Court Opinion

ID: 9864873
Source: CourtListenerOpinion
Date Created: 2023-09-25 16:15:13.887895+00
Date Added: 2024-06-11T12:32:22.012607
License: Public Domain

Mr. Justice Adams
dissenting.
I concur in that part of the majority opinion which holds that Toll cannot share in the proceeds o*f the sale under foreclosure to the extent of his unmatured interest coupons, but I must dissent to his being allowed to prorate with the bank as to his matured interest coupons, or at all. I think Toll’s matured interest should be subor*538dinated to the bank’s principal note and matured- interest. If I am correct in this, his attorney’s fees in foreclosing a subordinate lien should not be superior to the bank’s paramount lien. If I could believe that all liens were on a parity, I might have no difficulty in agreeing to the ruling as to his attorney’s fees.
As stated in the majority opinion, there is no dispute as to the facts. Indeed, there is an agreed statement of facts, which has materially lightened the burden of the record, and although the facts are undisputed, the construction to be placed thereon is a matter of serious controversy. I have no doubt but that the majority of the justices felt that the facts are stated as fully as the opinion requires, but they hardly embrace matters of record which form the bases of principles on the application of which I disagree with the majority of the court. These considerations, as I look at them, loom so large in their relation to the case as a whole that I believe a proper sense of proportion calls for a statement in somewhat more detail, at least for the purpose of making my objections clear.
As indicated in the opinion, there are two sets or series of negotiable promissory notes involved. Their genuineness is undisputed. They were executed and delivered in December, 1925, by the Twin Lakes Land and Water Company, to the Western Securities Investment Company, payable to order, and thereafter endorsed and put on the market by the investment company. One of these series consists of the principal note for $6,000, together with semiannual 6 per cent interest coupons in the sum of $180 each, attached to the principal note, all held and owned by the Colorado National Bank of Denver. The other series comprises a set of 1 per cent semiannual interest notes. According to an undisputed statement in Toll’s opening brief, the 1 per cent interest notes were executed and delivered by the Twin Lakes company as commission for the services of the investment company. They are called “commission notes,” and are also re*539ferred to as “split interest notes.” They are held by Toll in the manner hereinafter more fully stated.
In order to secure the payment of the principal note for $6,000 and “interest” — whatever the indefinitely expressed word “interest” may mean — the Twin Lakes company executed its deed of trust to the public trustee in Crowley county, covering the real estate to be sold under this foreclosure proceeding. This trust deed deserves special mention. While both series of notes are definite as to the rate of interest, the trust deed is indefinite in that it fails to specify any particular rate of interest. It says nothing about “commission notes,” or ‘ ‘ split interest notes. ’ ’ Whatever reference, if any, there may be! in the trust deed, relating to such notes, is found in the general expressions therein, such as “notes” and “interest notes.” There is nothing in the trust deed to indicate that it secures more than one series, or how many series of notes.
The investment company called itself “Farm Mortgage bankers, ’ ’ and did business on a large scale. In the conduct of its business it made other farm loans, secured by similar deeds of trust. It exploited an issue of its own notes, in denominations of $500 and $1,000 each, which it called 1 ‘6%'% Collateral Gold Notes,” hereinafter called the “gold notes.” Such notes, in a total par value of $175,000, were thereafter put on the market for sale, and $150,000 of them were disposed of to purchasers for value. As security, the investment company announced in a prospectus that there was deposited with the International Trust Company, as trustee, $192,500 of first farm mortgage interest notes, which it claimed to have acquired in its regular routine of business. The prospectus or circular contained this and other alluring representations, on which the purchasers of the gold notes relied. This $192,500 in security, as it is called, consists of 1 per cent interest notes, including those represented by the above Twin Lakes issue at that rate of interest. Toll evidently possesses a large quantity of them as trus*540tee, and this suit is to decide their fate. He became successor in trust to the International Trust Company after this suit was brought.
On July 10, 1926, some seventeen or eighteen months before this suit was commenced, the bank became, and is now, the holder in due course for value of the principal note for $6,000 and the 6 per cent notes. At the same time the investment company delivered to the bank the deed of trust, the insurance policy covering the buildings on the real estate, the title opinion relating to the property signed by the investment company’s attorney, and a prospectus, which stated, among other things, “First Mortgage Loan * * * Twin Lakes * * *. To net 6% interest per annum, payable semiannually. Principal and interest notes are secured by a first deed of trust on 78 lots,” etc. The bank believed that these documents thus delivered to it constituted all of the loan papers relating to this loan.
On July 10, 1926, when the investment company negotiated the principal and interest notes to the bank, it retained the split interest notes. The bank did not then know of the existence of these 1 per cent notes, nor was it aware of the existence of any outstanding notes purporting to be secured by the deed of trust, and it had no notice that they were in existence or outstanding, except such constructive notice, if any, as it had from the deed of trust which it then and there accepted. On September 29, 1926, the commission or split interest notes were deposited with the trustee, and thereupon became and now are a part of the collateral which secures the gold' notes. September 16, 1927, default having occurred in the payment of taxes, the bank declared the indebtedness held by it immediately due and payable, in accordance with a provision in the deed of trust. December 27, 1927, default having been previously made in payment of the interest on the gold notes, all of such outstanding notes were declared immediately due and payable, pursuant to the provisions of the trust indenture between the in*541vestment company and trustee, and the trustee was vested with all of the authority therein set forth. The hank brought foreclosure suit on December 31, 1927, and Toll became successor in trust on January 25, 1928. Toll’s collateral — the 1 per cent notes — are inadequate to secure the payment of the outstanding gold notes. Prior to the institution of this action, Toll and the International Trust Company were unaware of the representations, if any, of the investment company, in connection with the negotiation of the principal note involved in this action, or of any of the other principal notes given in connection with the other split interest notes which Toll holds as collateral under his substituted trust.
