Mullanphy Savings Bank v. Schott
26 N.E. 640
Ill.
1891
Check Treatment
Mr. Justice Baker

delivered the opinion of the Court:

In order of priority in point of time, the liens upon the prop-. erty of the insolvent Brookside Coal and Coke Company are: • First, the mortgage of October 19, 1881, to Martin J. Schott;, second, the deed of trust of June 17, 1882, to William H.; Krome, trustee; third, the mortgage of January 21, 1885, to-John 0. Evans, Sr.; and fourth, the judgments, according to their seniority of date.

At the time that the mortgage to Martin J. Schott was executed, he was a stockholder and director of the corporation, and its treasurer; but the company was then, and for a considerable time thereafter, entirely solvent, and consequently his interest in and relations to it did not preclude him from loaning money to and taking a mortgage from the company. i A director or officer of a solvent corporation may deal with it, loan it money, and take security therefor, in like manner as a stranger. Beach et al. v. Miller, 130 Ill. 162; Roseboom et al. v. Whittaker et al. 132 id. 81.

At the hearing, the appellants offered in evidence page 37 of record book 125 of the records of Madison county, for the purpose of showing what purported to be resolutions passed by the directors of the Brookside Coal Company, and authorizing the issue of $15,000 in bonds, and the execution of a mortgage to secure the same. An objection was sustained to the introduction of this testimony, and on the ground that the preliminary evidence produced was not sufficient to authorize the use of secondary evidence. The bonds and the Krome deed of trust were executed by the president and secretary of the corporation, and under its seal, and this was prima facie evidence that they were executed by the authority of the company. (Wood v. Whelen, 93 Ill. 153.) No claim was made that the bonds and deed of trust were unauthorized—in fact, ( their validity was conceded; but appellants desired to have, the resolutions in evidence, in furtherance of their claim that' the Schott notes and mortgage should be postponed, and the deed of trust and bonds given a priority of lien.

Resolutions adopted by private corporations are not such instruments as are entitled, under the statute, to be recorded in the office of the recorder of deeds. Assuming that resolutions were passed that authorized the making of the deed and bonds, the natural and legitimate, presumption is, that either a record was made of them by the secretary of the company in the book containing the record of the proceedings of the board of directors, or else that the'paper containing such resolutions was retained and preserved by the secretary, or both. If a paper is shown to have been in particular hands, then the person must be produced into whose hands it has been traced; or if the natural and legitimate presumption is that it is in ■certain hands, then it must be proved by legal evidence that it is not there, before secondary evidence of its contents is admissible. The evidence must satisfy the court that the paper is destroyed or can not be found. (Mariner v. Saunders, 5 Gilm. 113.) Here it was shown that the resolutions could not be found in the office of the recorder; but in any event, they were only left with him for a temporary purpose, and when they had been recorded, they, presumably, were returned to the possession of the secretary of the corporation. It was further shown that neither they nor the book containing the record of the proceedings of the board of directors were in the hands of either the receiver or of the attorney of the assignee, who had custody of the corporate property prior to the appointment of a receiver; but neither the secretary, president nor assignee of the company was produced as a witness, nor was the deposition of either taken. Although all three were either non-residents or out of the State at the time of the hearing, yet no reason is perceived why their testimony could not have been taken. The record book and resolutions may now be in the hands of either of the three, and yet all the evidence in this record be true. The conviction that naturally arises from the evidence is, that the record book is in the possession of one or another of them. There was no error in refusing to admit secondary evidence of the resolutions.

It is claimed that it was error to exclude proof of representations made by Freudenau, president of the company, to Hammerer, cashier of the Mullanphy Savings Bank, at the time some of the bonds were pledged to the bank, that they were a first lien upon the property described in the deed of trust. The representations were made in the summer or fall of 1883, nearly two years after Martin J. Schott had taken his mortgage, and in the absence of said Schott. If it should be assumed that the declarations of Freudenau were within the scope of his agency to negotiate the bonds for the corporation, and therefore binding upon said Schott to the extent of his interest as a stockholder therein, yet it would seem that in respect to the rights which he held adversely to the corporation, and as its mortgagee, such declarations would not be competent testimony. And if such representations were not admissible against him as mortgagee, then, as matter of course, they were not admissible against his assignee, who was complainant in the supplemental bill, and is appellee here.

