Republic Realty Co. v. Phoenix Savings & Loan Ass'n

McWilliams, J., delivered the opinion of the Court. The new Phoenix has risen from the ashes 1 of the old Phoetiix but among the ashes there still remain a few glowing embers. This appeal is one of them. . Brevity and clarity will better be achieved if first we identify the persons involved: Beiles Harry Beiles (Feiles), a vice president of Phoenix, a director, and an “authorized officer” on checks and passbooks.

Garbis Unless otherwise indicated, synonymous with Morris Garbis, Preston Realty Company, Bris Realty Company, Dood, Inc., Home and Investment Corp., and Roxy Realty Company. Irismark Irismark, Inc., a corporation owned by the Lapidus family. Lapidus was president and in control of its operations. KWT KDN KWT KDN, Inc., a corporation alleged to be owned and controlled by Miller.

Lapidus Unless otherwise indicated, synonymous with Stanley Lapidus, Irismark, Inc., Republic Realty Company and the Lapidus family. ⁵⁵¹ Marshall Saul Marshall, the secretary, treasurer, comptroller and auditor of Phoenix. Also a director and a member of the executive committee. Below his signature on checks and passbooks appear the words “authorized signature.” Miller Albert Miller, mortgage representative of Phoenix and, in this transaction, an authorized agent of Phoenix. New Phoenix The reorganized company, Phoenix Savings and Loan, Inc. North Shore North Shore Realty Corporation.

Phoenix Phoenix Savings and Loan Association, Inc., organized Dec. 1958, Conservator appointed 18 July 1961, reorganized 12 May 1962. Quarngesser Elwood S. Quarngesser, president and principal owner of North Shore. Republic Republic Realty Company, an entity, apparently unincorporated, of the Lapidus family, controlled by Lapidus. The appellee (Phoenix) has challenged the validity of 4 savings accounts standing in the names of Irismark ($16,-937.62), Lapidus in trust for Irismark ($8,000), Lapidus ($10,000) and Republic ($7,087.48).

The $8,000 account and the .$10,000 account were originally a part of the Irismark account. The transfers seem to have been made to bring the Irismark account below the maximum insurance level. The trial judge, without giving any reasons for his action, sustained the decision of the special master denying payment of the accounts. He declared that, in his opinion, there was sufficient evidence to justify the conclusions reached by the special master.

We disagree. A proper understanding of the questions presented for our consideration requires the narration, in some detail, of the significant events and circumstances leading up to this litiga ⁵⁵² tion. In April I960' Garbis owed Lapidus $134,570.50 secured by 15 first mortgages. Delinquent in his payments and to stave off the threat of foreclosure Garbis offered to Lapidus additional security.

To this end Garbis transferred to Irismark, which was organized by Lapidus for the purpose, a ground rent, some hypothecations, a few leaseholds and a number of second mortgages. The writing set forth below represents the agreement or understanding between Garbis and Lapidus. “April 15, 1960 “TO WHOM IT MAY CONCERN: RE: IRISMARK, INC. “I, Stanley I. Lapidus, President of IRISMARK, INC.- hereby agree to grant an option to Morris Garbis or any designated party of his choice to redeem the corporation as a whole by means of transfer of said corporation. This will be done in the following manner: “Upon repayment in full of all notes and mortgages to Stanley I. Lapidus and the Woodmoor Savings & Loan Association; this money was used for the purpose of bringing mortgage accounts up to date and other pertinent operating costs needed to put corporation in a staple [sic], financial status. IRISMARK, INC. will also be responsible for any deficiency judgments against Morris Garbis, Ruth Garbis, The Preston Realty Co., The Roxy Realty Co., Bris Realty, Inc., Home & Investment Corp. & Dood, Inc. to Stanley I. Lapidus and Samuel Lapidus and the First Republic Building and Loan Association (formerly known as Republic National Building & Loan Association) . “Any money loaned from Stanley I. Lapidus and Woodmoor Savings & Loan Association to IRIS-MARK, INC. will bear interest at the rate of 10% per year. “For management expenses, a salary of $25.00 per week will be paid to Stanley I. Lapidus. ⁵⁵³ “This option becomes null and void two years from date hereof, April 15, 1960.

