author: Emery, Y. C.

text:
    Edward S. Campbell, receiver of the Middlesex County Bank, v. The Perth Amboy Mutual Loan, Homestead and Building Association.
    [Decided October 20th, 1909.]
    1. A party in an action at law who accepts the decision of the supreme court that his remedy is in equity, instead of taking the opinion of the court of errors and appeals thereon, makes the decision the law of the case, and his right to sue in equity is not defeated by a subsequent decision of the court of errors and appeals in a similar case establishing the rule that the remedy is at law, though the decision may control as to the amount of the recovery.
    2. Where an assignment of shares in a building association was made to a bank as collateral before the termination of tile charter of the bank, and it continued to transact business as a corporation under the theory that its charter was extended by 1 Gen. Btat. 1895 p. 972, as construed by the banking and insurance department, the assignment should not be declared invalid because of a supposed legal non-existence of the corporation during the loans secured by the assignment.
    3. Notice to the treasurer of a building association of an assignment of shares to a bank of which he was cashier as collateral for a loan is not notice to the association of the assignment, where the treasurer and cashier contemplated in procuring a certificate for matured shares on maturity of the shares a fraud on the bank, and his knowledge of the bank’s rights will not be imputed to the association.
    4. A building association issuing matured shares in payment of shares which had matured fixes the rights of the shareholder in the distribution of the assets in which he is entitled to share.
    5. The books of a corporation are for many purposes the primary evidence of membership as between the corporation and the members, and in the payment of dividends without notice of an adverse claim a corporation is protected by payment to the holder of record on its books. .
    6. As between a building association and its members, a payment on the final distribution of assets to the shareholder of record without notice of a previous assignment is a valid payment as against a holder of the certificate by assignment who has not applied for a transfer on the books.
    7. Where a building association paid shares on their maturity by issuing a non-negotiable certificate of indebtedness to a third person personally, and the association knew of the assignment of the shares to him, the issue of the certificate was as between the association and the shareholder or those claiming under him an issue to the third person as assignee, and the certificate was subject in the hands of any holder to the defence that it was procured by the third person’s fraudulent suppression of a previous assignment of the original shares, so that on 'notice to the association of such previous assignment, a payment of the matured certificate was at its own peril.
    8. The right of a bank holding as assignee to secure a loan stock in a building association is entitled to share on distribution on the maturity of the shares, and it may then demand the amount coming to its assignor, and the time fixed for the accrual of its cause of action against the association is not affected by the fact that the association, without knowledge of the assignment, issued matured certificates on the maturity of the shares at the option of the assignor.
    9. The statute of limitations is not applicable to an equitable interest in a fund held in trust by a building association for distribution among the holders of shares in a matured series.

      10. Stock in a building association was assigned to a bank as collateral. The association had no notice of the assignment, and, on the maturity of the shares, it paid them by issuing a certificate of indebtedness to a third person individually, who was to the knowledge of the association an assignee of the original holder. The third person pledged the certificate, and the pledgee recovered in a suit from the association. The bank and its receiver delayed notice of any claim under the assignment until nearly six years after the maturity of the shares, and until after the certificate of indebtedness had been, with the consent of the receiver, sold to the pledgee for the payment of his debt. The pledgee was a bona fide pledgee.—Held, that the right of the bank to recover from the association on the original shares was barred by laches.
    11. A payment by a building association to the original holder of shares of the amount due, made with notice of a third person’s claim, under an assignment of the shares from the owner, is at the risk of the association, and the assignee may recover from the association the amount due on the shares on their maturity.
    Heard on bill, answer, replication and proofs.

      Mr. Sherrerd A. Depue, for the complainant (Messrs. Linden bury, Depue & Faulks, solicitors).

      Mr. Alan H. Strong, for the defendant.
   Emery, Y. C.

The substantial case disclosed by the' pleadings and proofs in this case is as follows: On August 27th, 1891, one Louis Briegs, being then the owner of ten shares, Series “A,” of the stock of the defendant, a building and loan association, assigned these shares to the Middlesex County Bank as collateral for a loan obtained from the bank. On the same date Rosa Briegs, his wife, assigned also to the bank five shares of stock in the same series, of which she was the owner, and as collateral for her loans or those of her husband. The constitution of the association provided that “certificates of stock may be transferred in person or by attorney in presence of the secretary, and shall be recorded in the books of the association.” The assignments to the bank authorized the transfer by the secretary on the books, but no transfer was made. The certificates for the shares, together with the assignments to the bank, were originally in the possession and control of George M. Yalentine, the cashier of the bank, and so continued until the failure of the bank in 1899, when they came to the possession of complainant as receiver of the bank, together with the notes for which they were collateral. The shares were duly sold by the receiver to pay the loans, were purchased by him at the sale, and assignments of the shares were also made to the receiver by Louis Briegs and Eosa Briegs in February, 1901. On March 8th, 1901, notice of the assignments and of the receiver’s title or claim to the shares was given to the building and loan association. In the meantime, and subsequent to the pledging of the shares as collateral to the bank in 1891, the status of the Briegs to the building and loan association, in reference to the shares, was as follows: The dues on the shares were regularly paid, the dues on both sets of shares, and also other shares, being paid by Louis Briegs’s own check. The association had several shares or series maturing at successive years, and under its charter and by-laws the board of directors on or about July 1st, 1896, declared the shares in Series “A” matured. By virtue of this declaration the Briegs, not being borrowers of the association, were entitled under the charter and by-laws to receive $200 for each share. Shortly before July 1st, 1896, Yalentine, the cashier of the bank (who held in his possession as cashier the certificates and the assignments to the bank), became also treasurer of the building and loan association, and he had also in May, 1896, become the assignee, under the Assignment act, of Louis Briegs, for the benefit of the latter’s creditors. The shares of stock were not specially mentioned in the deed of assignment, but under the statute (1 Gen. Stat. p. 78 B) the title of Louis Briegs, subject to the loan, passed to his assignee, Yalentine, who had the actual possession of the shares for the bank. The building and loan association, instead of paying oil at once the matured shares, issued certificates of matured shares of the par value of the original shares, payable at a future period, January 1st, 1907, with interest until paid. These certificates for matured shares were usually or regularly issued on the surrender of the original shares, where certificates had been issued, and were signed by Yalentine as treasurer as well as by the president and secretary of the association. Yalentine procured the issue to himself and in his own name of a certificate for the ten matured shares to which Louis Briegs, as owner of the original shares on the record or books of the association, was entitled. This certificate for matured shares, dated July 1st, 1896, was delivered to him about October 30th, 1896, and by him deposited with another bank (the First National Bank of South Amboy) as collateral security upon a loan to himself. ITp to the time of the delivery of this certificate and the deposit no notice had been given by the Middlesex County Bank to the association of the assignment of any of the Briegs shares to it as collateral, nor does it appear that any of the officers of the association (except Valentine himself) had notice of the assignment to the bank of any of the Briegs shares. They did, however, have notice of Briegs’s assignment to Valentine, and the secretary of the association says that the certificate of matured shares for the ten shares of Louis Briegs was, as he understood it at the time, given to Valentine, as claiming it as assignee, although not so described in the certificate. The certificate for the Louis Briegs matured shares issued to Valentine continued in the possession of the South Amboy Bank until after the failure and insolvency of the Middlesex County Bank in 1899, and as collateral to Valentine’s original personal notes renewed from time to time. In January, 1901, the association paid the amount due on these shares to the Amboy bank after suit brought. As to the Eosa Briegs five shares in Series “A” no certificate of matured shares appears to have been given, but on February 20th, 1897, Valentine, claiming (without any right or authority so far as appears by the proofs) that these original shares, although standing in Eosa Briegs’s name, really belonged to the creditors of her husband, and passed under the assignment to him as assignee, received from the association, by cheek to himself personally, payment of one of the matured shares of Eosa Briegs. For the other four shares no certificate of matured shares was issued, and no payment made on their account until August, 1902, when a sum equal to the amount then due, with interest on these four shares, was paid to Eosa Briegs herself, upon her giving indemnity. This payment was made more than a year after notice of the complainant’s claims to the money due on the shares, and also after a suit at law brought by complainant as receiver against the association to recover the amounts due on both the Louis and Eosa Briegs shares. The Briegs now say that this payment was made on account of the amount due Eosa Briegs on her five shares in another series, “F,” and not for the four matured shares of Series “A,” and that these have never been paid. The association claims that the payment was for the Series “A” shares. So far as relates to complainant’s claim to the amount due on these shares the dispute is immaterial, because the payment to Eosa Briegs after notice of complainant’s claim cannot discharge defendant if the complainant’s claim is valid.

