Adler v. Interstate Trust & Banking Co. ( 1933 )

The appellee, a Louisiana corporation, filed its bill in the chancery court of Forrest county against appellants, resident citizens of that county, to set aside and annul the cancellation of a mortgage on real estate in Forrest county. The mortgage had been executed by appellants to secure an indebtedness due by them to the Mortgage Securities Company, another Louisiana corporation. Appellee was named as trustee in the mortgage, and had canceled the mortgage of record at the instance of appellants and the Mortgage Securities Company, which cancellation was wrongful because the indebtedness secured by the mortgage had not been paid. Appellee thereupon took an assignment of the notes and mortgage from the holder of the notes, one McIlveen, and filed its bill to set aside its cancellation of the mortgage and reinstate and foreclose the mortgage for the purpose of paying the indebtedness thereby secured. The cause was tried on bill, answer, and proofs, resulting in the decree prayed for. From that decree appellants prosecute this appeal.

There is little, if any, conflict in the material evidence. On March 1, 1923, appellants executed a mortgage to secure an indebtedness due by them to the Mortgage Securities Company in the sum of $9,000, evidenced by twenty promissory notes bearing that date: ten of the notes were for the sum of five hundred dollars each, and ten for the sum of four hundred dollars each; one note for four hundred dollars and one for five hundred dollars became due annually on March 1st each year, beginning with the year 1924. The interest coupons on all the notes were payable semiannually on the 1st of March and September. Appellee was named as trustee in the mortgage. The mortgage was duly recorded in Forrest county. The notes evidenced a loan by the Mortgage Securities Company to appellants and were secured by a mortgage on lands in the city of Hattiesburg in Forrest county. The series of notes are negotiable instruments under the Negotiable Instruments Act (Code 1930, section 2657 et seq.). They, with their attached coupons, were made payable to the Mortgage Securities Company, or order, at its office in New Orleans. The notes recite that they are secured by a mortgage on real estate recorded in Forrest county, and that they are subject to payment in accordance with the terms of the mortgage.

The mortgage is substantially in the usual form, with the following exceptions: It provides that the mortgagor shall have the privilege on the 1st of March. 1924, and also on any semiannual interest payment date thereafter, of paying one or all of the notes secured thereby then outstanding "upon payment of all accrued interest to date of payment, and a premium of one and one-half percent of the amount so paid, having first given to the Mortgage Securities Company sixty days previous written notice of their intention so to do." It provides that the trustee shall not be liable for any default on its part, except its own willful and fraudulent conduct, nor shall it be in anywise responsible to any extent whatever for any default upon the part of any of its agents or servants, "the parties hereto expressly assuming the risk incident to such defaults upon the part of said servants and employees." It contains this further provision: "It is further expressly stipulated and agreed by the grantors, that any covenants or agreements in this Deed of Trust contained which might affect the character of the notes secured hereby as negotiable instruments to the contrary notwithstanding, the said notes shall as regards the grantors and in favor of the Mortgage Securities Company and all future holder or holders of the said notes be deemed negotiable instruments within the meaning and intendment of the Negotiable Instruments Act of the State of Mississippi with all of the qualities and characteristics thereof as stipulated in the said Act."

Appellants paid all the notes and interest coupons up to and including March 1, 1927. During the latter part of 1928, appellants notified the Mortgage Securities Company that on March 1, 1929, they desired to mature and pay the entire indebtedness, including interest, and in addition one and one-half per cent. thereon, as provided in the mortgage. This notice was given more than sixty days before the 1st of March, 1929. Upon its receipt the Mortgage Securities Company informed appellants that the amount necessary to discharge the indebtedness, including the bonus as of date March 1, 1924, would be four thousand seven hundred eleven dollars and fifty cents, but that it was no longer the holder of any of the notes: that it had sold and transferred all the notes for value before maturity, and did not know who the holder was, but would make an effort to ascertain. There was considerable correspondence between appellants and the Mortgage Securities Company during the winter of 1928-29, prior to the 1st of March, 1929. This correspondence evidenced the following agreement: Appellants were to pay over to the Mortgage Securities Company the sum of four thousand seven hundred eleven dollars and fifty cents, the amount of the matured indebtedness and bonus as of date March 1, 1929. The payment was to be made on or before that date. The Mortgage Securities Company agreed to find the holder of the notes, if it could, and pay them off and surrender them to appellants. The Mortgage Securities Company was to have appellee, the trustee, cancel the mortgage. This agreement was carried out; the four thousand seven hundred eleven dollars and fifty cents was paid by appellants to the Mortgage Securities Company by the 1st of March, 1929. Thereupon the Mortgage Securities Company had prepared and presented to appellee as trustee an instrument canceling the mortgage. Appellee executed the instrument. At the time appellee executed the cancellation it was informed by the Mortgage Securities Company that the entire indebtedness secured by the mortgage had been paid. Appellee had no notice at the time of the cancellation as to who was the holder of the notes. It supposed that the Mortgage Securities Company was. Appellee knew nothing to the contrary, until the failure of the Mortgage Securities Company, which took place later in the year 1929.

