Case ID: dc_13/html/0513-01.html
Source: Caselaw Access Project
Author: {"author": "Mr. Justice James", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Benjamin U. Keyser, Receiver, vs. John Hitz et al.
    Equity. No. 6,583.
    5 Decided October 29, 1883.
    ? TKe Chief Justice and Justices Hagner and James sitting-.
    1. The powers oí the directors of a national bank are not regulated by the strict principles of a special trust. They act in a fiduciary capacity, but are clothed by the statute with a power to manage the affairs of the bank, and this implies a considerable element of discretion.
    2. It is not an improper exercise of that discretion, where cash is needed for the legitimate business of the bank, to accept anticipated payment of a- debt bearing a high rate of interest where such debt constitutes an unavailable asset.
    3. Where a bank, under a contract made by its officers, receives money for the purpose of being applied by it to certain uses, such money cannot be retained by the bank except in accordance with the con-
    . tract under which it was received, although its officers exceed their powers in making the contract. The money comes into its hands charged with a trust and the retention of it constitutes an acceptance of the trust, and at the same time a ratification of the acts of its officers.
    4. Where, as part of an arrangement by which a- loan is to be secured on real estate, a conveyance of the premises is made, that arrangement will, of itself, supply the consideration for the conveyance.
    STATEMENT OE THE CASE.
    In January, 1876, the German American Savings Bank of the District of Columbia took, for value received, two notes of $10,000 each, dated January 5, 1876, payable respectively one and. two years after date, with interest at the rate of 10 per cent, per annum, payable semi-annually, drawn by one Wm, E. Chipley, to the order of E. P. Halstead, trustee, and by him endorsed. These notes were discounted or loaned upon realty for the benefit of John Hitz, then president of the bank. They were secured by a deed of trust to E. B. Donaldson, a director, and C. E. Prentiss, the cashier, of the bank, upon a piece of property situated at the corner of Ninth and G streets, N. W., Washington city, executed by John Hitz and his wife, Jane C. Hitz. The property was acquired by Mrs.' Hitz by inheritance, subsequent to her marriage and prior to the passage of the Married Woman’s Property Act. The deed provided for a release of the property, on the satisfaction- of the debt, to John Hitz, and' contained the usual provisions for sale in default of payment.
    
      The loan was numbered on the bank books, “ Loan 570,”' and interest was paid from time to time.
    In May, 1877, the German American Savings Bank was-converted into the German American National Bank, this loan forming part of its assets.
    In June, 1877, Mr. P. Jenks, of Philadelphia, entrusted B. W. Tyler, of Washington, with loaning $20,000 in that city.. Capt. Tyler, in his negotiations, consulted Mr. ITitz about a proposal he had received, and the result was an arrangement by which the money was to be loaned upon the property in question upon a first encumbrance at 8 per cent, per annum interest. The negotiations were conducted between Capt. Tyler, Mr. Hitz and Dr. Prentiss, and in the course of them it was agreed that the prior deed of trust should be released^, and a conveyance of the fee made to Miss S. L. Crane, who should appear as the new borrower, and execute the new deed of trust.
    The examination of the title and the preparation of the new deed of trust were entrusted by Tyler to Ashford and Hopkins, Prentiss undertaking to prepare the release of the Chipley trust and the conveyance to Miss Crane.
    By the release the property was conveyed back to Mrs. Hitz, and the deed to Miss Crane was, as first drawn, from her solely. Subsequently, it was changed, so as to include her husband also. The date of this change, whether before or after execution and acknowledgment by Mrs. Hitz, was one of the most contested questions in the case.
    The papers were completed about the 20th of June, 1877r and Tyler delivered Jenks’ duly certified and endorsed check for the money to Prentiss at the bank. Prentiss endorsed the check, as “ cashier,” to the credit of the German American Bank, at its Philadelphia correspondent, and subsequently as “ C. E. Prentiss,” and to the credit of an account kept by him with the German American Bank as “Account No. 578,” under the name of “C. E. Prentiss, trustee.”
    The books of the bank did not show any payment of the .Chipley notes' until June, 1878, when one was entered a& paid on the 6th and the other on the 22d. Meanwhile, they had figured as assets of the bank. The books also showed an entry under date of October, 1878, “Loan 570 Ket’d,” as a discount, and under date of October, 1878, a payment thereof.
    The bank failed, and closed its doors October 30, 1878, Keyser taking charge as bank examiner on the 31st, and on the 1st of November as receiver.
    The Chipley notes were claimed by the receiver as assets, and on the — of December, 1878, Miss Crane wrote on their back a guarantee of them, and executed a deed to Keyser of the reversion in the property in question to secure their payment. He declined to pay the instalment of interest due on the Jenks loan, and Tyler advertised the property.
    Thei-eupon, the plaintiff filed his bill, asking an injunction to prevent the sale ; discovery by Jenks and Tyler of their connection with the case ; reinstatement and priority for his benefit of the trust deed to Donaldson and Prentiss ; if this were refused, a personal decree for the amount of the Chipley notes against the defendants ; the establishment of a lien in his favor upon all the real property of the defendant Hitz and a sale of the property in question to satisfy his claim.
    Full answer.was made by the defendants, and Miss Crane- and Mrs. Hitz filed cross-bills. The former charged that her guaranty of the Chipley notes and her deed to Keyser were unadvised and’without consideration, and asked their cancellation.
    Mrs. Hitz charged that the whole transaction was a fraud upon her, and asked that all the deeds of trust, &c., involving-her property, be set aside. Subsequently, she filed an amendment to her cross-bill, charging that the deed to Miss Crane, purporting to be made by her and her husband, had been altered so as to include her husband as a party after its alleged execution by her. The further facts necessary to an understanding of the case appear in the opinion of the court.
    On the hearing of the case in Special Term, a decree was made denying any relief to Keyser, cancelling the Crane deed to him, and her guaranty of the Chipley notes, and holding the trust deed to Tyler to be valid only as to John Hitz’s interest in the property.
    Keyser, Mrs. Hitz, Tyler, and Jenks, appealed.
    
