Bank of Leipsic Co. v. Kreinbrink

This is an action brought in the Common Pleas Court of Putnam county by Louis Kreinbrink and Mary Kreinbrink against L.A. Kelly, T.P. Kelly and The Bank of Leipsic Company for the reformation of a contract in writing under date of January 6, 1932, entered into between Louis Kreinbrink and Mary Kreinbrink, as vendees, and L.A. Kelly and T.P. Kelly, as vendors, for the purchase by the Kreinbrinks from the Kellys of certain real estate located in Putnam county, to correct a mutual mistake of the parties to said agreement and a mistake of the scrivener, whereby there was omitted from said written agreement a covenant on the part of said Kreinbrinks that as a part of the consideration for the sale of said premises by the Kellys they would assume the payment of the balance, amounting to $8,427.45, owing on certain mortgage indebtedness on said premises to The Bank of Leipsic Company, said banking company then being the holder of said mortgage and note secured thereby; and, further, to set off the balance owing on said mortgage indebtedness at the time said action was brought, to wit, the sum of $3,176.26, against a claim of Kreinbrinks against said company for an equal amount owing to them by said company on certificates of deposit, and to quiet the title to said real estate of which the Kreinbrinks are now in possession.

The evidence and admissions of counsel tend to prove the allegations of the petition with reference to the mutual mistake of the parties, the mistake of the scrivener in drafting said agreement, and that through such mistake there was omitted therefrom a covenant on the part of said Kreinbrinks that as a part of the consideration for the sale of said premises by the Kellys to them they were to assume the payment of the balance owing on certain indebtedness to The Bank of Leipsic Company.

The evidence further tends to prove that under date of January 30, 1932, the Kellys duly executed and delivered their warranty deed of the premises above described to the said Kreinbrinks, pursuant to said written agreement entered into on January 6, 1932, and that said deed contains a covenant to the effect that the grantees assume and agree to pay as part of the purchase price the mortgage indebtedness to The Bank of Leipsic Company, hereinbefore referred to. The evidence further tends to prove that at and prior to the time the agreement of January 6, 1932, was entered into, Louis Kreinbrink and the broker who was engaged in the sale of said premises to the Kreinbrinks had at different times interviewed the officers of said banking company with reference to the Kreinbrinks applying the amount of funds belonging to them on deposit in said bank, evidenced by certificates of deposit of the bank, to the purchase price of the premises, and that some of the certificates of deposit representing such deposits were not then due, according to the terms thereof, whereupon the officials of the bank who were interviewed advised Kreinbrink and said broker that if the Kreinbrinks would pay $1000 in cash on the mortgage indebtedness such application of said deposit certificates would be agreeable to said banking company. Further, the Kreinbrinks, after said written agreement was executed, paid on said mortgage indebtedness the sum of $5,607.31 in cash, such payment being made in installments subsequent to the time the property and assets of the bank were taken possession of by the Superintendent of Banks on the 14th day of January, 1932, for the purpose of liquidation. Further, the evidence tends to prove that subsequent to the time the Superintendent of Banks took possession of the bank the Kreinbrinks made and tendered the certificates of deposit in payment of the balance owing on said mortgage indebtedness, said certificates of deposits and said mortgage indebtedness then aggregating the sum of $3,176.26, and that under date of April 4, 1932, Louis Kreinbrink made and filed with the Superintendent of Banks proofs of claims against said bank showing the amounts of such deposits.

At the October term, 1933, of the Court of Common Pleas of Putnam county, Ohio, to wit, October 4, 1932, an order was entered in cause No. 14075, then pending in said court, pursuant to the provisions of Section 710-89a of the General Code, authorizing The Bank of Leipsic Company to resume business on the terms and conditions mentioned in said order. This order, among other things, provided that the depositors of said bank should within a reasonable time surrender to the bank their passbooks and other evidence of indebtedness, and should accept new passbooks from said bank, representing sixty per cent of all the deposits or other indebtedness and evidence of indebtedness, to be issued by trustees appointed in said order, representing forty per cent of their original deposits; and that The Bank of Leipsic Company should be released from all liability with respect to such forty per cent, all in accordance with said plan, but that the Kreinbrinks have not surrendered their certificates of deposit.