In the suit at law brought by complainant to recover the amount or value of the fifteen shares, it was held by the supreme court that the remedy, was in equity and not at law. Campbell, Receiver, v. Perth Amboy Loan Association (1901), 67 N. J. Law (38 Vr.) 71. The substantial ground of the decision, as I read it, was, that under the building and loan association laws, where shares had matured, the fund to be distributed among the shareholders was a trust fund, to be distributed under the direction of the court of chancery, if the directors failed to recognize a shareholder’s claim. The decision was not rested on the technical point that the declaration failed to aver that in fact the shares had matured (which would have been an amendable defect), neither was there any suggestion that if there had been an averment that there were other shares than Series “A,” a legal cause of action would have appeared upon the declaration of the directors, under its charter, that the shares had matured. The legislation providing for the issue of different series was referred to in the opinion (Ibid. 78), but no suggestion was made that in such case the maturity would occur by force of the declaration of the directors. And, as the failure to aver the existence of different series was also an amendable defect, the opinion must, I think, be fairly construed as intended to establish as the law of this case—first, that the mere declaration of the directors of the maturity of the shares was not sufficient to establish such maturity as to any one of a series of shares, and second, that the fund belonging to my series, when matured, was a trust fund for all the shareholders of the series, and on failure of the directors to acknowledge the right of any shareholder, or person claiming under him, to share in the fund, the remedy to establish and recover his share was in equity and not at law. The decision was accepted by the plaintiff in the suit as the law of the case, as he had the right to do, instead of taking the opinion of the court of errors and appeals. Borcherling v. RucJcelshcms (Court of Errors and Appeals, 1892), 49 N. J. Eq. (4 Dick.) 340; Headley v. Leavitt (Court of Errors and Appeals, 1903), 65 N. J. Eq. (20 Dick.) 748, 755. This bill was thereupon filed in 1902, and, pending the hearing, the court of errors and appeals, in Cunningham v. Mutual Loan, &c., Association (November, 1903), 72 N. J. Law (43 Vr.) 175, decided that where shares in different series were issued, the charter and bylaws might determine the manner in which the series should mature and determine, and authorize the directors to declare them matured, and that on such declaration the holder in a series ceased to be a member and became a creditor entitled to his action at law for the declared value of the shares. In the opinion of Chancellor Magie the previous decision of the supreme court in the CampbeTl-Perth Amboy Case, was referred to, but decision on its correctness was expressly reserved. In a still later case, however (Ryle v. Manchester Building and Loan Association (March, 1907), 74 N. J. Law (45 Vr.) 840), the court of errors and appeals expressly disapproved the Campbell Case as to the right to sue at law, and approved and followed the Cunningham Case. The result of these decisions on the question of the proper forum for relief is that, if the present suit were a new suit between the parties, the bill must be dismissed because of the remedy at law, unless the fact that complainant may be an equitable assignee only of the shares (Broadway Bank v. McElrath (Chancellor Green, 1860), 13 N. J. Eq. (2 Beas.) 24, 30), might be held to give the court of equity jurisdiction. But independent of this basis for equitable relief, the complainant, having the right to accept as the law of this case the opinion of the court of law delivered in the case, that the remedy was in equity, has, under the cases above cited, the right in this case and against the defendant, to pursue the equitable remedy for the purpose of recovering the amount which may be due to him, claiming under the assignment. And the subsequent decisions of the appellate court made between other parties establishing finally the general rule that the remedy is at law, while they do not have the effect of annulling the rule of law settled as the law of this case between the parties as to the forum of the remedy, may control the rule as to the amount of recovery which can be had in this suit brought to hearing after the establishment of the amount to be recovered. And the recovery here, if at all, must therefore be bjr a decree for the amount declared as the value of the shares, admitted by the answer to be the value, and due to complainant as a creditor and not by a decree for account as was supposed in the Campbell Case.

The objection therefore that complainant’s remedy, if he have iany, is at law, made in the answer and pressed at the hearing, is not well founded.

Another technical objection to complainant’s recovery is also without merit. This is the objection that the charter of the Middlesex County Bank expired by limitation twenty years after its organization, and in 1892. It is claimed that the proceedings for extending the charter under the law of April 21st, 1876 (1 Gen. Stat. 1876 p. 972), were ineffective because this law was a supplement to the “Act concerning corporations,” and, as is claimed, did not apply to banking corporations. But the Corporation act of April 7th, 1875 (Revision), in many respects applied to all corporations, including banks, and contained some sections specially regulating the management of the affairs of banks (section 7 is one of them) as to dividends. This supplement has been acted on by the banking and insurance department as authorizing the extension of bank charters as well as others, and in-view of the facts that the original assignments of shares in this case was made before the termination of the original charter, and that the bank has been ever since, up to the time of its failure, a de facto corporation, making loans and discounts, and transacting a general banking business, the assignments should not be declared invalid because of supposed legal non-existence of the corporation during the loans secured by the assignments.

The real question, on the merits of the case as to the Louis Briegs shares is, whether the payment of the original shares on their maturity by the issue and delivery of the certificate of matured shares to 'Valentine, claiming them as assignee of Briegs, and which have since been paid to a bona fide holder, is valid or effective, as against the complainant claiming title to the original shares under an assignment made nearly five years prior to the payment, but of which the association had no notice, other than the notice to Valentine, its treasurer at the time of the issue, of the new certificate, who at the time had the certificate and assignment to the bank in his possession or control as cashier of the bank and as collateral for its loans. It is urged by complainant’s counsel in his brief, that notice to or knowledge of Valentine, then the treasurer of the association, was notice to the association of the bank’s claim, but as the case clearly shows that Valentine, in having the certificate for matured shares, contemplated an independent fraud on the bank, either for his own benefit or that of the estate of which he was assignee, his knowledge of the bank’s rights is not to be imputed to the association of which he was treasurer. Camden Safe Deposit Co. v. Lord (Vice-Chancellor Bergen, 1904), 67 N. J. Eq. (1 Robb.) 489, 492; 2 Pom. Eq. Jur. § 675. The'issue of the matured shares must therefore be taken to have been without notice of the bank’s rights, and the precise question is, was the issue by the association to Valentine, without the production of the original shares, valid? Had the issue been of shares of a corporation intended to continue the membership and rights of a shareholder, the general rule would seem to be that the issue of such certificate, without requiring the delivery of the one in lieu of which it is issued, is at- the risk of the corporation. Cook Corp. (6th ed.) §§ 402, 489.

This issue of matured shares was not, however, a certificate evidencing or intended to evidence continued or existing rights as a member or shareholder, but was a satisfaction or settlement of the final rights of the shareholder on distribution of the assets or fund in which he was entitled to share, and the present inquiry is therefore further narrowed, and is, whether in reference to a transaction having the character of the final distribution by the corporation itself to its members of their share of the assets, the distribution may be made to the member appearing to be such according to the records or books of the company (or his assigns under notice of assignment given), or whether in such case the production of the original certificate is necessary for a valid distribution in order to protect the corporation. For many purposes the books of the corporation are the primary evidence of membership, and the certificate is only secondary as between the corporation and its members. Thus for the purpose of exercising personal rights of membership, such as voting, &e., the corporation may require the. transfer on the books, and in the payment of dividends without notice of an adverse claim it is undoubtedly protected by payment to the holder of record on the books of the company. 2 Thomp. Corp. § 2387. Does the same principle apply to the final distribution of assets of a corporation as to the payment of the dividends? If it does, then the association making distribution to the shareholder of record, without notice of any intervening claim, is discharged from liability for further payment on those shares, even if the certificate be not surrendered. In my judgment the same rule is applicable as between the corporation and its members on the final distribution of assets as on the payment of dividends, and. a payment of the share to the shareholder of record at the time of distribution, made without notice of a previous assignment, is a valid payment as against a holder of the certificate by assignment, who has not applied for a transfer on the books.

