing to protect him, and without any express agreement of any kind in case Dwight should deny the right to set-off, has not been satisfactorily explained. It is one of the circumstances to be considered in determining whether he did not have actual notice of the trust, and whether the indirect method of keeping the personal account secured did not indicate, ■on Towar’s side, actual knowledge of the fiduciary character of the “trustee” account. The evidence in the ease warrants the conclusion, .1 think, that Towar, had actual notice of the fiduciary •character of the trustee account. But if the facts already brought to Towar’s attention, in relation to the trustee account, were not sufficient in themselves to give him actual notice of the fiduciary •character of the trustee account, they were certainly sufficient to put him upon inquiry as to the character of the account, and if this duty of inquiry exists, and the failure to make the inquiry is not satisfactorily explained, Towar must be charged with constructive and conclusive notice of the facts which would have been ascertained upon due inquiry. 4 Kent Com. *179; Hoy v. Bramhall, 4 C. E. Gr. 74, 563 (Errors and Appeals, 1868, Depne, J.); Tantum v. Green, 4 C. E. Gr. 105; S. C. on appeal, 6 C. E. Gr. 364 (Errors and Appeals, 1869); 2 Pom. Eq. Jur. §§ 605, 606; 21 Am. & Eng. Encycl. L. (2d ed.) 590. No further inquiry appears to have been made by Towar, nor has the failure to inquire been explained. The contention of counsel that no duty of inquiry existed, because inquiry could only be made of Dwight, and this would have been fruitless, cannot be sustained. Towar’s failure to perform the certain and existing duty to make inquiry cannot be excused on the uncertain and speculative assumption that Dwight would not have told the truth. Dwight’s answers to his inquiries, if falsely made, might or might not have relieved Towar from further inquiry. This would depend altogether upon the character of his answers. But not only can it not be conclusively presumed that Dwight’s answers would have been false, but the presumption is that he would have told the truth, and up to the latter part of the spring of 1887 there does not appear to be any reason why he should not have told the truth about it. Notice of the trust, either actual or constructive, being shown, the law is settled that the debt due on the individual account cannot be set off against the trust funds. All authorities agree on this point, and the principle is best stated in the terse language of Yice-Chancellor Knight-Bruce, in Pannell v. Hurley, 2 Coll. 241: “Money is due from A to B, in trust for C. B is indebted to A on his own account. A, with knowledge of the trust, concurs with B in setting one debt against the other, which is done without C’s consent. Can it be a question in equity whether such a transaction can stand?” Thé decisions differ as to what facts are sufficient to put a banker or broker upon inquny, and there is especially a variance in the authorities as to the effect to be given to the mere designation of the accounts. Yice-Chancellor Knight-Bruce, in Pannell v. Hurley, supra, says, in the course of his opinion: “If the only notice to the bankers had been the title to the account [Pannell estate, Davey, trustee], this might have been a case of more difficulty.” A later case (Ex parte Kingston, L. R. 6 Ch. App. 632) seems, however, to give greater effect to the mere designation of the account where there are two concurrent accounts, one personal, the other designated as trustee. In the decisions of New York it has been declared that the fact that an account with a bank was opened by one P. as “trustee,” or that he added the word “trustee” to his signature upon the note, did not put the bank upon inquiry as to the title to bonds, negotiable by delivery, which were pledged to secure the payment. In this ease, it will be observed, there were not two concurrent accounts. Some courts have declared that where a depositor has two concurrent accounts with a bank, ■one individual and the other “trustee,” the mere designation of the account as trustee will, unless special, circumstances be shown, import the existence of a trust and be notice of the character of the fund. In cases of this character the mere existence of two concurrent accounts, one of which is purely individual, is' a fact to be considered, for the reason that the designation, which is adopted by the depositor himself, to distinguish it from his individual account, must mean something, and, in the absence of other notice, must be considered his declaration that the fund is a trust fund, as distinguished from his own fund. In National Bank v. Insurance Co., 104. U. S. 54, where a depositor had two accounts, one “A. H. Dillon, Jr.,” and the other “A. H. Dillon, Jr., general agent,” and in the latter account deposited money collected for an insurance company, of which he was the agent, and tire depositor gave a check on his agent account to satisfy his indebtedness to the bank on his personal account, it was held that inasmuch as the bank was seeking to assert its lien as banker for a personal obligation of the depositor known to have been contracted for his private benefit, the designation of the account could not be held to be a mere description personae, but it was notice that the fund represented by the account was not the individual property of the depositor if it is shown to consist, in whole or in part, of funds held by him in a trust relation. The special circumstances at the opening of two accounts may, however, be such as to give the right to set off the two accounts. Thus, in Boody v. Pratt, 35 Vr. 281 (1900), a depositor having funds of his own, in his own account, with a broker, transferred a portion of the balance due him to an account in the name of his wife, proposing to continue transactions with the broker on both accounts. At the time of the transfer the depositor stipulated that, notwithstanding the transfer, the new account should, to the extent of the amount transferred from depositor’s own account, make good that account. It was held that this agreement authorized the transfer or set-off. These eases, which are only a few of those cited in the very able and elaborate briefs of counsel, illustrate the principles applicable to the decision of the present ease. The case, it will be observed, is not one where a banker or broker, having two accounts with his customer or depositor, one of which is designated as “trustee” account, or having only one account as “trustee,” is called on by his customer or depositor to honor his (the customer’s or depositor’s) checks or orders in favor of a third person, not the banker or broker. The law as applicable to this' class of cases is that the banker or broker is not justified in refusing to honor the customer’s check or demand upon the trustee account, unless an intent to misapply the trust exists on the part of the trustee, and the bankers are privy to this intent to make the misapplication. Gray v. Johnston, H. L. 3 Eng. & Ir. App. 1 (1868), is a leading case discussing the subject. But where the customer or depositor draws upon the account, which, on the face of it, is called a “trustee” account, for the benefit of the banker or broker, and for the credit of another account carried by the broker as a personal account, the banker or broker receives a direct personal benefit from this transfer of the credit from the trustee account, and in such cases the only question to be decided is whether the banker or broker had notice that the “trustee” account was held in trust by his depositor for the account and benefit of others. If he had such notice, then, as against the cestui que trust, a payment of the individual account, hy a check on the trustee account, would not be valid, and, a fortiori, the right of set-off, either' with or without the consent of the depositor, could not exist as to any indebtedness on the personal account arising after notice.

' I conclude, as the result of all the evidence in the case, that the defendant Towar did have notice of the character of the fund in the trustee account, and that it was held by Dwight as trustee and in a fiduciary capacity. ' Knowledge or notice of the. identity of the persons fox whom the trustee held the trust fund, at the time the individual debt was accruing, was not necessary in order to prevent the defendant from holding the trust fund for his personal benefit.