It also appears from the evidence, although not referred to in the pleadings, that the mortgage and note evidencing the mortgage indebtedness above referred to, which was held by said bank company, was, some time in September, 1931, prior to the date of said written agreement, pledged to the trustees of Liberty township as collateral security for funds deposited by the trustees with the bank company, that it is still in the possession of said bank, and that the order for resumption of business by said bank, hereinbefore referred to, authorized the release of and payment in full of public deposits and the depositors of said Bank of Leipsic.

On the evidence and admissions of counsel the trial court found that reformation and set-off should be granted, and entered a decree in accordance with such finding, and this proceeding in error is brought to reverse that judgment.

Stated in non-technical language, the grounds for such reversal contended for by plaintiff in error are as follows:

First. That the petition does not state a cause of action against the bank, and that the objection made by the defendant bank, before the introduction of any evidence, to the introduction of any evidence, should have been sustained for that reason.

Second. That the Kreinbrinks as assumers of the mortgage indebtedness had no right to have their deposits in said bank set off against said mortgage indebtedness.

Third. That as the deposit certificates were not due at the time the Superintendent of Banks took possession of the bank, no right of set-off exists.

Fourth. That if any right of set-off exists the Kreinbrinks are estopped from asserting the same by reason of the fact that they filed proofs of claim against the bank.

Fifth. That the order for the resumption of business made in the Court of Common Pleas pursuant to the provisions of Section 710-89a of the General Code precludes the Kreinbrinks from asserting a right of set-off against said mortgage indebtedness.

Sixth. That the mortgage and note having been pledged to the trustees of Liberty township prior to the execution of said written agreement as well as prior to the time the Superintendent of Banks took possession of said bank, as security for the deposit of public funds, no right of set-off exists.

These contentions will be considered in the order mentioned.

1. Although the petition did not allege knowledge on the part of the bank of the assumption by the Kreinbrinks of the mortgage indebtedness, or any agreement on the part of the bank to allow the amount owing on such certificates of deposit as an off-set to the mortgage indebtedness, a majority of this court are of the opinion that the right of set-off, for the reasons hereinafter mentioned, operated as a matter of law and did not require the consent or agreement of the bank, and this court is unanimously of the opinion that irrespective of whether the petition stated a cause of action for set-off, it did state a cause of action for quieting title, and consequently it was not error for the court to refuse to sustain said objection.

2. The only reported case by the courts of this state which we can find specifically relating to the right of a person assuming the payment of mortgage indebtedness held by a bank prior to the taking possession of the property and assets of such bank by the Superintendent of Banks for the purpose of liquidation, to set off amounts owing him on deposits in such bank against such mortgage indebtedness, is the case of Dellinger v. Fulton, No. 129519 in the Common Pleas Court of Lucas county, the decision of which is incorporated in the opinion in the case of Smith v.Fulton, 31 N.P. (N.S.), 49, in which it was held, without discussion of the principles involved, that such person was entitled to set off such deposits against such mortgage indebtedness.

In the reported decisions of courts of other states on this question, we have found but two cases in point, the first one being the case of Dameron v. Carpenter, 190 N.C. 595,130 S.E. 328, decided December 2, 1925, and the second one being the case of Salladin v. Mitchell, 42 Neb. 859, 61 N.W. 127, December 4, 1894. In the first mentioned case it was held that a purchaser of an equity of redemption was entitled to set off a debt due him from a mortgagee on an unsecured note against a mortgage indebtedness; there being mutuality of indebtedness quoad the land, and equity subrogating such purchaser to the rights of the mortgagor to clear his title.

In the opinion in this case it is stated, at page 597:

"There is a mutuality of indebtedness quoad the land mortgaged. The plaintiffs, purchasers, are entitled to all the rights, titles and equities of their grantor, McLean, including the right to pay off the indebtedness according to the terms of the mortgage, and thereby clear their title."

The second case above mentioned sustains the right to set-off under circumstances similar to these in the instant case.

A majority of the court, following these authorities, hold that the Kreinbrinks as assumers of the mortgage indebtedness were entitled by operation of law, without the consent or agreement of the bank, to have the amount owing them on their deposits set off against said mortgage indebtedness, and the court is unanimously of the opinion that in view of the evidence tending to prove that the officials of the bank had agreed to the application of the deposits to the payment of the mortgage indebtedness, and tending to show performance of the terms of said agreement on the part of the Kreinbrinks, which was admitted without objection, the Kreinbrinks had such right of set-off by reason of said agreement irrespective of whether such right was conferred on them by operation of law.