This payment or distribution was not, however, a payment in cash to the shareholder of record, but a payment or distribution by a non-negotiable certificate of indebtedness, issued to the assignee of the shareholder. The association had notice of this assignment and the certificate was issued as to the assignee. It must therefore be considered as if issued to the shareholder himself, and the designation as assignee, which was merely descriptive or convenient evidence of the character in which Valentine held it, was not, I think, essential to its issue to him, claiming it as assignee. The issue to him personally (being in fact the assignee of Briegs) was sufficient, and the omission of the designation did not make the issue, as between the corporation and Briegs, its stockholder, or those claiming under him, an issue to a person not the assign of Briegs. But in reference to this payment, the further question arises as to the effect of its having been made by the issue to Valentine of a non-negotiable certificate, and the status of the case by reason of this fact is one of more difficulty. This certificate being non-negotiable in the hands of Valentine or his assigns, was subject, in the hands of any holder, to the defence that it was procured by Valentine’s fraudulent suppression of the previous assignment to the bank, and had notice been given to'the association of the bank’s claim previous to its payment of the matured certificates to a bona fide holder, such subsequent payment would have been at its own-peril. But, as appears by the evidence, the Amboy National Bank sued upon its claim under the certificates in the year 1900, and, after judgment against it, the association in February, 1901, paid the claim arising under the certificates, without notice of any claim of the Middlesex County Bank to the payment of the shares for which the matured shares were given.

Complainant’s notice of its claim under the assignments does not appear to have been given until March 8th, 1901, the date alleged in the bill and admitted by the answer.

And it further appears by a letter of the complainant, as receiver, to the Amboy bank, dated November 9th, 1899, that the receiver (under a judgment and execution against Valentine) had levied on Valentine’s interest in these matured shares, subject to the Amboy bank’s claim, and in other shares, and that the receiver consented to a sale of this and other collateral by the Amboy bank to pay its loans to Valentine, notwithstanding the levy, and requested that the surplus only be held. The Amboy bank made the sale, purchased the stock, and then brought suit against the association for the payment, and received payment on the shares.

It does not appear that this consent to the sale was made with knowledge on the part of the receiver that the shares or any of them were issued to Valentine by the association to pay and satisfy the shares held by the receiver, and in the absence of such knowledge, the consent may not operate as a waiver of the receiver’s claim, or an es'toppel against asserting it, but the consent is important as bearing on the receiver’s delay in making his present claim and the effect of it on his right to relief in equity.

The question, therefore, is, whether the certificate for matured shares having been issued in 1896 and paid in 1901 under these circumstances to a Iona, fide holder after suit, without notice .to the association of the claim on the part of the bank, which arose in 1891 by reason of the assignment of the original shares, can now be declared valid.

The bank’s right to the share on distribution arose in July, 1896, on the maturity of the shares, and it was then entitled, to demand the amounts coming to the Briegs. There was no provision in the charter or by-laws for the issuing of the matured share certificates, and the talcing of these by a shareholder was optional purely. If the shareholder be considered as a creditor of the association, and not a cestui que trust in a trust fund held for distribution, complainant’s right of action for the debt to Briegs, due from the association, accrued on the maturity of the shares, July 1st, 1896. The bill in the cause was filed in October, 1902, more than six years after this cause of action arose. The time fixed in the certificates issued for the payment (January 1st, 1907), fixed the period of suit for those who received the certificates, but for those only, and is of no avail to a creditor claiming the amount due July 1st, 1896, on shares, without regard to these certificates and adversely to the holder of the certificate actually issued.

But, as between the parties to this suit, I take it to be settled as the law of this case, by the decision in the Campbell suit, that the nature of the complainant’s right is that of an equitable interest in a fund held in trust by the association for distribution among the holders of shares in a matured series. The statute of limitations is not applicable to such trusts. In Condit v. Bigalow, 64. N. J. Eq. (19 Dick.) 504, 514, and Mills v. Hendershot (1905), 70 N. J. Eq. (4 Robb.) 258, 267, the New Jersey cases on the application of the statute in equity are considered. And, independent of the 'statute, delay on the part of the Middlesex County Bank and of the receiver in giving notice of the assignment of the shares, or of their claim under it, may be a bar to the suit, especially when, as in this case, the delay has resulted in, or contributed to, the change in the situation by payment to another. The bank and the receiver delayed notice of their claim until nearly six years after the maturity of the shares, and until after the matured shares had been (with the consent of the receiver) sold by a bona fide pledgee for the payment of its debt, given perhaps in ignorance of his rights, and until after the shares had been paid by the association to such pledgee as such purchaser. In Bank of Commerce Appeal, '73 Pa. St. 89, it was held that the officers of a bank who had, as its trustees, distributed its assets among its stockholders on dissolution, and had paid his share to one of the stockholders of record, without notice of his assignment of his shares, were not liable to a previous assignee of the shares who had not had the same transferred on the books and had given no notice. It was held that in the absence of such notice the payment to the shareholder of record, without requiring production of the certificate, was not an act of negligence on the part of the officers making them liable. The claim of complainant as assignee of the Louis Briegs shares must be held to be barred in equity.

As to the Rosa Briegs shares, the defendant’s status is altogether different, and there is no equitable reason for depriving complainant of his' rights under the original assignments as collateral as well as under the Rosa Briegs assignment of 1901. The payment to Rosa Briegs of the amount due on four of these shares, if made at all, was made with full notice of complainant’s claim, and the payment of the value of one share to Valentine in 1901' was invalid. He claimed not under but adversely to her, an d the payment was at the risk of the association, which must look to its indemnity.

The complainant is entitled to a decree based on its rights to the shares of Rosa Briegs, and to the declared value, which is admitted by the answer. The decision in the Cunningham Case is effective in this case to establish the amount of recovery to which the decree is to be limited, and no further accounting is either necessary or proper.


source: Caselaw Access Project

author: Stevens, Y. C.

license: Public Domain

text:
    Margaret C. Lister v. John R. Hardin et al.
    [Decided November 15th, 1909.]
    1. "Where a testator directed his executor to pay his widow, during her life, the income derived from the investment of a certain fund which was set aside for that purpose, a portion of the principal of which was misappropriated by the trustee, and the residuary estate has been distributed to and among the residuary legatees, who are also residuary legatees of said fund, the widow cannot compel such residuary legatees to make good out of what has come into their hands the amount so misappropriated by the trustee, and which should have been paid to her by way of annual payments or income.
    2. Where the loss of a fund is due to waste or misconduct of the executor and trustee, he and his estate alone can be looked to. No contribution arises against residuary legatees in such a case.
    3. The case of Trenton Trust Go. v. Donnelly, 65 N. J. Eq. (26 Dielc.) 119, distinguished.
    On bill.

      Mr. Harry V. Osborne, for the complainant.

      Mr. Hgner, for the defendants.
   Stevens, Y. C.

This case comes np on demurrer to the bill. Complainant is the widow of Edwin Lister, who, by a codicil to his will, provided as follows:

“Instead of the provisions in my will for my wife I give and bequeath to her the sum of fifty thousand dollars to be paid to her within ten days after vacation of my homestead and after her releasing of her dower right in my real estate, the same to be in full satisfaction of such right, but if she neglects or refuses within six months after my decease to comply with above conditions, she is to have her dower right only in my real estate and no share whatever in my personal estate.
“If my wife accepts above conditions, I direct my executor to pay her annually during her lifetime the income derived from the investment of the sum of fifty thousand dollars in addition to the above.”

The widow accepted the first-mentioned bequest and received $50,000 in money. As to the second bequest, the bill alleges that complainant received the interest on $50,000 from the sole executor, Weeks, in accordance with the provisions of the will up to October 8th, 1901, the testator having died on-May 18th, 1898; that it was discovered “that Weeks had misappropriated the trust fund which had been set aside for your oratrix, to wit, the sum of $50,000, leaving remaining of such fund about the sum of $29,350;” that on June 6th, 1902, Weeks was removed from the trusteeship because of his misappropriation, and that the new trustee took possession of $29,350 the balance left by him. The bill then states that the residuary estate has been wholly distributed to and between Robert Lister and Esther G-. Selby, the residuary legatees, who are also residuary legatees of the $50,000 fund.

Taking the allegations of the bill as a whole, it appears that Weeks, in accordance with the directions of the codicil, set apart the $50,000 as a separate fund; that he paid the complainant the interest accruing from the investment of it down to October, 1901; that he misappropriated it to the extent of $20,670, and that for this misappropriation and other acts in breach of his duty as trustee he was removed.

The question is whether the complainant can compel the residuary legatees, to whom the residuary estate has been completely transferred, to make good out of what has come into their hands the amount so misappropriated by Weeks; in other words, whether the annual payment to be made to.the widow during her life is a charge upon the whole residuary estate. This must depend upon the intention of the testator as we find it expressed in the language of the bequest. The direction is to pay “the income derived from the investment of the sum of $50,000.” That means that the executor is to take $50,000 out of testator’s estate, invest it and pay the income, whatever it may be, derived from the sum thus invested. It thus appears that what the testator intended to give, and did give, was a definite sum of money, the interest of which was to be paid to Mrs. Lister for life and the principal of which was to be paid to his two children at her death, and not an annuity chargeable on the entire residue.