So far therefore as the funds in the trust account have been identified or traced as trust funds, no right of set-off exists.

And as to the cash deposits or fund whose sources have not been clearly traced and which were deposited to the credit of the trustee account, and which have not been proved to be individual moneys, the same rule must be applied. At the time of their deposit the defendant, as I have found, had notice of the character of the fund in the trustee account as a trust fund, and, where such notice exists, the rule is that even where deposits in the trustee account are proved to have been made with the depositor’s personal funds, but the deposits were made to replace or restore trust funds for which he was accountable, the deposits become trust funds, by way of substitution, and the beneficiaries are entitled to hold them. Baker v. New York Bank, 100 N. Y. 31, 34. In Ex parte Kingston, 6 Ch. App. 632 (1871), the bankers themselves, from the depositor’s personal account, made payments to the credit of his trust account, and it was held that even these payments became trust funds if the money was due to the trust, and a set-off of the two accounts, even to this extent, was not allowed. The defendant still holds two first mortgage bonds of the Colorado Coal and Iron Company, of $1,000 each, both deposited or held to the credit of the trust account. The transaction relating to these bonds, as appears from Towar’s statement to Dwight, trustee, and his books, is as follows: On May 3d, 1889, Towar bought for account of Dwight, trustee, $3,000 Colorado Coal and Iron Company bonds-for $2,913.75, and received from Dwight $3,000 in E. T. consols. These latter bonds were sold on May 7th, 1889, for $3,150, and the trustee account was put in funds, not only for the Colorado Coal and Iron Company bond purchase, but alsp for sending the draft of $391.60 to Jeffray on May 13th, 1889. The three Colorado Coal and Iron Company bonds were delivered to Dwight on May 3d, 1889, and were afterwards received by Towar from Dwight for credit to the trustee account, two of them on August 18th, 1890, and one on October 14th, 1890. One of these bonds was sold on October 21st, 1895, for $1,000, which was credited to the account, and the other two bonds are in defendant’s hands. Complainant is entitled to these bonds, as proceeds of the trust fund, and defendant must account for the interest received, so far as not already received and charged in his account. There remains to be considered tbe status of one bond of $1,000 of the Wisconsin Central Railroad Company in Towar’s hands. Its status as part of the trust fund is as follows: Two bonds of $1,000 each of the Chippewa Falls Railway Company were part of the original trust estate in Dwight’s hands and part of the trust funds described in the deed of trust. On October 22d, 1895, one of these bonds was delivered by Dwight to Towar and was credited by Towar to Dwight’s individual account. The bond was a coupon bond, payable to bearer, and there does not appear to have been anything on the bond itself to indicate that it was held by Dwight as trustee. The bond was delivered to Towar on October 22d, 1895. At that time the individual indebtedness was $32,998.72, with securities to its credit valued at $10,697.50. The margin on this account was short $22,301.22, and the balance to the credit of the trustee account was $20,339.79. Towar’s .account of the transaction .is

“I recall the occasion when the Ohippewa Falls bond was brought in; I had asked him for more margin and he brought it in as additional margin, and nothing was said as to what account it was to be put in.”

Dpon the day the bond was brought in, however (October 22d, 1895), a foreign draft was purchased by Towar for $782.40, payable to his order, and was endorsed by Towar personally. Exhibit G 15. Above the signature is the endorsement “Pay T. T. Dwight, Trustee, or order,” in Dwight’s handwriting. Whether this endorsement was made before or after Towar’s signature does not appear, but the trustee account was on that day charged with $782.40 and the bond itself credited to the personal account. This foreign draft was sent by Dwight to Jeffray, and I think the only conclusion to be drawn is that, on that day, the bond was brought in for the purpose of securing Towar for purchasing this draft. Towar had not advanced any cash or paid any drafts on Dwight’s personal account since May 6th, 1890, nor had Dwight, since that date, made any payments or deposits to the credit of that account; and since September 18th, 1891, no purchase of stock on this account had been made. The fact that the bond was delivered in order to secure the purchase of the draft, in connection with the fact that the draft, when purchased, was charged to the trustee account, would seem to indicate the intention of both parties to have the security itself credited to the trustee fund. It is clear, I think, under the circumstances, that in equity and in the absence of any special agreement, the trustee account was entitled to be credited with the bond, to the extent at least of the charge made against it on its receipt. Such credit to the trustee account would fully protect Towar for advances made on the credit of the bond, and as the bond was, in fact, trust property, and Towar made no-additional advances'on the personal account, either then or after-wards, on the strength of the bond, the burden is on Towar to-show a special agreement for the division of the security of the" bond and for its further deposit to the credit of the personal account. Towar has failed to prove any such agreement for division and deposit, and the bond must be held to have been originally delivered for the credit of the trustee account, and Towar, being allowed credit on the trustee account for the amount advanced on the delivery of the bond, must surrender the Wisconsin Central bond, into which this Chippewa Falls bond was subsequently converted, and must account for interest since its receipt. Dwight has left among his papers an unsigned receipt, 'with his statement endorsed (Exhibit G &4), that the special agreement between him and Towar, in reference to this bond, was that,, after deducting $782.40 and interest -from the proceeds of the bond, when sold, the balance should be paid to “Dwight as trustee for Clifford K. <Teffray.” As the receipt and statement, however,, seem to have been written by Dwight in the absence of Towar and after the delivery of the bond, I have not considered them as evidence against Towar upon the question of the application of the bond to the accounts.

The only remaining question is that of interest. The balance now appearing to be due on the trustee account results, to-some extent, from the compounding of interest on the balances, with quarterly or semi-annual rests, up to January, 1897, from which time the rests are annual. As between Dwight himself and Towar, such compounding might not be unauthorized, because it was evidently due to the fact that interest on the personal account was compounded quarterly. As the complainant’s claim is based wholly on the right to follow trust funds, my present view is that the account should be made up with annual rests. As this question, however, has not been fully argued, I will hear counsel upon it, if they desire, at the time of settling the decree for account.


