Fidelity Sec. Corp. v. Brugman

• Decision Date: 08 July 1931
• Citation: 1 P.2d 131,137 Or. 38
• Parties: FIDELITY SECURITY CORPORATION v. BRUGMAN et al.
• Court: Oregon Supreme Court

1 P.2d 131

137 Or. 38

FIDELITY SECURITY CORPORATION v. BRUGMAN et al.

Supreme Court of Oregon

July 8, 1931

Department 1.

Appeal from Circuit Court, Multnomah County; Jacob Kanzler, Judge.

Action by the Fidelity Security Corporation against W. J. Brugman and another. From a judgment in favor of plaintiff defendants appeal.

Reversed and remanded.

Plaintiff alleging itself to be a bona fide purchaser in due course of an unpaid promissory note in the sum of $2,310, of which these two defendants were the makers, brings this action upon that note. The answer, after denying all allegations of the complaint which described the plaintiff as the bona fide purchaser in due course of the note, alleged that the note was executed as part of a transaction wherein the plaintiff paid the defendants $16,000 only for another promissory note signed by them, calling for their payment to the plaintiff of $20,000 three years hence, together with 7 per cent interest, and that the above $2,310 note was without consideration, except so far as it operated as further interest upon the $20,000 note. Thus the defendants conceded execution of the note sued upon, but sought to avoid liability by pleading usury. The reply denied all the new matter. From a judgment in favor of the plaintiff, based upon a verdict, the defendants appeal, and set forth eight assignments of error.

F. P Keenan, of Portland (Reynolds, Flegel & Smith, of Portland, on the brief), for appellants.

John H. Hall, of Portland (D. P. Price, of Portland, on the brief), of respondent.

ROSSMAN J.

Preliminary to a consideration of the assignments of error, we deem it well to state the following few undisputed facts. The execution of the $2,310 note which constitutes the subject-matter of this action had its inception in the following transaction. In September, 1926, the defendants, who are engaged in the real estate and timber business, were apprised by one Ben F. Walling, a real estate broker, that a parcel of real property known as the Juliana Apartments in Portland could be purchased for the sum of $52,500, payable $15,000 in cash, and the balance in deferred payments secured by a first mortgage upon the said property. Defendants became convinced that at the price of $52,500 the Juliana Apartments constituted an attractive purchase, but lacked the required $15,000 cash. Walling, being acquainted with one C. W. Pallett, manager and treasurer of the plaintiff, suggested that he possibly could procure the required cash through Mr. Pallett. The testimony of the various witnesses which relates the incidents that followed this interview is for the most part in conflict.

According to Brugman, a conference took place between himself, Pallett, and Walling which resulted in an agreement that the defendants should execute their negotiable note in the sum of $20,000, payable three years hence, with 7 per cent. interest, to Ben F. Walling or order, secured by a second mortgage upon the Juliana Apartments, and that Walling should at once assign the note and mortgage to the plaintiff, which would thereupon pay to the defendants $16,000. Brugman testified that Pallett did not explain the reason for making the note payable to Walling, but that he knew the plaintiff would seek thereby to avoid the consequences of the laws against usury. Brugman further testified that shortly after this conference the plaintiff, over the signature of Pallett, submitted a memorandum of its offer wherein, in addition to the above terms, it included a requirement that the defendants purchase from the plaintiff a house and lot in a subdivision of Portland, entitled Westmoreland, for the sum of $2,310, subject, however, to two mortgages aggregating $3,300, provided the plaintiff would find a lender willing to loan the defendants $2,310 upon their note, due seven months hence, bearing 8 per cent. interest, secured by a third mortgage upon the Westmoreland property, and to be further secured by a bill of sale upon some personal property owned by the defendants. Brugman testified that he protested against being required to purchase the house and lot, but that the plaintiff refused to recede from its demands. According to his testimony, he was satisfied that this property was worth less than the two mortgages of $3,300 which incumbered it, but believing that he could escape liability upon this note by pleading that it was a purchase-money obligation, and being very desirous of proceeding with the purchase of the Juliana Apartments, agreed to the plaintiff's terms. He produced testimony that the transaction was consummated in the following manner: Pallett's son, C. W. Pallett, Jr., the payee named in the $2,310 note, gave to Brugman a check for $2,310. At that time the son's bank account contained a credit of only $50. Brugman at once indorsed this $2,310 check and handed it to Pallett, Sr., who later delivered to the defendants a deed to the Westmoreland property. The day following the delivery of the above-mentioned check, Pallett, Sr., deposited to his son's credit at the bank $2,400; about two months later the plaintiff paid to Pallett, Jr., $2,310, and thereupon the latter made the necessary indorsement of the note and an assignment of the mortgage so as to evidence the plaintiff's title. This is the note which constitutes the subject-matter of this action. Other evidence introduced by the defendants indicated that the Westmoreland property was worth slightly more than the two mortgages which incumbered it. Brugman testified that he had no desire whatever to purchase the Westmoreland property, and that, while the plaintiff did not explain to him the reason for including it in the transaction concerning the $20,000 note, he knew that Pallett's purpose was thus to obtain an additional $2,310 profit out of the transaction covering the $20,000 note. We shall state Pallett's version later.

