Doyle v. Chatham & Phenix Nat. Bank of City of New York

• Decision Date: 06 May 1930
• Citation: 253 N.Y. 369,171 N.E. 574
• Court: New York Court of Appeals Court of Appeals
• Parties: DOYLE v. CHATHAM & PHENIX NAT. BANK OF CITY OF NEW YORK.

253 N.Y. 369

171 N.E. 574

DOYLE

v.CHATHAM & PHENIX NAT. BANK OF CITY OF NEW YORK.

Court of Appeals of New York.

May 6, 1930.

Action by John A. Doyle against the Chatham & Phenix National Bank of the City of New York. Judgment of the Trial Term on a verdict directed by the court in favor of defendant was affirmed by the Appellate Division (227 App. Div. 630, 235 N. Y. S. 794), and plaintiff appeals.

Judgment of Appellate Division and Trial Term reversed, and new trial granted.

See, also, 219 App. Div. 522, 220 N. Y. S. 231.

Appeal from Supreme Court, Appellate Division, Second department.

Herbert C. Smyth and George P. Breckenridge, both of New York City, for appellant.

Benj. M. Kaye, of New York City, for respondent.

KELLOGG, J.

The plaintiff is the owner of ‘Collateral Trust Gold Bonds' executed by the Motor Guaranty Corporation, a Delaware corporation.Certain bonds were issued directly to the plaintiff for value paid; others were issued for value to persons from whom the plaintiff purchased. The bonds are expressed to have been issued in pursuance of the provisions of a certain indenture of trust entered into between the Motor Guaranty Corporation and the defendant, the Chatham & Phenix National Bank of the City of New York, as trustee. Each of the bonds bears a certificate, signed by the defendant as trustee, which reads as follows: ‘This bond is one of the series of bonds described in the Collateral Trust Indenture mentioned therein.’ The securities pledged by the Motor Guaranty Corporation to protect its bond issue, which were deposited with the defendant as trustee, have proven worthless, and the bonds are uncollectible. The plaintiff, as assignee of all causes of action accruing to the persons from whom he purchased, and in his own right, brings this action to recover from the defendant trustee the losses sustained, on the ground that its certificates were issued negligently and without authority, and that the plaintiff and his assignors were thereby induced to acquire worthless bonds and pay value therefor.

The collateral trust indenture was executed on the 1st day of February, 1922. It recites that the Motor Guaranty Corporation proposes from time to time to issue its collateral trust gold bonds, to draw interest at 8 per cent. payable semiannually; that each bond is to be written in accordance with a form of bond set up in the indenture. This form, with which the bonds of the plaintiff comply, contains the statement that the bond is ‘secured by the trade acceptances or notes of dealers, guaranteed by the Motor Guaranty Corporation; cash or notes of purchasers in part payment for motor vehicles, or other first lien mortgages, such purchasers' notes being endorsed by dealers and guaranteed by the Motor Guaranty Corporation.’ It also contains the following: ‘This bond is secured by said collateral of a face value of at least one hundred and ten per centum (110%) of the principal amount of the bond.’ It also states: ‘This bond shall not be valid for any purpose until the Trustee's certificate endorsed hereon shall have been duly executed.’ The form of the prescribed certificate, to be signed by the defendant as trustee, is identical with each of the certificates attached to the plaintiff's bonds, the reading of which has already been given.

The indenture provides that bonds shall from time to time be executed by the Motor Guaranty Corporation and delivered to the defendant as trustee for authentication by it; that the delivery shall be accompanied by a request, signed by an appropriate officer of the corporation, stating the amount, date, and denomination of bonds to be issued, and demanding authentication of the bonds requested to be issued. It further provides that the trustee shall thereupon, without further action by the corporation, authenticate the bonds and deliver them back to the corporation, ‘provided, however, there shall be delivered to and pledged with the Trustee’ certain named collateral. The collateral to be pledged is as follows: ‘(a) Cash or current funds, and/or (b) Trade acceptances or notes of dealers guaranteed by the Motor Guaranty Corporation, or notes of purchasers in part payment for motor vehicles, or other first lien mortgages, such purchasers' notes being endorsed by dealers and guaranteed by the Motor Guaranty Corporation.’ It also provides: ‘The aggregate principal amount of cash and/or of securities delivered and pledged under subsection (b) shall always be at least equal to 110% of the amount of the Bonds to be issued hereunder in respect thereto.’ It further provides: ‘Upon receipt of cash and/or notes, and/or first lien mortgages, all as provided and described in this article, the Trustee shall be fully protected and is anthorized without further inquiry, to authenticate and deliver the Bonds specified in such requests and shall in no way be responsible to see to the application of the proceeds of any such Bond.’

