92 N.J. Eq. 64 | New York Court of Chancery | 1920
This is a suit to foreclose a mortgage upon several tracts of real estate in Rutherford, New Jersey. The testimony is quite voluminous and the exhibits are numerous, presenting a somewhat complex case. This memorandum will undertake merely to state so much of the evidence as is necessary for the proper understanding of the points which are decided.
On July 26th, 1907, Mr. Ely procured the Eutherford National Bank to discount a note of $4,400 for the benefit of the Addison-Ely Compare, on which the Eidge Heights Land Company appears as maker, and the Addison-Ely Company appears as endorser. The Eidge Heights Land Company was in fact an accommodation maker having no interest in. the proceeds of the discount, the same having been credited to the account of the Addison-Ely Compare
On the same day, and in order to secure this note, the Eidge Heights Land Company executed a bond and mortgage in the usual form for $4,400 to Andrew H. Brinkerhoff, as trustee. Mr. Brinker’hoff was at the time the cashier for the Eutherford National Bank, but there is no disclosure made in the bond or mortgage of the party for whom Mr. Brinkerhoff was acting' as trustee in taking this security. It also may be noted that there was no mention made in any writing that has been produced, of any relation between the bond and mortgage to Mr. Brinkerhoff and the note for the same amount which the bank discounted as above mentioned. As a. matter of fact the evidence establishes beyond question that the bond and mortgage were given to secure the payment of the note and for no other purpose. Inasmuch as the complainant the Eutherford National Bank was governed by the National Bank act, we may surmise reasons why the transactions under consideration took the form they did.
While the making of this independent bond and mortgage may have put remedies within the reach of the bank which would not
2. After this mortgage for $4,400 had been duly recorded on August 5th, 1907, a series of mortgages which, some of the defendants now hold were placed upon a portion of the tracts included within the said mortgage for $4,400. At a later time Mr. Brinkerhoff assigned the bond and mortgage which he held as trustee for an undisclosed beneficiary to the complainant Mr. Edward J. Turner, as trustee also for an undisclosed beneficiary. Mr. Turner was, and is, now the president of the Rutherford National Bank. The connection between the note and the mortgage was still concealed, but the evidence shows, and the fact is not disputed, that Mr. Turner merely stepped into- the place of Mr. Brinkerhoff and held the bond and mortgage for the sole benefit of the Rutherford National.Bank and solely as security for the payment of tire note of $4,400.
After the junior mortgages above mentioned had been, made and recorded the trustee, Mr. Brinkerhoff, and later Mr. Turner, executed a series of releases whereby they discharged from the lien of their mortgage certain portions of tire lands covered by their mortgage not covered by the junior mortgages.
3. The note for $4,400 originally given, asi we have seen, on July 26th, 1907, was at two months, while the bond and mortgage ran for one year. The inference would seem to- be that renewals of the note were contemplated, but, however that may be, in fact the note was renewed a great many times through a series of years, and partial payments upon it were made. Complainants in their bill allege that the amount due om the mortgage is $2,850. Complainants’ counsel argue that this is a mistake and that the amount actually due i'si $3,000 and interest. The defendants say that the note, at most, if not wholly, paid stands to-day only for $1,750 and interest. I do not think that it will be necessary to consider these conflicting claims in detail.
4. On July 10th, 1911, the last renewal or partial renewal of the note for $4,400, amounting then- to $3,000, fell due. The
5. The defences which are set up are the following :
(1) The defendants claim that the whole mortgage debt for which the note for $4,400 and itsi renewals a.t all times stood as the primary security was fully paid when the Eutherford National Bank accepted the obligation above mentioned of Addison Ely, individually, and surrendered for cancellation the promis
(2) The Rutherford National Bank when it gave, or caused its trustee to give, the releases above mentioned, had actual notice of the junior mortgages now held by the defendants, and that, therefore, according to the familiar rule in equity as between the bank and these defendants, the mortgage held by the bank must be charged with a payment to the extent of the value of the security which the bank gave up bjr the releases. The defendants, the junior encumbrancers, claim that the value of the released lands was far in excess of any amount which could be found due upon the mortgage of the complainant, and that, therefore, they, the defendants, the junior encumbrancers, have a right to the entire proceeds of the sale of the land covered by their mortgage1;! until their mortgage debts are fully paid.
If this defence alone should be sustained it is probable that some adjustments would have to be made owing to the fact that-the junior mortgages do not all cover the same parcels, but I do not think that this matter calls at present for investigation.
To the defences above stated the complainants reply:
(1) That the acceptance of the note of Addison Ely, individually, instead of a strict renewal note on which the Ridge Heights Land Company would stand as accommodation maker, was a mere mistake and did not accord with the intention of the' parties, and that therefore they have a right to hold the bond and mortgage of the Ridge Heights Laud Company as security for the land named therein, less the amount of the partial payments.