It is urged that if Martin J. Schott agreed to accept payment before his money was due, and out of moneys to be obtained by the sale of second mortgage bonds, then the declarations of Freudenau were competent and relevant testimony in the contention for priority between the first and second mortgages. This argument proceeds upon the theory of agency; but suffice it, in this connection, to say, that it is elementary law that an agency can not be shown by the statements of the supposed agent.

Preliminary to a consideration of the merits of the controversy between appellants and appellee, it may be well enough to ascertain the status of the latter in respect to the equities claimed by the former. It is settled law, announced in Chicago, Danville and Vincennes Ry. Co. v. Loewenthal, 93 Ill. 433, and in many other cases, that when the assignee of commercial paper secured by mortgage, seeks relief in equity by foreclosure of the mortgage, the mortgagor may successfully interpose any defense which would have been available against the original payee or holder of the paper. This rule, however, has reference only to equities existing in the original obligor, and not to latent equities against the assignor residing in third persons. (Olds v. Cummings, 31 Ill. 188; Walker v. Dement, 42 id. 272; Silverman v. Bullock et al. 98 id. 11.) In the case last cited the statement is, that the assignee takes subject only to equities existing in favor of the mortgagor, as against the assignor, and not subject to latent equities in favor of third persons in the subject involved in the assignment, of which he had no notice. This brings us to the point that appellee, at and prior to the time that he purchased the mortgage debt and took an assignment of the notes and mortgage of September 22, 1881, had notice, in at least two several ways, of the equities, if any, existing in favor of the trustee and bondholders under the deed of trust, and the mortgagee in said mortgage of 1881. In the first place, before that time the trustee and bondholders under the trust deed of 1882 had filed their cross-bill, wherein they claimed that the lien of said deed of trust was superior to the lien alleged to exist on the property by virtue of the mortgage of 1881. Appellee, being a purchaser pendente lite, was chargeable with notice of the allegations of this cross-bill. Besides this, the evidence is clear and undisputed that the notes and mortgage were purchased for appellee, and assignments taken to him, by Martin J.'Schott, who was acting as his authorized agent in the matter. The doctrine is, that notice to an agent of any fact or facts connected with the business in which he is employed, is notice to the principal. (Singer Manf. Co. v. Holdfodt, 86 Ill. 455; Flower et al. v. Elwood et al. 66 id. 438.) Martin J. Schott, as matter of course, had full knowledge of all that had transpired between himself and either the corporation, the trustee in the trust deed, or the holders of bonds secured by the same, in respect to both the mortgage given to him and the trust deed, and appellee stands in the shoes of Martin J. Schott, the mortgagee, and holds the mortgage of 1881 subject to all the equities, if any there be, existing in favor of the trustee and bondholders as against said Mártin J. Schott. Does any matter appear in the record which would estop Martin J. Schott from claiming that the mortgage to him is the first and superior lien upon the property of the coal and coke company ?

It is insisted that it was the intention of the corporation and of said Schott, and that there was an agreement between them to the effect, that the deed of trust should be made a first lien upon the property, and that this should be accomplished by Schott accepting payment of his mortgage debt before it was due, and such payment to be made out of moneys to be obtained by sale of second mortgage bonds. It is not claimed that there is any direct proof whatever of such a contract. Nothing appears upon the face of the bonds to indicate that they either were or were intended to be first mortgage bonds, or secured by a first lien upon the mortgaged property. The only thing contained in the deed of trust that is suggested as amounting to a representation of priority, is the fact that the words “grant, bargain and sell” are used therein. These-words are, under the statute, a warranty of the company that the lands conveyed and mortgaged were free and clear of all incumbrances made by the .company, and a warranty of the-company to the purchasers of the bonds that there was no other mortgage made by it on the property. But the covenants were the covenants of the corporation alone, and not the covenants of the individual directors of the corporation, and' no suit could be brought for breach of such covenants against any of the directors. From the fact of the insertion of a i covenant against incumbrances, an implication arose of the probability or possibility that there were prior incumbrances, for otherwise there was no occasion for furnishing a remedy by way of an action for breach of covenant. The deed was not signed by Schott, but was executed by Freudenau, president, in the name of the company, and attested by Kombrink, secretary, and the incorporation therein of the covenant implied from the words “grant, bargain and sell,” can not be regarded as a fraudulent representation on the part of Schott, one of the directors of the company, that would preclude him from claiming the benefit of the prior mortgage held by him.