source: Caselaw Access Project

license: Public Domain

text:
    Eliza A. Morris v. John J. Joyce et al.
    [Filed October 10th, 1902.]
    1. Complainant left in the hands of her attorney J., who had charge of her investments, a bond and mortgage for $3,000 belonging to her and also an absolute assignment of the bond and mortgage, executed by her to defendant M. The execution of the assignment was procured by fraudulent representations made by J. to complainant, as was also the retention of the bond and mortgage. J. procured M. to endorse his note for $2,000 on the security of the mortgage and assignment, stating that he desired to raise a loan of $2,000 for the benefit of complainant. Complainant was not a party to the note. M. knew that J. had charge of complainant’s investments.—Held, (1) that complainant’s act in leaving the assignment and the mortgage with J. assisted in making J.’s representation to M. credible, and that she was estopped from denying J.’s agency to assign the mortgage to M., either absolutely or as collateral security; (2) the fact that complainant was not a party to the note did not, under the circumstances, give M. notice or put him upon inquiry as to the fraud in the assignment.
    2. J. owned the property on which the mortgage was given, and subsequently to the endorsement by M. procured from defendants, a building and loan association, a loan of $3,200, $2,000 of which were paid by its assuming payment of the note endorsed by M. and the balance was paid to J. The loan was procured by J.’s statements that the $2,000 on the note was the entire amount due on the mortgage. The association advanced the money ($1,200) and assumed the note, relying solely on J.’s statement. 'J.ney received from M. an assignment of the mortgage subject to the conditions on which he held it.—Held, (1) as to the $2,000 note assumed, they were assignees of M.’s rights against complainant and entitled to hold the mortgage to secure this amount; (2) as to the amount due beyond the $2,000, complainant is entitled to a decree giving her the benefit of the mortgage.

      Final hearing on bill, answers, replications and proofs.

      Mr. Frank P. McDermott, for the complainant.

      Mr. Addison Ely, for the defendants.
   Emery, V. C.

The complainant, Mrs. Morris, was the owner of a first mortgage for $3,000 on property of the defendant Joyce, situated in Point Pleasant. The mortgage was originally given by Joyce to the defendant Murphy, from whom Joyce purchased the property in November, 1895, and was a purchase-money mortgage. Joyce was Mrs. Morris’ attorney and looked after the investment of her entire funds. Mrs. Morris, before May, 1899, left the bond and mortgage with Joyce to keep with her other papers, and on May 26th, 1899, executed an assignment of the mortgage to the defendant Murphy. The consideration expressed in the assignment was $1, but the assignment contained a covenant that $3,000 were due, besides interest. As to the circumstances under which the assignment was made, the complainant says, substantially, that Joyce procured it by the statement that he wished to have the paper signed in order to make some change in her investments, and she further says that she understood it related to a $1,000 mortgage on Philadelphia property, which belonged to her and which was also in Joyce’s hands. She also says that after this explanation was given by Joyce, the master, who had come to the house with him for the purpose of taking the acknowledgment, was called into the room, and the assignment was acknowledged. The master has no special recollection of the circumstances and knew nothing about the transaction, but, speaking from his general custom, says that he explained to her the nature of the instrument. On the following day Mrs. Morris, as she says, went to Mr. Joyce’s office, and to her inquiry as to where he invested the monejr, Joyce said that he found he did not have to make the change, and that he had put the papers back with the rest of the papers. ■ The bond and mortgage, with the assignment to Murphy, were left with the defendant Joyce. Joyce applied to tbe defendant Murphy to purchase the mortgage himself or to find a purchaser, which Murphy said he could not do. Joyce then stated that he wanted to raise some money for Mrs. Morris, and could get along with $2,000. After a consultation of Joyce and Murphy with an officer of the Manasquan Bank, it was arranged that the bank would discount Joyce’s note for $2,000 if endorsed by Murphy, and Murphy agreed to endorse the note on the security of the mortgage. The note was so made and endorsed, and the bond and mortgage and the assignment were delivered to Murphy by Joyce for the purpose of securing Murphy’s endorsement. The proceeds of the note were received by Joyce, who misappropriated them to his own use. Subsequently, and in November, 1899, Joyce applied to the defendants the Chosen Friends, &c., a loan association, for a loan of $3,200 upon the property. The written application, signed by Joyce, stated there was a $3,000 mortgage on the property and also a $1,000 second mortgage, and that the $3,200 mortgage applied for was to be a first mortgage. Joyce’s verbal statement to the officers of the association was that, although the first mortgage was for $3,000 on its face, it had been liquidated and was only worth $2,000, and that the Manasquan Bank held it to secure the loan of $2,000 on a note. As to the $1,000 second mortgage, he stated that Murphy, who held this mortgage, had agreed to cancel his mortgage and take a new mortgage, subject to the loan association first mortgage of $3,000. The loan association did not have the entire $3,000 applied for on hand, and agreed with Joyce to assume the payment of the $2,000 note to the bank, which was then due, provided it could be renewed, this assumption being taken as payment of $2,000 of the mortgage, and to advance Joyce the balance of the loan, amounting, after charges due, to about $1,040.

Without, in fact, making any previous arrangement with the bank or with Murphy about taking up or renewing the note, the loan association, on November 9th, 1899, took a mortgage on the premises from Joyce and wife to secure $3,200, and paid to Joyce, on November 11th, 1899, the sum of $1,040, which he also appropriated to his own use. Murphy canceled his mortgage foi\ $1,000, and took a new mortgage for $1,000, which was expressly made subject to the loan association mortgage, but, in the meantime, Murphy continued to hold, as security for his endorsement, the mortgage assigned by complainant. This assignment had never been recorded, and on the record the title to the mortgage was still in complainant. The loan association had an abstract of the title, but this abstract has not been put in evidence. The advance of $1,040 by the loan association was made without any inquiries of either the bank, Murphy or complainant, and was made entirely in reliance on the statements and credit of Joyce. He was then in good standing and reputation and occupied a responsible position. The note given by Joyce to the bank was not taken up, and subsequently, and on July 12th, 1900, Murphy wrote the loan association requesting them to pay Joyce’s note of $2,000, according to their arrangement made, as he understood, with Joyce. He further states that the note is secured by a mortgage prior to the loan association mortgage, and unless the note is paid the first mortgage ($2,000) will be foreclosed. The loan association then had the note renewed, they becoming endorsers on it before Murphy. Subsequently they paid the bank $1,000 on account of the note which they originally endorsed, or the renewal of it, and, upon making this payment, gave their own note to the bank for the balance remaining due, and which is still unpaid. Murphy, upon being released from obligation to the bank by the payment of the note upon which he was the endorser, assigned the mortgage to the association by a written assignment, reciting, among other things, that he held the mortgage as collateral security for Joyce’s note, originally endorsed by Murphy, and which had been assumed by the association, and declaring that the assignment was made subject to the conditions on which the mortgage had been assigned to him. The complainant seeks to have the mortgage assigned to her, and for a decree for payment of the amount due on the mortgage to her. The equitable grounds upon which this claim to relief is based is that the assignment of the mortgage was procured by fraud and misrepresentation, and that neither Murphy nor the loan association claiming under him is entitled to hold the mortgage as against her.

