Commercial Trust Co. of New Jersey v. Kealey

• Decision Date: 18 October 1937
• Docket Number: No. 4174.,4174.
• Citation: 92 F.2d 397
• Parties: COMMERCIAL TRUST CO. OF NEW JERSEY v. KEALEY et al.
• Court: U.S. Court of Appeals — Fourth Circuit

92 F.2d 397 (1937)

COMMERCIAL TRUST CO. OF NEW JERSEY v. KEALEY et al.

No. 4174.

Circuit Court of Appeals, Fourth Circuit.

October 18, 1937.

Patrick A. Gibson, of Richmond, Va., and James E. Heath, of Norfolk, Va. (Page & Leary, of Richmond, Va., on the brief), for appellant.

Tazewell Taylor, of Norfolk, Va., for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

SOPER, Circuit Judge.

The principal error charged on this appeal by the Commercial Trust Company of New Jersey, trustee, plaintiff in the District Court, was the failure of the court to direct a verdict in its favor as the holder of four promissory notes dated October 28, 1930, for $5,000 each and payable by Robert B. Kealey and A. J. Brennan to the Terrill Bond & Mortgage Company or bearer at Chicago, Ill. Two of the notes, numbered 4 and 5, were payable in two years, and the other two notes, numbered 2 and 3, in three years after date, with interest at the rate of 5 per cent. per annum until paid. It was conceded that the notes, together with another note for $3,000, of like tenor, had been lodged with the Terrill Bond & Mortgage Company as collateral security for the payment of 230 notes of $100 each dated November 1, 1930, and payable by the defendant Kealey to the Terrill Company. The latter notes were executed in consideration of the sum of $23,000 loaned by the Terrill Company to Kealey, and were to have been made payable in thirteen years after date according to an agreement between the parties; but they bore no date of maturity when delivered, and subsequently a maturity three years after date was inserted without the knowledge of the makers. The collateral notes numbered 4 and 5 were indorsed by the payee and wrongfully delivered on June 22, 1931, to Matthew J. Woods in violation of the collateral agreement, although there had been no default in the payment of the principal indebtedness; and collateral notes numbered 2 and 3 were indorsed and wrongfully delivered in like manner to the said Matthew J. Woods on May 21, 1932. The principal notes were actually paid in full when presented. Thereafter all of these collateral notes were transferred and delivered without value by Matthew J. Woods to the plaintiff corporation as trustee.

It is not disputed that the plaintiff stands in the shoes of Matthew J. Woods in this case and is subject to the same defenses that would be available against him were he the plaintiff. He denied that he had any knowledge of the fraud, and the disputed question for decision is whether the plaintiff was entitled to a directed verdict on the notes, or whether the circumstances surrounding their acquisition by him were such as to cast a doubt upon his statement and justify the submission of his bona fides to the jury. The District Judge left the issue to the jury, which found against him and rendered a verdict for the defendants.

Robert B. Kealey, one of the defendants, is a priest of the Roman Catholic Church and rector of Holy Trinity Catholic Church at Ocean View, Norfolk, Va. A. J. Brennan, the other defendant, is the Catholic bishop of Richmond, Va., within whose diocese the parish of Holy Trinity is located. In order to raise funds needed for the use of his parish, Father Kealey borrowed $23,000 from the Terrill Bond & Mortgage Company as above described, the bishop joining in the collateral notes for better security. None of the notes had matured when the transactions in suit took place.

Matthew J. Woods is also a priest of the Roman Catholic Church, as is his brother George A. Woods. The latter was in charge of the Catholic Orphanage at Nazareth, N. C., in the diocese of Bishop William J. Hafey of Raleigh. Father Matthew was formally connected with the diocese of Seattle but had lived at the orphanage for eighteen years and helped with the work. He had solicited funds for the orphanage, traveling as far as the Pacific Coast. For years prior to 1929 he bought securities from the Terrill Company. On account of bad health he had resided in New York for several years prior to his acquisition of the collateral notes. On March 15, 1929, the two brothers, as donors, executed a deed of trust to the Commercial Trust Company of New Jersey, the plaintiff corporation, whereby they conveyed certain property listed on an annexed schedule in trust to provide an income for the orphanage. The property was said to be worth more than $100,000 at the time and to have a par value of $160,000 at the time of trial. The income of the trust at one time amounted to between $10,000 and $12,000 per year. The donors did not relinquish entire control of the trust property or the income therefrom. A salary of $100 per month, payable out of the income, was reserved to Father Matthew for life and after his death to his brother for life. By the terms of the trust, the net income was to be paid to Bishop Hafey annually for the benefit of the orphanage; but the payments to the bishop were not to commence until the donors, or either of them, gave written notice to the trustee; and, if both donors should die before notifying the trustee, then the annual payments of income should not commence until after the corpus of the trust should have reached the sum of $1,000,000. The trustee has never been notified to pay the income to the bishop, and was still in charge of the fund at the time of trial.