3. Under the great weight of authority the right of set-off becomes fixed at the time the bank is taken possession of by the Superintendent of Banks for the purpose of liquidation, and applies irrespective of whether the deposit in the bank is due or the mortgage indebtedness is due. Armstrong, Recr., v. Warner,49 Ohio St. 376, 31 N.E. 877, 17 L.R.A., 466; First National Bankof Winton v. Consolidated School District, 184 Minn. 635, 641,240 N.W. 662; Armstrong, Recr., v. Law, 11 Dec. Rep., 461, 27 W.L.B., 100; Scott v.Armstrong, 136 U.S. 499, 13 S. Ct., 148, 36 L. Ed., 1059.

4. As the right of set-off became fixed at the time the Superintendent of Banks took possession of the bank for the purpose of liquidation, the Kreinbrinks could not be deprived of such right unless they subsequently conducted themselves in such manner as to mislead the bank and cause the bank in reliance thereon to change its position for the worse. In this case the only act of the Kreinbrinks which it is contended estopped them from asserting their right of set-off is the fact that they filed proofs of their claims with the bank. The filing of these proofs did not in itself in any way mislead the bank, and there is no evidence tending to show any change of position on the part of the bank in reliance thereon. This being the case, the Kreinbrinks by reason of filing proofs of claim are not estopped from asserting their right of set-off.

5. Equity looks upon that as done which should have been done, and as the right of set-off was fixed at the time the Superintendent of Banks took possession of the bank for liquidation, such right operated immediately in the eyes of equity to set off the indebtedness on deposits against the mortgage indebtedness, and the Kreinbrinks, within the meaning of Section 710-89a, General Code, were depositors in the bank only to the extent that their deposit might exceed the amount of the mortgage indebtedness assumed by them. As the deposits were less than the mortgage indebtedness and were cancelled through set-off at the time the Superintendent of Banks took possession of said bank for liquidation, the Kreinbrinks were not depositors of the bank within the meaning of above section at the time said order for the resumption of business was made, and not being depositors were not precluded by the terms of said order from their right of set-off.

6. Although the bank pledged the note and mortgage as security for the deposit of public funds of the trustees of Liberty township it did not part with the title to said note and mortgage and such pledge did not bar the right of set-off. However, as the trustees are entitled to hold said note and mortgage as collateral security for such deposits, the decree directing such set-off should be made subject to the right of said trustees to hold said note and mortgage as collateral security.

Holding these views, the judgment of the lower court will be modified so as to provide that such set-off, and the cancellation of said note and mortgage, shall be subject to the rights of said trustees to hold the same in pledge for such deposit, and, as modified, the judgment will be affirmed at costs of plaintiff in error.

Judgment modified and affirmed as modified.

KLINGER, J., concurs.

CROW, P.J., concurs in the judgment because the evidence was amply sufficient to justify the court below in the presumed finding that The Bank of Leipsic Company agreed to accept the certificates of deposit in part payment of the mortgage indebtedness, pursuant to the contract of sale. Therefore it is unnecessary to decide whether in Ohio set-off would result if there was no such agreement, it being settled in this state that a contract to assume and pay, such as the evidence tends to prove in this case, is revocable by the parties making it until the holder of the indebtedness has accepted, adopted or acted on the faith of the contract of assumption and payment. CommunityDiscount Mortgage, Co. v. Joseph, 117 Ohio St. 127,157 N.E. 380.

The doctrine of the Joseph case is that an assumption of, and agreement to pay, mortgage indebtedness by a purchaser of land covered by the mortgage goes no further, so far as concerns the persons so agreeing and the one holding the mortgage indebtedness, than to confer on the latter a right to elect to take advantage of the agreement. Such right is but a result of the agreement. It is also the settled law in Ohio that the holder of a promissory note secured by mortgage may ignore the mortgage security and enforce collection of the note personally from the maker regardless of a contract between the maker and one who has agreed to pay the note.

Without definitely holding that in this case the doctrine of set-off would not apply but for the presumed finding that The Bank of Leipsic Company agreed to the contract of assumption and payment, it is in my opinion extremely doubtful whether the doctrine could be applied, which in effect would be to compel The Bank of Leipsic Company, without in any manner connecting it with the transaction between the Kellys and the Kreinbrinks, to accept the Kreinbrinks as its debtors on the promissory note of which the Kellys were makers, in place of the Kellys themselves, and thus cut off the right of The Bank of Leipsic Company to recover personally from the Kellys, who may not have had any claim against The Bank of Leipsic Company, the record being silent on that point.