As to the facts in the case bearing on the question of Murphy’s right to hold the mortgage to secure him for his endorsement ■of Joyce’s note, my conclusions are-^

First. That Murphy’s endorsement of Joyce’s note was made in reliance on complainant’s assignment of the mortgage and its ■delivery to him, with the bond and mortgage, and in the belief that Joyce’s application to him was for the purpose of assisting ■complainant in securing a loan upon the mortgage and its assignment to him.

Second. That the complainant, by leaving in Joyce’s possession the bond and the mortgage and the assignment to Murphy, duly. executed and acknowledged, assisted and made possible ■Joyce’s deception of Murphy by his application. The assignment, as shown, was such as would probably, or naturally, have been made had an application to Murphy on behalf of complainant been its real purpose.

Third. That there was nothing in the circumstances of the transaction which gave Murphy notice or could reasonably put Trim on inquiry as to the truthfulness of Joyce’s statement of the purpose of assigning the mortgage. The circumstance principally relied on is that Murphy knew that Joyce alone, and not Mrs. Morris, executed the note. But Murphy knew that Joyce was Mrs. Morris’ attorney and had been for some years; Joyce’s reputation was good at that time, and, in the absence of something to arouse suspicion as to his intention to misapply the money to be raised on the note, I do not think this was sufficient to put him on inquiry. There is no evidence that would justify me in concluding that Murphy had notice, actual or constructive, as to Joyce’s intent to misapply the money, or that the application was not made on behalf of complainant, before he endorsed the note.

If these conclusions of fact are well founded, the law is settled that, so far as relates to the assignment to Murphy to secure his endorsement, the complainant is not entitled to relief. By her delivery of-the bond, mortgage and assignment to Joyce, and allowing him to retain them, she assisted and made credible Joyce’s misrepresentation to Murphy that he was applying to Murphy for a loan on behalf of complainant. By leaving with J oyce the papers which assigned the mortgage to Murphy, complainant apparently, as Murphy had the right to consider on looking at them, applied to him, through Joyce, to take the assignment, either by way of purchase or as collateral, and Murphy was entitled to rely on these declarations and acts of the complainant apparently making Joyce her agent for sale or loan, and to rely on his authority to do so. Complainant having thus assisted in the misrepresentation of Joyce to Murphy, in reliance upon which Murphy endorsed the note, is estopped from now denying Joyce’s agency to deliver the mortgage and assignment made to Murphy, either absolutely or as collateral. The decisions leave no doubt upon this point. Putnam v. Clark, 2 Stew. Eq. 412; affirmed on appeal, 6 Stew. Eq. 338. In this case complainants executed an assignment of a mortgage (either in blank or to their counsel) for the purpose of transfer on a sale to a third person. „ The sale fell through, as counsel stated, and the mortgage as well as the executed assignment were left with counsel. He subsequently assigned them as collateral for his own debt. As between subsequent tona fide assignees and the mortgagee the assignment was held valid.

The present case is a particular application of the general rule relating to estoppels against the denial of the existence of an agency:

“Where the owner of things in action or of chattels, has either designedly or negligently clothed a third person with the apparent title and power of disposition, and this third person transfers them to a purchaser in good faith, who relies upon the apparent power of sale they conferred, the original owner is estopped by his conduct from asserting his right of property, and the tona fide purchaser acquires a perfect title by estoppel.” 2 Pom. Eq. Jur. § 811. See, also, Big. Estop, (,5th ed.) 565.

Complainant’s counsel contends that the case is one arising under the laws of agency, and that the question is whether the agency authorized a pledge of the mortgage. But this is a misapprehension of the situation. There was, in fact, no agency whatever in reference to the assignment of the mortgage. The assignment, on the contrary, was, by the understanding between Mrs. Morris and Joyce, a paper functus officio, and to be left and kept among the complainant’s papers as such. Joyce’s taking the assignment to Murphy, with the bond and mortgage, was not the exercise of any powers of agency, but was the fraudulent use of an assignment executed by complainant, for the purpose of inducing Murphy to advance money 'or incur liability on it. Murphy having in good faith incurred liability relying on the validity of the assignment for his security, the question is not whether Joyce was, in fact, the agent of Mrs. Morris for the purpose of assigning the mortgage, and whether the powers of the agent were exceeded, but the question is has complainant, by her acts, so held Joyce, out as her agent to negotiate the mortgage that she is now estopped from denying the agency? The distinction between cases of authority under the rules of law applicable to agency admitted to exist to some extent and estoppels to deny the existence of an agency which, in fact, did not exist for any purpose, is clearly stated by the text-writers. Big. Estop. (5th ed.) ^57; 2 Pom. Eg. Jur. § 811. Murphy being entitled to protection against his liability, and being, to this extent, a bona fide purchaser, has, of course, the right to the full benefit of this protection, which will extend to a transfer of his right of security to the loan association, which assumed and, in part, paid his obligation on the note, relying upon the payment of the note as being a discharge of the mortgage. So far as related to Murphy’s note, it became assignee of his rights, and the mortgage in its hands, as to the amount of the Murphy note, must be held valid against complainant, by reason of this assignment of Murphy’s rights.

As to the balance of the mortgage, the situation of the loan association is different. In assuming that $2,000 was all that was due upon the mortgage, which, on its face, secured $3,000, and that this was due to the bank, and in paying the $1,000 additional to Joyce on this assumption, it relied solely on the statement of Joyce, and made no inquiry, either of the complainant, Murphy or the bank. Joyce was the mortgagor, complainant the mortgagee of the first mortgage, and on the record she had title to it. Murphy claimed to hold the $3,000 mortgage only as collateral for the $2,000 note, and the loan association, in relying on the mortgage for information as to the amount due on the mortgage, and to whom it was due, took its own risk. Murphy appears to have made no statement to it in reference to the mortgage until July, 1900, several months after the payment to Joyce, when he referred to it, in a letter, as a $2,000 mortgage. The payment in November, 1899, cannot.be considered as made in reliance on any statement of Murphy’s. Neither was this payment to Joyce in November, 1899, due to any act or negligence of complainant, in relation to her conduct or duty toward the association, upon which the association relied in-making the payment. On the contrary, it relied solely on the •statement of Joyce, the mortgagor, and failed, before making the payment, to make inquiries of the complainant, the mortgagee on the record, or of Murphy, the assignee, or of the bank. Such inquiry would have disclosed that Murphy held, or claimed to hold, the mortgage of $3,000 as collateral to secure his endorsement for $2,000, and that the balance of the mortgage was certainly due to the complainant, and had not been paid. The .association, having failed in its duty to make this inquiry, must be charged with notice of the facts which would have been disclosed upon the proper inquiry, and as to this payment of $1,040 to Joyce in November, 1899, the association is not a 5ona fide purchaser or assignee. Joyce continued to pay or account to complainant for the interest on the mortgage until he absconded, in July, 1900, and she did not know until after that date that the mortgage was out of Joyce’s possession. The complainant was in no way bound by Joyce’s representation to the association as to the amount due on the mortgage. Nor did she, by any act •or conduct on which the association relied, assist in making credible Joyce’s misrepresentation as to the amount due on the mortgage. Had Murphy, on being applied to before the payment, shown the absolute assignment or informed the association that he owned the mortgage absolutely, and that only $2,000 were due on it, a different situation might have arisen. But there is no reason to believe that he would have made such statement, and, on the case as it stands upon the evidence, complainant is not estopped from claiming that, after receiving the $2,000 payment which Murphy, or the association as his assignee, has made, the amount due on the mortgage is payable to her.