In Willmott v. Jenkins, 1 Beav. 404., Lord Langdale says: “If an executor makes payment to a legatee in person or to a trustee for a legatee, or malees such appropriation as is equiveeleni to payment, the other persons entitled under the will are not to be called on to contribute for any loss which may happen to the fund so paid or appropriated.” It was held there that the appropriation was incomplete because the executor had carried several sums to one account and had invested them in his own name, without making any declaration of trust, but here the hill states that the sum of $50,000 was set apart by the executor for the particular purpose directed and that all the other money of the estate was distributed. Even where a testator gave an annuity, which in general stands upon a different footing, and directed that it should issue “out of so much stock in the navy five per cent, annuities as shall be fully sufficient to produce and answer the payment” of the yearly sum given, Vice-Chancellor Shadwell held that the investment having been made as directed, the legatee was not entitled to have the deficiency caused by the enforced conversion of the five per cent, into a four per cent, annuity, supplied out of the testator’s residuary estate. Kendall v. Russell, 3 Sim. 424.

The case of Mills v. Smith, 141 N. Y. 256, is directly in point. There a testator gave to his executors the sum of $20,000 in trust to invest on bond and mortgage and apply the net income to L. M. for life and at his decease to divide the principal among his children. The fund was invested and subsequently misappropriated. The effort was to hold the residuary legatees. Justice Gray said: “This action is simply an attempt to fasten upon the distributees of testator’s residuary estate the responsibility for the subsequent default of the executors, as trustees for plaintiff’s father. This cannot be done. Where the loss of a fund is due to waste or misconduct of the executor and trustee, he and his estate alone can be looked to. No claim for contribution arises against residuary legatees in such a case.”

The authority mainly relied upon.by complainant’s counsel (Trenton Trust Co. v. Donnelly, 65 N. J. Eq. (20 Dick.) 119) is not in point. There money had been bequeathed in trust to pay the interest to testator’s wife for life, remainder to his sisters and the heirs of his deceased brother. The corpus was diminished by an unfortunate investment and the question was how the loss was to be borne as between the widow and those who took the principal at her death. The widow was held entitled to part of the corpus to indemnify her, in part, against her loss of interest. There was no attempt to make the residuary or other legatees contribute to or make good the loss suffered. The bill in the present case is not framed upon the theory of that case and no facts are stated that would make its principle applicable.

The complainant also asserts that when she relinquished her dower right she gave a valuable consideration for the legacies and that she therefore stands upon a different footing from the ordinary legatee. If the question had been whether she was not entitled to a preference on a deficiency of assets, she might have prevailed, but the question here is quite different. She received, in the first instance, all that she bargained for. The estate gave her $50,000 in cash and it appropriated to her use, in the hands of a trustee, the other $50,000. The mere fact that that trustee was Weeks, the executor, instead of someone else, can make no difference so far as the legal aspect of the ease is concerned. If the trustee subsequently misappropriated the money, he is responsible and not the other distributees of the estate.

The bill should be dismissed.


author: Stevens, V. C.

text:
    William H. Dixon v. Josephine Dixon.
    [Decided December 11th, 1909.]
    1. tVhere a mother, after securing a judgment in a New Jersey court awarding- her the custody of her children, left the state, and the father, on application to the court, obtained a modification of the judgment permitting the children to visit him in the State of New York, where he resided, the order of modification was within the protection of the clause of the federal constitution declaring that full faith and credit shall be given in each state to judicial proceedings of every other state.
    2. Where the mother, in such case, commenced an action for divorce in the state to which she removed, the court, in such action, might determine the right to custody of the children on conditions arising since the order of the New Jersey court, but could not base its adjudication on evidence of facts occurring before that order.
    3. Where the mother, on application in the divorce suit for an order for the sole custody of the children pending suit, offered no evidence of facts occurring since the modified order of the New Jersey court, except that on the return of the children to the mother from a visit to the father, under order of the court, they were in poor health, such poor health not being ascribed to the treatment of the father, an order in such divorce suit, granting the prayer for such custody, being based on the facts occurring before the order of the New Jersey court, was of no effect, since it failed to give full faith and credit to the New Jersey judgment.
    4. Where, on presentation of a petition by a husband for commitment of the wife for violating an order as to the custody of the children, she had not yet disobeyed it, but her counsel had given notice thát she would not obey it in view of an order of a court of another state, and her counsel disavow any intentional disrespect to the court making the former order, she will not be adjudged in contempt, though the order of the foreign court is not valid.
    5. Where, after an order granting to a wife the custody of the children with a provision that they be sent to visit at the husband’s home two-months of each year, she commenced suit in another state for divorce, and procured an order for sole custody of the children pending suit, but the situation was otherwise unchanged, the former order would not be modified to give the husband custody of the children.
    6. In a proceeding for contempt for violating an order as to the custody of the children of divorced parents, where the right to the custody was determined according to the claims of the petitioner, but there had not been an actual violation of the order, and only notice of an intended violation, neither party would be charged with costs.

      On petition.

      Mr. Richard V. Lmdabury and Mr. J. Holmes (of Few York), for the petitioner.

      Mr. Gilbert Collins, for the defendant.
   Stevens, V. C.

This case comes up on petition. The petitioner asks the court to punish the defendant, Mrs. Dixon, for her contempt in disobeying an order, made July 24th, 1907, which directed that the two children of petitioner and defendant, whose custody was continued in defendant, should be sent with their nurse to visit their father two months in each year—one month during the summer or early autumn at his country home in Pittsfield, Massachusetts, and one month during the winter at his home in Few York City. The petitioner also asks that the general custody of the children be transferred to him.

At the time of the institution of this proceeding by the father, in June, 1905, he was living in Few York, and his wife, the defendant, was living separate from him, in Few Jersey. The children were then two and three years old. Their custody was awarded to the mother but the father was given the right to visit them.

After that the mother went to Maine and on the father’s application the original order was modified by that of July 24th, 1907- Mrs. Dixon’s answer to the present application is that the order last mentioned has been superseded by an order in a divorce suit instituted by her in Maine, made on August 30th, 1909, awarding the sole custody of the children, pendente lite, to her.

The original order of this court was appealed from and affirmed. Dixon v. Dixon, 71 N. J. Eq. (1 Buch.) 281. The second order, made after careful consideration of the question then raised, was acquiesced in and obeyed until the Maine divorce proceeding was instituted. That question was whether this court continued to have jurisdiction over the children after they had been taken by their mother to Maine. The decision was in favor of the jurisdiction. 72 N. J. Eq. (2 Buch.) 588.

The question now to be considered is twofold—first, is the order of July 24th, 1907, entitled to full faith and credit under the federal constitution? second, if it is, does the subsequent order of the justice of the supreme court of Maine supersede it ?

There can be no doubt that the order of July 24th, 1907, is within the protection of that clause of the federal constitution which declares that “full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state.” Discussion is unnecessary, for the decisions are all one way. The rule is that in any controversy between the parents relating to the custody of their children the award made by a competent tribunal is res adjudicata, and cannot thereafter be questioned on the same state of facts. Mercein v. People, ex rel. Barry, 25 Wend. 64; Matter of Lederer, 38 Misc. 668; Bleakley v. Barclay, 75 Kan. 462; Brooke v. Logan, 112 Ind. 183; Slack v. Perrine, 9 App. Cas. Dist. Col. 128; Slate v. Baird, 19 N. J. Eq. (4. C. E. Gr.) 481-486; Stetson v. Stetson, 80 Me. 483. Speaking of a child whom it was awarding to the custody of a mother living in Massachusetts, Justice Danforth, in the Maine case last cited, said: “Though she (the mother) may not personally be within the jurisdiction of the court, the subject-matter is, so that the judgment of the court will be valid and binding upon her, and, by the provisions of the constitution of the United States, may be enforced against her, though in another state.”

But the adjudication is an adjudication upon the issue presented and upon that only. So far as children are concerned, the situation is, or may be, constantly varying. The parent fit to have the custody of his children to-day may, by reason of changed circumstances, become unfit to-morrow. The above rule does not prevent the courts of the state, within whose limits the children may be, from considering whether a change in the situation may not call for a new disposition. But the changing circumstances must be, obviously, those that affect the children, not those .that concern the parents. To illustrate by the case in hand: In her petition, presented to the Maine tribunal, Mrs. Dixon says that she lived with her husband until May, 1904, and that, while so living, he treated her with extreme cruelty, whereby her health and life became endangered. It is manifest that evidence bearing upon his disposition and upon his conduct towards his wife might have an important bearing upon his fitness to have the custody of his children, either for two months in the yeai- or for any lesser period, and that it must or should have been considered by this court when the order of July 24th, 1907, was made. By reason of the effect of the doctrine of res ad judicata this evidence could not be made the basis of an independent adjudication by another court. If this were not so, the rule established by the decisions to which I have referred would be nullified.

