A customer of a bank who had deposited with it, as collateral
security for his current indebtedness on discounts, the note of a
third person secured by mortgage and had withdrawn the same after
maturity for the purpose of foreclosure and collection under an
agreement to return the proceeds or to replace the note by
securities of equal value, purchased the mortgaged property at the
foreclosure sale. At the request of the bank, he deposited with it
the deed he had received for the property. His indebtedness to the
bank was then fully paid, and his dealings with it were temporarily
suspended. He afterwards incurred debts to it, and on his becoming
an adjudicated bankrupt, it filed its bill against his assignee,
claiming an equitable lien in its favor upon the property. The bill
contained no allegation of money loaned or debt created on the
faith of the deposit of the deed, and it prayed for the specific
performance of the agreement to replace the note withdrawn.
Held that the bank could not claim an equitable mortgage
by such deposit.
The facts are stated in the opinion of the Court.
MR. JUSTICE MILLER delivered the opinion of the Court.
The partnership firm of Yeager & Co., composed of Yeager and
Crandall, were declared bankrupts Oct. 24, 1873, by the District
Court of the Eastern District of Missouri and the appellant duly
appointed assignee. At the time of their failure, Yeager & Co.
had the legal title to a mill in Washington County, Illinois, and
the Continental Bank, the appellee, filed its bill in chancery in
the Circuit Court for the Eastern District of Missouri against the
assignee alleging a large indebtedness of the bankrupts to the
bank, for the security of which they were entitled to an equitable
lien on the mill property in Illinois, above mentioned.
The facts as recited in the bill, out of which this lien is said
to arise, are shortly these:
For several years prior to 1871, the bankrupts had been doing
business with the bank and had a line of discounts amounting
generally to upwards of $50,000. There had also been on deposit
with the bank as collateral security for this current indebtedness,
among other paper of the same
Page 99 U. S. 144
kind, a note of Harriman & Co. to Yeager & Co. for
$20,000, secured by a mortgage on the mill. This note being overdue
and unpaid, Yeager & Co. applied to the bank for its delivery
to them that they might foreclose the mortgage and collect the
money, promising to pay the money if collected or return to the
bank whatever might be recovered in the foreclosure proceeding. The
bank complied with this request, taking a receipt from Yeager &
Co., which will be presently considered, dated Feb. 11, 1871. The
mortgage was foreclosed, the property sold and bought in by Yeager
& Co., who on the 6th of December, 1872, received in their own
name the master's deed, which was duly recorded in Illinois, Dec.
20, 1872.
It is further alleged that shortly after this deed was made to
Yeager & Co., it was, at the suggestion of the bank, delivered
to it, and remained there until suspicion was excited that this
deposit might not give them a lien on the property. A mortgage of
the property to the bank was drawn up by its attorney, which one of
the bankrupts promised should be executed, but which was not done,
and matters remained in this condition when the bankruptcy
proceeding was instituted, at which time, as the bill states, the
bankrupts were indebted to them over $40,000.
Pending the litigation, the property was sold under a
stipulation for $7,369.90, and the money paid into court, and for
this sum a final decree was rendered in favor of the bank, from
which this appeal is taken.
The assignee filed an answer affirming ignorance of the facts
alleged and putting them in issue.
Most of the matters stated in the bill are supported by the
evidence. The original pledge of the note and mortgage of Harriman,
their withdrawal under a promise to return them or their proceeds,
or to supply their places by some equivalent, seem fairly
established. The purchase of the mill property under foreclosure
proceedings, the deposit of the master's deed with the bank, and
the indebtedness of Yeager & Co. to the bank at the time of
their failure, are sufficiently proved. It would seem under these
circumstances that the equitable lien asserted by complainants in
their bill is established. But there is one fatal defect in the
grounds on which this equity rests.
Page 99 U. S. 145
It is established, we think, by the evidence of complainant's
witnesses, the officers of the bank, that every dollar of the
indebtedness of Yeager & Co. existing at the time they withdrew
the note and mortgage of Harriman was fully paid off and discharged
before they purchased the mill and received the title, and that a
total interruption or suspension of loans or discounts took place
in the summer of 1872.
It is impossible to hold under these circumstances that for a
new debt made on a renewal of business relations, the bank retained
any lien on the note and mortgage which had been delivered up, or
on the proceeds of the foreclosure sale. All that it stood for when
so delivered up had been paid. By this payment the lien was
released or discharged. To test this proposition, let us suppose
that when the master's deed came to the hand of the bankrupts,
there had been $10,000 due the bank, for which the original note
and mortgage had been pledged to the bank, and the bank had
demanded of Yeager & Co. a compliance with their promise to
place in their hands the proceeds of the foreclosure. Can it be
doubted for a moment that Yeager & Co., by paying the $10,000
due, would have fulfilled their promise and would have been
released from any obligation to give a lien on the mill
property?
The language of the receipt given by Yeager & Co. when the
original note and mortgage were delivered to them shows this very
clearly. It says:
"Whereas, the subscribers being indebted to the National Loan
Bank of St. Louis (afterwards the Continental) to a considerable
amount on sundry notes and drafts, and having given said bank the
following-described notes, secured by a deed of trust to secure
said bank against loss, which have been delivered to said Yeager
& Co. for the purpose of disposing of them,"
they agree if they do not return them in a reasonable time to
replace them by others of equal value.
Now what was secured by the notes and mortgage? Clearly the
amount they then owed, evidence and identified by notes and drafts
then in existence. Not only is there here no allusion to security
for any future transactions, but the parties acted on this idea,
for during the two years they were engaged in foreclosing the
mortgage, not only were all these notes and drafts paid, but there
was a period of some months in which
Page 99 U. S. 146
the bankrupts owed the bank nothing and in which there was no
business transacted between them. This is sworn to clearly by the
cashier of the bank, who says there was quite a number of months we
did not see the bankrupts in the bank. Mr. Yeager, the bankrupt,
testifies to the same thing -- namely that for a long time during
this period, the bank stopped taking paper from them, and it was
all paid up. Mr. Crandall declares that none of the paper held by
the bank at the date of their failure was for money discounted in
1872, and that they owed them nothing which they owed them in 1872.
It is true the president of the bank suggested rather than affirmed
that renewals ran into the present time, but refused on request to
produce the books or transcripts from them to show this fact. The
cashier, whose deposition was taken a second time, after full
opportunity to examine the books, did not retract or modify his
first declaration on this subject.
We are of opinion, therefore, that there was no lien for the
bank's debt growing out of the original pledge of the note and
mortgage of Harriman, or of any promise made when it was returned
to Yeager & Co.
As regards the subsequent transactions, there are no allegations
in the bill which would bring the case within the principle of an
equitable mortgage by deposit of title deeds, if that doctrine is
recognized in the State of Illinois, where the land lies, or of
Missouri, where the transaction occurred. There is no allegation of
money loaned or debt created on the faith of the deposit of this
deed. On the contrary, the allegation is that the bankrupts owe
complainants over $30,000, which will be wholly lost unless the
assignee be compelled to perform the contract of Feb. 11, 1871,
which was the date of the receipt taken from Yeager & Co. when
the note of Harriman was returned to them. And the prayer of the
bill is for specific performance of that contract. No such
suggestion is made in argument and, no proper foundation for relief
on that ground being found in the bill, it is unnecessary to
consider it here.
The decree of the circuit court will therefore be reversed and
the case remanded with directions to dismiss the bill, and it
is
So ordered.