It is plain that neither the bank nor the International Trust Company, nor Toll, participated in the fraudulent concealment by the investment company of the fact that there were two outstanding series of notes purporting to be secured by the one deed of trust. However, in the light of present developments, only one inference can be drawn from the record as a whole, that the investment company sought to, and did, boost its sales of both series of notes by intentionally victimizing the holders of one or the other series, or both of them, by leading the bank, and others similarly situated, to believe that their security was an exclusive first lien, and by also leading the holders of the gold notes to also believe that the collateral 1 per cent split interest notes were also a first lien. The deed of trust used by the investment company was manifestly framed with this end in view. The question is, whether on the one hand the bank, or, on the other hand, the holders of the gold notes, with their “commission” or “split interest” notes, as collateral thereto, shall lose by the investment company’s fraud. It does not involve the right of either the bank or Toll to participate in the proceeds of foreclosure, but only the relative rank of their respective liens.
I am unable to look with complacency on the light tread on the toes of the Western Securities Investment Com*542pany by “assuming but not deciding” that it was guilty of fraud. It was unquestionably guilty of a carefully systematized, gigantic swindle, that rocked the whole community, if not the state, and it calls for more than a glancing blow. No assumption of fraud is necessary. It stands out in bold relief, and I am confident that my associates would all agree with me had they felt that the cause required such a determination, but I think it does require it. I cannot but believe that the question of the fraudulent concealment and misrepresentations of the investment company to the investing public, including the bank, as well as the “gold note” holders, demands a yes or no answer, in order to determine the further question as to who should suffer. It is not enough to say that the holder or holders of the gold notes ought not to suffer for the wrongs of the investment company. It does not reach the point. Certainly, they ought not to suffer, if we assume that they were not chargeable with actual or constructive notice of the fraud — a dubious assumption, to say the least — but neither should the innocent holder of the $6,000 principal note and 6 per cent interest notes suffer by the prorating of their security with others. I wish that the woes of the parties might indeed be magically ameliorated by saying that they ought not to suffer, but we are all unhappily destitute of such a curative wand. One or the other of the parties must suffer, for the investment company has vanished with whatever may be left of its ill-acquired gains. Of necessity, whatever is awarded Toll must be taken from the bank, and vice versa. The issues are between them.
When the bank made its loan there was nothing in the title papers delivered to it to give warning of the fraudulent concealment and deceit of the investment company. The bank exercised every reasonable care, and with such precautions, a prospective buyer would be shocked to be informed that he was supposed to be sharing his security with other claimants. There was nothing to put the bank on further inquiry. The interest coupons were attached *543to the principal note, the 6 per cent interest was an ordinary rate, and there was not the remotest suggestion of a second series. The representations, express and implied, repelled even the thought of such a thing. But the situation of the holders of the gold notes was different. They relied on the investment company’s prospectus or circular in connection with the sale, but, as far as can be said, made no further inquiries as to title or security, notwithstanding the fact that they were warned by the trivial rate of interest of the commission notes that they were “split” (to use their attorneys’ expression). They were thus notified that such notes could not represent the total interest, and that other notes of an unknown amount must be outstanding. A casual inspection would have betrayed the absence of any usual connecting link between the commission, notes and the parent note, and afforded notice of the fact that they could never have been attached to the latter note, or have become an integral part of it and entitled to a first lien. These obvious guideposts, crowded in front of the purchasers of the split interest notes when they bought, were repeated danger signals that should have caused prudent men to halt, and to look before they leaped. They were solemn warnings that the holder of the parent note with interest coupons attached, must have relied, and had full right to rely, on the integrity of its security. It should not be penalized for the lack of diligence on the part of the trustee or his cestuis que trustent.
On the subject of the fraudulent concealment of the investment company, and on the question as to who should suffer because of notice of such fraud, in the final analysis, resort must be had for judicial construction of that instrument to which all had common access when they acquired their several holdings which are now under adjudication. This instrument consists of the publicly-recorded deed of trust. In the absence of ambiguity, to put the parties on a parity with each other, might be allowable under the decisions. The innocent or inadver*544tent omission of the rate of interest may not be unusual, but its deliberate omission from the deed of trust to conceal a surreptitious double series of notes was a serious breach of business usage and custom without lawful warrant or sanction. The taking’ of commission notes, in connection with regular principal and interest notes, when all are definitely mentioned, is not such a departure from usual business methods as to provoke comment'. But if a second series of interest notes can be hid in the brush of general expressions such as “interest” or “interest notes” without express mention, a third or fourth series, or an indefinite number of interest notes, may be issued with equal impunity, each reducing the value of the security. I think that when not more than one series of notes is mentioned, only one is contemplated under the rule of certain and uniform usages and customs, and that this one series must be the commonly understood, ordinary principal note or notes’, with interest intact, and not destroyed or “split” with a concealed knife. I am constrained to believe that Toll, trustee, and the gold note holders, and also all others interested, were chargeable with notice of this ordinary fact, when, contrary to all common business usages and customs, the deed of trust was conspicuously silent in respect to their novel claims to prorate. I fear that our majority decision marks an unfortunate innovation in commercial life that may serve to vex the business world in the uncertainty that it must engender among those who would make legitimate investments.
For the above reasons, I respectfully dissent in the particulars stated.
I am authorized to add that Mr. Justice Burke and Mr. Justice Moore agree with me in all that I have said.
As modified by the majority opinion, the judgment of the district court is affirmed.