The indenture further provides that the trustee may require from time to time that the corporation furnish a certificate or certificates of the president or a vice president, attested by the secretary or assistant secretary, under the corporate seal, setting forth all or any information ‘concerning names and addresses of makers, acceptors, and other pertinent data regarding such collateral and/or first lien mortgages, such lists, descriptions and tabulations of collateral delivered or to be delivered to the Trustee.’ It contains this: ‘Such certificate or certificates shall be conclusive evidence to the Trustee of all statements therein contained and full warrant and protection to it for any and all action taken on the faith thereof under the terms of this indenture.’

During the year 1922, the Motor Guaranty Corporation delivered to the defendant, for its certification as trustee, bonds of an aggregate par value in excess of $110,000. The defendant executed the requested certificates and returned the bonds to the corporation, which issued them to various persons upon payment of value therefor. Among these bonds were the bonds now owned by the plaintiff. In January, 1923, the corporation defaulted in the payment of interest and the defendant resigned as trustee. The fact then appeared that the corporation had, during the course of the year 1922, deposited with the trustee, as collateral for the bonds certified by it, the notes of various persons or corporations expressing an aggregate par value in excess of $130,000, all of which, with the exception of one note for $300, were in fact utterly valueless. With the same exception, none of the notes given were for the purchase of an automobile; none were made by an automobile dealer, or, for that matter, by a dealer in goods, wares, and merchandise of any description. The makers comprised a lawyer, a bond salesman, a ticket agent, a mining corporation, and a construction company. The maker of two notes, aggregating $75,000, had no occupation, business, or other visible means of support, although judgments in excess of $900,000 were outstanding against him. None of the securities held by the trustee defendant, at the time the bonds now owned by the plaintiff were issued, with the exception noted, were the notes or acceptances of dealers or automobile purchasers. Subsequently to January, 1923, all the assets of the Motor Guaranty Corporation were sold for the sum of $143.30.

We agree that the defendant cannot be held as the guarantor of the sufficiency or legality of the securities pledged with it, or for negligence in not ascertaining that the securities were worthless. Tschetinian v. City Trust Co. of New York, 186 N. Y. 432, 79 N. E. 401;Green v. Title Guarantee & Trust Co., 223 App. Div. 12, 227 N. Y. S. 252, affirmed 248 N. Y. 627, 162 N. E. 552;Byers v. Union Trust Co., 175 Pa. 318, 34 A. 629; Jones on Corporate Bonds & Mortgages, § 287a. ‘The purpose of the certification was not to insure the sufficiency of the security. It was to prevent an over issue.’ Ainsa v. Mercantile Trust Co. of San Francisco, 174 Cal. 504, 512, 163 P. 898, 901. If the defendant, without investigation, chose to lend its name to the swindling operations of a bogus finance corporation, by acting as its trustee and certifying its bonds, provided it certified with authority and without actual knowledge of the fraud intended, it was well within its legal rights. The question before us for decision is this: May the defendant be held in damages if, without authority, it certified the bonds now owned by the plaintiff, thereby inducing the plaintiff and his assignors to advance moneys upon the faith of securities which were worthless?

It is clear that the defendant signed the certificates without authority. As we have seen, it was authorized to certify, ‘provided, however, there shall be delivered to and pledged with the Trustee’ certain securities. The securities enumerated were the acceptances or notes of dealers or automobile buyers. No such securities were ever delivered to the defendant. If the defendant had requested and obtained a statement from the appropriate officers of the corporation, certifying to the ‘pertinent data regarding such collateral’ possessed by them, its authority. without further investigation, to execute the certificates could not have been questioned. However, it requested and received no such statement. Its authority therefore remained conditional upon the fact that the notes of dealers had been precedently deposited with it. No such securities having been deposited, it had no authority to execute the certificates.

In Conover v. Guarantee Trust Co., 88 N. J. Eq. 450, 461, 102 A. 844, 848, affirmed 89 N. J. Eq. 584, 106 A. 890, the facts considered were these: A trust agreement provided that the mortgagor would assign to a trustee bonds and mortgages acquired by it, which had been appraised and guaranteed by a corporation associated in interest with the mortgagor; that, as the securities were...