To repeat in a brief way: Neither the appellants nor the Mortgage Securities Company knew who the holder of the notes was. Appellants said to the Mortgage Securities Company: "We will pay the four thousand seven hundred eleven dollars and fifty cents over to you as our agent to find the holder and pay the notes and surrender them to us; in the meantime we want this mortgage cancelled, and we request you to have the trustee, appellee, cancel it." The Mortgage Securities Company accepted the proposition, and the money was accordingly paid, and the mortgage canceled by appellee at the request of the Mortgage Securities Company.

It is undisputed that one McIlveen was the holder in due course of all of these notes, and had no part in, and knew nothing of, the agreement above set out between the appellants and the Mortgage Securities Company, and did not learn of it until the Mortgage Securities Company failed and went into the hands of a receiver for liquidation. It was not shown that he knew the mortgage contained the maturity clause, but if he did it is immaterial, as will be shown later. On August 5, 1929, the Mortgage Securities Company wrote the appellants as follows: "We enclose herewith cancelled First Mortgage Notes. Numbers 11 and 12, for four hundred dollars and five hundred dollars each, respectively, due March 1st, 1929, together with interest coupons, Numbers 11 to 20 inclusive, aggregating the sum of one hundred fifty-seven dollars and fifty cents, also due March 1st. The balance of the notes will be sent to you as soon as presented for payment. Please acknowledge receipt of enclosures." If the Mortgage Securities Company knew at that time who the holder of the notes was, it failed to so notify appellants; nor did it notify McIlveen, the holder of the notes, that the entire indebtedness had been matured and paid under the terms of the mortgage, and that it held the funds as the agent of the appellants for the discharge of the notes. As stated, McIlveen knew nothing of those facts until the failure of the Mortgage Securities Company. This failure, as above stated, took place in the latter part of August, 1929. On September 10th, following, McIlveen learned of the failure, and that the mortgage had been canceled by the appellee. McIlveen represented to appellee that he was the holder and owner of the notes for value acquired long prior to their maturity; that they had not been paid, and therefore appellee had wrongfully canceled the mortgage. McIlveen claimed that under section 2153, Code 1930, appellee had become liable to him for the unauthorized cancellation of the mortgage. That section provides, in substance, that a trustee in a deed of trust may acknowledge satisfaction of the deed of trust in like manner as the cestui que trust may, and with like effect, but in such case the trustee shall be liable to the cestui que trust for the amount secured by the deed of trust. Appellee acceded to McIlveen's claim and discharged the indebtedness in consideration of McIlveen's transferring and assigning to it the notes and mortgage. This was done.

The Mortgage Securities Company being insolvent, appellee thereupon filed the bill in this case against appellants to set aside and annul its cancellation of the mortgage, and to reinstate and foreclose the mortgage for the payment of the unpaid indebtedness. On proof, in the form of correspondence between appellants and the Mortgage Securities Company, and documentary evidence and oral testimony, the chancellor found, in a written opinion made a part of the record, substantially what has been stated above to be the facts of the case. Such finding was amply justified by the evidence.

The principal question in the case is whether or not the payment by appellants to the Mortgage Securities Company was a discharge of the notes. In considering this question these undisputed facts must be borne in mind. McIlveen, the holder of the notes, had no part in, nor knowledge of, the payment to the Mortgage Securities Company; he learned of such payment for the first time after the failure of the Mortgage Securities Company; the notes were negotiable instruments under the laws of this state; McIlveen was the holder of the notes for value in due course; although they were payable at the office of the Mortgage Securities Company they were payable to the holder in due course, and appellee, as trustee, canceled the mortgage on the representation of the Mortgage Securities Company that the notes had been paid; however, McIlveen had actual notice from the face of the notes that they were payable in accordance with the terms of the mortgage, and payable at the office of the Mortgage Securities Company in New Orleans, and the mortgage gave him constructive notice that appellants had the right to mature all the unpaid notes on the 1st of March, 1924, or any semiannual interest payment period date thereafter, by paying the outstanding notes and accrued interest and a bonus of one and one-half per cent. thereon, provided sixty days written notice of such payment should be given to the Mortgage Securities Company. The mortgage provided further that nothing therein contained should be construed as in anywise affecting the negotiability of the notes.

