Consolidated Discount Corp. v. Holton Street State Bank ( 1945 )

This action was begun on April 16, 1942, in the civil court of Milwaukee county by service of the summons and complaint. Answer was served October 30, 1942. Judgment in the civil court was entered February 4, 1944. Judgment of affirmance in the circuit court was entered August 3, 1944.

The plaintiff is a finance corporation and the defendant is a banking corporation. During the period covered by the transactions between the plaintiff and defendant, Leonard B. Brill and Martin S. Brill were copartners doing business as Brill Uniforms. Brill Uniforms was under contract with the United States government for the manufacture of uniforms and jackets.

The trial court found that on the 2d day of August, 1941, the plaintiff loaned Brill Uniforms the sum of $32,000, the repayment of such loan being secured by the assignment of an interest in and to the proceeds of two certain contracts between the said Brill Uniforms and the United States government, and in addition was secured by a provision contained in an agreement of August 2, 1941, between the plaintiff and said Brill Uniforms, providing as follows:

"Said parties of the first part do further covenant and agree that all of the moneys received by them in consideration for this assignment will be kept in a separate fund and expended solely for the purpose of paying wages to employees, purchase of equipment and materials for the manufacturing of jackets, uniforms and bowling shirts, and that none of said money will be diverted to the personal use of the said parties of the first part or either of them, and that none of said fund will be diverted to pay pre-existing liabilities of the partnership or either partner except with the written consent of the party of the second part."

Said loan was further secured by a chattel mortgage upon all of the manufacturing equipment of said Brill Uniforms. Said agreement provided for repayment of the sum of $37,000 in less than one year from the date of such loan.

It was further found that plaintiff knew of the nature of the business of Brill Uniforms, knew that Brill Uniforms was indebted to many persons in a substantial amount; that Brill Uniforms was indebted to the defendant herein in the sum of $6,000:

"6. On the 2d day of August, 1941, it was the intention and contemplation of both the plaintiff and Brill Uniforms that the business of Brill Uniforms should continue as theretofore and it was not the intention of said parties that the business of Brill Uniforms would be confined solely to the manufacture of jackets for the United States under the contracts referred to in the agreement of August 2, 1941.

"7. On the 4th day of August, 1941, said Brill Uniforms opened an account in its name with the defendant and deposited therein the sum of $31,494.49, being a portion of the sum of $32,000 loaned to said Brill Uniforms by the plaintiff herein as hereinbefore found. Said account was designated `Brill Uniforms Special Trust Account' as a matter of convenience and not to create a fiduciary account. At the time said account was opened by said Brill Uniforms the agreement between the plaintiff and Brill Uniforms, dated August 2, 1941, was not examined by the officers or employees of the defendant and none of the officers or employees of said defendant had knowledge of the contents thereof.

"8. The managing officers of the plaintiff knew that said Brill Uniforms had opened an account in the name of said partnership at the Holton Street State Bank, and said plaintiff did not notify the Holton Street State Bank in any manner until after said account was closed that said plaintiff claimed that such account was a fiduciary account. Plaintiff permitted said Brill Uniforms to use said account in its sole discretion and said account was used from the time it was opened until it was closed to pay expenses of the operation of the business conducted by Brill Uniforms including expenses which had no relation to the performance of the two contracts with the United States hereinbefore mentioned.

"9. On the 12th day of August, 1941, said Brill Uniforms paid to the defendant the sum of $3,051.92 in payment of principal and interest then due upon a then existing valid debt of said Brill Uniforms to the defendant. At the time of said payment neither the bank, nor any of its officers or employees, in fact knew that the funds with which such payment was made actually were a part of the $32,000 loaned to said Brill Uniforms by the plaintiff herein.

"10. The defendant did not induce or otherwise cause said Brill Uniforms to violate any provision of the agreement between the plaintiff and said Brill Uniforms, dated August 2, 1941, and said defendant on August 12, 1941, did not have such knowledge that its dealings with said Brill Uniforms on said date amounted to bad faith on the part of the said defendant.