(2) That the hank had no actual notice of the junior encumbrances when the releases were made.
6. My conclusion is that the first defence must be sustained; that as fhe evidence stands the complainant the-Rutherford National Bank must be adjudged to have knowingly accepted the individual note of Addison Ely, endorsed by the Addison-Ely Company, in place of the note made by the Ridge Heights Land Company and endorsed by the Addison-Ely Company, and that as the result of this transaction the mortgage of the Ridge Heights Land Company covering its own lands, which stood as security for its note, was extinguished.
There ia no credible evidence which leads to any other conclusion than that the Ely note was intentionally accepted by the bank in discharge of the note of the Ridge Heights Land Company except that which relates to the alleged mistake. The bank certainly would not have knowingly surrendered the note of the Ridge Heights Land Company if it had not been paid—if the bank still'held any claim against the Ridge Heights Land Company as accommodation maker.
The claim of the complainants that the acceptance of the individual note of Mr. Ely was a mistake on their part as well as on the part of Mr. Ely, in my opinion, isi not sustained by the evidence. It is true there is some support for the surmise that a mistake was made in drawing the note by the clerk who prepared it. This clerk may have thought, and probably did think, that a renewal of the note of the Ridge Heights Land Company was to be executed, and therefore used the word “we” at the start, supposing that the rubber stamp' of the company would be placed below with the line for Mr. Ely’s signature as president.
The testimony of Mr. Ely, however, indicates that whatever the clerk thought who drew the body of the note and made it ready for signature, the note in fact was given instead of the note of the Ridge Heights Land Company, because it was at that time a stronger note and the bank intentionally accepted it and forthwith surrendered the note of the Ridge Heights Land Company as a paid note for cancellation. Eor 'all that Mr. Ely knows this stronger note may have been requested by the cashier of the bank. The new note—the note of Mr. Ely, individually, was duly en
The story of this note transaction which the cashier of the bank tells is a tissue of gross inaccuracies, if not falsehoods. His testimon}'’ on all points in favor of the bank is utterly discredited by his failure to recollect the facts or state of facts correctly. Counsel for the complainants admit in their brief that the cashier “was mistaken” in regard to a most important matter. This witness represents that the substitution of the Ely note for the note of the Ridge Heights Land Company was a mistake; that he, the cashier, was not present when the note came in; that there was “absolutely no intention on anybody’s part to accept anything but a note similar to what those were we had had theretofore;” that “some employe of the bank accepted” the note and thereupon “surrendered the Ridge Heights Land Company note.” The witness further testifies that he found out the mistake in. ten or fifteen days and took charge of the business of correcting it, and that he sent “this note [referring to the Addison Ely note] down to the Ridge Heights'Land Company” objecting to the exchange which had been made. The witness further testifies.that ■the president of the Ridge Heights Land Company thereupon
According to the cashier's story the conduct of the bank in entering judgment on the Ely note on which it had no1 claim whatever was not “an honest mistake,” as counsel for the bank now argue, but a gross fraud.
The cashier’s testimony in regard to the entry of the note of July 10th, 1911, in the books of the bank is contradictory and unsatisfactory. At first he says “that there was no entry made of the so-called correct note. The account book of the bank before the witness showed only the entry of the Addison Ely note—the so-called incorrect note. The witness, however, stated that there was another book not present in which there was an original entry of the note of the Ridge Heights Land Company, so that, when that note upon his demand came in, it fitted the entry which had been made and no other entry was necessary. By request the absent book in which the witness alleged the correct entry appeared was subsequently produced. It proved to be the regular discount, book of the bank and there was an original entry in it under date of July 10th, 1911, of the'Addison Ely note, and no entry of any note of the Ridge Heights Land Company.
As to Mr. Ely’s view of the status of the bond and mortgage after the note had been surrendered, we can only surmise. He was not interrogated in regard to the matter. He, too, may have overlooked the effect upon the mortgage of the payment of the
Mr. Ely appears to have been 'somewhat negligent in getting the papers purporting to be obligations of himself or his companies after they had been paid or rejected, as is illustrated by his failure to demand or obtain the note of the Bidge Heights. Land Company for $3,000 after the Butherford National Bank had refused to accept that note in place of the Ely note.
We have this situation in August, 1913, when the Butherford National Bank sued Mr. Ely and the Addison-Ely Company on the note which the cashier says was accepted in July, 1911, by mistake, and would have been, surrendered to Mr. Ely if he had demanded it; the bank knew, according to its present pretence, that it had no just claim against Mr. Ely on this note, but, nevertheless, put it in judgment and refused to exchange the note for the noté of the Bidge Heights Land Company, which Mr. Ely drew and dated back and which tire cashier swears was the “correct” obligation which it ought to have received, and did receive, in July, 1911.
