Perring v. Baltimore Trust Corp.

Shehan, J., delivered the opinion of the Court. This appeal is from a decree of the Circuit Court of Baltimore City, and presents two questions for our consideration. The first involves the right of the Baltimore Trust Corporation, appellee, to collect items of interest, on a loan made by its assignor, the Baltimore Trust Company, to Hambleton & Company, out of the proceeds of ⁶²⁰ the collateral held by the Hambleton Corporation under a special agreement between the parties. The second involves the right to set off, against the balance due on this loan, a certificate of deposit of the Baltimore Trust Company issued to and held by ‘the receivers of the Hambleton Corporation.

In order to understand the relative rights of these three banking concerns, it will be necessary to recite the course of dealings and the facts and circumstances surrounding the transactions in which these three concerns were engaged. Hambleton & Company was indebted in a large sum of money to the Citizens & Southern National Bank. This bank was demanding payment, and threatening to sell certain collateral held by it as security for this loan. In order to pay this indebtedness, and to prevent the sale of the collateral, the Baltimore Trust Company, on July 11th, 1981, loaned to Hambleton & Company on its promissory note $200,00,0, with interest, payable on demand, and the Hambleton Corporation loaned to Hambleton & Company $276,122.98 on its promissory note with interest.

At the time these loans were made Hambleton & Company was largely indebted to the Hambleton Corporation, and had delivered to it as collateral certain stocks and bonds. At the time of the loan of $200,000, arrangements were made between these three concerns whereby certain stocks, and a percentage of other stocks and bonds already held by the Hambleton Corporation, should be held by it' as collateral security for the loan of $200,000'. This arrangement was evidenced by a letter written Ito the Baltimore Trust Company by the Hambleton Corporation on July 11th, 1931, which was also the date of the loan and of the note of $200,000, with interest, •given by Hambleton & Company to the Baltimore Trust Company. The part of this letter which deals with this transaction, and is here incorporated, states: “Since the first of January, 1931, we have made loans to Hambleton & Company aggregat ⁶²¹ ing at this date $372,929.00; this is in addition to the advance of $276,122.98 which we are to make today; interest on the loans heretofore made has been paid up to the first of July.

As collateral for the indebtedness, we have certain securities, a list of which is attached hereto.” “In the event that any of the said collateral is sold before repayment to you of the $200,-000.00 which you are to advance today, we agree that 23%% of the net proceeds of such sale shall be paid to you on account of or in full payment of the loan of $200,000.00 to be made by you, and the remaining 76%% shall be applied by us on the account of this indebtedness due to' us on the loans made since January 1st, 1931, including the loan of $276,122.98 to be made today.” “Our respective advances shall be made to Hambleton & Company and shall be evidenced by its demand notes running with interest at six per cent.” This letter and the collateral therein mentioned are referred to in the promissory note of Hambleton & Company to the Baltimore Trust Company, of July 11th, 1931, in this manner: “12,286 shares Haverty Furniture Companies, Inc. $1.50 preferred and 23%% interest in other collaterals as per agreement of The Hambleton Corporation dated July 11th, 1931.” A list of these stocks, bonds, and notes held by the .Hambleton Corporation and referred to in said note was attached to the said letter and sent to the Baltimore Trust Company. Thus it came about that the stock of Haverty Furniture Companies, Inc., and 23% per cent, of the other stocks and securities owned by Hambleton & Company and held by the Hambleton Corporation as collateral, were pledged to secure the loan of $200,000, as evidenced by the promissory note with interest. Neither this note nor the obligations of Hambleton & Company held by the Hambleton Corporation were paid, and in due course sales ⁶²² of the collateral were undertaken for the purpose of satisfying these debts. On account of the widespread depression and financial distress, these banking institutions all became much involved.

