Court Opinion

ID: 9705712
Source: CourtListenerOpinion
Date Created: 2023-08-26 01:17:35.592046+00
Date Added: 2024-06-11T18:22:13.698479
License: Public Domain

Smith, J.
This is an action brought by Ellen Johnson Griffin against her husband, William Griffin and the Bank of Waterbury under the Declaratory Judgment Act. The action was brought by Ellen Griffin to determine the validity of certain notes and assignments held by the Bank of Waterbury and signed by the petitioner. The defendant Bank of Waterbury has brought its appeal here from the Decree of the Washington County Court of Chancery.
The facts found by the chancellor, none of which were excepted to here, disclose the following factual situation:
Ellen Griffin and defendant William R. Griffin were husband and wife, although since about June 1, 1960, they had been living apart, and a divorce action brought by the petitioner against her husband had been pending in the Washington County Court since July, 1960, at the time of hearing.
*427Prior to November 15, 1959, Ellen Griffin, her husband and his mother and father were indebted to the Bank of Waterbury by reason of notes and mortgages as follows:
a. A note in the original amount of $800.00 dated March 2, 1956, and signed by Dennis Griffin and Ina Griffin, and by Ellen and William Griffin.
b. A note in the original amount of $7,200.00, dated March 2, 1956 and signed by Ellen and William.
c. A note in the original amount of $379.00, dated October 18, 1957, and signed by Ellen and William.
d. A note in the original amount of $1,485.53, dated December 16, 1958, and signed by Ellen and William.
e. A note in the original amount of $3,150.00, dated March 26, 1958, and signed by Ellen and William and by Dennis and Ina Griffin.
The findings disclose that until the middle of November, 1959, Ellen and William were in severe financial straits. They were continually delinquent in payments of both interest and principal on the above notes, and in tax payments on their home place. The request made to them by the defendant Bank at frequent intervals to pay the various delinquencies, clearly demonstrate that the Bank was aware of their precarious financial situation. William Griffin was in the logging business, apparently without much success, for the joint checking account used to pay the bills of such operations was overdrawn at frequent intervals.
In the fall of 1959, President Meaker and Director Brisbin of the Bank, visited the home of the petitioner. Mr. Meaker, in addition to being President and Director of the Bank, was an attorney, and his firm also acted as lawyers for the Bank. He had handled legal business for Ellen and William in the past, principally in preparing their income tax returns over the years. The purpose of the visit to the Griffin home at this time was to appraise its value and to warn the Griffins that under the conditions then existing it might be necessary for the Bank to institute foreclosure proceedings against the property.
Ellen advised the Bank officials at the time of this visit that she was soon to receive an inheritance of money and stocks and that as soon as she received this inheritance she would bring the delinquencies up to date as far as the loans on the home place were concerned. On November 25, 1959, Ellen received her inheritance which consisted of $5,111.52 in cash and stocks then having a market value of $20,000. *428A listing of such stocks, given below, is necessary for an understanding of the questions presented on this appeal:

No. of shares Corporations

11 General Electric
22 General Portland Cement (1)
8 General Insurance (2)
11 Great Northern Railway
7 Gulf Oil Corporation
55 Metal and Thermit
11 Monmouth Racing Association
71 National Lead Go. Common Stock
13 Northern Pacific Railway (4)
17 Riegal Paper
13 Southern Company
22 United States Steel
22 U.S. Tobacco
40 Texas Company
Two days after receiving her inheritance, Ellen made total payments to the Bank of interest and principal on the above mentioned notes of $684.24, and a short time later, paid in full a note dated December 16, 1958, with a then balance of $1,308.91, at the Bank’s request.
It is from this point on, that is, from the time Ellen came into the possession of the money and stocks, that the Bank and the plaintiff entered into the transactions which are the subject of this controversy.
Involved here are five notes upon which Ellen’s signature appears, given to the Bank between December 10, 1959 and April 29, 1960. Also involved are assignments to the Bank of the various stocks, listed above, signed by Ellen Griffin, ostensibly given as collateral security for the payment of some or all of the five notes. Plaintiff, in her complaint, asserts that she received no consideration for the notes given, and that by reason of the constructive fraud of the Bank, through its officers, she was induced to sign the various assignments of stock. The relief she seeks in her declaratory judgment action is a determination as to the actual ownership of the various stock certificates, as well as to her liability on the various notes.