The notes, although payable in Louisiana, were executed in this state and secured by a mortgage on property in this state. The mortgage expressly provided that the negotiable instruments law of this state should control the rights and obligations of the parties. We hold, therefore, that the questions involved are solvable by the laws of this state.

The payment of a note to a bank, which is payable there but has not been left with the bank for collection or presented there, is not a satisfaction of the note. In such case the bank is not the agent of the holder of the note. If, however, the person at the place designated for payment has possession of the note, payment to him is binding on the holder. The mere designation of the place at which payment shall be made does not alter the obligation of the maker as to the person to whom, or through whom, payment shall be made. He is still bound to see for himself that payment is made to the legal holder, whether he be the original payee or an indorsee, or to his authorized agent. 8 C.J. 601: 3 R.C.L., section 522, p. 1289; section 2744, Code 1930; Union Station Trust Co. v. Bostick, 133 Miss. 627, 98 So. 105, 106; Anderson v. Moore Dry Goods Co., 152 Miss. 312, 119 So. 914: Virginia-Carolina Chemical Co. v. Steen, 99 Miss. 504, 55 So. 47, 34 L.R.A. (N.S.) 734; Sivley v. Williamson, 112 Miss. 276, 72 So. 1008. Section 2744, Code 1930, is a section of the Negotiable Instruments Act; its caption is, "What constitutes payment in due course," and provides that payment is made in due course when made at or after maturity of the instrument to the holder thereof in good faith and without notice that his title is defective.

In the Bostick case our court, in construing this statute, used this language, in part: "It is the duty of the maker of a note to require its production before making payments thereon, and if he fails to do so he pays at his risk. The note itself is the only evidence the maker has the right to rely upon. He has the right to refuse payment until actual presentation." Citing Coffman v. Bank of Kentucky, 41 Miss. 212, 90 Am. Dec. 371; Crawford's Ann. Negotiable Instruments Law (4 Ed.), section 88, pp. 162 and 163 and notes; 8 C.J., section 1060, pp. 801, 802. In the Anderson case the court, in construing the statute, reaffirmed the holding of the court in the Bostick case. It was held in the Steen case that where the maker of a note contracted to pay the note at a certain bank and the holder of the note, for the convenience of the maker and at his request, forwarded the note for collection to another bank, the latter bank was the agent of the maker and not of the payee, and the payment to it did not discharge the note until the funds were transmitted to the payee. In the Sivley case the court held that the payment of a negotiable note to a person not in possession of the note was at the risk of the payer.

Appellants rely principally on two cases: Bank of Charleston Nat. Banking Ass'n v. Zorn, 14 S.C. 444, 37 Am. Rep. 733, and Lazier v. Horan, 55 Iowa 75, 7 N.W. 457, 39 Am. Rep. 167. The latter case was expressly overruled in Bank of Montreal v. Ingerson, 105 Iowa 349, 75 N.W. 351. The Bank of Montreal case held that the maker of a note, payable at a bank, could not discharge himself from liability thereon by payment to the bank which did not have possession of the note. In Bank v. Zorn the court used some language that appears to support appellants' contention. Yet the case itself does not fully sustain such contention. It appears that the pledgee of the note in that case knew that the course of dealing between the maker and the payee was such that the maker expected to pay the note through the shipments of cotton to the payee, who would deduct the amount due the maker for cotton, and the note was actually paid in this way.

Is this case removed from the operation of those principles by virtue of the maturity provision in the mortgage? We think not. As above stated, the mortgage provided that the maturity notice should be given by appellants to the Mortgage Securities Company, but that nothing in the mortgage should operate to affect the negotiability of the notes. The notes, on their face, were in every respect negotiable instruments. When appellants sought to mature them by notice to the Mortgage Securities Company, none of them were due and payable. McIlveen was the holder in due course. He had the right to rely on the recitals on the face of the notes, and if he had gone and examined the mortgage securing them, he would have found nothing to the contrary. He would have been assured by the mortgage that nothing contained in it should in anywise affect the negotiability of the notes. He had no actual notice of appellants' attempt to mature the notes. Notes matured and overdue are not negotiable instruments in the full meaning of the negotiable instruments law. We hold that notice to the Mortgage Securities Company did not constitute that company the agent of McIlveen to receive payment of the notes.

