Hadley v. Passaic Nat. Bank & Trust Co.

• Decision Date: 22 August 1933
• Citation: 168 A. 38
• Parties: HADLEY v. PASSAIC NAT. BANK & TRUST CO.
• Court: New Jersey Court of Chancery

168 A. 38

HADLEY

v. PASSAIC NAT. BANK & TRUST CO.

Court of Chancery of New Jersey.

Aug. 22, 1933.

Syllabus by the Court.

1. A mortgagee held fire policies with standard mortgagee clause, indorsed thereon. After a loss, the mortgagee indorsed to Z, the owner of the property, the insurers' drafts, and they were deposited by Z in a special bank account under an agreement with the mortgagee to apply the money to repairing the mortgaged property and for no other purpose without the mortgagee's consent. Held, the mortgagee had an equitable lien on the fund to secure performance of Z's promise to repair.

2. When the account was opened, the bank held Z's promissory note authorizing the bank at its option to appropriate to payment of his obligations all moneys on deposit to his credit. Several months later, the bank applied the account to notes on which Z was liable. The bank originally accepted the deposit in ignorance of the equity of the mortgagee, but it had notice thereof before it applied the fund to the satisfaction of the notes and before it changed its position on the faith of the deposit. Held, the mortgagee's equitable lien is superior to the title of the bank.

Suit by Mary E. Hadley against the Passaic National Bank & Trust Company.

Decree in accordance with opinion.

Greenburg & Wilensky, of Passaic (Victor Greenburg, of Passaic, of counsel), for complainant.

William A. Sumner, of Paterson, for defendant.

BIGELOW, Vice Chancellor.

Complainant seeks to impress a trust on a fund of $25,021.56 in the hands of defendant bank. The money was deposited in the bank to the credit of "Special Building Account, David Zaritsky," and, after Mr. Zaritsky's death, was applied by the bank to the payment of notes of which Zaritsky was maker or indorser. To succeed in her suit, complainant must show a title in the deposit superior to that of the bank. The fund arose in this manner:

Complainant held a mortgage for $75,000 on property owned by Zaritsky. The mortgage contained the usual fire insurance covenant. In the bond it was agreed that the mortgagee would consent to the use of the proceeds of the fire policies for the repair of the building, provided, however, that the obligor or his assigns should repair the building so that it would be in as good condition as before, and that the cost of repairs above the proceeds of the policies should be provided and paid by the obligor or his assigns. Pursuant to the covenant contained in the mortgage, Zaritsky procured and delivered to complainant insurance policies with the standard mortgagee clause indorsed thereon. Early in the spring of 1932, the building on the mortgaged property was badly damaged by fire. The loss was settled for $45,000, of which $18,578 was applied to the payment of taxes, interest, and other purposes. The balance, $20,422, was deposited with the defendant bank in the account above mentioned.

Before the account was opened, complainant and Zaritsky talked over the situation and agreed that so much of the insurance money as necessary should be applied to the reconstruction of the building. They evidently decided that the money should be deposited by Zaritsky in a special account, for complainant told him that he must be careful in opening the account to word it correctly. The insurance drafts were payable to complainant and Zaritsky jointly, and they were not collectible unless accompanied by the insurance policies. Complainant indorsed the drafts in blank and gave them with the policies to Zaritsky, who delivered them to the bank for collection. Two of the drafts totaling $22,294 were thus handled when he opened the account on July 20, 1032, and a third draft for $4,128 was deposited in the account August 9, 1932. Zaritsky, in his lifetime, drew only two checks on the account, one on August 12 to the general contractor, and the other on August 19 to the insurance adjuster. Each time, before making the check, Zaritsky telephoned complainant to secure her approval of the payment out of the special account. Complainant's secretary, Mr. Porter, about the middle of August had a talk with Zaritsky about having cheeks on the building account countersigned by complainant or her representative, but no such arrangement was actually made.

Complainant, as the person named in the mortgagee clause indorsed on the policies, had title to the proceeds thereof, subject, however, to her consent that the proceeds be used by Zaritsky for repairs. Conversely, Zaritsky was obligated to repair. By indorsing and delivering the drafts, complainant surrendered title to the proceeds of the policies. If complainant relied, for the restoration of the building, solely on Zaritsky's general credit, then she had no interest in the deposit with the defendant bank. But if she and Zaritsky intended that that particular money should be applied to repairs as agreed in the mortgage bond, and for no other purpose without complainant's consent, then I think she had an equitable lien on the fund to secure performance of Zaritsky's obligation. This is true even though she put it within Zaritsky's power wrongfully to divert the fund to another purpose.

In Smithurst v. Edmunds, 14 N. J. Eq. 408, 417,...