Mut. Trust Co. v. Merchants' Nat. Bank of New York

• Decision Date: 20 November 1923
• Parties: MUTUAL TRUST CO. v. MERCHANTS' NAT. BANK OF CITY OF NEW YORK et al.
• Court: New York Court of Appeals Court of Appeals

236 N.Y. 478

141 N.E. 922

MUTUAL TRUST CO.

v.MERCHANTS' NAT. BANK OF CITY OF NEW YORK et al.

Court of Appeals of New York.

Nov. 20, 1923.

Action by the Mutual Trust Company against the Merchants' National Bank of the City of New York and another. From a judgment of the Appellate Division of the Supreme Court in the First Department, 204 App. Div. 357 (198 N. Y. Supp. 104), affirming a judgment of the Trial Term in favor of plaintiff entered upon a directed verdict, defendants appeal.

Reversed and complaint dismissed.

Appeal from Supreme Court, Appellate Division, First Department.

George Zabriskie and William E. Sims, both of New York City, for appellants.

Edward F. Clark, Leonard J. Reynolds and Roger Hinds, all of New York City, for respondents.

CARDOZO, J.

The action is for conversion.

The defendant, the Merchants' National Bank of the City of New York, loaned to one Edwin H. Hatch the sum of $200,000. One-half of this amount was loaned in May, 1915, and the other half a year later. The collateral first deposited consisted of certificates of deposit of the National Newark Banking Company, each for $100,000. In June, 1916, Hatch withdrew these certificates, and substituted 1,800 shares of Pacific Gas & Electric Company, preferred, as well as other securities not now important. Of these 1,800 shares, 1,400 stood in his own name, and 400 in the name of another. In truth, the 1,400 shares were owned by the plaintiff, the Mutual Trust Company of Orange, N. J., but this was unknown to the defendant. Hatch, who was the trust company's chief stockholder and one of its vice presidents, was a thief and a forger. In addition to his misuse of the stock, he had overissued to himself the trust company's certified of deposit. None the less, he was at all these times a man of good repute. The bank received the collateral in good faith, and was entitled to the protection of a holder in due course.

In July, 1916, Hatch acting by his wife, made request for the delivery of the shares in return for a check for $100,000 which was tendered. The certificates at that time were in San Francisco, having been sent there at Hatch's order to be exchanged for shares of the first preferred stock of the same corporation. This made compliance with the request impossible. Mrs. Hatch then asked the bank's cashier, one Joseph Byrne, who is joined as a defendant, to go to see her husband, who was ill. Hatch said he would like to get the stock back, explaining in a vague way that his affairs had become involved. A few days later, July 18, 1916, Byrne was summoned to a conference. Present with Hatch at this time were the chief officers of the trust company, the cashier of the National Banking Company, and other advisers. Byrne was asked to state the terms on which the bank would release its lien upon the shares. Only a day before, the New Jersey bank examiner had visited the trust company and was looking into its condition. The officers had learned of the unlawful pledge, and they were anxious to get the stock back so that the examiner might not miss it. Byrne said that the bank would not deliver the certificates except upon payment of $120,000. Plaintiff's officers accordingly agreed that the trust company, the plaintiff, would send its own check for $90,000 the next morning, and Hatch undertook to supply the remaining $30,000. Plaintiff's treasurer suggested that the examiners might notice the check, and Van Dusen, the cashier of the National Newark Banking Company, advised that it be taken out of order, from a stub near the end of the cheek book, and so it was done. Hatch was to do more, however, than pay $30,000 to the bank. He was to furnish other securities for the protection of the plaintiff. In fulfillment of this promise, he gave a second mortgage for $39,300 upon his house, and also 780 shares of the Boyertown Ore Company, which he valued at $65 a share ($50,700). The mortgage has since been collected in full, but the value of the stock is doubtful. Byrne testified that he paid little, if any, attention to these details, but they were arranged in his presence, and he had at least the opportunity to hear and understand.

On July 19 the bank received a letter from Hatch, drafted by Byrne, requesting it to accept payment of $120,000 on account, and to release 1,400 shares of the stock from the collateral, and to hold it on special deposit for the account of the plaintiff. The letter was accompanied by two checks, one for $90,000 drawn by plaintiff on the National Newark Banking Company and certified, and the other, Hatch's, for $30,000. On the same day the trust company telephoned the bank to send it the shares by registered mail, and this was done, with a letter.

Five days later the trust company was closed, and a liquidator put in charge by the state banking commissioner. The liquidator sold the shares for $126,000. He received from the Newark National Banking Company an additional payment of $20,000. He also collected the mortgage ($39,300). He now sues the defendant for the conversion of the $90,000 check or its proceeds. A verdict was directed in favor of the plaintiff for $41,595.73, the amount of the $90,000 check less the proceeds of the mortgage and the $20,000 payment. The Appellate Division unanimously affirmed.

[1][2] The defendant did not commit a wrong in the acceptance of the check unless it had notice, either actual or sufficient to put it upon inquiry, that the plaintiff's officers were without power to issue the corporate check for the redemption of the stock. The defendant was the pledgee of shares which it held in good faith, and was entitled to retain. The shares belonged to the plaintiff, and Hatch, in pledging them, had been guilty of a tort, but the plaintiff could not reclaim them from a holder in due course without payment or tender of the debt which they secured. The value of the shares was $126,000. The plaintiff was getting them back upon payment of $90,000. True the payment was made upon account of Hatch's indebtedness, but the shares were not delivered to Hatch. They were to be held for the account of the plaintiff, and to the plaintiff they were delivered. Ward v. City Trust Co. of New York, 192 N. Y. 61, 84 N. E. 585, is thus beside the point. If the board of directors had come to the defendant and had asked for these shares, tendering $90,000 in return, they would have been well within their rights. The liquidator himself might have done the same thing. What the bank did was to permit the true owner to redeem upon payment or reduction of the debt for which the property was pledged. It did nothing unlawful in permitting this. If the payment had been equal to the whole debt, and not merely a part, it would have risked a liability for damages or the loss of its security by doing anything else.

The plaintiff marshals other circumstances, sufficient, it is said, to put an aspect of guilt on what would otherwise be innocent. The officers of the trust company wished to get the stock back in order to conceal from the examiner the fact that it had once been misappropriated. This the defendant knew, and a duty to resist redemption is said to have arisen from the knowledge. The argument confuses what is intrinsic in the transaction with what is ulterior and collateral. It confuses the legality of the act with the purity of the...