But, on the other hand, it is equally manifest that it might be shown that, since the date of the prior adjudication, the father had so conducted himself as to have become unfit to associate with his children; that any association with them would be injurious to their morals or welfare.

While this court, therefore, as has been decided, may still have jurisdiction, if it sees fit to exercise it, it does not follow that the courts of Maine may not also have jurisdiction as long as the children are actually present in that state, and it must be conceded that the Maine tribunals are, for the time being, in a position to exercise it more beneficially and effectually than this court can.

But, when the mother refuses to allow her children to visit their father, the question for the courts of both jurisdictions is not, whether, in view of all that has occurred at any time in the past, the father is to be denied his parental right, but whether such a change has taken place in his character and circumstances since the date of the order of July 24th, 1907, as to require such denial. The evidence taken before me on this hearing, a hearing in which both parties participated, shows that such a change has not, in fact, occurred. If the same evidence, on the same issue, had been taken by the Maine tribunal, I have no doubt it would have reached the same conclusion.

One naturally asks why the husband, having been notified of the application, did not appear, at least by counsel. The case presents a somewhat singular situation. Mr. Dixon is domiciled in New York. By the law of that state he may, in so far as the proceeding is a divorce proceeding, disregard notice served upon him in New York. The Maine decree will not, in New York, be treated as severing the marriage bond.

The application for the custody of the children was made, not as an independent proceeding, but in the course of the proceeding for divorce.

Should he have appeared to contest it, would or would not such appearance be treated as an appearance in the cause and would it give validity in New York to an adjudication which would otherwise be disregarded by the courts of that state?. No doubt, under advice of counsel, he was unwilling to do that which would raise such a question.

This brings me to the real question in the case, and, as I conceive, the only debatable one. “Ought this court to presume that the order of Mr. Justice Spear was based upon evidence showing a change of circumstances?” Whether I look at the Maine record or at the evidence presented to him on the part of the wife, I am unable to find any indication that her counsel presented to Judge Spear the only question which it was competent for them to present.

Eirst, as to the issue made in the record: In her libel for divorce Mrs. Dixon asks simply for the custody of her children. She does not state any facts pertinent to this part of her prayer. The facts that she states relate only to her prayer for divorce and to a time anterior to July, 1907.

Her subsequent petition praying for the custody of her children reads as follows: 1

“To the Honorable Justices of the Supreme Judicial Court:
' “Respectfully represents Josephine W. Dixon, of Portland, in said county of Cumberland, that she has heretofore filed a libel in said court against William H. Dixon, praying for a divorce and asking for the custody of her minor children, William P. Dixon, Jr., and Barbara W. Dixon, named in said libel; that said libel has been duly served upon the said William H. Dixon and that it is now pending- in said court; that said children are now under her care and are residing with her in the State of Maine, but that the said William H. Dixon has made demand upon her to deliver said children to him in the State of Massachusetts.
“Wherefore she prays this honorable court to give her the custody of said children during the pendency of said libel.
“Dated this 16th day of August, a. d. 1909.
“Josephine W. Dixon.”

Mr. Dixon failing to appear, an ex parte hearing was had, and on August 30th Mr. Justice Spear made the following order:

“It appearing that said libel for divorce is pending in said court; that said petition has been duly served upon the said William H. Dixon; that said Josephine W. Dixon resides in said State of Maine, and that she is a suitable person to have the care and custody of said William P. Dixon, Jr., and the said Barbara Dixon, minor children named in said libel, and who reside with the said Josephine W. Dixon in said State of Maine, it is
“Ordered, adjudged and decreed that, pending said libel for divorce, the said Josephine W. Dixon shall retain and have the sole care and custody of said minor children.
“A, M. Speab,
“August 30th, 1909. Justice Stipreme Judicial Court.”

As this order adjudges that Mrs. Dixon is to have the sole care and custody of her children, it cannot be doubted but that it conflicts with the prior order of this court.

It was held in Reynolds v. Stockton, 140 U. S. 254, that a judgment not responsive to the pleadings is a nullity in so far as it is not responsive, and in Munday v. Vail, 34 N. J. Law (5 Vr.) 418, that a decree entirely aside from the issue raised in the record is invalid and to be treated as void, even in a collateral proceeding.

Under the issue raised by Mrs. Dixon’s petition, a decree that' Mr. Dixon had, since July 21th, 1909, become an unfit person to have that limited enjoyment of his children’s society which the order of this court had given him, would not have been responsive to the allegations of a pleading, which averred merely that the children were then under her care and that William H.v Dixon had made demand upon her to deliver said children to him. Her allegation that she had filed a libel, while it showed a' change in her relations with her husband, did not show a change in the relations of that husband to his children.

But not only was no proper issue made by her pleading; she did not produce any evidence of unfitness at the ex parte hearing. It is true that according to the evidence of Mr. Hutchinson. she stated to Mr. Justice Spear that after their last visit to their father (which occurred in the winter of 1909) the children liad returned (to Maine) in poor health, but no attempt was made to show that their condition was attributable to neglect or misconduct on his part. They might have contracted colds on the journey back to Maine, after they had left their father’s house, and such was the evidence given on the hearing before me. Fo other evidence of unfitness was even suggested. The order made on the issue as she made it did not, therefore, give full faith and credit to the decree of July, 1907, and, according to the above-cited cases of Stockton v. Reynolds and Munday v. Vail, may be disregarded even in a collateral proceeding.

I am of opinion, therefore, that that decree is still in force. It provides that the children shall be sent, with their nurse, to visit their father for a month in the winter and for a month during the summer or early autumn. When Mr. Dixon’s petition was presented Mrs. Dixon had not as yet disobeyed it. Her solicitor had merety given notice that she would not send the children in view of what she regarded as a change in the situation. Her counsel disavow any intentional disrespect. They appear to have thought that the Maine order, which they were endeavoring to obtain, would supersede the Few Jersey order. In view of these circumstances, it would not be proper at this time to adjudge Mrs. Dixon in contempt.

The petitioner asks that the custody of the children may be awarded to him. The situation as it existed in July, 1907, so far as the children are concerned, remains unchanged. I see no reason why the order should be modified.

Tn view of the circumstances, I think neither party should pay -costs to the other.


author: Stevejstsoít, Y. C.

text:
    Thomas W. Streeter, trustee in bankruptcy of Hammond Braman, v. Grenville D. Braman, individually and as executor of Susie A. Braman, deceased.
    [Decided October 30th, 1909.]
    1. An affidavit attached to the bill cannot be considered as a part thereof.
    2. Testatrix gave her entire estate to her two sons and made them executors. The will was proved January 3d, 1907, and the executor who qualified filed in the orphans court on April 26th, 1909, an inventory showing about $1,500 cash on hand, and at the same time filed his final account. The son who did not qualify as executor was adjudged bankrupt on December 1st, 1908, and complainant was appointed trustee in bankruptcy several months thereafter and brought a suit against the executor to transfer to the chancery court the settlement of the executor’s account pending in the orphans court. The bill alleged that testatrix received large amounts during her lifetime and turned over to defendant money and securities amounting to $23,000, which property was owned by her at her death, together with other property; that defendant’s relation to testatrix precluded a gift thereof to him, and complainant believed that testatrix did not dispose of such property, and it should have been in defendant’s possession and accounted for as assets of the estate; that it was impossible to secure a complete accounting in the orphans court, it being without adequate jurisdiction to compel discovery of the assets of which testatrix should have died seized. Fraud by the executor, or his pecuniary irresponsibility for any failure to account, was not alleged.— Held, that where the chancery court and the probate court have concurrent jurisdiction, it is a matter of discretion whether the former will intervene, either before or after the probate jurisdiction has attached, and. in view of the enlarged powers of the orphans court in such cases, the complainant showed no reason why the chancery court should assume jurisdiction.
    3. A bill cannot be sustained as a bill for discovery where it did not allege that a discovery was sought in aid of a proceeding in another court, but merely sought to enjoin a pending proceeding in another court so as to transfer the case to the chancery court.
    4. A bill cannot be sustained as a bill for discovery where it prays for an answer without oath.