The Hambleton Corporation was placed in the hands of receivers. Hambleton & Company owed large sums of money it could not pay, and is alleged to have been insolvent, and the Baltimore Trust Company was closed, and has since been in process of liquidation. Prior to the closing of the Baltimore Trust Company, the Hambleton Corporation had been one of its depositors, and for this deposit a certificate was issued to it in the sum of $16,789.19, upon which certificate there was a balance due of $12,591.58. No question is involved as to the transfer of assets and assumption of liabilities under the Emergency Banking Act (Acts 19.38, ch. 46), and there is no dispute as to Ithe facts in this case.

In accordance with the agreement above set forth, upon the sale of the collateral and the payment of the proceeds thereof, curtailing the loan of $200,000, there remained to be paid from such sales of said collateral only $12,591.89, which amount the Hambleton Corporation refused to pay, because that iwas the amount due by the Baltimore Trust Company to the Hambleton Corporation, as a depositor, as evidenced by the certificate of deposit issued to the Hambleton Corporation. The Hambleton Corporation endeavored to effect a set-off as to these obligations. It is obvious that the debt due by the Baltimore Trust Company to the Hambleton Corporation was a direct obligaron, evidenced by a certificate of deposit, while the debt owing to the Baltimore Trust Corporation was an obligation of Hambleton & Company, pledged for the payment of which was a sum of money belonging to Hambleton & Company and held as pledgee or trustee by the Hambleton Corporation for that purpose. The refusal of the Hambleton Corporation to further pay was based upon the claim, first, that its agreement with the Baltimore Trust Company, in relation to the securities pledged for the payment of the loan of $200,000, ⁶²³ did not bind it further than to pay the principal of said loan, and that the said collateral was not pledged as to the payment of interest thereon; secondly, that there was a set-off available to it against the Baltimore Trust Corporation, growing out of the above transaction.

In order to require the receivers of the Hambleton Corporation to pay the interest due on the loan and the unpaid balance on the principal, out of the proceeds of the sale of said collateral in its possession, the Baltimore Trust Corporation filed a petition in which it was prayed that the receivers be directed to pay the said balance on principal, and to pay the interest at the rate of six per cent, on the successive balances due on the said note. The case was twice argued in the Circuit Court of Baltimore City and a decree was filed on September 2nd, 1936, as follows: “The Court having found that the claim of Baltimore Trust Corporation for interest as set forth in its said petition should: be allowed and that the right claimed by said Receivers of The Hambleton Corporation to set-off the balance due on a certificate of indebtedness issued to them, by The Baltimore Trust Company should be denied,” ordered the receivers to pay the two sums of money aggregating $38,534.67 with accrued interest on the $12,591.89; and from this decree this appeal is taken. The effect of this decree was to deny the set-off of $12,591.89 and to require interest to be paid on the successive balances due on the said note, which interest amounted to $25,942. The Baltimore Trust Corporation claims that, from the very nature of the above banking transactions, the agreement with respect to the collateral should be so construed as to require the Hambleton Corporation to pay the interest on the loan of $200,000 out of the sale of the collaterals pledged, and that neither under the common law nor under the Emergency Banking Act (Acts 1933, eh. 46, sec. 71B) which went into effect on March 4th, 1933, could a set-off be maintained.

Considering these questions in the order above named, it must be borne in mind 'that these three institutions are banking concerns and lend money for the purpose of ⁶²⁴ earning interest and not as gratuities. The Hambleton Corporation was aware of this, and further knew that interest was to be paid on this loan, because by the very terms of the note upon which this loan was made there was an express provision for ¡the payment of interest, and also the stipulation in the note that there had been “deposited with or given to- the holder the following property as collateral for the payment of the note and interest thereon.” As between the Baltimore Trust Company, or Baltimore Trust Corporation, and Hambleton & Company, it is conclusive that the collateral was intended to secure both principal and interest. It is equally conclusive that, the collateral having been previously pledged to the Hambleton Corporation as security for large loans made by the Hambleton Corporation to the Hambleton Company, it had a right to restrict the pledge of such collateral or any part thereof to the Baltimore Trust Company. But has such restriction as to interest on the note in question been made by it?

The Hambleton Corporation was a