Before proceeding to the decree of .the. chancellor relative to the right of ownership in the various stocks, and .the liability of the petitioner on the respective notes, we must first resolve the questions initially presented to us in the brief of the Bank.
*429The Bank contends that the plaintiff, by her prayers, did not seek to have the chancellor determine the validity of any of the notes given by her to the Bank. But, as we said in Blanchard v. Knights, 121 Vt. 29, 36, 146 A. 2d 173:
“The scope of a bill in equity is to be determined, not by the special prayers for particular relief, but by the case stated.”
In the earlier case of Hoadley v. Hoadley, 114 Vt. 75, 79, 39 A. 2d 769, the Court stated:
“Under the general prayer the plaintiff may have relief agreeable to the case made by the bill.”
In her bill, the petitioner states that one of the questions she seeks to have determined is “as to the validity of certain of the notes and the validity of all the assignments...” Such questions were before the chancellor for his determination.
The Bank also advances the argument that both the validity of the note and of the various stock assignments was conceded by the petitioner in her pleadings, as well as by the introduction by the petitioner, in evidence of the notes and assignments involved. It is true that petitioner in her pleadings admitted signing the various notes, and the chancellor so found. It is also true that petitioner introduced into evidence the various assignments of stock and her signatures and stated she has made “a full and complete assignment” of her stock. But such pleadings and evidence were consistent with her further pleadings, and evidence, that such assignments were fraudulently obtained, and that certain of such notes were invalid.
It was essential for petitioner to plead existence and execution of the various notes and stock assignments, the validity of which she sought to have determined, as well as to introduce them into evidence. None of the cases cited to us by the defendant hold that such allegations in a pleading stops a plaintiff from asserting in the same pleading that such notes or assignments were invalid because of fraud or failure of consideration.
We cannot sustain defendant Bank’s position that plaintiff had cast herself by her pleadings so that she: was estopped from denying, the validity of the notes and assignments in the hearing below, on the. grounds of constructive fraud and failure of consideration.
Nor can we sustain the Bank’s brief that the plaintiff should not have been allowed to introduce evidence to vary the terms or legal effects on the written instruments introduced in this case. The case of *430Lunnie v. Gadapee, 116 Vt. 261, 262-263, 73 A. 2d 312, cited to us by the defendant does state, as defendant says, that the parole evidence rule applies where the enforcement of an obligation created by the writing is substantially the cause of action. But the opinion goes on to hold that an exception to the parole evidence rule is applicable where the parties to the litigation and to the writing are the same, but the instrument, as here, is not the basis of the action.
Nor has the defendant, in its brief, pointed out that claimed errors in the admission of such evidence was ever brought to the attention of the chancellor in the hearing below. No question shall be brought to the Supreme Court except that upon which it is made to appear that the trial court has had fair opportunity to pass judgment. Langevin v. Gilman, 121 Vt. 440, 442, 159 A. 2d 340.
We now turn to the decree made below and the exceptions to it. Defendant Bank’s exception to the decree raises only the question as to whether the decretal order is supported by the facts found. Lorenz v. Rowley, 122 Vt. 480, 486,177 A. 2d 364.
What now concerns us is a series of five notes signed by the petitioner between December 10, 1959 and April 29, 1960, together with certain assignments covering all the stock of the plaintiff, and which defendant Bank claims to be security for payment of these notes. The total amount of such notes exceeds $22,000.00.
The chancellor found that such notes and assignments of stock were signed by the petitioner under the following set of circumstances. They were signed by her either while in the hospital following an automobile accident in which she and her three children suffered personal injuries, or soon after leaving the hospital. The plaintiff received none of the proceeds from such loans, except for certain deposits made in the joint checking account used by defendant William Griffin in his business. The loans were never passed upon by the Directors of the Waterbury Bank until after they were made.
