In re Hackett, Hoff & Thiermann

• Decision Date: 18 April 1934
• Docket Number: No. 5048.,5048.
• Parties: In re HACKETT, HOFF & THIERMANN, Inc. MARINE NAT. EXCHANGE BANK OF MILWAUKEE et al. v. KALT-ZIMMERS MFG. CO.
• Court: U.S. Court of Appeals — Seventh Circuit

70 F.2d 815 (1934)

In re HACKETT, HOFF & THIERMANN, Inc. MARINE NAT. EXCHANGE BANK OF MILWAUKEE et al. v. KALT-ZIMMERS MFG. CO.

No. 5048.

Circuit Court of Appeals, Seventh Circuit.

April 18, 1934.

George Affeldt, Douglass Van Dyke, and Leon E. Kaumheimer, all of Milwaukee, Wis., for appellants.

I. A. Fish, J. H. Marshutz, and G. R. Hoffman, all of Milwaukee, Wis., for appellee Kalt-Zimmers Mfg. Co.

Before EVANS, SPARKS, and FITZ HENRY, Circuit Judges.

SPARKS, Circuit Judge (after stating the facts as above).

Two questions are involved in this appeal: Were the bonds negotiable instruments, and were the banks holders in due course? A negative answer to either question would prevent the banks' recovery and sustain the decision of the District Court.

In August, 1929, Kalt-Zimmers, a manufacturing concern located in Milwaukee, executed and delivered to the Hackett firm, a Wisconsin corporation, as trustee, a deed of trust conveying certain of its property as security for a bond issue of $115,000. The bonds contained the following provision:

"Said bonds are issued under and secured by a mortgage or deed of trust of even date herewith, duly made, * * * to which deed of trust reference is hereby made with the same effect as though recited at length herein, for the description of the property mortgaged, the nature and extent of the security, the rights of the holders of the bonds, and the terms and conditions upon which the said bonds are issued, held, and secured, and may, before their fixed maturities, be declared at once due and payable, and the manner of prepayment before maturity."

The trust deed, after reciting the facts regarding a prior encumbrance of $55,000, of which $35,000 was still outstanding, provided that the trustee should first set aside sufficient bonds of the new issue or the proceeds thereof to satisfy the first mortgage, after which the proceeds of the remainder were to be used in the erection of a building on Kalt-Zimmers' premises, and the balance, if any, was to be at the disposal of Kalt-Zimmers. The bonds secured by the trust deed were to pass by delivery unless registered, and the trustee was given the right to acquire, own and deal in the bonds and coupons with the same rights as if it were not trustee. This trust deed was duly recorded in October, 1929.

The books of account of the Hackett firm with respect to this bond issue showed bonds unsold in the amount of $21,000, and cash on hand in the sum of $25,000. The Hackett firm was adjudicated a bankrupt on June 8, 1931. At that time it was indebted to the Marine Bank in the amount of $87,767, and to the West Side Bank in the amount of $72,019. To secure these sums the bankrupt had from time to time pledged various securities as collateral, including some of the bonds of Kalt-Zimmers. After the adjudication each of the banks filed with the referee a petition for permission to sell these various securities showing that the Marine Bank held Kalt-Zimmers' bonds in the amount of $6,000, and the West Side Bank, $8,500. Kalt-Zimmers filed its answer and cross-petition, setting up the facts as to the execution of the trust deed and the issuing of the bonds, alleging failure of consideration for the bonds, denying appellants' title to them, and praying delivery of the bonds to appellees. The answers of the banks to this cross-petition were substantially the same, and alleged that the bonds were negotiable, that the banks became their holders in due course with no notice of any infirmity in the bonds or defect of bankrupt's title, and further that they were delivered by Kalt-Zimmers to the bankrupt who was clothed with apparent authority to transfer and negotiate them.

The District Court did not pass on the question of negotiability, but held that the banks were not holders in due course; that even though the bonds were negotiable, that alone was insufficient to excuse the banks from inquiry concerning the trustee's power to pledge them for what the banks knew was the trustee's personal indebtedness.

Appellants urge that this ruling contravenes a recent decision of the Supreme Court of Wisconsin, Pollard v. Tobin, 211 Wis. 405, 247 N. W. 453. That decision involved the identical question now under consideration, arising out of a transaction between the same bankrupt and another bank, in which there were pledged, under similar circumstances, bonds practically identical in form and terms with the bonds herein involved. There the court held that the bonds were negotiable, and that the bank was a holder in due course, although the evidence showed that they had been accepted as collateral after one of the members of the bankrupt pledgor had committed suicide, and after the bank had made inquiry of another bank in which the bankrupt had its principal checking account as to the effect of the suicide upon the firm's solvency. The bank apparently had been satisfied with the answer of the other bank that in fact the bankrupt was put in a stronger position by reason of the fact that it had carried insurance upon the deceased member, and that the bankrupt was solvent anyway. We would have supposed that under those facts the bank accepting the bonds as security for personal loans of the bankrupt would have been held to inquire as to the title of the bankrupt to the bonds and his right to pledge them, since the bonds showed on their face that the pledgor held them as trustee, and since they referred to the trust deed in which it was recited that the bonds were to be sold by the Hackett firm as soon as possible after delivery. It seems to us that those facts would have prevented the bank from asserting that it "had no notice of any defect in the title of the person negotiating" them, and would have necessitated a finding that the bank had knowledge of such facts that its action in accepting the bonds as a pledge amounted to bad faith under section 116.61 of the Wisconsin statutes.¹ In the case at bar we agree with the view of the District Court that "* * * the duty was cast upon the one to whom they were tendered, no matter how clearly their negotiability in case of attempted transfer in execution of a fiduciary power, or negotiation by sale in case of individual ownership, may otherwise appear from the instrument; that is to say: the fact of negotiability within limited range is not the sole determiner of a right of a trustee to transfer property once it appears clearly that an individual, and not a trust purpose is sought to be carried out. * * * The infirmity of the bank's position arises out of their knowledge that the bankrupt trustee was tendering the bonds for its personal benefit."

The District Court in reaching its conclusion relied on broad principles of equity forbidding trustees from dealing in trust property for their own benefit. The plain terms of the bonds stated that they were trust bonds, and that the holders' rights thereto were set forth in the deed of trust, which was made a part of the bonds by reference. Appellants, therefore, could not disregard that notice and innocently accept the bonds as a pledge of security for the trustee's personal debt to appellants, when in fact the trust deed gave no authority to pledge them in any manner. See Sanger v. Farnham, 220 Mass. 34, 107 N. E. 359; Brovan v. Kyle, 166 Wis. 347, 165 N. W. 382; Whitford v. Moehlenpah, 196 Wis. 10, 219 N. W. 361; Greene v. Greene, 19 R. I. 619, 35 A. 1042, 35 L. R. A. 790; Townsend v. Wilson, 77 Conn. 411, 59 A. 417; Colonial Trust Co. v. Brown, 105 Conn. 261, 135 A. 555. This principle was very clearly set out in Duncan v. Jaudon, 15 Wall. 165, 21 L. Ed. 142, which held that the duty of inquiry was imposed on a lender lending on stocks where the stock certificates disclosed a trust, and that notice to the cashier of a bank that the stock pledged was a trust stock was notice to the bank. The failure to perform that duty by appellants in the instant case, we think, amounted to bad faith on their part, as contemplated by section 116.61 of the Wisconsin Statutes. The same principle is supported quite...