      On demurrer.

      Mr. Isaac W. Carmichael and Mr. William M. Stoclcbridge (of Massachusetts), for the demurrant.

      Mr. John M. Dickinson, for the complainant.
   Stevejstsoít, Y. C.

My conclusion is that the demurrer should be sustained.

1. The object of the bill is to transfer to this court the settlement of an executor’s account now pending in the orphans court of Ocean county. The main facts are as follows:

The testatrix, Susie A. Braman, died March 8th, 1907, leaving her estate to her two sons whom she appointed executors. Oné of the sons only, the defendant above named, qualified as executor. The other son is the bankrupt whose interest in the estate is now vested in the complainant. The will was proved in Ocean county on June 3d, 1907. On or about December 1st, 1908, Hammond Braman was adjudged a bankrupt by the United States district court in Massachusetts, and subsequently, whether one month or three months after the adjudication does not appear, the complainant was appointed trustee of the bankrupt’s estate. On or about April 26th, 1909, the defendant filed an inventory showing a single item, viz., cash amounting to $1,549.66, and at the same time filed a final account charging himself with the inventory and praying “allowance for various expenditures,” none of which are questioned in any way. • In view of the allegation that the defendant “although often requested” to file an inventory failed, and refused to do so until he filed his account, and until the complainant had instituted proceedings to compel him to file such inventory, it is important to note that' the delay in filing the inventory where the two brothers alone appear to have been interested from June 3d, 1907, until after December 1st, 1908, is not significant of any substantial violation of duty on the part of the defendant, and that the inventory and final account were actually filed within four months after the adjudication of bankruptcy and within a less time, perhaps only a few weeks, after the complainant had been appointed trustee and acquired an interest which entitled him to call upon the defendant to account.

An affidavit attached to the bill alleges that the complainant has filed exceptions to the account of the defendant in the surrogate’s office of Ocean county. This affidavit, of course, cannot be considered as part of the bill, but counsel for the complainant in his brief treats the filing of exceptions as a fact presented to this court by the demurrer, and makes an argument in regard to that fact. It would seem that as against the complainant the bill might well be deemed amended so as to include the allegation that exceptions are pending in the Ocean county orphans court. But however this may be no ‘obstacle in the way of the filing and having a complete trial of exceptions in the orphans court is suggested by the bill.

The bill sets forth that the testatrix received large amounts of money and securities during her lifetime, and that in 1903 she "turned over” moneys or securities amounting to $S3,000 to the defendant to hold for her; that this property was owned by the testatrix at her death and formed part of her estate; that the testatrix also owned certain valuable jewelry and other chattels which “formed a part of her estate;” that the testatrix for three years next preceding her death lived with the defendant and during that time he had sole .custody of her estate; that so far as the complainant is informed she made no disposition of any of her estate except the distribution of a certain sum specified; that the securities, &c., placed in the hands of the defendant, together with the jewels and other chattels above referred to “should have leen in the possession of said defendant and accounted for by him as assets of her estate.” The bill also alleged that the relations between the testatrix and the defendant “were such as to preclude the idea of any gift of any property whatever” from her to him, and that, as the complainant is informed, she made no other gift or distribution of the estate which she placed in the care and custody of the defendant.

Ppon these facts the bill alleges that the complainant is advised and he avers that it is

“wholly impracticable and impossible to proceed in the orphans court of Ocean county to secure a complete accounting of the assets of testatrix’s estate which court is without full, complete and adequate jurisdiction in the premises to compel the discovery by said executor of the assets of which his testatrix died seized or should have died seized, together with an account of the kind, character and amount thereof,”

and that the court of chancery alone has power to grant relief. The sole charge against the executor in the bill is that he has failed to inventory and account for a substantial portion of the estate of the testatrix. He is not charged with any fraud whatever unless the mere failure to account for assets before any opportunity has been afforded for an explanation is to be regarded as an indirect charge or suggestion of embezzlement. There is no specification of any objections to the account including the account of disbursements which the defendant has filed excepting -his failure to account for these assets which apparently at some time disappeared. There is no direct charge that the defendant had any portion of the estate of the testatrix in his possession at the time of her death for which he has failed to render an account. The exact charge is that certain assets “should have been in the possession” of the defendant and should have been accounted for by him. There is no charge that the defendant is not absolutely responsible pecuniarily for any demand that may be made upon him growing out of his failure to discharge his duty as executor and account for all the property of the deceased which came to his hands or which “should have” come to his hands.

2. The law applicable to this case may be found in a few recent decisions of this court and the court of errors and appeals. Filley v. Van Dyke, 74 N. J. Eq. (5 Buch.) 571; Wyckoff v. O’Neil, 71 N. J. Eq. (1 Buch.) 681; Woolsey v. Woolsey, 72 N. J. Eq. (2 Buch.) 898; Pyatt v. Pyatt, 46 N. J. Eq. (1 Dick.) 285.

The test of the propriety of this demurrer is presented by the question whether any “special reason” appears upon the face of this bill why the court of chancery should interfere with the orderly administration of this estate by the orphans court of Ocean county and take upon itself the burden of such administration. I am quite unable to discover any special reason, or, indeed, any reason whatever, for such interference. If this cause should ho removed to this court because it is “wholly impracticable and impossible” for the orphans court of Ocean county to accomplish justice, it would seem that in all or almost all cases where an executor is charged with merely failing to account for an asset which “should have been in his possession” any party interested has the option to remove the administration of the estate into the court of chancery. If the complainant is justified in objecting to the forum in which this cause now lies, it would also seem that the efforts of the legislature for many years to expand the powers of the orphans court by giving those courts equitable jurisdiction for the recovery of legacies and distributive shares, power to compel executors and administrators to make discovery under oath, and produce books and papers, to try exceptions to accounts, to compel the giving of additional security, to remove executors and administrators for waste, neglect or abuse of trust of any kind, have still left the orphans courts in an extremely feeble condition so that parties interested in estates still find it “impracticable and impossible” to get adequate relief in them in very simple cases.

It must always be borne in mind that in cases like this, where the court of chancery has concurrent jurisdiction with a law or probate court, and it is a matter of discretion whether the court of chancery will intervene, either before or after the law or probate court has taken jurisdiction, to use the language of Yice*Chancellor Seed in Bellingham v. Palmer, 54 N. J. Eq. (9 Dick.) 136, 139, it is, “the present and not the past method of legal procedure which should be regarded.” This principle is applied to bills for an accounting (Bellingham v. Palmer, supra; Daab v. New York Central Railroad Co., 70 N. J. Eq. (4 Robb.) 489, 493, bills for a new trial; Hannon v. Maxwell, 31 N. J. Eq. (4 Stew.) 318, 329; Walcott v. Jackson, 52 N. J. Eq. (7 Dick.) 387, 390; Hayes v. United States Phonograph Co., 65 N. J. Eq. (20 Dick.) 5, 8), and must be generally applicable to all cases where the jurisdiction of a court of equity or a special reason for the exercise of such jurisdiction is based upon the claim that the remedy in the law or probate court is inadequate.

Many of the older decisions of this court where jurisdiction has been taken of proceedings in the orphans court must be read and applied with the full recognition of the fact that at the time those decisions were rendered the remedial agencies and powers of the orphans court were to a large extent undeveloped. The legislature by steadily increasing the powers of the orphans court has necessarily decreased the number of instances in which the jurisdiction of this court now under consideration can wisely and discreetly be exercised.

It is urged on behalf of the complainant that the decision of the court of errors and appeals in Filley v. Van Dyke, supra, sustains or tends to sustain the complainant’s bill. The “special reasons” in that case found sufficient by the court of last resort for the interposition of the court of chancery are conspicuously wanting in the present case. The reasons specified (p. 944) axe “long delays unexplained, the inaction of the parties, the retention of assets by Frederick (a former removed executor charged with the possession of assets and financially irresponsible) and above all the action of the judge” of the orphans court who was a party defendant in the chancery suit “in passing an important item of account in which he was personally interested.” The delays referred to included the failure to file an account “though seven years had elapsed.” In the present case, as we have seen, there is no delay which is significant of fraud or substantial violation of duty causing injury to anyone. But in this Vam, Dyke Gone the court of errors and appeals find as prominent “above all” other reasons for equitable intervention that the particular judge of the orphans court having jurisdiction of the estate in question was disqualified by interest from attending to the particular case. I do not think that the decision of the court of errors and appeals in Filley v. Van Dyke, or the opinion delivered by Mr. Justice Parker on behalf of the court in that case, suggests any adequate “special reason” why the court of chancery in this ease should oust the orphans court of Ocean county of its jurisdiction and assume the administration of Mrs. Bra-man’s estate.