Stanley I. Lapidus” Garbis worked out a deal with Miller, with whom he had done business on at least one earlier occasion, for the sale to Phoenix of most of the second mortgages held by Irismark, 46 to be in the first package, 9 in the second. The purchase price, it seems, was to be 50% of the face amount of the mortgages, and the face amount also happened to be the total of the unpaid balances due thereon. Garbis then persuaded Lapidus to convey the second mortgages to Phoenix upon payment to Irismark of $34,947.62 out of the first package and $7,087.48 out of the second package. Lapidus said Garbis was about $59,000 in arrears in his payments and he agreed because he wanted to “decrease” his loss.

Lapidus understood that Garbis was to get $20,000 out of the deal upon settlement of the first package, but the testimony is not clear as to when he first became aware of it. Lapidus testified, and the contrary does not appear, that he was entirely unaware of the terms of whatever the agreement was between Miller and Garbis. On 23 November 1960, Lapidus went to the office of Phoenix for settlement of the first package (46 mortgages). There he learned for the first time which mortgages were to be transferred and that the amount to be paid to Irismark plus the $20,000 to Garbis equaled 50% of the face amount of the 46 mortgages ($109,875.25).

Miller, who conducted the settlement, handed to Lapidus the following checks and asked Lapidus to endorse them: §7666—Payable to Irismark .............. $ 20,000.00 §7667—Payable to Irismark .............. 34,937.62 §7668—Payable to Irismark .............. 10,987.52 §7669—Payable to Irismark .............. 43,950.11 $109,875.25 All of the checks were specially printed for the use of Phoenix and all were drawn upon The Equitable Trust Company. The ⁵⁵⁴ notation “In payment of purchased schedule of mortgages” appeared on all of the checks and all were signed by Marshall, beneath whose signature were the words “authorized signature.” Lapidus endorsed each check “Irismark, Inc., Stanley Lapidus, Pres.” and handed them back to Miller. Each of the four checks was endorsed by Phoenix, beneath the Irismark endorsement, “For Deposit Only” and all were thereafter deposited to the account of Phoenix in The Equitable Trust Co. At this point, it is clear, no money had changed hands. Nothing but bookkeeping had taken place.

As stated'by the special master : “Lapidus testified that he was told by Miller at settlement that the cheques in excess of the 50% purchase price represented the difference between the face of the mortgages and the purchase price, that this was merely bookkeeping for Phoenix and was placed in its reserve. He testified he understood it to be a bad debt reserve, and was so told by Miller. On cross-examination, he testified that he believed Miller, that it did not seem strange to him, that he had a similar thing with his own accountant where the item was held as a ‘deferred profit.’ ” Although Lapidus had expected to receive cash at the settlement he was induced to accept a Phoenix savings account book showing a deposit of $34,947.62, 25% of which was withdraw-able at the' end of one year and an additional 25% at the end of each succeeding year.- He felt this was the equivalent of cash, which he did not then need, so he agreed. The passbook, dated 23 November 1960, was signed by Miller above the imprinted signature of Feiles, the'“authorized officer.” Lapidus left with his passbook and, unknown to him, it seems, an unrestricted passbook was issued by Miller to “Morris Garbis, Trustee” for $20,000 and a passbook, also unrestricted, to KWT KDN, for $43,950.11. $10,987.52 was credited to the Commissions and Fees Account on the books of Phoenix.

On 8 December 1960 settlement for the second package of 9 mortgages was held. Three checks ($7,087.48, $5,670.00 and $1,417.49) were issued, all payable to Irismark, all endorsed by Irismark ánd handed back to Miller. The checks, signed by ⁵⁵⁵ Marshall, were drawn on The Equitable Trust Company and deposited to the account of Phoenix in the same bank. Lapidus received a similar passbook, this time in the name of Republic, showing a deposit of $7,087.48.

Again unknown to him, $5,-670.00 was credited to the KWT KDN savings account and $1,417.49 was credited to Commissions and Fees oil the books of Phoenix. Garbis had nothing coming to him out of this settlement. The net result of the two transactions was that Phoenix had acquired the 55 second mortgages without putting up a penny of cash. Indeed, it does not appear anywhere in this record that Phoenix, at the time, had that much cash.