It was provided that the donors might from time to time increase the trust fund by transferring additional moneys, securities, or property; that they, or the survivor of them, reserved the right to make withdrawals of all or any part of the principal or income of the trust fund as they or either of them in his discretion might deem proper for the benefit of the orphanage, with no obligation on the part of the trustee to see to the application of the withdrawal. Power was given to the trustee, subject in each instance to the written consent and approval of the donors or either of them, to sell, exchange, invest, and reinvest the trust property. The donors, jointly during their lifetime, and the survivor reserved the right at any time to amend, alter, and modify the terms, conditions, and agreements of the trust relative to the amounts or the persons or objects for which the net income of the trust should be paid by the trustee. The trustee agreed to keep books of account showing the condition of the trust estate which should be open at all times to the inspection of the donors or either of them.

Although the orphanage was subject to the authority of Bishop Hafey, as Bishop of the Diocese of Raleigh, and although the deed of trust provided that the income of the trust was to be paid to the bishop under the conditions above recited, he was not notified of the creation of the trust on March 15, 1929, when the deed was executed; nor did he ever hear of it before the present suit was entered on October 19, 1935, when he was notified by Father Kealey, one of the defendants. In the meantime the relationship of the donors with the orphanage was terminated, when the bishop in the year 1931 called for the resignation of Father George, notified Father Matthew that he no longer had any affiliation with the institution and sent out a notice that the brothers were no longer connected therewith.

In the same year 1931 Father Matthew became apprehensive about the security of certain real estate mortgage bonds which had been purchased from the Terrill Company and placed in the trust fund. He testified that he withdrew from the trust $33,000 of the bonds of the Marquette Boulevard Apartments due July 15, 1931, and took them with him from New York to Chicago; that on June 22, 1931 he received notes 4 and 5 for $5,000 each from the Terrill Company in Chicago in exchange for certain matured bonds and certain money. The trust officer of the trustee testified that he had turned over certain Marquette bonds to Father Matthew about this time, but the latter could not remember with certainty that he gave the Marquette bonds for the notes or indeed what he gave for the notes. A letter written by him on March 24, 1931, indicates that he had no money at that time, and hence it can hardly be inferred that a large amount of cash was given for notes 4 and 5 on June 22, 1931. There was considerable cross-examination as to the consideration for this transfer but, except for a receipt given by Father Matthew for the Marquette bonds, the records of the trustee were not produced to show what securities were withdrawn from the fund at the time of the acquisition of the notes, and the records of the Terrill Company were not produced to show what was given for the notes.

In contrast with this uncertainty, the evidence of Father Matthew as to what he gave to the Terrill Company in 1932 for notes 2 and 3 for $5,000 each was specific. He produced from the custody of the trustee two statements from the Terrill Company dated respectively May 21 and May 27, 1932, at 60 Wall Street, New York, where the company then had an office. The first statement charged him with $5,000 for note No. 2 and credited him with overdue coupons in the amount of $3,027.50 on five several sets of bonds previously purchased from the Terrill Company — $35 for other bond interest, $250 for interest on Brennan notes Nos. 4 and 5 not then due, $268 as a discount, $100 as a donation and $1,319.50 on a check given by Father Matthew Woods, or $5,000 in all. The evidence shows that when he returned from his visit to Chicago, May 21, 1932, he brought back $21,000 bonds, but how he acquired them is not explained.

From these statements it is obvious that the greater part of the consideration paid for note No. 2 was of dubious value, consisting in addition to a discount and a donation of overdue interest coupons and real estate mortgage bonds accepted as part payment in 1932 at the depth of the financial depression. There is nothing in the record to show that these coupons ever became of value. There is...