3. It is conceded by counsel for the complainant that the bill cannot be sustained in this case as a bill for discovery alone. The bill does not allege that discovery is sought in aid of a proceeding in any other court, but, on the contrary, seeks to enjoin a pending proceeding so as to give the court of chancery sole power to grant relief for the grievance set forth in the bill. Story Eq. Pl. §§ 826, 560; United N. J. R. Co. v. Hoppock, 28 N. J. Eq. (1 Stew.) 261. It is also, in my judgment, a sufficient answer to any suggestion that the bill can be treated as a bill for discovery only that it prays for an answer without oath. In the case of Manley v. Mickel, 55 N. J. Eq. 563, Mr. Justice Collins, speaking for the court of errors and appeals, leaves this point undecided, but stigmatizes the filing of such a bill for discovery as “a fruitless experiment.” Lex nil frustra. See Daab v. New York Central Railroad Co., 70 N. J. Eq. (4 Robb.) 489.


author: Stevenson, Y. C.

text:
    Ida A. Peterson v. Cyrus D. Reid and Frank T. Morrill & Company.
    [Decided November 8th, 1909.]
    1. In a suit to foreclose a purchase-money mortgage, a cross-bill, praying not only for an abatement of the mortgage debt, but for the surrender of the mortgage for cancellation, on its being found that the debt had been discharged, will be considered on demurrer as presenting equitable claims properly presented by answer by way of cross-bill, though an abatement of the mortgage debt may be gained by answer.
    2. A cross-bill, in a suit to foreclose a purchase-money mortgage, which alleges that the assignee of the mortgagee bringing the suit has no interest in the litigation, but is prosecuting it for the mortgagor, and which demands damages for the breach of the mortgagee’s covenant to fill in the land sold by him to the mortgagor, is not demurrable for failing to make the mortgagee a party, but the assignee may make him a party.
    3. The mere fact that the damages sought to be set up as an abatement of the mortgage debt in a suit to foreclose the mortgage are unliquidated does not -prevent equity from granting the abatement; the damages may be ascertained by a jury in a law court or by the court of chancery.

      4. Where a vendor of lowland of small value covenanted to fill in the same, and the purchaser gave a mortgage for the price, based on the valuation of the land filled in, one succeeding to the rights of the purchaser under the conveyance from the vendor and his covenant could, in a suit to foreclose the mortgage by an assignee having no interest in the litigation, reduce the mortgage debt to the extent of the damages sustained by the vendor’s breach of covenant.
    0. A vendor of lowland of small value covenanted to fill in the same. The purchaser gave a mortgage for the price, based on the valuation of the land filled in. A third person acquired the purchaser’s rights. After the time for performance, the vendor and the third person entered into an agreement, whereby the vendor agreed to perform the covenant. Prior to the agreement the vendor had assigned the mortgage to an assignee, who was a mere volunteer, and who had no actual interest in the matter. —Held, that in a suit by the assignee to foreclose the mortgage, the third person could reduce the mortgage debt to the extent of the damages sustained by the vendor’s breach of the original covenant.
    On demurrers to cross-bills.

      Mr. Francis V. Dobbins, for the complainant, the demurrant.

      Messrs. Tennant &. IlaigM, for the defendants, filing answers by way of cross-bills.
   Stevenson, Y. C.

1. In view of the specification of grounds of demurrer and the argument of counsel in this case, it is unnecessary to discuss the technical question whether the defence set up in the answers by way of cross-bill could or should have been presented to the court by the answers. The cross-bills pray not only for an abatement of the mortgage debt, but, in case of such abatement, the mortgage debt shall be found to have been discharged, as the defendants insist is the case, that the mortgage be surrendered up for cancellation. This court will consider that for all present purposes the equitable claims which the defendants set forth against the mortgage indebtedness are properly presented by answers by way of cross-bill, even though the defendants might have gained the benefit of any abatement of the mortgage debt by an answer. See O’Brien v. Hulfish (Court of Errors and Appeals, 1871), 22 N. J. Eq. (7 C. E. Gr.) 471, 475; McMichael v. Webster (Court of Errors and Appeals, 1898), 57 N. J. Eq. (12 Dick.) 295; Dayton v. Melick (Chancellor Runyon, 1880), 32 N. J. Eq. (5 Stew.) 570; S. C. (Court of Errors and Appeals, 1881), 34 N. J. Eq. (7 Stew.) 245.

2. The first objection, to the demurrer is that the Carteret Eealty Company, the original mortgagee, ought to have been brought in as a party in accordance with the practice prescribed or recommended in Green v. Stone, 54 N. J. Eq. (9 Dick.) 387, 401. See Haberman v. Kaufer, 60 N. J. Eq. (15 Dick.) 271, 277. It is unnecessary, I think, in this case to discuss the extent to which new parties may be brought into a cause in this court by making them parties defendant to a cross-bill, or an answer by way of cross-bill, or in what manner, in case the pleading is an answer by way of cross-bill, the new parties may or must be brought into court. The elaborate brief for the demurrant, which seems to present every possible argument against the sufficiency of the answers by way of cross-bill on the merits, does not undertake to state any reason whatever why the Carteret Eealty Company should be made a party to this suit. If it be conceded that the Carteret Eealty Company is interested in the question of damages from its breach of covenant raised by the answers by way of cross-bill, it may follow that this company is a proper party to the cross-bills. It does not follow that this company is a necessary party to this litigation for the accomplishment of justice between the parties who are already before the court. The result of leaving out the Carteret Eealty Company is simply to leave that company unaffected by the decree in this cause. The cross-bills allege that the complainant in fact has no interest in this litigation, but is prosecuting the same for the benefit of the Carteret Eealty Company, and in fact is a mere cover or representative of that company. The complainant may amend her bill by making the Carteret Eealty Company a party, but I see no basis for any objection on the part of the complainant that the defendants by cross-bills or answers by way of cross-bill do not bring the Carteret Eealty Company into this litigation.

3. The,only other objection to the sufficiency of these answers by wajr of cross-bill is the general one of want of equity.

The facts set forth in the answers by way of cross-bill are somewhat complex and voluminous. It will not be necessary to state all these facts in order to set forth distinctly the point on which is placed the decision that the demurrers should be overruled.

The Carteret Bealty Company conveyed to one Beid, to whose rights the defendants succeeded, a tract of land containing a little over three acres. The price was $5,000 per acre. The land was low and marshy and of small value unless filled in. As a part of the consideration on Beid’s part the Carteret Bealty Company covenanted that on or before a date specified it would fill in a certain portion of the premises, and within six months after the conveyance it “would fill the whole of said premises to the height of three feet above the surface as it then existed.” Mr. Beid paid $5,000 in cash and gave back a purchase-money mortgage to secure the balance of the price of the land, viz., $10,365, payable in about three years thereafter. The mortgage contains a provision to the effect that the same was “given to secure part of the purchase price and conditions named in said deed.” The Carteret Bealty Company failed almost completely to perform its covenant, having partially filled in only a small strip of the land in question. A large part of the consideration of the mortgage has manifestly failed. What the Carteret Bealty Company in effect contracted in its deed of conveyance to give the mortgagor was this parcel of land containing about three acres filled in to a certain grade.

After the conveyance and purchase-money mortgages were made the Carteret Bealty Company assigned the mortgage to the complainant. This assignment appears to have been made after the Carteret Bealty Company had defaulted in its agreement to fill a portion of the land, but before the six months had expired within which the company was obliged by its contract to fill in the remainder. The grantee and mortgagor, Beid, acted merely as agent for one Morrill to whom he conveyed the land and transferred all his rights in the covenant with the knowledge and consent of the Carteret Bealty Company. Subsequently Morrill transferred the land and all his rights in the covenant to the defendant corporation Frank T. Morrill & Company. It appears distinctly that the defendant Frank T- Morrill & Company has succeeded to all the rights of the defendant Reid under the conveyance from the Carteret Realty Company and the covenant of the company therein contained. It also appears that the assignment of the bond and mortgage made by the Carteret Realty Company to the complainants “was made without any valuable consideration and with the intention of defrauding” Reid, Morrill and the Frank T. Morrill & Company, “by having the complainant enforce the payment of said mortgage for the benefit of said Carteret Realty Company, without said company performing its said covenant.” The cross-bills allege that the Carteret Realty Company has no assets from which any judgment against it could be satisfied, and that the cost of filling in the land to the height called for by the covenant “will alone exceed the said principal sum of said bond and all interest alleged by the complainant to be due thereon.”