In view of the plaintiff’s claims of constructive fraud on the part of the Bank through its officers, the findings as to the relationship between the President of the Bank, Mr. Meaker, and Ellen Griffin, the plaintiff, are important. Mr. Meaker, in his capacity as an attorney, had acted as lawyer for both the plaintiff and her husband, principally in making out their income tax returns for a period of several years. However, the chancellor also found that Mr. Meaker had acted as attorney for the plaintiff in connection with legal matters concerning her automobile accident in November, 1959. Also, found by the chan*431cellor was that at no time during these tranactions was the plaintiff ever advised of her legal rights or effects of these transactions by the Bank officials.
The first of such notes signed by the plaintiff was on December 10, 1959, while she was still in the hospital following her accident. It was in the amount of $2,500.00. At the time of such signing, language appeared on the face of the note concerning the assignment of 40 shares of Texaco, Inc. stock “as additional security for payment of this note.” At the same time, plaintiff signed an assignment of the Texaco shares to the Bank, and while such assignment is witnessed by Mr. Chase, Treasurer of the Bank, neither Chase, nor any other Bank official was present at the time of such signing.
Sometime after the signing of the note, the Bank caused to be added to the stocks listed as collateral security on such note 14 shares of Gulf Oil Corporation, 41 shares of American Can Company (such stock had been received in place of the Metal and Thermit shares) and 40 shares of Texaco Company, which Texaco shares had been received in a one for one stock split from the Texaco corporation after the making of the note and the assignment of the stock to the Bank by the plaintiff.
The second note in this series was signed on December 28, 1959, by the plaintiff, in the amount of $4,000.00 and contained on the face of the note, at the time it was signed, a statement that 11 shares of National Lead Company stock had been assigned to the Bank as collateral security for its payment. A general assignment of such shares of stock to the Bank was signed by the plaintiff on the same date. At a point later in time, and without the knowledge or consent of the plaintiff, the Bank caused to be added as collateral security described on such note “also Gulf Oil Certificate No. G025131 exchanged 8/ 29/63 for 41 shares of American Can Company, common.” The Bank admitted that changes as to the collateral security in both notes were made following the signing of the note by the plaintiff and without her knowledge. The finding is that no assignment had been made to the Bank at the time the note was signed of the stocks later added to it. The chancellor found that both of these notes were altered by the Bank in adding to the list of stocks assigned as collateral security on each.
The decretal order relative to these two notes is that the Bank is entitled to hold only the Texaco stock and the National Lead Company stock for the payments of these two notes, with any sums left after such notes are satisfied being paid over to the plaintiff,
*432Defendant Bank claims that the addition of the stocks to the notes after the date of signing was only a “bookkeeping” matter and was not a material alteration.
9 V.S.A § 576 of the Negotiable Instruments Act provides:
“Where a negotiable instrument is materially altered without the assent of all parties liable thereon, it is avoided, except as against a party who has himself made, authorized or assented to the alteration, and subsequent indorsers; but when an instrument has been materially altered and is in the hands of a holder in due course, not a party to the alteration, he may enforce payment thereof according to its original tenor.”
9 V.S.A § 577 provided in part:

“What constitutes a material alteration:

An alteration is material which changes:
... or (6) which adds a place of payment where a place of payment is not specified, or any other change or addition which alters the effect of the instrument in any respect.”
The findings establish that the Bank, not a holder in due course of the note, added certain stocks to the memoranda on the notes setting forth the collateral security by which notes were secured, after their respective executions, and without the assent or knowledge of the party liable thereon.
The test laid down to determine which alterations are material and which are not, is set forth in Gray v. Williams et al, 91 Vt. 111, 117, 99 Atl. 735:
“A material alteration is one which makes the instrument speak a different language in legal effect from what it originally spoke; an alteration which produces some change in the right, interests and obligations of the parties to the instrument.”
Also pertinent to the notes we are now considering is the following quotation from the same case:
“The general rule is that if a memorandum written on an instrument in the margin or at the foot is made before or at the time of its execution, it is considered a part of it; and if it affects the operation of the terms of the body of the instrument, it is a material part of it.” Gray v. Williams, supra, p. 119.
