Church v. Swetland

• Decision Date: 04 June 1917
• Docket Number: 260.
• Parties: CHURCH v. SWETLAND et al.
• Court: U.S. Court of Appeals — Second Circuit

243 F. 289

CHURCH v. SWETLAND et al.

No. 260.

United States Court of Appeals, Second Circuit.

June 4, 1917

[Copyrighted Material Omitted]

John M Shedd and Hector M. Hitchings, both of New York City solicitors for appellant.

Parker, Davis & Wagner, of New York City (Arnold L. Davis and N. Raymond Heater, both of New York City, of counsel), for appellee Swetland.

Lemuel E. Quigg, of New York City (George H. D. Foster, of New York City, of counsel), for appellee Commercial Trust Co.

Hays, Hershfield & Wolf, of New York City (Henry H. Kaufman, of New York City, of counsel), solicitors for appellee Sheppard.

Before COXE, WARD, and ROGERS, Circuit Judges.

ROGERS Circuit Judge (after stating the facts as above).

The complainant heretofore filed a bill against the same defendants in the same court, which bill related to the same transactions of which complaint is made in the present suit. We dismissed the bill, after a consideration of its merits in a lengthy opinion, which concludes as follows:

'The complainant is wrong in supposing that he is entitled to bring one suit in equity and join all the defendants upon the theory that his separate claims arise from the same transaction, the failure of the bankrupt corporation. His claims do not arise from one transaction, as he asserts, but from a number of separate transactions, and they are not so connected with the failure of the bankrupt as to create 'a common right,' or a community of interest, within the meaning of the rule.' 233 F. 891, 899, 147 C.C.A. 565, 573.

The present bill differs from the former not only in the fact that certain persons who were defendants in that suit are not made defendants in this one, but that this bill makes specific allegations of fraud, whereas the first bill contained no charges of fraud against any of the parties. While all the transactions complained of in the present bill were included in the former one, certain transactions included in that are omitted from this. The bill covers 48 printed pages instead of 34 pages, which in the former suit sufficed to state the wrongs for which complainant sought relief.

It is observed, too, that this is the fourth complaint against the respondents in regard to the transactions herein involved. All the previous complaints were dismissed by the court on motion because they failed to state a cause of action either at law or in equity. For the same reason and on motion the court below has dismissed the present bill, except as against Ellis, the cause of action as to him being remanded to the law side, as before stated.

The present bill was not filed until November, 1916. It was then for the first time that complainant sought to avoid on the ground of fraud transactions which took place in February, 1912. No excuse is offered for this delay. It is not alleged that complainant did not know of the fraud at the time he filed the former bills, although if he then knew of the fraud he should have alleged it. If he did not then know of it, but has discovered it since, he should have so stated. For it is a principle of equity that a party loses his right to rescind on the ground of fraud by not availing himself of it within a reasonable time after he discovers it. In Grymes v. Sanders, 93 U.S. 55, 62, 23 L.Ed. 798, the Supreme Court declared that:

'Where a party desires to rescind upon the ground of mistake or fraud, he must, upon the discovery of the facts, at once announce his purpose, and adhere to it. If he be silent, * * * he will be held to have waived the objection, and will be conclusively bound by the contract, as if the mistake or fraud had not occurred. He is not permitted to play fast and loose. Delay and vacillation are fatal to the right which had before subsisted.'

In McLean v. Clapp, 141 U.S. 429, 12 Sup.Ct. 29, 35 L.Ed. 804, these words are quoted approvingly by the court, and it was said that, if the plaintiff in that case had the right to repudiate on the ground of fraud a settlement by which certain notes were surrendered, 'it was his duty to do so as soon as advised of all the circumstances justifying such repudiation; and he also must have repudiated it in toto.'

While this case might be disposed of upon the ground that the complainant by his delay had waived his right to complain of fraud, if fraud in fact existed, and especially in view of the fact that in his previous suits attacking the transactions involved herein his failure to suggest that any of the transactions were in any degree affected with fraud might be deemed a waiver, still we are inclined not to dispose of the case upon a technicality, but to consider it upon its merits.

