Court Opinion

ID: 8508974
Source: CourtListenerOpinion
Date Created: 2022-11-23 08:34:46.176556+00
Date Added: 2024-06-11T16:51:01.497098
License: Public Domain

GIFFEN, P. J.
The original action was- commenced by Charles I. Dreifus to recover from the defendant, the Union Savings Bank & Trust Co., the face value .of six bonds for $500 each, with interest. The bonds were a part of a series of 500 bonds executed by the Georgetown Water, Light, Heat & Power Co., a corporation organized under the laws of the state of Kentucky, for the purpose of purchasing and taking over the property, rights, interests and franchises of the Georgetown'Water, Gas, Electric & Power Co., a corporation also organized under the laws of the state of Kentucky. To secure the payment of such'bonds the new company executed and delivered to the defendant as trustee a mortgage or deed of trust of the property, interests' and franchises of the old company, although the board of directors had authorized its execution only after the purchase of the property of the old company had been completed. The defendant accepted the trust, and signed the following certificate indorsed on the bond:
“It is hereby certified that this bond is one of a series of bonds mentioned in the mortgage or deed of trust within referred to. ”
Three hundred of these bonds as certified were, upon the order of the board of directors of the obligor, delivered by the defendant to Holzman & Company, brokers, who pledged six of them to the plaintiff, who afterwards discovered that they were and at all times had been worthless. He claims that he relied to his prejudice upon the certificate of the defendant as trustee, and that the same was a false representation of the identity and security of the bonds.
The purpose and effect of the certificate is made more apparent by the recital in each bond that:
“This bond shall not become obligatory until it shall have *48become authenticated by a certificate indorsed thereon, duly executed by said trust company, the trustee named therein.”
This statement prevented the bond from becoming obligatory until it was identified by the trustee as one of the series of bonds mentioned in the mortgage or deed of trust, and authorized such trustee to render it truthworthy by signing a certificate to that effect, although it could not reasonably be expected that it would thereby become a guarantor of the value of the security described in the mortgage nor of the priority of the lien.
But the certificate itself, when read in connection with other statements in the bond and the actual knowledge of the trustee of the whole transaction, becomes very significant and may amount to a representation of a material fact upon which an intending purchaser or pledgor may rely and recover if he suffers loss, not simply because the representation is untrue, but because the trustee knew it to be false and therefore fraudulent.
The language of the. certificate, “the mortgage or deed of trust within referred to,” directs us to the body of the bond Avhere we find the statement that “these bonds are secured by a deed of trust or mortgage,” whereas the deed of trust or mortgage under which the defendant was acting secured nothing, because none of the property described therein belonged to the mortgagor, and all of which was well known to the defendant. The statement that the mortgage was duly recorded in Scott county, Kentucky, is also found in the bond, whereas'the mortgage delivered to the defendant was not then and never has been recorded in Scott county, Kentucky, nor any other place, all of which the defendant well knew.
This identification of each of the six bonds, pledged to the plaintiff, as one of a series of 500 bonds secured by a recorded mortgage, while apparently true, is in fact false and known by the defendant to be false. It would be a novel construction of the legal duty of a trustee in certifying bonds to hold it to be a mere formal matter, unaffected by the actual knowledge he has of their infirmity. It is this knowledge of the falsity of *49the representations that makes them fraudulent, independent of the motive of the\defendant. Taylor v. Leith, 26 Ohio St. 428.
Counsel for defendant rely upon the ease of Tschetinian v. Trust Co. 186 N. Y. 432 [79 N. E. Rep. 401], where a certificate like the one in this case was held not to make the trustee a guarantor of the quality and extent .of the security, but the court is careful to .exclude all questions of fraud or deceit, active or passive.
In the case of Bauerschmidt v. Trust Co. 89 Md. 507 [43 Atl. Rep. 790], the decision is qualified by the statement, “the bonds being in fact secured by a mortgage of property.” In other words, there was an actual lien upon tangible property, and not a sham and false pretense. The plain duty of the defendant in this case, when ordered as trustee by resolution of the board of directors of the new company to deliver the bonds to Holzman & Company, was to withhold its certificate until the property described in the mortgage had been conveyed by the old company to the new company, the mortgagor; or if objection were made to this mode of transfer, then to require that the conveyance of the property, and the delivery of the bonds be simultaneous.
A prior resolution of the board of directors, set forth in the mortgage itself, authorized the president and -secretary to execute and deliver a first mortgage or trust deed upon all the property owned by the company, as soon as they shall receive the conveyance for the plants directed to be purchased. If this natural and sensible provision had been observed and followed there could be no legal objection to a delivery of the bonds by the trustee to Iiolzman & Company or to any other person designated by the board of directors; but in the absence of any property upon which the mortgage could operate as a' lien, the certificates and delivery of the bond by the trustee, with full knowledge of s.ueh defect, was inexcusable and fraudulent Counsel for plaintiff have.argued the case upon the ground of negligence ;.b'ut the pleadings and proof present a case of constructive fraud or gross negligence amounting to fraud.
It is claimed, however, that the act of the defendant in *50certifying the bonds and delivering the same to Holzman & Company was not the proximate cause of plaintiff’s loss; but that such loss was directly caused by the fraudulent pledge of the bonds by Ross Holzman, a member of Holzman & Company.
The certificate of the trustee was, according to the statement in the bond, the final, authentication that made them obligatory, and the delivery to Holzman & Company gave them apparent currency, the natural and probable consequence of which was to induce purchasers to rely upon them as being vkhat they purported to be. The loss to the plaintiff would have been the same had Ross Holzman sold the bonds to him for cash and accounted for the proceeds to the mortgagor. His firm was clothed with apparent authority of disposition, the bonds being complete in form and negotiable by delivery. The plaintiff was dealing with him as a broker and not as an officer of the mortgagor, and relied upon the certificate of the defendant as trustee. It seems quite clear therefore that the act of the trustee was the direct cause of the loss to the plaintiff.
The court erred in arresting the case from the jury at the close of plaintiff’s evidence.
The judgment is reversed and the cause remanded for a new trial.