We have no hesitancy in holding that the two notes now under discussion were materially altered. Siich alteration materially affected the interest of the plaintiff in that certain of her securities, not pledged *433for the payment of the notes at the time she executed them, were made subject to such liability because of the unauthorized alteration. Such changes materially altered the effect of the instrument upon the plaintiff and her property.
However, that part of the decretal order which states that the plaintiff is liable to the Bank on the two notes which were materially altered, and that the Bank is entitled to use the proceeds of, the Texaco and National Lead Co. stock, is inconsistent with a material alteration of such notes.
A material alteration in the note by the Bank, a party to it, was destructive of its validity. Barton Savings Bank and Trust Co. v. Stephenson, 87 Vt. 433, pgs. 438-439, 89 Atl. 639. It necessarily follows that the decree, in accordance with the findings, should have declared the plaintiff not liable on such notes by reason of such material alteration, and the assignments of stock, if only given to secure such notes, would also become invalid.
On March 7, 1960, the plaintiff and defendant husband signed a discount note in the principal sum of $11,705.52, payable in installments and secured by 1 International TD-14 Crawler Tractor, at the Waterbury Bank. No other collateral security is set forth in the note. At the same time and place, the plaintiff signed general assignments to the Bank of the following shares of stock:
11 shares of General Electric Co.
22 shares of General Portland Cement Co.
21 shares of Gulf Oil Corporation
55 shares of Metal and Thermit Corporation
17 shares of Riegal Paper Corporation
13 shares of Northern Pacific
22 shares of U.S. Tobacco Company
22 shares of United Steel Corporation
13 shares of Southern Company.
The Crawler Tractor, stated on the note to be collateral security for the loan, was, on March 7th, the date of the loan, under a mortgage to the State Equipment Co. This mortgage was paid off by the proceeds received from the loan, and the Bank then took a first mortgage on this equipment. The Bank, according to its appraiser’s report, valued this equipment at between $15,000 and $18,000. Such appraiser’s report also states: “add’l security various certificates of stocks (see c/o Ellen Griffin) present value $6,000.00.” It was the finding of the chancellor that the loan of $11,705.52, by reason of the mortgage on the equipment *434and the stock assignments, was secured in an amount not less than $25,000 or more than $28,000.
Also found was that the plaintiff believed that such stock assignment was for the temporary purpose of securing the Bank on such loan, only until the indebtedness to the State Equipment Co. on the Crawler Tractor had been paid, and the Bank was secured on its loan by a mortgage on such equipment. No explanation of the effect of the stock assignment was made by any Bank official to the plaintiff, although none was requested by her, and the assignments were drawn out of her presence, and then presented to her for her signature. None of the proceeds of the note was received by the plaintiff.
The decretal order directs that all of the securities listed above, assigned by the plaintiff to the Bank, be returned to the plaintiff, which is excepted to by the defendant Bank.
This brings us to principal contention in the cause before us. It is the position of the defendant Bank that all assignments of stock made to it by the plaintiff, secured all the notes signed by her, such assignments being unequivocal and with no conditions attached. The facts found by the chancellor, asserts the Bank, do not establish fraud on the part of the Bank, and so the decretal order returning the assigned stocks to the plaintiff cannot be sustained.
The chancellor finds that the Bank obtained such stock assignments by virtue of its confidential relationship with the plaintiff, and by reason of a failure on the Bank’s part to fully inform and advise the plaintiff of the nature, extent and effect of such assignments. Also found is that the Bank had superior knowledge on the contracts, which was not available to the plaintiff. The chancellor found a confidential relationship between Bank and plaintiff existed through its President, Mr. Meaker, who was also attorney for the plaintiff and her husband, not only on tax matters, but for the plaintiff on matters relating to her automobile accident. Further, found by the chancellor was that the defendant Bank was adquately secured on the tractor loan of March 7, 1960, without the general assignments of most of her stock made by the plaintiff at that time.
On March 7, 1960, the plaintiff and the defendant husband signed a discount note in the principal sum of $11,705.52. Upon the face of the note appears “This note secured by Chattel 1 International TD-14 Crawler Tractor.” No other collateral security is set forth on said note.