1. The bill asks that $200,000 of first mortgage bonds which complainant loaned to be used as collateral be delivered up to him by Swetland. If the said bonds have been in any way canceled or discharged or their lien value interfered with or destroyed by and through any act of Swetland's, the bill asks that in such case the complainant may be adjudged to have a just, equitable, and valid first lien against the leasehold property mortgaged to secure their payment. And the bill avers that complainant is ready and willing to do and perform all acts and things and to pay such moneys as to the court shall seem just and equitable as a condition of the return of the bonds.

2. The bill asks the court to set aside certain contracts which are alleged to be illegal, unlawful, and fraudulent. The basis of the allegation does not grow out of the subject-matter of the contracts, and the illegality, if it exists, must be found in the facts alleged as to the manner in which the contracts were obtained.

3. Certain conduct of Swetland's is alleged which it is claimed amounts to a direct breach of trust. It grows out of the disregard of certain representations, promises, and agreements he is said to have made to and with the complainant. The court is asked, therefore, to declare Swetland a trustee and to require him to account as such.

4. The bill also asks that certain claims which complainant possessed against the estate in the hands of Sheppard as trustee in bankruptcy, and which had been released, may be re-established in complainant's favor.

Certain other relief is sought to which it is not necessary to refer specifically at this time.

It is alleged that the contract of February 14, 1912, by which the Wyckoff Company gave its note for $150,000 to defendant Swetland in return for $105,473.68 advanced by him to it when it was in financial embarrassment, was 'an illegal, unlawful, and fraudulent agreement. ' It was to secure the payment of this note that $150,000 of the bonds now sought to be recovered were pledged. This makes it necessary to consider how Swetland obtained the note and the collateral.

It appears from the bill that some time in January, 1912, defendant Swetland and one E. S. Partridge, vice president of the Wyckoff company, requested complainant, in their capacity as directors, to allow the company to have the use of $150,000 of first mortgage bonds which complainant was holding as collateral for a debt owing to him by Clarence F. Wyckoff. This they requested him to do for the purpose of saving the Wyckoff Company from insolvency.

The bill states that they requested him to loan the bonds to the corporation 'for the purpose of being used by said corporation as collateral security for the repayment of a loan to said company of about one hundred thousand dollars ($100,000), wherever said loan might be secured, and stated and represented to complainant that the said bonds would be forthwith returned to your complainant whenever said loan was repaid.'

It also appears that, as an inducement to complainant to consent to this use of the bonds, it was stated by Swetland that he had carefully examined into the company's financial condition, and that, if it could secure a loan of $100,000 for one year, this would liquidate all the company's pressing debts and enable it to continue in business; that Swetland also stated that if he (Swetland) made the loan he would personally take charge of the management of the company, would keep and maintain it on its feet, and not allow insolvency or bankruptcy proceedings to intervene and destroy it; that complainant believed the statements so made, and relied upon them, and without consideration placed $150,000 of bonds with Wyckoff and Partridge, the president and vice president of the company. This, of course, means that they were handed to the company, and with authority to pledge them as collateral for a loan to the company, 'wherever said loan might be secured. ' Complainant did not turn them over to Swetland to secure a loan which he agreed to make; nor were they turned over to the company to be used only in case Swetland made the loan, or in case a loan was made on any specified condition. There are no allegations that there was any such understanding or agreement. There is no allegation that any representation made by Swetland to complainant at that time, and there is no allegation that any other interview occurred at which the subject was discussed between them, was false as to existing facts, or that any promises were made to complainant with no intention of fulfilling them.

Then it is alleged that on February 14, 1912, the Wyckoff Company gave the note for $150,000 to Swetland as a consideration for a loan of $105,473.68 made by him to it, and that the said note was payable one year after the date thereof, without interest, and that it contained a provision that it should forthwith become due and payable in case any judgment assignment, or bankruptcy proceeding should be brought against the company. At the time the note was given the company turned over $150,000 in bonds loaned...