Lapidus had withdrawn nothing but a few dividends from his accounts before they were frozen in October 1961. The present balance as shown in the Lapidus accounts is $42,025.10. Garbis managed to extract about $13,000 from his account before his balance, $6,-815.43, was impounded: The history of the KWT KDN account is worth noting. As has been said, the account was opened on 23 November 1960 with a credit of $43,950.11.

On 8 December 1960 the $5,670 credit was entered. During the next 7 mouths there appear 17 additional credits, including 3 dividends, totaling $30,022.76. Thirteen withdrawals, totaling $53,370.06 are shown. On 30 June 1961 the indicated balance was $26,272.81 which, on the same day, was transferred to the account of North Shore.

The KWT KDN account was then stamped “CLOSED.” Except for the 2 credits above mentioned and the final withdrawal none of the credits or withdrawals has been identified as to source, purpose or use. We shall have more to say about this. There is no need to set forth all of the findings of fact of the special master. We shall comment briefly, however, on a few of his findings. “21.

As a result of the above transactions, Phoenix paid $111,645.21 for 55 second mortgages with a then unpaid principal balance of $124,050.22, or 90% of such balance. Of the $111,645.21, the sum of $42,-025.10 went to Lapidus, $20,000 to Garbis, and $49,-620.11 went to KWT KDN (or Miller).” ⁵⁵⁶ We think finding No. 21 is inaccurate. Phoenix certainly did not “pay” $111,645.21 for the mortgages. No money changed hands. “The sum of $42,025.10” did not go to Lapidus.

Phoenix has not yet parted with that money. Nor did “$20,000” go to Garbis. Phoenix still has $6,815.45 of that “$20,000.” The record is not at all clear in respect of what Miller actually did get, if anything. And, as we shall see, there is substantial evidence that Phoenix got back at least $26,272.81 of the KWT KDN account. “No. 22.

The payments of $49,620.11 by Phoenix to Miller were not authorized by Phoenix.” We find no evidence to support the fact that the opening of the KWT KDN account and the issuance and delivery of the passbook to Miller were not authorized by Phoenix. We shall have more to say about this. “26. Both Lapidus and Garbis had interests in the mortgages assigned to Phoenix.” The record, it seems to us, makes it quite clear that Irismark was vested with exclusive title to the mortgages and that Garbis’ only “interest” therein was the right, under certain conditions, to acquire or redeem, not the mortgages, but the corporation, Irismark, Inc. After discussing what he considered to be the applicable principles of law, the special master stated his conclusions. He said : “Regardless of the value of the 55 second mortgages assigned to Phoenix, Phoenix was defrauded in that it paid $111,645.21 when it could have acquired them for $62,025.11.

The excess payment of $49,620.11 went to Miller and Phoenix received no consideration therefor. Phoenix was defrauded to the extent of $49,-620.11. Lapidus, by endorsing the cheques made that fraud possible. “Under the authority quoted above, it is not necessary that Lapidus be found to have participated in the fraud, consciously and knowingly. It is sufficient if, ⁵⁵⁷ when he knew or should have known that a fraud was being perpetrated, he nevertheless acted in a way which made the fraud possible. “Plere, Lapidus had incentives not to check into Miller’s activities.

Lapidus was owed approximately $135,000 by Garbis. Lapidus expected to suffer a $59,-000 loss. To prevent or reduce that loss, he took, in April, 1960, through Irismark, a large number of second mortgages. He apparently was not interested in their value as he testified he never inspected the properties, never had the titles searched, and knew they were all subject to first mortgages.

Further, Irismark, the titular holder of these second mortgages, was operated at a loss and required Lapidus to put more money into it. This unfavorable situation continued for 6 months, until November, 1960. “Consequently, when, through Garbis, he received an offer to dispose of a number of these mortgages, first for $34,000 and later a second group for $7,000, he agreed to the proposition without even checking on which mortgages were being sold or what was their value. His sole aim was to reduce his expected loss of $59,000. He was even willing to accept in lieu of cash, deposits in Phoenix which could only be withdrawn 25 % per year beginning in the second year. “Although he understood the purchase price was 50% of the principal balance of the mortgages, on the first settlement he endorsed in blank, cheques in double that amount, took his $34,000 passbook ‘and walked out.’ He was not interested in what, if anything, Garbis got out of the settlement.