"11. On November 6, 1941, said Brill Uniforms was wholly insolvent to the actual knowledge of the plaintiff. To the actual knowledge of the plaintiff said Brill Uniforms transferred to the plaintiff on said date all of its assets and thereafter had no assets with which to pay its creditors. The plaintiff did not give fair consideration for the assets of said Brill Uniforms which it received on said date."

As conclusions of law the court found that that part of the agreement between plaintiff and said Brill Uniforms dated August 2, 1941, was void as to the defendant as a creditor of Brill Uniforms, and further found that the defendant did not induce —

"or otherwise cause said Brill Uniforms to violate any provision of the agreement between the plaintiff and said Brill Uniforms, dated August 2, 1941, and said defendant on August 12, 1941, did not have such knowledge that its dealings with said Brill Uniforms on said date amounted to bad faith on the part of the defendant."

Judgment was entered accordingly dismissing the plaintiff's complaint with costs.

On appeal to the circuit court the findings of the trial court were affirmed for the reason that they were not against the clear preponderance or great weight of the evidence. In its complaint the plaintiff alleged and upon this appeal the plaintiff contends that the transaction of August 2, 1941, between the plaintiff and Brill Uniforms was a purchase of an interest in the proceeds of the two contracts between Brill Uniforms and the United States government. This contention raises the principal question for decision upon this appeal. The decision of other questions raised are in the main dependent upon it. It is considered that the circuit court correctly held that the transaction was a loan. It said, among other things:

"In testing the force and applicability of counsel's contentions, this court has not only analyzed the evidence aliunde the writing of August 2, 1941, but has also given proper place to the chattel mortgage of the same date covering `all machinery (and equipment) in the manufacturing plants and stores of said mortgagors [Brill Uniforms]' at two locations `together with all machinery and equipment hereafter acquired and placed in said manufacturing plants and stores;' and the later chattel mortgage of October 18, 1941, also covering after-acquired machinery and equipment. All of these documents govern the same subject matter between the parties and must be treated as one contract. (Blakeslee v. Rossman,43 Wis. 116, 122; Boyden v. Roberts,131 Wis. 659, 666.) The second chattel mortgage given in October must be treated as in the nature of a contemporaneous instrument relating back to August 2, 1941, because it was given pursuant to, and in compliance with, the express provision of the earlier mortgage of that date.

"In this connection, certain features of the agreement of August 2, 1941, are also deemed significant:

"(a) The liquidated damages, so-called, assured to the plaintiff . . . as its maximum share of any surplus of the proceeds derived from the deal were fixed and limited at $37,000. This was also emphasized by an interlineation which reads:

"`In no event shall the party of the second part receive more than the sum of $37,000 from the proceeds of said contracts O.K.JTT, Sec. O.K.LBB.'

"(b) The unassigned share (25 1/4/62 1/4) of the government contracts left to Brill Uniforms was also assigned to the plaintiff to assure said maximum share of proceeds, namely, `as collateral security for the performance by said first parties (the Brill's) of all of the terms and conditions of this agreement,it being the intent and purpose hereof that the said secondparty shall at all times be fully secure."

The contract also provided for the giving of chattel mortgages covering all manufacturing equipment and machines, present and future, "to secure the performance of said contractsand this agreement."

"Only $32,000 actually passed from the plaintiff to said Brill Uniforms and that sum was paid subject to the restriction in the agreement of August 2, 1941, that it was not to be used to pay pre-existing liabilities of the latter firm or of either partner `except with the written consent of the party of the second part (plaintiff).' It is fair to say that purchase money, in an out-and-out sale, is customarily paid to the seller without string or reservation. This, and the other, security features in the transaction point to a pledge rather than to a sale. Moreover, the contract further provided that `in no event' was more than a fixed maximum of $37,000 to come back to the plaintiff. The difference of $5,000 was referred to by the witness Alfons Klein, who kept all of plaintiff's books as `a fee' carried on the account of plaintiff called `Unearned Service Charges,' and that $5,000 would be the entire profit from the discount of the 37/62 1/4 of the contract."

