Bromfield v. Trinidad Nat. Inv. Co.

• Citation: 71 ALR 542,36 F.2d 646
• Decision Date: 09 December 1929
• Docket Number: No. 114.,114.
• Parties: BROMFIELD v. TRINIDAD NAT. INV. CO. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

71 ALR 542, 36 F.2d 646 (1929)

BROMFIELD v. TRINIDAD NAT. INV. CO. et al.

No. 114.

Circuit Court of Appeals, Tenth Circuit.

December 9, 1929.

Horace Phelps, of Denver, Colo., for appellant.

Forrest C. Northcutt, of Denver, Colo. (Jesse G. Northcutt, of Denver Colo., on the brief), for appellees.

Before LEWIS, PHILLIPS, and McDERMOTT, Circuit Judges.

McDERMOTT, Circuit Judge.

The appellant sued the Trinidad National Investment Company on certain notes. The company admitted its liability thereon, but asked that there be set off a deposit of the Trinidad National Bank in the Drovers' National Bank, of which appellant is receiver; and for an accounting of certain securities pledged as collateral to the notes sued on. The cause was transferred to the equity side and the trial court, after hearing the evidence, allowed the set-off. The controversy centers around the propriety of the set-off.

The facts are not in dispute. The investment company was formed by the Trinidad National Bank to afford customers of the bank increased facilities for borrowing money. The stockholders of the two institutions, and their officers, were substantially the same. They had the same place of business. Early in 1924, a Mr. Hardey was vice-president of the Drovers' National Bank, and a part of his business was to solicit accounts from other banks. He proposed to Mr. Cox, president of the investment company and of the Trinidad Bank, to enter into a three-cornered agreement to the effect that if the Trinidad Bank would open a deposit account with the Drovers' Bank, the latter bank would purchase notes of the investment company up to the amount of the deposit maintained, the Drovers' Bank to have the right to charge the notes of the investment company to the account of the Trinidad Bank. Mr. Cox, for the two Trinidad institutions, accepted the proposal. It was necessarily implied that the Drovers' Bank would pay the Trinidad Bank on demand the amount of the deposit in excess of loans made to the investment company. The correspondence and records show that the agreement was carried out in this way: The Trinidad Bank would forward notes of the investment company to the Drovers' Bank, generally collateralized by customer's notes; the Drovers' Bank would credit the Trinidad Bank with the face of the investment company notes, less the discount. Upon maturity of the notes, they would be charged to the deposit account of the Trinidad Bank. Some of the collateral deposited with the investment company notes was held by the Trinidad Bank under a trust receipt, as agent of the Drovers' Bank, to facilitate collections from the customers making the notes. Upon the failure of the Drovers' Bank, its receiver seeks to collect the investment company notes in full, and to relegate the Trinidad Bank to its participation with other depositors. The investment company, and the Trinidad Bank, want the receiver to apply the deposit of the Trinidad Bank on the notes, and offer to pay the balance. Hence the litigation.

The action of the trial court in applying the deposit of the Trinidad Bank on the notes of the investment company, and rendering judgment against the investment company for the balance, was right. It is right because that is the substance of what the Drovers' Bank agreed to do. The purpose of the arrangement was to avoid any real extension of credit to either of the three parties to the agreement. The Drovers' Bank required that the deposit of the Trinidad Bank equal the notes of the investment company it carried, and exacted the right to charge them to that account. The Trinidad Bank made its deposit with the Drovers' Bank on condition that it carry investment company paper to approximately the amount of the deposit. It has been settled ever since the decision of Scott v. Armstrong in 1892, 146 U. S. 499, 12 S. Ct. 148, 36 L. Ed. 1059, that a receiver of a national bank, when suing the maker of a note to the bank, must set off the amount of the maker's deposit, without an express agreement. Without an express agreement, a receiver may not set off one man's deposit on another man's note. But here the Drovers' Bank solicited and procured a three-cornered agreement, the very basis of which was to avoid extensions of credit, and which treated the two Trinidad institutions as one for the purpose of this transaction. The agreement gave the Drovers' Bank the right to apply the Trinidad Bank's deposit to the investment company notes, and carried with it a reciprocal obligation to credit the notes with the deposit. It would be manifestly unfair to permit the Drovers' Bank to treat the two Trinidad institutions as one when it served the purposes of the Drovers' Bank, and permit it to treat them as separate corporations whenever its interest so indicated.

The errors assigned may be grouped. The appellant contends that the agreement is violative of the parol evidence rule. It is abundantly settled that parol evidence of an agreement that a note shall be paid out of a particular fund, or in any way other than specified in the instrument, cannot be received. United States Bank v. Dunn, 6 Pet. 51, 8 L. Ed. 316; Brown v. Spofford, 95 U. S. 474, 24 L. Ed. 508; Burnes v. Scott, 117 U. S. 582, 6 S. Ct. 865, 29 L. Ed. 991; Wagner v. Kohn (2 C. C. A.) 225 F. 718; Earle v. Enos (C. C.) 130 F. 467; Grand Valley Water Users' Ass'n v. Zumbrunn (8 C. C. A.) 272 F. 943, and a wilderness of other cases. But the investment company concedes its liability to pay these notes according to their terms. It seeks only to show the terms of the agreement pursuant to which the notes were given, and that the appellant has defaulted in its part of that agreement. The consideration for a note, or the lack of or failure thereof, or the terms of the agreement pursuant to which notes are given, may be shown by parol. Burke v. Dulaney, 153 U. S. 228, 14 S. Ct. 816, 38 L. Ed. 698; 22 C. J. 1164, and cases there cited. In Paine v. Central Vermont R. Co. (C. C.) 14 F. 269, 270, the maker of a note was permitted to show a parol agreement that the payment of an assessment should be applied on the note. The trial court said:

"The evidence by which these facts as to the assessments were proved was objected to, and it is argued that it was not admissible to affect the note, and that without it there would be no defense to the note. There is no question but that parol evidence is inadmissible to alter, contradict, or vary a written instrument, in an action upon the instrument as claimed by the plaintiff, but that rule is not applicable to this proof. This evidence did not vary the note nor its obligation. It recognized the note as a valid instrument according to its terms, but showed an obligation from the holder to an equal amount to be set off against the note. There is no fair question but that the evidence is admissible if the facts established by it would affect the note in the hands of the plaintiff."

This decision was affirmed by the Supreme Court of the United States. Id., 118 U....