She is entitled to a decree for such payment.


author: Emery, Y. C.

text:
    Wallace Wilson et al. v. The American Palace Car Company of New Jersey et al.
    [Filed October 20th, 1902.]
    Where a plea to the jurisdiction has been filed and has been duly noticed and set down for argument at the next term, as required by section 20 of the Chancery act of 1902, the complainant is not entitled to-move to strike out the plea under Rule 213, providing that any objection to a pleading may be made and adjudicated on motion without the filing of a demurrer or exceptions, and that the making of a motion under the-rule shall be deemed a waiver of the right to demur or except.
    On motion to strike out plea.

      Mr. Edward Q. Keasbey, for the motion.

      Mr. Robert H. McCarter, contra.

   Emery, Y. C.

' Three of the defendants to the bill have filed a plea to the'jurisdiction of the court, and the plea has been duly' noticed and set down for argument at the next term, as required by section 20 of the Chancery act of 1902. Complainant now moves, under Eule 213, to strike out the plea. The reasons relied on for striking out the plea are reasons which would, if well founded, entitle-the complainant to an order at the hearing overruling the plea. The present application is therefore, for all practical purposes,, a hearing on the validity of the plea, taking place on complainant’s motion. Defendant claims that Eule 213 does not authorize-this motion on behalf of complainant. The rule reads:

“Any objections to any pleading or any part thereof may be made and" adjudicated upon motion, without the filing of a demurrer or exceptions. * * * The making of a motion under this rule shall bd deemed a waiver-of the right to demur or except.”

It has always been held that a motion to strike out a demurrer could not be made under this rule, as the motion under the rule was one made in lieu of demurrer or exception. Nolan v. Nolan (Chancellor McGill, manuscript conclusions), referred to in Stanbery v. Baker, 10 Dick. Ch. Rep. 270. It is also held that a motion to strike out an answer cannot be made under the rule, as such motion is substantially a demurrer to the answer, and no such demurrer is recognized. Doane, &c., Co. v. Essex Building and Land Co., 14 Dick. Ch. Rep. 142 (Vice-Chancellor Stevens, 1899); Brill v. Mary A. Riddle Co., 47 Atl. Rep. 223, 224. (Vice-Chancellor Grey, 1900); Haberman v. Kaufer, 15 Dick. Ch. Rep. 271, 275 (Vice-Chancellor Grey, 1900).

The present motion is, in effect, a demurrer to the plea or motion to overrule it for the reason that the plea sets up no defence, and the hearing of the motion is, in effect, as I have said, an argument of the plea. The only difference is that, on an argument of the plea, the defendant opens and closes (1 Dan. Ch. Pr. (6th Am. ed.) *694), while on this motion the complainant has this right. The decisions I have referred to settle that the .right to object to a pleading by motion, given by the rule, was a privilege or choice given to the party who otherwise could only demur or except, and was in lieu of the demurrer or exception, and that it was not intended to introduce, for the benefit of the adverse party, a new right of demurrer or exception where no such previous right of demurrer or exception existed. The reason of these decisions govern this application, and I must hold that the complainant cannot, under Rule 213, substitute a motion to strike out a plea, for the hearing on the allowance of the plea, already noticed and set down by defendant, and the motion is denied for that reason, without considering the validity of the plea.


author: Reed, V. C.

text:
    Samuel H. Tate v. The Security Trust Company et al.
    [Filed May 26th, 1902.]
    1. A bona fide assignee for value of a mortgage takes it free from all latent equities existing in favor of third parties.
    2. The president of a trust company, acting as attorney for other parties, negotiated the execution of a mortgage to his clients. The mortgage was subsequently assigned to the trust company, it not appearing who conducted this transaction on its behalf.—Held, that the company was not chargeable with any knowledge its president may have had in regard to the purpose for which the mortgage was given.
    3. An assignee taking a mortgage as collateral security for pre-existing debts, without delivering up the evidence of such debts, was not a purchaser for value.
    4. A mortgage of $4,000 was given to secure a note of $3,000. The mortgagee assigned the mortgage to a trust company as security for the note and other pre-existing debts.—Held, that the equity of the mortgagor to have the mortgage reassigned to him on payment of the note was superior to the equity of the trust company to hold it for the pre-existing debts. .
    On final hearing.

      Mr. David J. Pancoast, for the complainant.

      Mr. John F. Earned, for the defendants.
   Reed, V. C.

On February 2d, 1900, Charles S. and William Solomon entered into a written agreement with Samuel H. Tate, the terms of which were that the Solomons would sell the San Marcos Hotel, in Atlantic City, to Tate for $50,000, free of encumbrances, except a $15,000 mortgage. The consideration to be paid to the Solomons was in the shape of certain properties that were to be conveyed to them by Tate and a promissory note of $3,000 made by Tate. It was also agreed that, to enable the Solomons to raise money upon the $3,000 note, for the payment of taxes and for other payments, Mr. Tate was to make a second mortgage of $4,000 upon the hotel property sold, which mortgage was to be used by the Solomons to secure the said $3,000 note,, and when this n'ote jvas paid the mortgage was to be reassigned to Tate.

The agent who acted for Tate in the transaction was Charles B. Prettyman, a real estate broker, who signed the agreement for his principal.

After the agreement for the sale or exchange was signed, Mr. Prettyman sold the property to a Mr. Stehle, and a part of the consideration for such sale was a $4,000 mortgage to be executed, by Mr. Stehle upon the said hotel property. By an arrangement between Prettyman and the Solomons this mortgage was made to the Solomons, instead of to Tate, for the purpose of being' used by them to secure the $3,000 note, in accordance with the agreement already mentioned. It was made in this shape, according to the statement of Mr. Prettyman, to avoid the expense of' two papers—first, a mortgage to Tate, and then an assignment from Tate to the Solomons. This mortgage, therefore, belonged to Mr. Tate, after the payment of the $3,000 note, for the-security of which it was made to Solomon. William Solomon had the $3,000 note discounted by the defendant the Security Trust Company, of Camden, and the mortgage was delivered as security. Five hundred dollars were paid upon the note, and the trust company refused to redeliver the mortgage to Tate, in case the note should be paid, claiming to hold the mortgage as security for other indebtedness due to them from the Solomons. This bill is filed to compel such delivery.