It appears from the evidence that late in May or early in June, 1882, there was°a meeting of the stockholders of the Brookside Coal Company, at which Freudenau, its president, Schott, and others, were present; that Freudenau made a statement of its financial condition, in the presence and hearing of Schott, in which he summed up its indebtedness, stating its total to be between $14,000 and $15,000, including the notes and mortgage of Schott; that he suggested that a loan of $15,000 was sufficient to pay all the debts of the company, including the Schott mortgage, and stated that it would be for the interests of the company to issue bonds to the amount of $15,000, and execute a mortgage security, for the purpose of raising money to pay off the total indebtedness of the company. From the circumstance that Schott made no response or objection to these suggestions, and from the further circumstance that appears from the recitals in the deed of trust, that the bonds were issued “in pursuance of a vote of all the directors of said company,” it may be inferred that Schott was willing to receive payment of his debt prior to its maturity, but it can not be justly deduced therefrom that he consented to waive his priority of lien without payment, in money, of such debt.

It seems that the board of directors of the company consisted of three members,—Freudenau, the president, Kombrink, the secretary, who was his brother-in-law, and Schott, the treasurer; that the two former managed its business affairs, and that Schott was treasurer only in name, neither the proceeds of the bonds nor the other funds of the company passing through his hands.

In the latter part of 1882, ten of the bonds secured by the deed of trust, and of the face value of $5000, were delivered to Schott, and it is claimed that as he received the same he is thereby estopped from saying that they were not in satisfaction of his debt and in discharge of his mortgage lien. The notes and mortgage of 1881 were not surrendered to the company, but have been continously retained and held by Schott and his assignees. We think that the evidence satisfactorily shows that Schott did not accept the bonds in payment of his debt, but that the conditional arrangement between him and Freudenau was, that he should take the bonds and try to sell them to a bank in Highland that held a note against him, and that if he sold them he was to surrender his note and mortgage to Freudenau, and receive from him the unpaid interest, and that if he did not sell them they were to be returned to Freudenau; that the bank declined to buy because the bonds bore only seven per cent interest, while Schott’s note bore eight per .cent interest, and because it wanted nothing to do with coal mines; and that thereupon some of the bonds were given back to Freudenau, and some delivered to the Mullanphy Bank on the order of Freudenau, and that all ten of the bonds were, after their return, negotiated and disposed of for the Brookside Coal Company, by Freudenau. It does not appear that any of the proceeds of the bonds were used for other than corporate purposes.

. The transactions above mentioned took place in 1881, 1882 and 1883. It is not shown that in 1881, 1882 or 1883 the Brookside company was insolvent. Schott, therefore, in those years, as director and treasurer of the corporation, was trustee and agent of the company and its stockholders, only. He at that time owed no duties or obligations to appellants or. to the creditors that would have prevented him from dealing as he did with the company and with the bonds. The assets of the corporation were not then a trust fund for the payment of its creditors. (Beach et al. v. Miller, 130 Ill. 162; Roseboom et al. v. Whittaker et al. 132 id. 81.) Schott did not appropriate the money or bonds of the company to his own use. He simply retained his notes and mortgage, which were a first lien upon property of the company, and he had a right so to do. It may be that in 1882 and 1883 he was negligent in the performance of his duties as director and treasurer, in not seeing that the one-fourth of one cent per bushel on all coal mined was paid to the trustee, as a further security, as provided in the deed of trust, and otherwise, but the pleadings in the cause did not proceed upon any such ground; and besides this, the trustee in the deed of trust and the bondholders were guilty of like negligence. Moreover, the- trustee had actual notice of Schott’s mortgage, and the bondholders had constructive notice of the same from the public records. The bondholders neglected to examine the records, and neither they nor the trustee made inquiries of Schott in regard to his mortgage. In view of the greater negligence of appellants, it would seem inequitable and unjust, even if the nature of the case and character of the pleadings permitted, that appellants should shift the burden of the loss either to the shoulders of Martin J. Schott or of appellee.

We find no sufficient ground for disturbing the decree of the circuit court. The judgment of the Appellate Court is affirmed.

Judgment affirmed.