Real Estate Trust Co of Philadelphia v. Washington A & Mt V. Ry. Co.

• Decision Date: 21 February 1911
• Docket Number: 12-1910.
• Citation: 191 F. 566
• Parties: REAL ESTATE TRUST CO. OF PHILADELPHIA v. WASHINGTON, A. & MT. V. RY. CO.
• Court: U.S. Court of Appeals — Third Circuit

191 F. 566

REAL ESTATE TRUST CO. OF PHILADELPHIA v. WASHINGTON, A. & MT. V. RY. CO.

No. 12-1910.

United States Court of Appeals, Third Circuit.

February 21, 1911

Rehearing Denied May 15, 1911.

George H. Earle, Jr. (Joseph De F. Junkin and John G. Johnson, of counsel), for appellant.

W. B Bodine, Jr., G. W. Pepper, and Moore, Barbour & Keith, for appellee.

Before GRAY, BUFFINGTON, and LANNING, Circuit Judges.

BUFFINGTON Circuit Judge.

In the court below the Washington, Alexandria & Mt. Vernon Railway Company, a corporation of the state of Virginia, hereinafter called 'Railway,' filed a bill in equity against the Real Estate Trust Company of Philadelphia, a corporation of Pennsylvania, hereinafter called the 'Trust Company,' to enjoin it from enforcing, and to compel delivery by it to complainant of, 96 mortgage bonds of the latter company, of $500 each, dated July 1, 1892, and issued under a mortgage of that date, given by the Railway to Frank K. Hipple and James W. Schwartz trustees. The bill prayed the same relief with reference to 50 mortgage bonds, of $1,000 each, dated August 1, 1895, and given under a mortgage of that date by the Railway to the Trust Company as trustee. On final hearing the court below in an opinion wherein the facts of the case are set forth in extenso and reported at 177 F. 306, held the Railway was entitled to the relief prayed for. From a decree so adjudging the Trust Company appealed to this court. After argument and a careful study of all the proofs, we have reached the conclusion the court below was right in granting the relief prayed for as to the 50 $1,000 bonds, but was in error in granting the relief prayed for as to the 96 $500 bonds. Turning first to the questions arising over the later bonds, it seems that both the Railway and the Trust Company were innocent victims of the dishonesty of Hipple, and the case turns upon the question upon which of them shall the loss fall? In such case the law has established the broad, equitable rule that:

'Where one of two innocent persons must suffer by reason of the fraud or deceit of another, the loss should fall upon him by whose act or omission the wrongdoer has been enabled to commit the fraud. ' O'Connor v. Clark, 170 Pa. 321, 32 A. 1030, 2. L.R.A. 607.

And to the same effect is Pennsylvania Railroad's Appeal, 86 Pa. 84, wherein it is said:

'Where one of two parties, who are equally innocent of actual fraud, must lose, it is the suggestion of common sense, as well as equity, that the one whose misplaced confidence in an agent or attorney has been the cause of the loss shall not throw it on the other. As Judge King has well expressed this principle in Bank of Kentucky v. Schuylkill Bank, 1 Parsons' Equity Rep. 248: ' The true doctrine on this subject is that, where one of two innocent persons is to suffer from the tortious act of a third, he who gave the aggressor the means of doing the wrong must alone bear the consequences of the act."

Now in the case before us the Trust Company, on November 20, 1902, by its check of even date for $65,000, loaned that sum on a note of J. W. Schwartz. This was in reality a loan obtained by Hipple for himself. The Trust Company received from Hipple, as collateral therefor, inter alia, the 96 bonds here involved. All of said bonds had been paid or retired by the Railway, and were in the hands of its trustees for cancellation. On August 24, 1895, the said two trustees, Hipple and Schwartz, joined in an acknowledgment of satisfaction of said mortgage, which was duly recorded. Shortly thereafter, Schwartz, one of the trustees, who had in his possession $152,000 of the bonds, burned them. Hipple, the other trustee, who then had the other $48,000 in his hands for retirement, did not destroy them, and continued to retain them from 1895 until 1902. During that period Schwartz, his cotrustee, made no inquiry or took no steps to see that these bonds were destroyed. He says: 'I do not recall ever asking him positively and definitely whether he did or did not cancel them; but I assumed, I presume, that he would do just as I did. * * * I ought to have done it, but I did not. It was simply a failure to do it.'

It subsequently transpired that Hipple, who was president of the Trust Company, had looted it by concealed loans, and on the discovery thereof committed suicide. From the facts in this case it is clear that while Hipple was president of the Trust Company, from 1895 to 1902, his custody of the bonds in question during that time was as the agent or representative of the Railway. The latter was, through a subsidiary construction company, engaged in building a street railway in Virginia. Hipple, in addition to acting with Schwartz as trustee in the Railway's 1892 mortgage, was, with Schwartz, financing the Railway to the extent of practically conducting all its financial affairs. He was a stockholder director, assistant treasurer,...