It is thus perceived that the litigation arises by reason of the-incapacity of the agent in conducting the transaction. Had the mortgage for $4,000 been made to Tate, and by him assigned to-the Solomons, by an instrument stating the purpose of such assignment, there could not have been the least trouble. As the-affair was conducted, the Solomons were invested with the power to make an absolute assignment of the instrument, and this they seem to have done.

It appears that the Solomons are indebted to the Security Trust Company to an amount in excess of the face value of the $4,000 mortgage. This indebtedness, other than the $3,000 note which was discounted at the time of the pledge of the mortgage, so far as appears, was one existing at that time. What occurred between the officers of the trust company and Mr. Solomon, or his agent, at the time of the discount of the $3,000 note and the delivery of the mortgage does not appear, as neither of the parties to the transaction was sworn. The right to hold this mortgage for a pre-existing indebtedness is rested upon an agreement, endorsed upon a note for $3,000, dated February 8th, 1898. By this endorsement William Solomon agreed that the securities hereby pledged (that is, in 1898), together with any that may be pledged hereafter, shall be applicable in like manner to secure the payment of any past or future obligations held by the trust company, and that

“all of my securities in their hands shall stand as one general continuing collateral security for the whole of my obligations, so that the deficiency of any one shall be made good for collaterals for the rest.”

The query is thus presented whether the trust compa^, taking this mortgage as collateral security for a pre-existing debt, stands in a position superior to Tate, who had an equitable interest in the $4,000 mortgage, which, as against him, Solomon misapplied by pledging it for amounts in excess of the $3,000 note.

The general rule that an assignee of a mortgage takes subject to the equities existing in favor of a mortgagor does not apply in this case, because the equity of Tate was a secret equity. While there is some conflict between the cases (Davis v. Cressman, 12 Dick. Ch. Rep. 619), I think the rule should be settled in this state that a bona fide assignee for value of a mortgage takes it free from all latent equities existing in favor'of third parties. Vredenburgh v. Burnet, 4 Stew. Eq. 229.

It is first said that the trust company is not a bona fide holder. The point is made that, at the meeting of the parties when the mortgage and the note were finally passed to Solomon, Mr. Cooper, the president of the trust company, was present and took part. It is insisted that he had notice of the purpose for which the $4,000 mortgage was made to Solomon, and that his knowledge of that purpose is equivalent to notice to the Security Trust Company, of which he was the head. Mr. Cooper says that he appeared at that conference as counsel for the Solomons, and not as a representative of the trust company. I think he took, for the Solomons, away from that meeting the note and the mortgage. He knew, I think, that the note was to be presented to the trust company for the purpose of raising money upon it. He has no recollection of taking any part in the actual presentation of the note and mortgage to the financial officers of the trust company, and thinks the transaction was with Mr. Longstreth. As already remarked, it does not appear who actually conducted that particular transaction, and as it is not proved that Mr. Cooper took any part in the reception of the bond and mortgage on behalf of the trust company, it is not chargeable with any knowledge of which he may have been possessed.

It is, in the second place, insisted that if the trust company took the mortgage without notice of the equity of Tate, yet it is not a holder for value. I think it quite clear that, to enable an assignee to hold free of any equitjr existing in a third party, he must not only have taken the mortgage bona fide, but for value.

In nearly all the cases in which the doctrine of the immunity of an assignee of a chose in action from latent equities has been recognized, the matter of consideration paid by the assignee has not been discussed, but the general rule stated that the assignee takes free from such equities. Losey v. Simpson, 3 Stock. 246; Woodruff v. Depue, 1 McCart. 168; Danbury v. Robinson, 1 McCart. 213; Starr v. Haskins, 11 C. E. Gr. 414.

In Putnam v. Clark, 2 Stew. Eq. 412, it was, however, said, obiter, that it was the established rule in this state that while the purchaser for value of a chose in action is bound by the equities existing against it, in the hands of the original obligor, he is not bound by the equities in favor of third parties, of which he had no notice, citing the line of cases just mentioned.

In Vredenburgh v. Burnet, 4 Stew. Eq. 229, Vice-Chancellor "Van Fleet said: “Where two persons holding successive mortgages, recorded in the order of their execution, agree, by writing, that the first shall stand second in order of payment, and the holder of the one made second by the agreement subsequently assigns it to an innocent purchaser for value, upon the representation that it is first in order of priority, such an agreement is a latent equity, and is without force against a bona fide assignee.

In Pryor v. Wood, 31 Pa. St. 142, the same remark in respect to a holder for value was made. Upon theory this must be the rule.

Now, regarding the title of the trust company as an equitable title, it having paid nothing, its equity is, to say the least, not higher than the equity of Tate, and the latter equity, being prior in point of time, is the superior. If the trust company, by reason of its written assignment, is to be regarded as holding the legal title to the mortgage, nevertheless, the maxim by which the legal title will prevail between equal equities only aids a purchaser of the legal title for value. Pom. Eq. Jur. § lf.11.

A purchaser from a trustee must not only get the trust property without' notice, but must pay a valuable consideration for it, else he takes the property impressed with the trust; for the rule is that a person who takes a property without paying a full consideration, will hold it charged with the trust of which it is subject, whether he had notice or not. Perry Trusts § 211. The entire doctrine that an assignee of non-negotiable securities takes them free from latent equities, must, upon principle, rest Upon the ground that he is an assignee for value.

The next question is whether an assignee taking a mortgage for a pre-existing debt, without delivering up the evidence of such debt, but taking it merely as collateral security for its payment, holds it as purchaser for value. In my judgment he does not.

It is true that it was held, in the case of Allaire v. Hartshorne, 1 Zab. 665, following the doctrine laid down by the supreme court of the United States, in Swift v. Tyson, 16 Pet. 1, that one who takes a promissory note before maturity, for a preexisting debt, is a holder for value.

Chancellor Zabriskie, also, in Uhler v. Semple, 5 C. E. Gr. 288, said that the rule that a prior debt is not sufficient to make, one a bona fide purchaser or mortgagee for value has never been adopted in New Jersey. “Our courts,”, said he, “have uniformly held that it is a sufficient consideration to protect one holding the legal right, against the prior equity of one who has not legal right, when the other had no notice of such equity.” He cites Allaire v. Hartshorne, supra, as his authority for this statement.

