Southwestern Savings & Loan Co. v. Diluzio , 44 Ohio Law. Abs. 495 ( 1945 )

OPINION

By MORGAN, J.

On March 30, 1935, the defendants, Louis and Guiseppina DiLuzio were indebted to plaintiff bank in the amount of $3737.75 on a promissory note secured by a mortgage on their home.

The defendants applied for a H. O. L. C. loan. This was allowed by H. O. L. C. for $3200.00 which was 80 % of the H. O. L. C. appraisal. Certain expenses, including taxes, abstract, attorney fees etc., amounted to $415.79 leaving $2784.21 as the amount available for the first mortgagee, the plaintiff bank.

The plaintiff bank by its release, executed to H. O. L. C., agreed “to accept in full settlement of the claim of the undersigned the sum of $2784.21, face value of the bonds of Home Owners Loan Corporation.” The plaintiff bank was given the privilege of converting said bonds in whole or in part into savings accounts credits of the bank.

On March 30, 1935, the defendants, DiLuzio, executed a note and second mortgage to the bank in the amount of $779.87. This action was brought by the plaintiff bank against the defendants, DiLuzio, to recover from them the sum - of $682.08 with interest, being the amount which the bank alleged in its petition was then due from defendants on the said second mortgage not©.

A jury was waived and the trial judge rendered judgment for the defendants.

In most of the States of the Union similar cases to the instant case have arisen. These cases in general hold that a mortgage secretly .taken and without the specific consent and approval of H. O. L. .C. is invalid on the grounds of estoppel, lack of consideration and public policy where the mortgagee had agreed to accept bonds in full settlement of his claim.

The case of Weber v Sternad, 140 Oh St 253, affirming this court in 69 Oh Ap 258, followed the general rule and held that (syllabus):

“A mortgagee who voluntarily'and knowingly releases his mortgage lien and waives the unpaid balance of the loan for the agreed purpose of enabling the mortgagor to- refinance his property by obtaining a new mortgage loan from the Home Owners Loan Corporation, is estopped from asserting a claim based upon a new unsecured note thereafter secretly obtained from the mortgagor in known violation of the terms and conditions of the refinancing agreement.”

The plaintiff contends that the general rule should not be followed in the present case because the fee or closing attorney of H. O. L. C. had knowledge of the execution of the second mortgage-note in this case. In fact'the record shows that the second mortgage was prepared by an assistant in the office of the closing attorney. This assistant testified as follows:

“Q. You prepared the Home Loan mortgage?

A. Yes.

Q. Who told you to prepare the second mortgage?

A. The Southwestern Savings & Loan Company.

Q. You talked with The Southwestern Savings & Loan Co. about this?

A. That’s right.

Q. With Mr. Spooner?

A. I believe so.

Q. Did he tell you what to put in it?

A. Yes.”

The plaintiff contends that the above facts put the H. O. L. C. on notice of the execution of the second mortgage note and is bound by it notwithstanding the fact that plaintiff bank agreed to accept bonds in the amount of $2784.21 in full settlement of its claim.

One of the witnesses in this case was Charles Kaps who testified that on Jan. 1, 1935, he became, the district counsel of H. O. L. C. and continued in that position until June, 1940. He testified that H. O. L. C. in 1935 had a loan committee composed of the district manager, the district appraiser and himself as district counsel. The If. O. L. C. loan in this case was approved on April 24, 1935, by the above named three persons. Mr. Kaps testified that the loan committee in approving the H. O. L. C. loan took into consideration the mortgagee’s consent to take the bonds in full settlement. It was also a rule of H. O. L. C. that if an additional security such as a second mortgage was to be given, such security “must be shown on the mortgagee’s consent to take bonds” and it is conceded that there is nothing in the mortgagee’s consent in this case to indicate that there was to be a second mortgage given.

Mr. Kaps further testified that after the loan committee had passed on the loan it became the duty of the “closing attorney” to draw a note and mortgage for the amount as indicated by the mortgagee’s consent to take bonds. The closing attorney was to make a complete title search' and if this was satisfactory to have the note and mortgage properly executed, recorded and returned to H. O. L. C. The bonds would then be sent to the refinanced mortgagee.

Mr. Kaps also testified as follows:

“Q. Now, did the closing attorney in this case, or in any case, have any authority to grant permission or approval to allow the second mortgagee to take back an additional note or mortgage, or second note or mortgage?

A. The closing attorney had no such authority, but had strict instructions, under the rules, under no circumstances to permit any kind of security to be taken other than designated in the Mortgagee’s Consent to Take Bonds.”

Mr. Kaps further testified that “A consent to the creditor' to take back a second mortgage from the debtor would have to be approved by the loan committee.”

It is not claimed in this case that the giving of the second mortgage was ever approved by the loan committee. The record also shows that there is nothing in the files of H. O. L. C. in this case with reference to a consent or approval for plaintiff to take back a second mortgage.

In a memorandum opinion filed by the trial judge in this case, he stated:

“The contention of plaintiff that full knowledge of this transaction was brought to the Home Owners’ Loan Corporation through its agent is not substantiated by the evidence. The uncontradicted testimony is that Mr. Clarke the fee attorney, had a very definite limited authority and there is no evidence which justifies the conclusion that any of the transactions which were carried on by members of Mr. Clarke’s office were ever accepted by the Home Owners Loan Corporation and made a part of this transaction. The court is further of the opinion that the interests of the public demand careful scrutiny of contracts of this nature and that such a scrutiny when applied to this case would not justify a decree in favor of the plaintiff.”

The majority of this court is of the opinion that not only was the trial judge justified in coming to the above factual conclusion but also that the evidence in this case does not permit or support any other conclusion.

The evidence in this case also discloses that the DiLuzios could not read or understand English and relied solely on the information furnished them by the assistant to the closing attorney who handled the second mortgage. This assistant testified that he did not know that the mortgagee had consented to accept $2784.21 in bonds in full settlement of its claim and it therefore follows that this fact was never brought to the attention of defendants in this case.

The exact question in this case was passed upon by the New Jersey Court of Errors and Appeals-in Markowitz v Berg, 127 N. J. Equity, page 90, paragraphs 1 and 2 of the syllabus:

“1. The second mortgage here in suit, if made without the knowledge of the Home Owners Loan Corporation as security for part payment of a judgment, which the holder of the judgment had settled and released by the refunding effected by the corporation, contravenes the fundamental policy of the Home Owners Loan Corporation Act (12 U. S. C. A. §§1461 et seq) and the rules and regulations formulated in pursuance of the authority thereby granted and is therefore void.

2. Such knowledge as the fee attorney of the Home Owners Loan Corporation had of the existence of the second mortgage here in question, or of the intention of the home owner to assume payment of part of the judgment debt so agreed to be cancelled, is not imputable to the corporation.”

The plaintiff has cited to us the case of Home Owners Loan Corporation v Baker et al, 73 Oh Ap 195. We find, however, that in that case knowledge of the second mortgage was brought home to the Home Owners’ Loan Corporation itself and not simply to the closing attorney. The case therefore is not in point in the present case.

Judgment affirmed.

LIEGHLEY, J., concurs. SKEEL, P. J., dissents.