Mr. Ely, on the other hand, swears that he knew of no mistake and had no defence; he submitted to judgment after trying vainly to get the bank to accept the note of the Bidge Heights Land Company and take judgment on that note. Whether this effort of Mr. Ely was before judgment was entered or afterwards is immaterial. The 'important matter is, that Mr. Ely knew of no mistake in regard to the note and testifies in accordance with
The complainant evidently thought that it was to- its advantage to prosecute its action on Mr. Ely’s note to- judgment, although, according to its present admission, it had no just claim whatever on that note, Mr. Ely having an absolute right to- the surrender of .that note. When, however, it became to the advantage- of the bank for the purposes of its foreclosure suit to reinstate the liability of the Ridge Heights Land Company on the- note, it undertook to do so, practically admitting that it had been- guilty of fraud in taking judgment against Mi*. Ely. Counsel for the complainants in their brief state that the bank “made an. honest mistake” in suing on the Ely note and that the bank now “offers to cancel the judgment.” Eor blowing hot and cold, committing fraud and then offering to undo the fraud—all according to what seemed advantageous at the time—the conduct of the bank is a somewhat striking illustration.
The history of the litigations between, these parties at law and in equity throws some light, I think, upon the merits of this present case.
As we have seen, the Ely note (Exhibit D. No. 2) on which the Ridge Heights Land Company was not a party, fell due September 10th, 1.911, was protested and held without any proceedings being taken to collect it, until August, 1913, when an action was commenced thereon in which judgment w-as entered on October 10th, 1913. Immediately before, or immediately after this judgment was entered, Mr. Ely drew and executed as president the note of the Ridge Heights Land Company (Exhibit D. No. 1). and delivered the same, or caused the same to be delivered, to the Rutherford National Bank, and vainly sought to have that note substituted for his personal note (Exhibit D. No. 2) upon which the judgment had been, or was about to- be, recovered. This note remained in the possession of the bank or its attorney, although, of course, it had no validity, not having been accepted. Both notes were produced by the complainants upon the defendants’ call and were offered in evidence by the defendants. The complainants rested their case, I think, without voluntarily producing any evidence in regard to the existence of
However this may be, the evident design of the complainants in their foreclosure suit was to ignore the notes and the judgment. The bill, as originally filed on October 11th, 1911, made Edward J. Turner, trustee, the sole complainant, not disclosing for whom he stood as trustee. The draftsman of the bill used the common form with the printed blanks for the commencement and the conclusion and made no reference either to the note or to the judgment, but treated the bond and mortgage as original, independent securities. Being compelled by a demurrer to disclose the principal an amended bill was filed November 13th, 1916, making the Rutherford National Bank the trustee’s beneficiary, a co-complam'ant, but still ignoring the notes and making no mention in any way of the indebtedness to secure which tire mortgage was merely collateral.
The answer of the defendant Ridge Heights Land Company alleges that “at the time of the execution, and delivery of the bond and mortgage 'sought to. be foreclosed by the bill of complaint herein, said Ridge Heights Land Company gave to said Andrew H.' Brinkerhoff, trustee, a note for the sum of $4,400 (representing the same indebtedness mentioned in said bond and mortgage), and that subsequently payments on account” were made and renewal notes from time to time taken, and that on or about July 10th, 1911, the complainants claimed a balance of $3,000, and “that thereupon the complainants accepted in payment, satisfaction and discharge of said balance the note of Addison Ely for the sum of $3,000, payable to Addison-Ely Company and due two months from the date thereof, and endorsed by said AddisonEly Company to the complainant Rutherford National Bank.”
The answer further alleges that the note was not paid at maturity and that suit was brought and judgment entered on October 10th, 1913, for the sum of $3,437.54, “and the mortgage sought to be foreclosed by said bill was, and is, paid and satisfied.”
It may be conceded that the complainants were not bound to •anticipate the defence of payment which they had every reason to believe could be set up; the noticeable fact is that the com
7. The second defence to the claim of the bank based on the releases I think should also be sustained. The only question seems to be whether the bank had. actual notice of the junior mortgages when it gave its releases. I shall not taire the time to go through the testimony again in order to state all the indications that the bank had actual notice. The following now occur to me:
(a) The bank knew of the large operations of Mr. Ely and his corporations in real estate mortgages in Rutherford. The first release appears to have been dated August 1st, 1908, over a year after the junior mortgages had been, put upon the property. The other releases were given on different dates in the year 1909.