It is argued strenuously on behalf of the complainant that the answers by way of cross-bill set up no equity which can be recognized or enforced in favor of the defendants or either of them in this suit. The defendant Reid stands liable upon the bond which accompanied the mortgage. The defendant Frank T. Morrill & Company own the land which the complainant seeks to have sold for the satisfaction of her mortgage. The case will be considered as if the two defendants had united in a single answer and a single answer by way of cross-bill.

It seems to me upon both principle and authority that if the allegations of these answers by way of cross-bill are established by the proofs, the defendants have a clear equity to have the damages from the breach of covenant of the Carteret Realty Company ascertained and applied as an abatement of the mortgage debt. In case the mortgage debt is found to be extinguished, the bond and mortgage should be delivered up for cancellation. This result follows, I think, from the logical application of the principle laid down in the case of Kuhmen v. Parker (Vice-Chancellor Stevens, 1897), 56 N. J. Eq. (11 Dick.) 286. After discussing numerous cases Yice-Chancellor Stevens concludes (p.

“1 think that the true principle of decision goes at least to this extent. ■ If the mortgagee foreclose a purchase-money mortgage against the mortgagor, and the mortgagor shows that the covenant against the encumbrances has been broken in such manner as to give him a claim to substantial damages, he may reduce the mortgagee’s demand to the extent of those damages.”

The cases cited show beyond question that the mere fact that the damages sought to be set up as an abatement of the mortgage debt are unliquidated, is a circumstance which gives the court no difficulty. The damages may be ascertained or assessed by a jury in a law court, by a master, or under our present system bjr testimony of witnesses taken in open court.

In Kuhnen v. Parker, however, the court dealt with unliquidated damages caused by the breach of a covenant at the time the conveyance was made, and purchase-money mortgage given back. The covenant under consideration was a covenant against encumbrances, and, as the court pointed out, was broken as soon as it was made. In respect to this feature the present ease manifestly is different. The covenant was contained in the deed of conveyance, but it was not broken as soon as it was made, or when the purchase-money mortgage was given back. The breach followed some weeks later. I am unable, however, to see any reason in the distinction just mentioned for the application to this case of any different principle from that which was applied in the case of Kuhnen v. Parker. In each case there is complete or at least a partial failure of consideration. In Kuhnen v. Parker, perhaps, if the situation is to be described with metaphysical accuracy, the defect in the mortgage was not so much a partial failure of consideration as a partial lack of consideration, while in the present case there was subsequent to the execution of the mortgage a complete or partial failure of its consideration. The consideration of the mortgage was the conveyance of the land and the covenant of the grantor to fill the land in. The mortgagor plainly received precisely what he was entitled to. As between the original parties to this transaction it seems to me that we have a perfectly plain case where the damages of the mortgagor from the failure of the mortgagee to perform its covenant constitute a proper abatement of the mortgage debt in the foreclosure suit. If a man conveys a parcel of unimproved land and at the same time covenants to erect a valuable building upon it, and takes back a purchase-money mortgage based on the valuation of tlie land with the building on it, and then completely defaults in his covenant to erect the building, is it possible that under any system of jurisprudence in a civilized state he would be permitted to foreclose his purchase-money mortgage for the entire -amount, while the unfortunate mortgagor would be left to an action at law for' his damages which he might never be able to- collect?

The case of Courson v. Canfield (Chancellor Runyon, 1870), 21 N. J. Eq. (6 C. E. Gr.) 92, is.cited as an authority against the position of the defendants. In that case the complainant sought to foreclose a purchase-money mortgage. When the conveyance and purchase-money mortgage were made as a part of the same transaction the grantor covenanted “that he would immediately procure releases of their title from certain persons named who were reputed to have some claim on the lands.” The releases were never procured. Whether they were necessary in order to make the title of the purchaser merchantable did not appear, but the complainant insisted that he had shown “a good title and that the releases would be of no value.” hTo effort was made to have the amount of the mortgage debt abated by an amount of money which would equal the difference between the value of the land as it stood, and the value of the land as it would have been if the releases had been obtained. The contention of the defendant was that the performance of the covenant to procure the releases was a condition precedent to the payment of the mortgage, and the conclusion of the argument was that “the payment of the mortgage should therefore be suspended until the performance” of the covenant. (Page 99.) The court rejected this argument, holding that the breach of covenant on the part of the mortgagee did not preclude him from foreclosing his mortgage because the covenants were independent. There is absolutely nothing in the report of the case to indicate that the defendant, either by Ms pleadings or by his proofs, set up that .in case contrary to his insistment the complainant should be allowed to foreclose his mortgage, then an abatement of the mortgage debt should be allowed on account of the complainant’s breach of covenant resulting in a partial failure of the consideration of the mortgage. That aspect of the defendant’s case was in no way presented to the mind of the chancellor.

The only possible question in this case, if there be one, would seem to be whether the mortgage could be assigned so as to place the assignee in a better position than the assignor with respect to the claim of abatement.

The complainant took the mortgage charged with notice of ' the conveyance to the mortgagor and the covenant of the Carteret Eealty Company, therein contained to do this work upon the mortgaged premises. Any discussion, however, of a possible superior position of the complainant over her assignor is rendered unnecessary by the distinct allegation that she is a mere volunteer without interest and acting for the benefit of her assignor, the Carteret Eealty Company.

It is important at every stage of our inquiry to bear in mind that the cross-bills show that the defendant Frank T. Morrill & Company occupy precisely the same position with respect to this land and the covenant of the Carteret Eealty Company which was formerly occupied by the defendant Cyrus D. Eeid. Frank T. Morrill & Company did not assume to pay the mortgage debt nor was the amount of the mortgage debt deducted from the price which that company agreed to pay. It may be conceded that Mr. Eeid might have sold the land unfilled to a purchaser who took it and paid for it in that condition^ and who assumed as a part of the price of the land to pay the mortgage debt. In such a case, no doubt, the owner of the equity would be obliged to submit to a foreclosure for the entire mortgage debt while the original mortgagor and covenantee would have an action against the grantor and mortgagee for the damages resulting from the breach of covenant. In such case the entire loss from the breach of covenant remains with the original mortgagor and falls upon him alone. He has been obliged to sell his land diminished in value and presumably for a smaller price because of the failure of his covenant to impart the additional value to it provided for by the covenant, while his grantee has received precisely what he bargained for. We are not obliged to consider various questions of importance or difficulty because of the facts distinctly alleged in the cross-bills which show that all of the equities of the defendant Cyrus D. Reid are vested in the defendant Erank T. Morrill & Company, while the defendant Reid, on account of his liability upon the bond which hevgave, is interested in the enforcement' of those equities on behalf of his co-defendant.

One other objection to the equity of the answers by way of cross-bill may be briefly considered. It appears that many months after the expiration of the period within which the Carteret Realty Company was to perform its covenant by making the filling in question, the defendant Erank T. Morrill & Company, being then the owner of the land, entered into an agreement under seal with the Carteret Realty Company wherein the defendant waived its claim to damages up to October 1st, 1906, “by reason of the failure of the Carteret Realty Company to perform the said covenant upon condition and in consideration that the said Carteret Realty Company would perform the provisions of said last-mentioned agreement” (which the company undertook and agreed to do), on or before October 1st, 1906. This was long after the assignment of the mortgage to the complainant. The Carteret Realty Company wholly failed to perform its covenant within the extended period provided for by the last-mentioned agreement. The complainant insists that this new agreement was a novation of the original contract, and that the result of it was to relieve the purchase-money mortgage, then in the hands of the complainant, from any claim of abatement growing out of either the breach of the original covenant of the Carteret Realty Company in its deed of conveyance, or the breach of the subsequent covenant of the Carteret Realty Company with Erank T. Morrill & Company, by which the time of performance of the covenant was extended. All the important facts, especially relating to the actual notice to the parties of circumstances and conditions affecting their respective equities, probably are not before the court. It seems to be quite sufficient to dispose of every possible claim of the complainant based on the distinction between the covenant of the Carteret Realty Company with Cyrus D. Reid, and the subsequent covenant of

25 tlie Carteret Eealty Company with Frank T. Morrill & Company to point out again that the answers by way of cross-bill allege in substance that the complainant is a volunteer without actual interest and merely representing the Carteret Eealty Company7 in this suit in order to accomplish a fraud.

The demurrers will be overruled.