      R. K. Elliot and L. Robinson, for Keyser, contended :
    That the deed of trust of January 26, 1875, to secure the .Chipley notes, was valid and subsisting ,• that the subsequent deed, purporting to have been from Hitz and wife to Miss Crane, was never fully executed, as Mrs. Hitz never expressly or by implication consented to its being put on record. See Armstrong vs. Morrill, 14 Wall., 120; Adams vs. Adams, 21 Wall., 185; Younge vs. Gilbeau, 3 Wall., 641; Parmeler vs. Simpson, 5 Wall., 86; Maynard vs. Maynard, 10 Mass., 458; Samson vs. Thornton, 3 Met., 231; Merriam vs. Leonard, 6 Cush., 151; Brabrook vs. Savings Bank, 104 Mass., 231; Chase vs. Breed, 5 Gray, 442.
    Nor can it be shown to the court that, in the forum of conscience, the trust to secure the Chipley notes, though never legally released, should be released. The Chipley notes -of themselves do not indicate payment; they figured as assets of the bank, and were shown as such on several occasions to the bank examiner. The Jenks money was not paid to the bank, but went to the credit of the private account of 4í C. E. Prentiss, trustee,” and the notes themselves were unhesitatingly transferred to the receiver as assets. The negotiation of the Jenks loan was in the interest of private pai’ties, enured to the benefit solely of John Hitz, and was an injury to the bank by reducing the interest from 10. per cent, per annum to 8 per cent. If Tyler, in advancing the Jenks money, was paying off the Chipley notes, he should have seen that they were produced and cancelled, as very many authorities show. But he went according to his own showing to pay them with an amount insufficient. There was due on them interest for nearly six months, and yet he paid only the principal. Such a payment is no payment. The trustees of the security for the Chipley notes could not release except on full payment. They must follow strictly the charter of their authority. See Clark vs. Maguire, 16 Mo., 302; Richardson vs. Sharpe, 29 Barb., 222; Young vs. Benthuysen, 30 Tex., 762; Griswold vs. Perry, 6 Lans., 98; Cassell vs. Riss, 33 Ill., 259; and many other similar authorities.
    
