#### Union Bank of Brooklyn, Appellant, *v.*Lida M. Fleitman, as Administratrix, etc., of F. Augustus Heinze, Deceased, Respondent.

Second Department,

June 4, 1915.

Bills and notes—notes to secure repayment of moneys advanced by payee — defense — failure of payee to make payments — evidence — parol evidence to vary written agreement.

Where, in an action upon a series of promissory notes given by the defendant to the plaintiff, or to its predecessor, to secure payments agreed to be made by the plaintiff to a savings bank in which the defendant was interested, it appeared that the plaintiff had failed to make a certain number of payments, for the repayment of which it had received notes from the defendant, and had not paid judgments obtained against it by the savings bank for such default, it cannot recover on the notes of the defendant.

As the defendant had given other notes in the usual form, pledging collateral, with written authority to sell the same at public or private sale at the option of the plaintiff on the non-performance of the promise, and without notice, it was error to admit testimony as to a subsequent parol agreement authorizing the defendant to control and direct the sale of the collateral, for it contradicted the terms of the written instrument.

Appeal by the plaintiff, Union Bank of Brooklyn, from a judgment of the Supreme Court partly in favor of the defendant’s intestate, entered in the office of the clerk of the county of Kings on the 10th day of June, 1913, upon a dismissal of certain causes of action alleged in the complaint by direction of the court at the close of the case. As to certain other causes of action the court directed a verdict in plaintiff’s favor.

*172Plaintiff also appeals from an order entered in said clerk’s office on the 16th day of June, 1913, denying its motion for a new trial made upon the minutes.

*Joseph G. Deane [Rufus O. Catlin*with him on the brief], for the appellant.

*Nash Rockwood [L. B. McKelvey*with him on the brief], for the respondent.

Putnam, J.:

The plaintiff’s twenty-four causes of action were disposed of by the trial court without sending any to the jury. Mr. Heinze admitted a liability of $195,451.74 upon the first seven causes of action, which took them out of controversy. The other causes of action upon a series of seventeen promissory notes, given by Mr. Heinze to the plaintiff or to the prior corporation, the Mechanics and Traders Bank, were dismissed. The counterclaim, for not selling collateral' pledged to plaintiff to secure Mr. Heinze’s note, was left to the jury, who gave a verdict for $149,825. The excess of $195,451.74 over this counterclaim left a judgment in plaintiff’s favor for $45,526.74, from which plaintiff appeals.

The dismissed causes of action arose from Mr. Heinze’s notes given to secure the Mechanics and Traders Bank for payments which it agreed to make periodically to the State Savings Bank of Butte, Mont., in which Mr. Heinze had been largely interested. As the present plaintiff, the Union Bank, succeeded to the Mechanics and Traders Bank in the course of these proceedings, the term “plaintiff” will be applied here to both banks. After plaintiff had opened a credit of $200,000 in favor of the Butte bank, it gave a written agreement for its future payments at stated intervals. This had been modified so as to prolong the period for such advances. When the cause of action arose, the agreement of 1908 was in force, by which plaintiff’s installment payments to the Butte bank were spread over three years, the last being on December 1, 1911. Mr. Heinze was to execute thirty-seven new notes, payable on the dates of the plaintiff’s promised payments to the Butte bank, “to the order of the Mechanics and Traders Bank to secure *173the repayment of the funds so to be paid to the party of the second part” (the Butte bank). Mr. Heinze also signed this agreement, and gave plaintiff the thirty-seven notes as therein provided.

The Mechanics and Traders Bank and plaintiff, its successor, made its stipulated payments to the Butte bank, and Mr. Heinze paid his installment notes corresponding to such payments, which, however, stopped after June, 1911, leaving seventeen installments in default. Therefore, Mr. Heinze declined to pay the last seventeen notes.

