Hagerstown Bank & Trust Co. v. College of St. James

Offutt, J., delivered the opinion of the Court. The Trustees of the College of St. James, herein called the school, is a body corporate, incorporated by chapter 253 of the Acts of 1843, and for many years has owned, maintained, and conducted in Washington County, Maryland, a preparatory school for boys. The Hagerstown Bank & Trust Company, herein called the bank, is a Maryland corporation which was on and prior to February 24th, 1933, engaged in the general banking business in Hagerstown in Washington County and in connection with that business also operated and conducted a “trust department.” On March 18th, 1930, the school borrowed $20,000 from the bank, and, to secure the loan and the interest thereon at six per cent., executed to the bank a mortgage maturing in one year on the school property, which comprised about 31.48 acres of land and the school buildings located thereon. By payments made from time to time in the interval, it paid on account of the principal mortgage debt $9,000. so that on February 24th, 1933, there remained due on account of the principal debt $11,000.

At that time the school had on deposit with the bank, under an account entitled “Trustees of St. James School,” .$11,038.31, and the account was in that state when, on the following day, acting under a proclamation of the Governor of the State declaring a banking holiday, the bank failed to open for business. It remained closed until, act ⁶⁴⁹ ing under the power and authority of chapter 46 of the Acts of 1933, the bank commissioner of Maryland, on March 4th, 1933, took custody, control, and management of the bank, from which custody, control, and management it had not, prior to the filing of the bill in this case, been discharged. On April 28th, 1933, the school made a lawful tender to the bank of $372.19, which, with the sum standing to its credit on the books of the bank, covered the whole mortgage debt, principal and interest, demanded that the bank apply the balance due by it to the school, together with the sum tendered, on account of the mortgage debt and interest, and release the mortgage. The bank refúsed to comply with that demand, and on October 6th, 1933, the school filed the bill of complaint in this case against the bank, the bank commissioner of the State of Maryland, and Edward Oswald, Jr., who had been on July 10th, 1933, appointed conservator of the bank.

In addition to the facts stated, it appears from an exhibit filed with the bill that on September 14th, 1931, the bank assigned the mortgage to the Nicodemus National Bank of Hagerstown, and that on November 20th, 1931, that bank reassigned it to the Hagerstown Bank & Trust Company, and that both assignments were promptly recorded. The bill, after stating .these facts, further alleged: “That the said mortgage remains open and unreleased upon the land records of Washington County as a lien upon the lands and property of your orator more particularly described as aforesaid and that it is inequitable and unjust that the same should remain unreleased as a cloud upon the title of your orator so as to prevent it from securing a loan elsewhere upqn its said property. Your orator further alleges that it permitted said account to remain on deposit with the said the Hagerstown Bank & Trust Company prior to and on said 24th day of February, 1933, because it had been advised that it was entitled to the right of set-off against the said mortgage in event the said bank should become insolvent while holding the ⁶⁵⁰ said mortgage. That your orator has been at all times and is still ready, able and willing to pay in cash to the Conservator of the Hagerstown Bank & Trust Company the said sum of $372.19 which was tendered by your orator on April 28th, 1933, in full payment and satisfaction of the said mortgage and which tender the said Hagerstown Bank & Trust Company and the defendants in this cause have refused and now refuse to accept.” Upon those averments the school prayed that the defendants be required to allow the set-off, to accept the tender in full satisfaction of the balance due on the mortgage debt, and to release the mortgage.