      All persons taking property agreed to be taken as security, take it itnpressed with the trust.
    In this case, the release by Donaldson and Prentiss being in contravention of the trust,-is absolutely void, and the estate remains in the hands of the original trustees for the original purposes of the trust. Eustice vs. Holmes, 52 Miss., 305.
    The property of the stockholders of the bank of which the plaintiff’is the receiver,, is not bound by the irregular transactions, or the declarations of its officers, beyond the legal sphere of their action, as numerous authorities show.
    Even if Jenks’ claim on this property were of equal equity with that of the defrauded stockholders, the complainant might invoke the doctrine that priority in time gives 'him priority in right. See, inter alia, Beckett vs. Cordley, 1 Brown’s Ch., 358. See, also, for its pertinency to this case, Wallis vs. Thornton, 2 Brock., 422.
    Enoch Totten for Mrs. Plitz :
    1. The deed of trust to Donaldson and Prentiss was fraudulent and void as to Mrs. Hitz.
    The requirements of the statute touching acknowledgments of deeds by married women were not observed; the deed was procured by fraud ; it was wholly without'consideration.
    Among the authorities cited, Johnson vs. Wallace, 53 Miss., 335, discusses at length the question of the requirements, and what is due compliance with them, in the matter of an acknowledgment by a feme covert.
    
    2. The so-called deed of June 16, 1877, purporting to be from Mrs. Hitz and her husband to Sarah L. Crane, is fraudulent and void as to all persons.
    It was procured by means of fraud and deception, and the defendant Jenks, was constructively a party to such fraud ; it was not properly acknowledged ; it was without consideration ; it was fraudulently altered as to material parts by the grantee,-or those claiming under the deed, after execution and delivery, and whilst in the possession of such grantee or persons claiming under the deed.
    
      As to the effect of the alterations, see Harper vs. the State, 7 Blackf., 6; Bonvier, sub verbe “Deed ;” Stover vs. Lord, 80 N. Y., 60; Chisley vs. Frost, 1 N. H., 145; Morgan vs. White, 24 How., 317; Waringer vs. Smith, 2 Barb. Ch., 119; U. S. vs. Nelson, 2 Brock., 64; Drury vs. Foster, 2 Wall., 24; Vanhorn vs. Darrance, 2 Dall., 304; Moore vs. Berkham, 4 Binney, 1; and others.
    Jenks is not helped by the doctrine of subrogation.
    Nor had Hitz any marital interest in this property of his wife’s, our Married Woman’s Property Act serving to abolish such inchoate right as he may have had to the future income of that estate when it was passed. See, Magwire vs. Magwire, 7 Dana, 183; Buchanan’s Estate, 8 Cal., 507; Kugh vs. Ottenheimer, 6 Oregon, 321; Freeman on Judgments; Cord on Rights of Married Women; Schouler’s Dom. Rel., 300.
    So that the decree in Special Term should be modified so as to grant all the relief prayed in Mrs. Hitz’s cross bill.
    W. D. Davidse, for Jenks and Tyler, and R. D. Mussey, for Prentiss, contended that—
    1. The bank could not resist Jenks’ claim. The debt due under the first deed of trust was paid by Jenks’ money. The notes themselves and the records of the bank show that prior to the payment by Jenks of his $20,000, the interest on the notes had been paid, till July, 1877, so that $20,000 was the precise amount due. If the bank failed to retire the notes when paid that cannot affect Jenks. It is not the case where a prior incumbrancer, losing his security,seeks to have it re-instated, but where a prior encumbrance is discharged with the money advanced by a later encumbrancer.
    See Insurance Co. vs. Eldredge, 102 U. S., 545; Williams vs. Jackson, XI Wash. Law Rep., 310.
    2. The averments of the cross-bill of Mrs. Hitz are not sustained by the evidence.
    3. The amended cross-bill of Mrs. Hitz, is answered in several ways.
    
      A. The evidence shows that the changes in the deed to Miss Crane were made before execution.
    B. It was not necessary to give effect to Mrs. Hitz’s conveyance of her property, that her husband should join in the deed, as our Married Woman’s Act shows. See Wing vs. Schramm, 18 Hun., 377; McIlvaine vs. Kadel, 30 How., Pr. Rep., 193; Farr vs. Sherman, 11 Mich., 38; Watson vs. Thurber, Id., 453.
    C. But the conclusive answer is that, Jenks’ money having gone to discharge a prior valid mortgage on Mrs. Hitz’s property she cannot assail his right, in a court of equity, without paying back that money with interest. See Sheldon on Subrogation § 8; Gilbert vs. Gilbert, 39 Iowa, 657; Price vs. Hobbs, 47 Md., 384; Bowie vs. Berry, 3 Md. Ch. Dec., 359; Burnhisel vs. Firman, 22 Wall., 170; Davis vs. Gaines, 104 U. S., 386.
   Mr. Justice James

delivered the opinion of the court.