Although the Butte bank obtained judgment for $85,000 against plaintiff for this default, no part of this judgment has been paid. Accordingly the learned trial justice, finding these facts undisputed, held that plaintiff had no cause of action as to these notes, since it had not complied with the terms of its agreement. Having made no payments which the notes were given to secure, it could not claim on the notes for reimbursement. In this the learned court was clearly right.

This left Mr. Heinze’s counterclaim for the bank’s misuse of his collateral deposited to secure loans made in 1907. Mr. Heinze pleaded that he had a right to redeem such collateral, by paying the market value of such stocks and securities, such payments to reduce the loans. Alleging a demand and refusal to permit such redemption, by which the collateral had been depreciated, Mr. Heinze’s damage was counterclaimed at $250,000.

It appeared that Mr. Heinze had given the demand notes in the usual form, pledging collaterals, by which he recited having deposited certain securities “with authority to sell the same at the Board of Brokers of the City of Hew York, or other cities, or at public or at private sale, at the option of said Bank, on the non-performance of this promise, and without notice.” Here follow other provisions to the effect that the note comes due on insolvency of the maker; that the agreement shall apply to substituted collaterals; also, that-by further deposits the borrower shall keep the collateral at a margin of twenty per cent over the debt; otherwise, on the borrower’s failure, the lender may immediately sell the securities and apply the proceeds to the debt.

*174Notwithstanding these express terms, parol evidence was admitted, over plaintiff’s objection and exception, of a different agreement made with the former president of the plaintiff’s predecessor, to the effect that the right to market this collateral and to say how and when it should be disposed of, was reserved and remained vested in the defendant, and the verdict on the counterclaim was for a breach of such verbal promise. The note which carried this collateral bears the date of October 17, 1907. On the day before (October sixteenth) was the interview, as Mr. Heinze told it, when he was applying for a further loan. That Mr. Heinze stated as a condition (to which he says Mr. Sullivan, the president of the bank, agreed) that Heinze should “be allowed to handle the disposal of the collateral, so that the collateral would not be slaughtered in the market, and the loan which he was then making to me, with the other loans, should be carried for some time, so that an opportunity would be given to dispose of the collateral on a market which was different from the one that existed at that time.”

On cross-examination Mr. Heinze restated this conversation, but with greater stress on the depreciation to follow if large amounts of the collateral should be thrown on the market, “particularly at the time of the panic.” Mr. Heinze, however, admitted that he knew when he signed the note that no such power was contained in it, so that fraud or mistake was not claimed.

As the note evidencing this collateral loan was a complete contract which in the form of commercial paper stated what Mr. Heinze was to do and what were the bank’s rights over the security pledged, this parol testimony was ineffective. It contradicted the instrument in its vital essentials. If its express terms could be thus negatived and avoided by parol evidence, then no bank or lender has any safeguard in taking commercial paper.

Counsel for respondent, however, argues that this note was but part of a larger scheme that Mr. Heinze had engineered, a far-reaching plan of dealing with his peculiar collateral, reversing the power of control so that, regardless of the note’s wording, the borrower was to manage the disposition of the pledged securities.

*175Had this alleged promise been that before selling the securities the borrower was merely to be consulted, even that would be repugnant to the broad express power to sell, either at public or private sale, at the bank’s option *without notice.*But by this parol evidence Mr. Heinze completely reverses the power given in the note. He, the pledgor, is to handle, control and direct the sale of these securities pledged. The hypothecation becomes a mere sham if the sale of the securities remains dependent on the debtor’s will so that the pledgee becomes subject to the borrower’s direction and mandate.

The admission, therefore, of such testimony was error. *(Studwell*v. *Bush Company,*206 N. Y. 416; *Thomas*v. *Scutt,*127 id. 133; *Jamestown Business College Assn.*v. *Allen,*172 id. 291.)

The judgment and order must, therefore, be reversed and a new trial granted, costs to abide the event.

Thomas, Carr, Stapleton and Rich, JJ., concurred.

Judgment and order reversed and new trial granted, costs to abide the event.