The defendants, in the fourth paragraph of their answer, alleged, as a defense to the case made by the bill, that the bank had for a valuable consideration assigned the mortgage to the Nicodemus National Bank, and that on the 20th day of November, 1931, The Hagerstown Bank & Trust Company, acting in a fiduciary capacity, had in its hands uninvested funds belonging to various trust estates which it was administering, and, desiring to invest said funds, it did on said date use the same in purchasing said mortgage from the said Nicodemus National Bank of Hagerstown, who was then the holder thereof”; that, acting in a “fiduciary capacity,” it applied the funds of nine trust estates to the purchase of the mortgage, and “that upon the payment to the Nicodemus National Bank of Hagerstown the sum of .$13,659.46 out of and from the trust funds above mentioned on the 20th of November, 1931, it did assign said mortgage to the Hagerstown Bank & Trust Company, which said assignment was duly recorded as will appear by reference to ‘Plaintiff’s Exhibit Mortgage’; that although in above mentioned assignment of said mortgage from the Nicodemus National Bank, it does not appear that the Hagerstown Bank & Trust Company acquired and took title to the same in a fiduciary capacity, however, said mortgage did not then, nor has it since become a part of the individual property ¡and assets of the Hagerstown Bank & Trust Company, but on the contrary it did become and has ever since comprised in ⁶⁵¹ vested corpus or a part of the property and assets of the above mentioned trust estates, respectively, to the full extent and in the respective amounts as above set forth, with the exception of those cash payments made on the principal of said mortgage as hereinafter accounted for”; that it had applied payments on account of the mortgage debt to payment in part of those portions of the mortgage which comprised the “invested corpus” of certain of these trust estates. The plaintiff demurred to that paragraph of the answer, and, that demurrer having been sustained, the case was submitted for decree on bill and answer, whereupon the court decreed that the defendants, upon the payment by the plaintiff to them of $372.19, execute and deliver to it a valid legal release of the mortgage, and that they pay the cost of the proceeding. From that decree, the defendants have taken this appeal. The vital and important question presented by the appeal is whether a mortgagor who has executed a mortgage to a bank, which is by its charter authorized to act also as a trustee, is entitled to set off against his mortgage debt a debt due to him by the bank, where the bank, without notice to him, to the cestuis que trust, or to any other person, and without any formal transfer, physical segregation, or apparent authority, has apportioned the mortgage debt severally among different estates which it represented as trustee, but where it did in fact use the uninvested funds of such estates to buy the mortgage.

The appellants contend that it is not so entitled, because they say the debts lack mutuality, in that the debt due to the school from the bank is owed by the bank in its own proper, private, individual corporate capacity, whereas the debt which the school owes is due to the bank as a trustee and therefore in a representative capacity. The appellee, on. the other hand, appears to take the position that as to it, at least, the bank must be treated as holding the complete and exclusive title to the mortgage for its own particular corporate uses and purposes, wholly unaffected by any trust: that therefore the debts are mutual; ⁶⁵² and that it is entitled to have the debt of the bank to it set off against its debt to the bank. From these contentions it is apparent that the real issue in the case is not whether a debt due on his own private account to a creditor by one who happens to be a trustee can be set off against a debt due by the same creditor to him as trustee, for it is well settled that that cannot be done [Ghingher v. Fanseen, 166 Md. 519 , 172 A. 75, 77, 78 ; Doxen v. Wagner, 142 Md. 447 , 121 A. 254 ; Perry on Trusts (7th Ed.) p. 1382; Lewin on Trusts (13th Ed.) 689, 692], but whether upon the facts of this case the bank is as to the school estopped from' denying that the mortgage was held by it for its own private corporate uses and purposes, for it is equally well settled that where the demands are in the same right, set off will be allowed, Id. In dealing with that question, Colton v. Drovers’ Perpetual Building & Loan Assn., 90 Md. 85 , 45 A. 23, 26 , and Code, art. 66, sec. 25, cited in support of the appellee’s positiqn, are net controlling.

In the Colton case there was no question of setting off a debt due in autre droit, for there Colton’s demand against the building assotion and its demand against him were in the same right, so that the question presented here was not considered. Article 66, section 25, Code, provides: “The title to promissory notes and other instruments hereafter made, and debts hereafter contracted, secured by mortgage or deeds in the nature of a mortgage, shall both before and after the maturity of such notes, other instruments or debts, be conclusively presumed to be vested in the person, persons or body corporate holding the record title to. such mortgage or deed in the nature of a mortgage; and if such mortgage or deed in the nature of a mortgage is duly released of record, the promissory notes, other instruments or debts secured by such mortgage or deed in the nature of. a mortgage, shall both before and after the maturity of such promissory notes, other instruments or debts, be conclusively presumed to be paid so far as any lien upon the property conveyed by said mortgage or deed in the nature of a mortgage is concerned.” ⁶⁵³ The manifest purpose of that statute was to quiet the title to real and leasehold property by removing the doubt occasioned by the loss or destruction of promissory notes secured by mortgage, and to protect the parties to the mortgage, and their privies, against any loss which they or those claiming under them might suffer through the fact that the mortgage and the mortgage note or debt might not be in the same hands. It is true that the statute embraces within its scope “debts,” as distinguished from notes, secured by mortgage, but in view of the preamble to the original act, chapter 719 of the Acts of 1910, the mere use of that word cannot be taken as evidence of an intention to confer upon strangers to the mortgage, other than assignees of the mortgage debt, the mortgage notes, or the mortgage, any rights not existing before its adoption, nor indeed upon the mortgagor any right other than that of assuming as a