The original bill in this cause was filed by Keyser as Receiver, appointed under the national banking law of the German American National Bank, a corporation organized in the city of Washington. From the voluminous testimony taken on behalf of the several parties, we deduce the following conclusions:

On the 26th of January, 1876, the defendants, John Hitz and Jane C. Hitz, his wife, conveyed to Donaldson and Prentiss certain real estate, in Washington, which she had owned as a married woman before ■ the passage of what is known as the Married Woman’s Act of 1869, in trust to secure the payment of two promissory uotes, which had been dated of the 5th of the same month, each for the sum of $10,000, drawn by defendant Chipley, payable to the order of defendant, Halstead, in one and two years from date, with interest at the rate of ten per centum per annum. This •deed of trust provided that John Hitz, the husband, should ■occupy and take the rents and profits of the premises until ■default, and that upon final payment the release should be to him, his heirs and assigns. The notes were duly endorsed by Halstead, to “ The German American Savings Bank,” a banking corporation in Washington, which was afterwards, on the 14th day of May, 1877, organized, by proper proceedings under the national banking law, as a national bank, under the name of “The German American National Bank, Washington ” The notes in question, with other assets of the savings bank became the property of the national bank.

The records of the bank show that a loan of $20,000 was made to Ghipley, the maker of these notes, on the 26th of January, 1876, the day of the date of the deed of trust, that deed being noted as the security. No such loan was made to Ghipley, and it is not shown that any money was paid out at that time to any person on account of this transaction. Ghipley an d Halstead were merely men of straw, and the use of a security made by them was a contrivance by which Hitz and Prentiss, two of the officers of this very extraordinary institution, proposed to conceal and at the same time provide for certain antecedent transactions. Hitz had incurred considerable liabilities to the bank, which it had become necessary to adjust, at the same time that the savings bank should be enabled to exhibit real estate securities based upon transactions in the customary form of its legitimate business. The actual transaction was indicated when Prentiss, on receiving the notes, wrote under Chipley’s signature, the number and name of Hitz’s post-office box; and it is established by the testimony that Hitz was the actual party and debtor in the transaction. The intent and the effect of the contrivance was to conceal from the public, and especially from the bank examiner, his improper liabilities to the concern in which he was an officer, to secure them by the usual real estate security, and to fix periods of credit by which the conversion and application of this security should be determined.