While at the Bank, and at the same time, the plaintiff was requested *435to wait until certain assignments of stock were prepared for her signature. Such assignments were in general form, entitled “Assignment Separate From Certificate”, and assigned to the Bank of Waterbury the number and kind of stock certificates listed above.
It is the Bank’s position that, as its brief states, “the stocks taken in on March 7, 1960 were considered by the Bank to be additional security for the loan of that date.” The brief also goes on to state: “As far as the Bank was concerned, all certificates secured all notes.” This is because, as the Bank asserts, the written assignments and designations of attorney for transfer of the stock are all unequivocal and with no conditions attached. Admitted by the Bank is that no discussion was held between the plaintiff and the Bank and its officials, regarding any terms or conditions under which the assignments were made. By virtue of the assignments described above (and the Bank’s unilateral understanding of their legal significance), the Bank contends that all indebtedness due it from the plaintiff is secured by such assignments.
The plaintiff’s position in the matter is set forth in No. 13 of the findings of fact: “That the Chancellor finds that the Petitioner believed when she went to the Bank in connection with this transaction relating to the purchase of International TD-14 Tractor by Defendant husband, that the assignment of her shares of stock as above set forth on March 7, 1960, was a temporary arrangement to enable the Bank to take title to the tractor, dozer and winch, which equipment was then under a mortgage to the State Equipment Company; that the Petitioner believed she was in no way liable for the payments of the indebtedness in connection with the tractor, dozer and winch to the State Equipment Company, and that petitioner did not receive any of the proceeds of the note of March 7, 1960.....”
This finding, like all others, is not excepted to by the Bank by brief herd. But if it were we think it would be amply supported, not only by the testimony of the plaintiff but by the circumstances surrounding the assignments. The note had only the equipment listed as collateral upon its face. Further, the value of the equipment, once in the Bank’s possession, had an admitted value of between $15,000 and $18,000, a sum greater than the face of the note. Added to this is the conceded lack of any other explanation of such assignments on the part of the Bank to the plaintiff.
The decretal order directs that all of the securities listed above, assigned by the plaintiff to the Bank, be returned to the plaintiff. It is apparent that the Chancellor made such order on the ground that there was constructive fraud on the part of the Bank in its dealings *436with the plaintiff. The Bank asserts that the Chancellor made no findings upon which a composite finding of constructive fraud on the part of the Bank could be made.
No. 23 of the findings of facts states: “That the Chancellor finds that the Petitioner at the time she signed the note for $11,705.52 (Plaintiff’s exhibit 3) was not fully and fairly informed by Defendant Bank as to the full nature, extent and legal effect of such transaction; that the Bank had superior knowledge as a party to the contract, or knowledge which was not within the fair and reasonable reach of the Petitioner and which she could not discover by the exercise of reasonable diligence; that the Bank stood in a close confidential relationship through its President, Mr. Meaker, who was also attorney for Defendant Griffin and the Chancellor further finds that in fact had acted as attorney for the Petitioner in connection with legal matters concerning her automobile accident as late as November, 1959; that the defendant Bank had adequate security for the so-called tractor loan (Plaintiff’s exhibit 3) by reason of its then value without the Petitioner assigning her shares of stock represented by Plaintiff’s exhibits 12 through 18.” The last exhibits referred to are the stock assignments here in dispute.
“Even where there is no actual fraud courts of equity will frequently relieve against hard and unconscionable contracts which have been procured by taking advantage of the condition, circumstances or necessities of the other party, especially if such contracts are made by parties acting in a fiduciary capacity.” 23 Am. Jur. Fraud and Deceit, § 16, p. 767.
The findings disclose that the Bank loaned thousands of dollars to defendant Griffin and the Petitioner during a period when the Bank was well aware of the desperate financial straits of defendant Griffin. At least, in part, such knowledge had been obtained by the Bank President, in his fiduciary relationship with the Griffins as their attorney, in making out their income tax returns. In the year 1959, for example, the tax return prepared by the Bank official showed that defendant Griffin had a profit from his logging business of only $949.32~hardly sufficient to meet the obligation to the Bank then existing.