(b) In July, 1908, after the mortgages, or some of them, nearly all, I think, had been given, the bank accepted another mortgage for $2,200 from the Ridge Heights Land Company upon property already covered by the mortgage for $4,400, which the bank tiren, held, and the testimony, though not positive, indicates that a search was then made by an attorney of the bank, the result of which was communicated to the bank. The president of the bank testifies that he thinks that the bank “ran down the search to find out if there were any other liens in between”— i. e., between its mortgage for $4,400 and its new mortgage for $2,200.
(c) The bank produces no searches. I think the intention is to have the court believe that the searches cannot be found.
(cl) The attorneys who made the searches for the bank are not produced as witnesses, although the indications are from the testimony of the president that whatever searches were made when these mortgages were accepted were made by one of two well-known attorneys in Rutherford.
(e) The officers of the bank, the president and the cashier, though testifying at length in regard to the transactions in ques
While it must be conceded that actual notice must be proved to create the equity which the defendants claim, when we find that the matter of notice is in controversy and these officers go on the stand presumably having knowledge on the subject, and give no testimony, the usual rule of evidence seems to apply and the conclusion is warranted that the testimony which they could give would be unfavorable to their side.
It seems to me that counsel on both sides erroneously supposed that the junior encumbrancers have some equity in the mqney paid to the first mortgagee aa the consideration of a release. No authority is cited to support such a supposed equity and I see no foundation for it. The first mortgagee may make what bargain he pleases with the mortgagor with respect to the conditions under which a release will be given. The mortgagee may exact double the value of the land released; he may take one-half. The money paid for the release and its application to the mortgage debt or any other debt is a matter purely between the mortgagor and mortgagee.
The equity of the junior encumbrancers arises from the fact that the mortgagor with his encumbrance on two parcels of land, knowing of the junior encumbrances covering only one, has knowingly and intentionally given up a security which in equity he was bound to exhaust before resorting to the other security which stood as tlie only security of the junior encumbrancers. Whether the mortgagor had paid double the value of the released land or only one-lialf such value, the equity of the junior encumbrancers is the same. According to the well-settled rule the first mortgage, after the releases, is cut down as a. mortgage prior to the junior mortgages, to the extent of the value of the released land, and continues to stand as a mortgage subsequent to those junior encumbrances for the amount subordinated to those encumbrances, which amount the mortgagor still owes. If the first mortgage is for $5,000, and the released lands are worth $ 1,000, the decree gives the first mortgage priority to the extent of $1,-000, then provides that the junior encumbrances shall come next, and then, last of all, if there is any surplus, it will be applied to
8. The discussion immediately preceding disposes of the' counter-claim on behalf of the junior encumbrancers which prays that the mortgage of the complainants be surrendered for cancellation. The basis of this claim seems to be that the released land far exceeded in value the utmost which could be found due upon the complainants’ mortgage.. This fact, however, if it be a fact, does not affect the status of the mortgage between the complainants as mortgagee and the Ridge Heights Land Company as mortgagor. It would, indeed, be a most extraordinary result of equitable principles if the mortgagee who has voluntarily released to the mortgagor lands greater in value than his mortgage debt should be obliged to release his mortgage debt to the mortgagor and cancel his mortgage. It may be in this case that if the widest claim of the defendants to priority in respect of their junior mortgages is sustained, and the sale of the property covered by their mortgages pays their mortgage debt in full, a substantial sum may be left which will be applicable to the complainants’ mortgage debt which stands unpaid as against the mortgagor and as against it an encumbrance' upon' the unreleased land.
9. I have considered both of the defences which have been interposed, notwithstanding the fact that the first, which is the defence available to the Ridge Heights Land Company having been sustained, the result must be a dismissal of the bill.
The second defence, however, which is available to the junior encumbrancers only has been fully argued and the facts, according to the judgment of the defendants, are such that if the defence is sustained the entire amount of the junior encumbrances in question will be placed prior to' the whole of the complainants’ mortgage debt. It would seem in the condition of the proofs that in case the first defence should be finally overruled and the second defence sustained a reference to a master would be necessary.
It will be observed that the mortgagor, the Ridge Heights Land Company, and the junior encumbrancers unite in the counter-claim which prays for the surrender of the bond and
My conclusion is that the defendant the Kidge Heights Land Company is entitled to a decree sustaining its defence of payment and giving it the affirmative relief prayed for in its counterclaim, viz.,'the surrender of the bond and mortgage for cancellation.
Inasmuch as the matter has been tried, argued and submitted for decision, I think I may state the further conclusion that if the conclusion first above stated is to be deemed erroneous so that the complainant must he adjudged to hold its mortgage for the full amount due thereon as an encxunbrance upon the unreleased land, it must be subordinated to the junior encumbrances upon that land to the extent of the value of the releásed land.
The final decree may be settled on notice and any unconsidered matters may then be determined.