Afterwards, in the month of June, 1877, when the savings bank had been converted into a national bank, subject to the provisions of the national banking laws, and among others to that provision which required them to keep on hand a sum of money equal to twenty-five per centum of their notes in circulation and of their deposits, the reserve fund of the German American National "Bank was in danger, and it became necessary to replace the Chipley notes and their real estate security with cash. Hitz, being advised that defend-' ant Tyler, as agent or broker for the defendant Jenks, had in his hands the sum of $20,000 for loan upon, real estate security in Washington, informed Tyler that he would in a few days be prepared to submit a proposition for that amount, in order to pay the Chipley notes. He explained that it would be dangerous to borrow and secure the money in his own name, and proposed to have the property transferred to some third person, and through that person to consummate the loan. Subsequently certain transactions were had. By a deed dated June-16, 1877, Donaldson and Prentiss, trustees in the deed which secured the Chipley notes, released the premises to Jane C. Hitz and her heirs, reciting that those notes were paid. On the same day a deed was prepared in which Mrs. Hitz appeared to be sole grantor, conveying the property to one Sarah L. Crane, for an alleged consideration of $40,000, which was not in fact paid. This deed was afterwards altered by erasures and re-writing, so as to include John Hitz as one of the grantors. The circumstances and effect of this alteration will be considered later. This deed wuis acknowledged by Mrs. Hitz on the 18th and by Mr. Hitz on the 20th of June. By a deed dated on the 20th Sarah L. Crane conveyed the premises to defendant Tyler, in trust to secure her promissory note of that date for the sum of $20,000, payable to the order -of John Hitz three years after date, with interest quarterly, at the rate of eight per centum per annum. This note was endorsed by Hitz, with waiver of-notice and protest. Pie thus made Ms liability absolute, and substantially made himself the actual debtor. Prentiss, who was cashier of the bank, made himself party to this negotiation. Some of the conveyances, notably that from Mrs. Hitz and her husband to Crane, were prepared under, his supervision and by his procurement. Throughout the transaction it was understood between Prentiss, acting for the bank, and Plitz, on one part, and Jenks, through his agent, Tyler, on the other, that the original and first lien of the Chipley trust was to be got out of the way and extinguished, and that, to this end, the money lent by Jenks was to be immediately applied by the bank to the payment of the Chipley notes. In other words, although the loan was nominally made to Crane, it was understood to be substantially a loan to Hitz, or for his use, and that he was at the same time to turn the money over to the bank, in order that it might be at once applied to the satisfaction of the Chipley trust. In accordance with this understanding Jenks’ check on a Philadelphia bank for the amount of the loan was made payable to the order of, and was by Tyler delivered to Prentiss, as cashier, and it was by Prentiss’s endorsement made payable to the German American National Bank when he forwarded it to Philadelphia for collection. By this means this money went directly to the credit of the bank, and became part of its funds, but applicable, both as against Hitz and his wife and as against Jenks, solely to the payment of the Chipley notes. Prom that moment its application was fixed. It does not appear by the books of the bank that it was applied immediately, but as against the bank, and, therefore, as against the complainant, whose rights are only those of the bank, it must be treated by a court of equity as having been applied according to the contract under which it was received. Hence it must be held that the Chipley notes were satisfied on the 20th of June, 1877, if the Jenks loan was sufficient to pay what was due on them, provided the bank authorities could lawfully allow them to be paid in anticipation of maturity, and provided the bank was bound by the transaction carried out by its officers, Hitz and Prentiss. As a matter of fact, the interest on the Chipley notes had been paid at that time, so that the Jenks loan was precisely adequate to the payment of the principal. The question of the bank’s power and obligation will be considered.

The actual conduct of the bank officers in the subsequent treatment of the matter was certainly extraordinary. It appears from the bank books that Prentiss undertook to place the money received from Jenks to his own credit in a certain trustee account which included other funds ; that for some time afterwards the Chipley notes appeared on the books, and were exhibited to the bank examiner, as living assets ; that in October, 1878, in two several entries, they were credited as paid, and that finally on the last day of that month, the day on which the bank went into the hands of the receiver, they were entered as “returned” to the list of assets ; in other words, as not paid. These book-keeping statements are entirely immaterial; but if they were material, the admission of payment, made by the bank against its own interest, must outweigh the subsequent statement made in its own favor ; especially when the later entry was made under suspicious circumstances. Their actual importance is that they confirm the testimony as to the nature of the contract under which the Jenks fund was received.

It is objected, however, by coniplaiuant, that the Jenks loan was made six months before the second of the Chipley notes was due ; that this note bore a high rate of interest, and that even the directors, and, a fortiori, the officers of the bank, could not make a valid contract to receipt payment in anticipation, because they stood in the strict relation to the stockholders and creditors of the bank of trustees of these notes, and because trustees cannot vary the terms of payment. Numerous cases were cited to ns in which the transactions of trustees have been held invalid because they departed in that way from the terms and limitations of the instrument which created the trust. We should give great weight to them if we supposed that the powers of the directors of a national bank were regulated by .the strict principle of a special trust. We think that they are not. It is true that these directors act in a fiduciary capacity, but they are trustees clothed by the statute with a power of management, and this power to manage the affairs of the bank implies a considerable element of discretion. We think that this discretion fully embraces a case in which cash, which is needed for the purpose and legitimate business of the bank, may be obtained for a debt which it holds, although that debt is not yet due. In this case the security was inherited from an institution whose business it was to lend money on real estate securities; but it was not the proper business of its successor, a national bank, to carry such investments, and it would seem to be a very proper act of discretion, in exercising the power of management, to convert such unavailable assets into money by accepting payment in anticipation. We hold, then, that there was no defect of power in the directors to make this transaction, and to bind the bank by a contract that the Jenks loan should be applied immediately to the extinction of the Chipley notes.