There can be little doubt that the Bank was well aware that a general assignment of all her stocks by the plaintiff to the Bank to secure all the indebtedness of the plaintiff and her husband to the Bank would be of great benefit to it. At the time of the transactions of March 7th, leading to the stock assignments, by virtue of its close and confidential relationship with the plaintiff through the fiduciary relationship of its President, the Bank knew that the resources and *437income of the defendant husband and the plaintiff wife were inadequate to return to the Bank the money already advanced to them unless the stocks then in the ownership and possession of the plaintiff were made general collateral for all loans.
The loan actually made on March 7th, and for which the note was signed by the plaintiff, as we have already seen, was amply secured by the equipment stated to be the collateral security on the note. As the chancellor found, and as we have commented, none of the circumstances of the signing of the note and assignments relative to the signing of the note on March 7th by this plaintiff (with the exception of the legal form of the assignments) served to notify the plaintiff that the assignments of stocks then made by her were to be used by the Bank as collateral for all her indebtedness to the Bank, past, present and future.
There is no disagreement here that the Bank, at no time, ever offered to the plaintiff any explanation of the situation in which she would place herself by the signing of the general assignments of stock. The constructive fraud found by the chancellor in No. 23 of the findings is that there was a duty upon the Bank, because of the relationship of the parties, to disclose to the plaintiff the liabilities she would assume on her signing of the stock assignments.
As stated in Howard v. Howard, 122 Vt. 27, 32, 163 A2d 861: “Fraud in equity reaches an intentional act and concealment involving a breach of duty or confidence, by which undue or unconscientious advantage is obtained.”
The distinction between active and passive concealment in cases of fraud was well pointed out in the earlier case of Newell Brothers v. Hanson, 97 Vt. 297, pp. 303-304, 123 Atl. 208:
“The law distinguishes between what is termed active fraud and passive concealment. Mere silence, or mere failure to disclose known fact, though material, may not be fraudulent. Where persons are dealing at ‘arms length' as where the facts are equally within the knowledge of both, neither is required to speak, in the absence of inquiry respecting such matters. But fraud may be committed by the suppression of truth as well as by the suggestion of falsehood. The test of liability for failure to disclose facts material to the transaction is some duty, legal or equitable, arising from the relations of the parties, such as that of trust or confidence, or superior knowledge or means of knowledge. When in the circumstances of the particular case such duty is present, failure to disclose a material *438fact with intention to mislead or defraud is equivalent to a fraudulent concealment of the fact and stands no better than the affirmation of material misrepresentation.”
Present: Holden, C. J., Shangraw, Barney and Keyser, JJ.
In these security transactions the plaintiff and the defendant were not dealing at arm’s length. The defendant’s President obviously gained the plaintiff’s confidence by virtue of his engagement as her attorney in other matters. While there was no breach of fidelity arising from that representation, its very existence creates a fiduciary tie not present in the usual bargaining position between borrower and lender.
The findings contain no implication that Meaker entertained any conscious purpose to take advantage of the plaintiff. Nonetheless, when the defendant Bank elected to deal with the plaintiff frequently through its president, who had previously served the plaintiff as a confidential advisor, it became charged with something stricter than the “morals of the marketplace.” In this situation, secret, silent and .undisclosed objectives will not satisfy the demands of equity and fair dealing. Minehard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546.
It is clear from the record presented that the defendant’s acquisition of the assignment on March 7, 1960 was the combined product of the plaintiff’s misunderstanding on the one hand, and the superior advantage of the defendant on the other. Through its silence and the misleading description of the security designated to secure the obligation, the defendant contributed to the misunderstanding.
These considerations support the intervention of equity by way of a decree that the plaintiff be restored to possession of the stock certificates now held by the defendant.

The decree below is affirmed as to No. 1. It is amended as to No. 2. in that the stocks there set forth shall be returned to the plaintiff, and the notes herein described are declared void. It is affirmed as to the remainder of the decree, to which no exceptions have been briefed.