Conceding for argument's sake that the notice given by appellants to the Mortgage Securities Company matured the notes in McIlveen's hands, it would not follow that his failure to present them for payment at the office of that company at the maturity date (March 1, 1929) discharged the notes, although if so presented they would have been paid. If the money for the payment of a note awaits the holder at the time and place of payment, this is equivalent to a tender by the maker, but it does not follow that, if the holder fails to present his note for payment, he forfeits the principal of the indebtedness and accrued interest. He only forfeits the unearned interest and attorneys' fees provided for in the note, and the costs of collection by suit. Brannan's Negotiable Instruments Law (4 Ed.), pp. 633, 634, 670; Moore v. Altom, 196 Ala. 158, 71 So. 681; Binghampton Pharmacy v. Bank, 131 Tenn. 711, 176 S.W. 1038, 2 A.L.R. 1377; National Bank v. Erion-Haines Realty Co., 213 App. Div. 54, 209 N.Y.S. 522; Maddock v. McDonald, 111 Or. 448, 227 P. 463; Forwood v. Magness, 143 Md. 1, 121 A. 855; United States National Bank v. Shupak, 54 Mont. 542, 172 P. 324.

It results from these views that the notes secured by this mortgage had not been paid when the mortgage was canceled by appellee. McIlveen, the holder of the notes, had the right to have such cancellation set aside and annulled and the mortgage foreclosed for the payment of the notes. Equity will set aside the cancellation of a mortgage procured by accident, fraud, or mistake. 41 C.J. 822; Holmes v. Bacon, 28 Miss. 607; Eagle Lumber Supply Co. v. De Weese (Miss.), 135 So. 490. In the latter case the cancellation of the mortgage was by the trustee who held a second lien on the property. The cancellation was wrongful. The trustee transferred his lien on the property to third parties. The court held that they were not entitled to enforce the lien as against the lien in the first deed of trust. The cancellation was held invalid, and the beneficiary in the original deed of trust entitled to enforce his lien.

We are unable to see why appellee did not have the same rights that McIlveen, the holder, had. It canceled the mortgage in good faith; it was done at the request of appellants, through the Mortgage Securities Company, and was done on the representation that the notes secured by the mortgage had been paid. Appellee knew nothing to the contrary. Appellants constituted the Mortgage Securities Company their agent to find the notes and pay them, and when paid surrender them to appellants. Appellee knew nothing of that arrangement. It is true that, when appellee canceled the mortgage without the notes having been paid, it breached its duty as trustee to McIlveen, the holder of the notes, but it breached no duty to appellants. Appellee paid the penalty of its breach of duty to McIlveen, the holder of the notes. In order to protect its rights it purchased the notes and paid value for them and took the chance of collecting them as the result of that breach of duty. Appellants having led appellee into the wrongful cancellation of the deed of trust cannot now complain of it. We are of the opinion that appellee stands exactly in the shoes of McIlveen, the holder of the notes.

At the time of the failure of the Mortgage Securities Company, it was largely indebted to appellee; to secure that indebtedness appellee held certain collateral. The evidence tended to show that this collateral was insufficient to pay the indebtedness. Both of these institutions had some stockholders in common. Each of them had many stockholders; they were separate corporations; they were differently officered, except there was one person vice-president of both companies; each company had many directors; three or four of these directors were common to each corporation. As we understand, appellants made some such contention as this: That it follows from these facts that the two corporations were in fact one corporation, and that the knowledge of the Mortgage Securities Company was the knowledge of appellee, and the agency of the Mortgage Securities Company for appellants constituted appellee also such an agent. We fail to see the force of this position. The two corporations were entirely separate and distinct; they were separate entities — separate artificial persons.

It is argued that the fact that the Mortgage Securities Company deposited the funds turned over to it by appellants for the payment of these notes with appellee was sufficient to put the latter on notice of appellants' rights. The evidence showed that the Mortgage Securities Company was a large depositor with the appellee, but there was no evidence tending to show that this particular deposit, if made with appellee, was "ear-marked" so as to bring to its attention the source from which it came. We are unable to see any merit in this contention of appellants.

Affirmed.