But it is objected further that, as a matter of fact, the directors never made any such contract, and that the officers who did make it were not empowered to do so either by virtue of their office or bj' special authorization. We think it is a sufficient answer to say that the bank received the money and cannot retain it except in accordance with the terms of the contract under which it was received. As to Jenks, it came.into the hands of the bank charged with a trust, and the retention of the fund must constitute an acceptance of the trust and at the same time a ratification of the acts of its officers.

If the Chipley notes were extinguished by this transaction, the complainant took nothing by Miss Crane’s deed of November 11th, 1878, purporting to convey the premises to him in trust to secure the payment of these notes. Not only was it an attempt to secure a 11011-existing debt, but it was made by one who was a naked trustee, without power to charge the property.

These view's dispose of the case of the receiver. He has no claim against this property. It remains to consider the case set up by Mrs. Hitz in her cross-bill and amended cross-bill. She alleges that the deed to Crane, in which she originally appeared to be the sole grantor,.was altered after she had executed and acknowledged it, so as to describe herself and her husband as grantors. Having inherited and held the premises as a married woman before the act of 1869, she claims that she continued to hold them as at common law after that act, and that the joinder or non-joinder of her husband in her deed was a very material matter ; so that an alteration, after she had executed and acknowledged it, was a very material alteration.

- It is not worth while to consider the questions touching the effect of a sole conveyance by a married woman, since the act of 1869, of real estate owmed by her before that enactment ; or touching the effect of alterations made without the knowledge of the grantor before delivery to the grantee, until we shall have considered the question of fact as to when the alteration was made. The scrivener who both prepared the original paper and made these alterations testifies that they were made before Mrs. Ilitz signed and acknowledged the deed. He had previously made an affidavit that she had both signed and acknowledged the instrument before they were made. That affidavit is not evidence as to the main question, and is brought out only as affecting the credibility of the witness. In his deposition, however,he is very positive as to his memory that the paper bore no signature when he altered it. A number of witnesses, including experts in processes and in the effect of mechauical processes, and lawyers who spoke from their professional habits and knowledge, were examined as to to the question whether the seal which accompanied Mrs. Iiitz’s acknowledgment was impressed above one of the erasures, or had itself suffered by the process of erasure, thus showing that the erasure was made after acknowledgment. We have very carefully examined both the testimony of the witnesses on this matter and the paper itself. It may be sufficient to state that most of the experts were of opinion that the seal was impressed after the erasures had been made. An allegation, or more properly, an accusation of this kind must be satisfactorily made out, in order to justify a court in holding a deed void for alteration ; and this charge has not been made out. Taking the testimony of the only witness who speaks from personal observation as to the presence or absence of a signature when he made the alteration, and the supporting testimony of the experts, we are compelled to the conclusion that the alteration was made before execution and acknowledgment,, and, therefore, did not affect the validity of the deed. Even if this were doubtful, it is clear that it was made before delivery to the grantee, and while it was in the hands where Mrs. Hitz left it. There is nothing to show that the grantee knew or was charged to know that the alteration was made without the knowledgé and consent of the grantors.

Next, it was objected that the alleged consideration of $40,000 was never paid by Crane. As to Jenks, it'is immaterial whether it was paid or not. This conveyance was part of an entire arrangement by which a loan was to be secured on this land, and this arrangement supplied the consideration.

We think, then, that the complainant has no interest in this property in respect of the Chipley notes ; that the release of the original trust by Donaldson and Prentiss was valid; that the deed of Crane to complainant further to secure those notes must be candelled ; that the deed of Mrs. Hitz and her husband to Crane, and the deed of Crane to Tyler, in trust to secure Jenks, are valid; and that the trustee in the latter should be allowed to proceed to execute his trust.

It may be that, after payment of the note to Jenks, by sale of the premises, a surplus may remain to be disposed of. It is proper that the trustee be required, in case he makes sale and receives such surplus, to pay the latter into court. It appears, also, that a considerable amount of rents accruing from the premises has been collected and paid into court by the complainant. In the argument it was claimed on one hand that these sums should go to the creditors of Hitz. Eor the present, we do not dispose of either question, and this cause will be retained in order that the parties claiming to be interested may' litigate their lights by proper further proceedings.