But, as was pointed out by Vice-Chancellor Pitney in his opinion in the case of Milton v. Boyd, 4 Dick. Ch. Rep. 142, 149, the rule enunciated in the case of Allaire v. Hartshorne was in respect to negotiable paper, and was admittedly a rule grounded upon the requirements of the business world, in respect to the transference of such securities. Indeed, Chancellor Zabriskie himself, in a subsequent case of Mingus v. Condit, 8 C. E. Gr. 313, in holding that a grantee or mortgagee for a pre-existing' debt was not a holder for value, recognized the distinction which Chief-Justice Green drew in Allaire v. Hartshorne between the passing of negotiable commercial paper and the transfer of ordinary property, without parting with anything for value.

In Butterfield v. Okief 9 Stew. Eq. 482, the language employed by Chancellor Zabriskie in Uhler v. Semple was, it is true, reiterated, but only as the language of a judge, in the same court, in an unreversed case.

The case of First National Bank v. Cummins, 12 Stew. Eq. 577, merely asserts the right of an insolvent debtor to prefer a creditor, and, in the opinion in that case, Mingus v. Gondit, supra, is criticised as deciding a principle that was not involved in the case—it really involving the right of an insolvent creditor to prefer a creditor.

In Knowles Loom Works v. Vacher, 28 Vr. 490, it was held that, within the meaning of the act which made every unrecorded conditional sale of chattels void against subsequent purchasers- and mortgagees in good faith, a subsequent chattel mortgage given for a pre-existing debt to one without notice of a conditional sale held the prior right. It was held that the meaning of the words "bona fide,” as used in the statute, excluded the idea that a purchaser or mortgagee must also hold “for value.”' Ill this opinion Mr. Justice Yan Syeket drew a distinction between this statute, from which the words ‘-‘for value” are absent, and the- statute concerning real estate mortgages, in which unrecorded deeds and mortgages are void against subsequent mortgages and deeds made in good faith, and also for valuable consideration.

In Pancoast v. Duval, 11 G. E. Gr. 445, it was held that an unrecorded mortgage was not void against a subsequent mortgage given in payment of a. pre-existing debt, the- reason being that the latter mortgage was not made for á valuable consideration. In De Witt v. Van Sickel, 2 Stew. Eq. 209, Yice-Chancellor Yan Fleet refused to accord to the assignee of a mortgage assigned in consideration of a precedent debt the character of a holder for value. The mortgages assigned had been made as part of a scheme to defraud creditors. The equity of the creditors to set it aside being a secret one, the mortgage would have been good in the hands of a bona fide assignee for value. The case directly involved the question whether the assignee of a mortgage for a pre-existing debt takes it free from latent equities outstanding in third parties, and the question was answered in the negative.

I am of the opinion that, upon the payment of the amount due upon the $3,000 note, the trust company should deliver the mortgage to Tate.


author: Reed, V. 0.

text:
    John N. Schmidt v. Solomon Lewis et al.
    [Filed June 3d, 1902.]
    1. The revised city charter of Camden, approved February 14th, 1871 (section 35), prescribing the minimum thickness of party walls, gives the common council no authority to enact an ordinance permitting a lot owner to build a wall partly on the land of an adjoining- owner without his consent.

      2. Where a.revised charter omitted the provisions of the prior charter, which authorized an ordinance to permit a party wall to be built partly on the land of an adjoining owner without his consent, such an ordinance, existing at the time of the revision, is annulled by the adoption of the revised charter.
    3. Where 'an ordinance authorizing a party wall to be built partly on the land of an adjoining owner without his consent also provides that no person shall lay the foundations of any party wall without first applying to the city surveyor to set out and regulate the construction, such application must be made before the wall can be built.
    4. Where complainant built partly on defendant’s land, he was not thereby estopped from objecting to defendant’s extending the wall the entire length of the lot.

      Mr. Ralph W. E. Donges, for the complainant.

      Mr. Henry Hollingshed, Jr., for the defendants.
   Reed, V. 0.

The bill is filed to enjoin the erection of a wall, in the city of Camden, partly upon the land of the complainant.

It is admitted that the proposed structure will be a wall nine inches thick, with from ’four to four and one-h^lf inches upon the land of the complainant. The right to so place the wall of the proposed building is asserted upon the ground that the wall is to be a party wall.

First, assuming that the right to impose a portion of a building upon the land of another is authorized by legislation, I yet entirely concur in the views expressed by Yice-Chancellor Pitney in respect to the constitutional invalidity of.such legislation. Traute v. White, 1 Dick. Ch. Rep. 437. Nevertheless, in view of the opinion expressed in Hunt v. Ambruster, 2 C. E. Gr. 208, and the contrariety of opinion expressed elsewhere in-the cases of Swift v. Callanhan, 37 Law Rep. 462, annot., and Wilkins v. Jewett, 139 Mass. 29, and Allen v. Evans, 161 Mass. 485, I would not advise a preliminary injunction to arrest the erection of a building authorized by legislation.

Second, there seems to be no legislative authorization of such structures in the city of Camden. The ordinance of June 6th, 1850, undoubtedly, in express terms, recognizes tbe right to impose a part of such wall upon neighboring lots.

At the time of the passage of that ordinance, and at the time of the decision of the case of Hunt v. Ambruster, supra, the charter of Camden, in its eighteenth' section, provided that it should be lawful for the city council to pass ordinances, inter alia, for authorizing the erection and building of partition or party walls and fences, and to regulate and govern the same. That language, however, seems to be absent from the present revised charter of the city of Camden, approved February 14th, 1871. The only provisions in the present charter respecting the matter of party walls is to be found in the thirty-fifth section, which confers upon the common council the right to prescribe the character and stability of all buildings to be hereafter erected, to direct the depth of foundation, thickness and materials used in the construction of the walls thereof, and regulate all such other matters as shall be deemed necessary to be observed in the construction of buildings, to protect and insure the health and safety of the citizens; provided, that no party wall shall be less than nine inches in thickness.

It is perceived that this section contains no authority, by ordinance, to impose a servitude by one owner upon the land of his neighbor, but only provides for a police regulation in respect to the walls that may be built, by agreement or otherwise, as party walls.

This section, in my judgment, confers no authority upon the common council to pass an ordinance of the character of that of June 6th, 1850.

Dpon the adoption of the revised charter, therefore, that ordinance, in so far as its provisions exceeded the authority conferred upon the common council, was annulled.

In my judgment there is no authority in the city of Camden, existing in any landowner, unless by agreement, to occupy any portion of the land of another for the erection of an outer wall for any building.

But third, if the ordinance is valid, -it does not appear that the defendants have conformed to its provisions, for the first Section provides that no person shall lay the foundation of any party wall within the city of Camden without first applying to the city surveyor to set out and regulate the construction of such foundation and party wall.

I remark, further, that if authority is rested upon the provisions of section 203 of the Book of Eules and Eegulations submitted to me, it is to be observed that such section contains no authority to build a party wall, but is only regulative of party walls. . By its terms no party wall can be built—that is, walls legally built by agreement—unless they are built according to the rules and regulations so established as a police regulation.