The exchange of the $20,000 note, together with the accompanying mortgage and incidental papers, for the $16,000 in cash was consummated through the instrumentality of an escrow agent. The latter received three letters of instruction. The one over the signature of the plaintiff inclosed its check in the sum of $16,000, payable to Walling, to be delivered to him upon the escrow agent's receipt of the defendants' note, indorsed by Walling, in the sum of $20,000, secured by a second mortgage upon the Juliana Apartments. Walling's letter instructed the escrow agent to deliver defendants' note and mortgage, which he inclosed with his letter, to the plaintiff upon the latter's deposit of the sum of $16,000. The third letter of instruction, being the one over the signatures of the defendants, transmitted their note and mortgage for the sum of $20,000, payable to Walling, with directions "to use in connection with your above numbered escrow upon payment to my account of $15,500.00. ***" (The balance of $500 constituted Walling's commission.)

According to Mr. Pallett, the plaintiff was not engaged in making real estate loans, and confined its business to that of "buying paper." He testified that he had no conferences or negotiations whatever with the defendants, and explained that he became interested in the $20,000 note when Walling informed him that "he was dealing or propositioning the Juliana Apartments" in such a manner that he (Walling) would obtain a $20,000 note, secured by a second mortgage upon that property, under such favorable circumstances that he could afford to discount it. Pallett swore that he thereupon appraised the aforementioned property and offered Walling $16,000 for the contemplated note and mortgage. Pallett testified that when these terms seemed satisfactory he suggested that, since he was helping Walling in a matter of consequence to the latter, he would like to have Walling help him dispose of the Westmoreland property, and thus brought that property into the transaction. He testified that, not being a real estate salesman, he was experiencing difficulty in finding a buyer for this property, which had recently come into the possession of the plaintiff. He added that at this point Walling requested a writing setting forth fully the terms of plaintiff's offer, and that when he prepared the writing he included a requirement that the makers of the $20,000 note must purchase the Westmoreland property at the price of $2,310. Pallett insisted that the Westmoreland property was worth at least $2,310 in excess of its incumbrances. He explained that the money paid by his son for the $2,310 note and mortgage belonged to the son, and that the plaintiff purchased this note and mortgage from him when the son was in need of money.

The $20,000 note was paid before its maturity by an individual to whom the defendants sold the Juliana Apartments. In August of 1927, the holder of the second mortgage upon the Westmoreland property instituted suit to foreclose it, naming as parties defendant, among others, these defendants. After all the defendants had defaulted and the appropriate proceedings had been taken, the mortgagee acquired title. The action with which we are now concerned is, therefore, an action upon the note alone. The nature of the assignments of error render it unnecessary for us to narrate any more of the evidence.

The first two assignments of error challenge rulings made by the circuit court wherein it received, over the objections of the defendants, evidence which apparently was intended to show (1) that Pallett believed in good faith that the Westmoreland property was worth $5,600 at the time of the execution of the two aforementioned notes, and (2) that the property was, in fact, worth that sum of money. Thus the court permitted Pallett, as a witness for the plaintiff, to testify, over the objections of the...