He testified he may have suspected that Garbis got something, though he also testified he did not regard Garbis the owner of any part of the mortgages being transferred. “Apparently, if Lapidus had checked on the first transaction, or if he did check, he would have seen that the cheque of which he received the benefit, and the cheque of which Garbis received the benefit, to ⁵⁵⁸ gether made up the aggregate purchase price of the 50% of the mortgages. That should have put him on notice that when he endorsed the other two cheques he was acting as an instrument which made possible the defrauding of Phoenix. As a person experienced in real estate, he must have known that by the issuance of the four cheques, Phoenix was paying double the agreed price, and he must have realized that the issuance of the extra cheques was not the way to set up a bad debt reserve for the difference between the purchase price and the face of the mortgages purchased. The second transaction is governed by the same principles.” I. Lapidus argues earnestly and cogently that Phoenix has not met the burden of proving it was defrauded of $49,620.11, an amount characterized by the special master as “the excess payment * * * [which] went to Miller [KWT KDN].” As Lapidus points out, absent a fiduciary relationship, fraud is never presumed, it must be proved.

Bathan v. U. S., 173 F. 2d 953 (4th Cir. 1949), and the cases cited therein. While we shall not undertake to decide whether a fraud actually was perpetrated in respect of Phoenix, we shall indulge in some comments on the evidence, or lack of it, which might be said to support Lapidus’ contention. There is evidence in the record that there was some kind of an agreement between Miller and Phoenix, at least some of the provisions of which appear to be that Miller was to receive a finder’s fee on each mortgage procured for Phoenix, that he had control of the mortgage operations of Phoenix from March 1960 to June 1961, that he was to receive a percentage of every mortgage deal purchased by Phoenix, and that he was to receive a commission of 40% for obtaining mortgages. The KWT KDN account may indeed have been tainted with fraud but our attention has not been directed to any evidence of it, nor have we found any.

The 19 credits and 13 withdrawals could have been made in connection with lawful oper ⁵⁵⁹ atious by Phoenix and Miller. There is no evidence to the contrary. Moreover, there is the evidence that Miller may have been entitled to a 40% commission, which would explain the 2 credits to the KWT KDN account. Peat, Marwick and Mitchell, the Conservator’s accountants, “were not able to establish the nature of the transaction giving rise to the credit of 40% of the face amount of the mortgages to the account of KWT KDN.” Why Miller should have been given 40% of the face value rather than 40% of the purchase price, or why he should have been entitled to as much as 40% is, of course, another quarrel.

The validity of the KWT KDN account was under direct attack in the North Shore proceeding. 2 There Judge Oppenheimer (later a member of this Court) observed: ⁵⁶⁰ “It is contended by the conservator that the Miller accounts [including KWT KDN] were invalid and ⁵⁶¹ spurious. They may or may not have been so. That question may come up for adjudication between different parties at some time in the future; but the burden here is on the party claiming fraud. “I do not find that there is sufficient affirmative evidence to show that the Miller accounts were invalid.” ⁵⁶² In respect of the application of the $26,272.81 balance in the KWT KDN account to North Shore, Judge Oppenheimer said: “It is undisputed that * * * [the Fruehauf stock], which had been pledged in connection with the loan from Phoenix to North Shore Realty Corporation, had been illegally pledged by Phoenix * * * [to secure a bank loan], * * * North Shore Realty Corporation had a valid cause of action against Phoenix * * * for the misuse of property as collateral. North Shore and Phoenix had the right to enter into a fair compromise of this claim.” * * * “In short, as far as North Shore Realty Corporation is concerned, I find that the transaction complained of has not been proved to be fraudulent.

The fact that a preference may have been involved does not make it illegal. “The Master’s report, in my judgment, rests upon a sound analysis of the facts and of the law.” The special master in the North Shore case was of the opinion that “* * * if it were assumed that the transferring of the Miller controlled deposits [KWT KDN] to a credit on the North Shore loan were treated as an unlawful or fraudulent preference to Miller, in my opinion this was a scheme only to the benefit of Phoenix, and not for the benefit of North Shore or Qitarngesser (Emphasis supplied.) It seems odd that Miller would have agreed to the transfer of the $26,272.81 balance in the KWT KDN account if, in fact, that balance was the equivalent of cash and if, in fact, he was the absolute owner of it. At very least it