Nor do I find anything in the conduct of the complainant that has estopped him from asserting his right to retain the entire area of his lot, unburdened from this proposed structure. The fact that he himself built his building partly upon the land of the defendant,. which wall the defendant used, cannot estop him from denying the right of the defendant to extend the wall the entire length of the lot. By building his house as he did, he undoubtedly gave the right of the adjoining owner to use the one-half of his wall, but he gave him no right to trespass upon any other portion of his lot.

The order to show cause should be made absolute and the injunction allowed.


author: Seed, Y. C.

text:
    Edward C. F. Grumley v. Augustus Grumley et ux. et al.
    [Filed June 13th, 1902.]
    A father purchased realty for his son, who testified that the father said repeatedly that it was bought with money which had belonged to his deceased first wife, the mother of this son. A brother of th$ father testified that the father had told him that he intended to keep the money of his first wife until he could find a place to invest it for this son, and that .after the property in question was purchased the father told witness that it was paid for with the money of the first wife. During the life óf the first wife the husband had purchased two houses and lots and put the title in her name, and in a memorandum of a will, dictated some months before his death, he gave all his interest in these two. houses to the son, and the rest of his estate to his second wife and her children.—Held, sufficient to show that the property purchased for the son was not intended as an advancement.

      Mr. Philip 8. 8covel, for the complainant.

      Mr. Howard Garrotv, for the defendants.
   Seed, Y. C.

The question is whether Augustus Grumley, one of three children of Philip Grumley, deceased, is entitled to a share of the real estate of which his father died seized. The bill for the partition of this real estate was filed by Edward C. E. Grumley, a brother of Augustus. He charged, in his bill, that. Augustus had been advanced a piece of real estate, valued at $2,500, in 1882, and is therefore disentitled to a share in the property sought to be partitioned.

Augustus, in his answer, denies this.

By the testimony taken it appears that Philip Grumley, the father, bought for Augustus property which was conveyed to the latter in April, 1882. Augustus, who was then sixteen years of age, swears that his father repeatedly told him that he paid for this property with money which belonged to the mother of Augustus, the first wife of Philip, she having died in 1875.

Chauncey Grumley, a brother of Philip, says that about the time the property was conveyed to Augustus, Philip said to the witness:

“I am going to keep that money of ‘Chris’ ’ (‘Chris’ was the name of his first wife), until X can see where to invest it for the benefit of ‘Guss.’He is her son, and I don’t think that any of the other children-have any title to it at all.”

The witness further says that when his brother bought the house he (the witness) was away, and when he came home his brother said to him:

“I bought No. 604 South 6th St., and had the papers made out in ‘Guss’ ’ name and paid for it out of the money belonging to ‘Chris.’ Augustus was the only son of Philip and ‘Chris.’ ”

Chauneey also says that Philip told him that it was money that she had saved by economical living and from building associations.

At the time this property was purchased, in 1882, Philip had married his second wife.

The testimony on the part of the complainant is that Philip, some months before his death, got his brother Chauneey to make a memorandum of a will for him, in which memorandum he gave to Augustus all his interest in two houses, Nos. 532 and 543 North Sixth street, Camden, which had belonged to Christina; then gave a life interest in his real estate to Tillie, his then wife, and, after her death, directed the real estate to be divided equally between his two youngest children, Edward C. and Mary Grumley.

It also appears that Philip had paid for two houses and lots, Nos. 532 and 543 North Sixth street, Camden, in 1873, and put the title'in the name of his wife Christina.

The above seems to be the material facts bearing upon the question of advancement or no advancement. That Philip said, at the time the property was conveyed to Augustus, in 1882, that the money with which he paid for this property was “Chris’ ” seems to me entirely clear. The relation between Philip and his brother Chauneey seems to have been very confidential, and it is impossible to believe that Chauneey is either mistaken or untruthful in detailing the conversation with his brother.

The testimony for the defendant, in respect to the fact that from 1873 the first wife of Philip and mother of Augustus had these two houses, Nos. 532 and 534 North Sixth street, fortifies, rather than refutes, the theory that the purchase made in August, 1882, was intended to be a purchase with money which Philip regarded as belonging to the mother of Augustus. Her ownership of this property discloses a source of revenue for nine years, which revenue her husband could very properly regard as equitably belonging to her, and, after her death, to her son. The question is not whether he was entitled to her personal property upon her death, and to the income of this property as tenant by the courtesy after her death in 1875, but the question is whether he regarded the money so received as equitably belonging to his son, and therefore whether, when he applied them to the payment of this property in 1882, he intended the transaction as a payment of what was equitably due to his son, or whether he intended it as an advancement.

The purpose of the provision concerning advancement is to-preserve that equality between the children of an intestate, which is not only equitable, but which is supposed to be consonant with the desire of a father presumed to have an equal affection for each child. When, therefore; á father turns over to one child, without consideration, a portion of his property during life, such portion is regarded as a part of or as the entire distributive share of such child given to him in advance of his parent’s death.

It is equality in the division of the parent’s property, which the parent is supposed to desire, that raises the presumption, that the transfer to the children or child is an advancement.

So long as the property transferred to the son is the property of the father, or is purchased with the property of the father, the presumption of advancement exists. If, however, it appears that the property transferred to the child, or the property with which such property is bought, is property which the father regards as belonging,'either legally, equitably or morally, to the-child so favored, to the exclusion of the other children, the presumption of an advancement must cease to exist.

Now, assuming that the declarations were made by Philip, the father, it is clear that he regarded Augustus, standing as the-son of his first wife, as entitled exclusively to certain property then held by the declarant. A transfer of a property to a child in pursuance of a moral duty was held to rebut the presumption of advancement in the case of Beakhust v. Crumby, 18 R. I. 689.

That Philip thought that he was executing a moral duty in transferring the property in question to Augustus I have no ■doubt.

In respect to the dictation of the memorandum for a will, it is to be observed that the intention manifested by the memorandum was not carried out, and may have been abandoned. But assuming that such intention was retained, it casts no light upon the original purpose of the testator in 1882. Philip no doubt thought, at the time he dictated the memorandum, that Augustus was so well provided for by Ms ownership of two houses, wMch he inherited from his mother, and of the houses deeded to him in 1882, that, taking into account the amount of property which Philip then had to devise, it would be wise to leave his real estáte to his widow and Ms two other children. It did not, however, exhibit an intention, in 1882, that the property then conveyed to Augustus should be taken as a part of his estate in any distribution of his property to be made upon his death.

I am of the opinion that Augustus is entitled to his share of the land involved in the present suit, and therefore-of the money raised by the sale of the property.