In spite of the decision of the trial court and the convincing reasons given therefor, the plaintiff contends very insistently in this court that the language of the agreement of August 2, 1941, unquestionably stamps the transaction as a purchase and sale and therefore excludes the possibility of a loan. This contention of the plaintiff cannot be sustained. The language of the contract of August 2, 1941, is no more controlling as to the nature of the transaction than the language of a warranty deed of lands given to secure payment of money which may be shown by parol to be in fact not a deed but a conveyance to secure a loan and therefore a mortgage. Acme BrickCo. v. Jacobi-Erdman, Inc., (1940) 235 Wis. 539, 545,292 N.W. 453.

The transaction of August 2, 1941, amounted to this: Brill Uniforms assigned to the plaintiff 37/62 1/4 of the proceeds of the government contracts in consideration of which the plaintiff advanced Brill Uniforms $32,000. Brill Uniforms further promised to pay 37/62 1/4 of the proceeds, not exceeding $37,000, to the plaintiff, the payment of which was further secured by the chattel mortgages already referred to. If the transaction had been carried out in accordance with the terms of the contract, the plaintiff would have been reimbursed for the advancement which it made and would have received in addition thereto $5,000 which it called "a fee," and the assignment would have served its purpose. The plaintiff would have had no further interest in the contracts and the mortgages would have been satisfied.

Clearly this transaction created the relationship of creditor and debtor and not that of seller and buyer despite the language used in the agreement of August 2, 1941, and both the trial court and the reviewing court correctly so held.

The second contention of the plaintiff is presented argumentatively in "Questions Involved" II, III, IV, and V, and may be condensed as follows: Did the defendant become liable to the plaintiff by reason of its acceptance of the sum of $3,051.92 paid upon an indebtedness of Brill Uniforms to the defendant incurred prior to August 2, 1941, in violation of the terms of the contract of that date? The determination of this question depends upon whether a trust was created and whether the defendant had knowledge of the terms of the contract of August 2, 1941. These are questions of fact. Upon that question the trial court found that the account designated "Brill Uniforms Special Trust Account" was created by Brill Uniforms as a matter of convenience and not to create a fiduciary account; that at the time the account was opened the contract of August 2, 1941, was not examined by the officers or employees of the defendant and none of the officers or employees of said defendant had knowledge of the contents thereof and that when payment was made to the defendant on August 12, 1941, neither the bank nor any of its officers or employees knew that the funds with which such payment was made actually were a part of the $32,000 loaned to the said Brill Uniforms by the plaintiff. The force of plaintiff's arguments upon this phase of the case is very much weakened by the determination that the transaction was a loan and not a purchase and sale. Being a loan, the plaintiff parted with control of the funds loaned. While the contract provided that no part of the $32,000 should be —

"diverted to the personal use of the said parties of the first part or either of them, and that none of said fund will be diverted to pay pre-existing liabilities of the partnership or either partner except with the written consent of the party of the second part" —

the contract contained no provision nor does there appear to have been any understanding to the effect that Brill Uniforms should keep the $32,000 separate and apart from other funds belonging to Brill Uniforms. No attempt was made to create a trust fund. The finding of the trial court that the defendant had no knowledge of this provision of the contract and that no trust was created must be sustained. Having no knowledge of the terms of the contract, without indicating what its liability would be if it had had such knowledge, it is clear that the defendant was guilty of no breach of faith or violation of trust in accepting the $3,051.92 in payment of a part of the prior indebtedness owing to it by Brill Uniforms.

The trial court held that the contract of August 2, 1941, was void as against creditors. We do not necessarily reach that matter and for that reason do not consider it.

We have carefully considered all of the questions raised by the plaintiff on this appeal. We need notice only one other in this opinion. Plaintiff contends that the court erred in denying it leave to amend so as to allege damages in the sum of $9,831.99 in lieu of the $3,051.92 alleged in the complaint and set out in the addendum clause. In this connection we need only say that, in view of the foregoing conclusions which we have reached, this contention drops out of the case along with a number of others which depend for their vitality upon the proposition that the transaction of August 2, 1941, was a sale and not a loan.

By the Court. — Judgment affirmed.