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Supreme Ruling of Fraternal Mystic Circle v. Lawton

Supreme Court of New York, Appellate Division

March 8, 1911

ERNEST W. LAWTON and SAM B. HORSFALL, as Trustees, Respondents, Impleaded with COMMONWEALTH TRUST COMPANY OF NEW YORK and Others, Defendants.

APPEAL by the plaintiff, The Supreme Ruling of the Fraternal Mystic Circle, from a judgment of the Supreme Court in favor of

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the defendants, entered in the office of the clerk of the county of Jefferson on the 29th day of August, 1910, upon the report of a referee, dismissing the complaint upon the merits.


Thayer, Tuttle & White [Wallace Thayer of counsel], for the appellant.

W. S. & H. H. Farmer and J. F. La Rue, for the respondents.


The judgment should be reversed and a new trial granted, with costs to appellant to abide event.

The action was brought in equity to restore a mortgage upon real property on the ground that a discharge thereof was improperly obtained for reasons hereafter referred to, and then to foreclose such mortgage. In order to understand and appreciate the questions involved in this appeal it will be necessary to get the somewhat complicated facts appearing from the record well in mind. The St. Lawrence Land and Improvement Company about 1894 became the owner of lands upon the St. Lawrence river just above Clayton, consisting in all of about fifty-eight acres of land and plotted the same and laid out streets and lots thereon. It was then or subsequently known as 'Prospect Park.' About the year 1898 the land and improvement company conveyed to the St. Lawrence Club a parcel of about nine and four-tenths acres of this land. This club erected a large hotel or clubhouse on the property, and gave two trust mortgages on the property to the National Bank of Syracuse; one November 10, 1899, to secure a bond issue of $60,000, of which only about $35,000 are outstanding; the other April 15, 1901 or 1902, to secure a bond issue of $99,000, for the purpose among other things of paying off the bonds issued under the first mortgage, $35,000. Only about $34,000 of the bonds under the last mortgage are outstanding, and those are held by the bank as security for notes amounting to about $22,000. So that the indebtedness under these two mortgages is about $57,000. February 28, 1900, the land and improvement company gave a bond and mortgage to the Safety Fund Insurance Company to secure payment of $10,000, three years from date, with six per cent semiannual interest. This is the mortgage involved in this litigation.

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It was assigned October 20, 1902, to the American Guild, and the plaintiff became the owner of it by general assignment of the guild May 27, 1907. This mortgage covered all the land and improvement company's property remaining after the sale of the nine and four-tenths acres to the St. Lawrence Club, about forty-nine acres. After the giving of these three mortgages the Prospect Park Company became the owner of the whole fifty-eight acres, subject to the mortgages. August 1, 1902, the Prospect Park Company gave a trust mortgage upon the whole property to the Trust Company of the Republic to secure a bond issue of $125,000. This last mortgage recited on its face that the bonds issued thereunder were to be first mortgage bonds and that the purpose was to pay off the debts of the Prospect Park Company and the three above described mortgages, and to borrow money to transact its business. The original trustees under this last mortgage have been succeeded by others and now the defendants Lawton and Horsfall are the acting trustees. The intention of the Prospect Park Company and its officers in giving this last mortgage was, among other things, to pay and satisfy the three prior mortgages, so as to make this one a first lien on the whole property. After the American Guild became the assignee of the $10,000 mortgage there were negotiations between it and the Prospect Park Company with a view to paying off and discharging that mortgage by the issue to the guild of some of the bonds issued under the $125,000 mortgage, and it was finally agreed that there should be transferred for that purpose $11,000 of the bonds and $6,000 of the stock of the Prospect Park Company. May 26, 1903, the guild sent to the First National Bank of Clayton the bond and mortgage for $10,000, the assignments thereof to the guild and the discharge of the bond and mortgage, duly acknowledged, to be delivered to the Prospect Park Company upon receipt of the $11,000 of bonds of the latter company, and the bank was directed to forward the bonds to the guild by registered letter or express. The bank received these papers from the guild May 27, 1903, and forwarded the bonds, which the guild acknowledged the receipt of June 10, 1903. The discharge of the mortgage has never been recorded. The intention of the Prospect Park Club was to call in and pay all the indebtedness under the $60,000 and $99,000 mortgages by the issue of

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the bonds under the $125,000 mortgage or the sale of the same and the use of the proceeds for that purpose. Some of the indebtedness was so paid off, but not all, and, therefore, these mortgages were never discharged, and the $125,000 mortgage was not a first mortgage and the bonds issued under it were not first liens as stated therein. The plaintiff wants its $10,000 mortgage restored. Passing for a moment the question of the technical grounds on which such relief is sought, let us see who is interested in defeating this claim. The St. Lawrence Land and Improvement Company, the St. Lawrence Club, the Prospect Park Club and the trustees under the $125,000 mortgage have defended the action. There were many other defendants served, but they do not by answers object to the granting of the relief asked for. The St. Lawrence Land and Improvement Company and the St. Lawrence Club are not interested in the question. They had transferred all their interest in the land to the Prospect Park Company before the $125,000 mortgage was given and the bonds were issued thereunder. The St. Lawrence Club never had any interest in the forty-nine acres covered by the $10,000 mortgage any way. Its interest was in the nine and four-tenths acres only, and the $60,000 and $99,000 mortgages covered only the nine and four-tenths acres, not the forty-nine acres at all. The Prospect Company, the mortgagor in the $125,000 mortgage, and the trustees under that mortgage, are the only parties who can object to granting the plaintiff relief. There is no dispute but that the intention of the parties was to make the $125,000 mortgage and the bonds issued thereon a first lien on all the property, and the omission to record the discharge of the $10,000 mortgage would seem to indicate a desire to protect the plaintiff in the transaction. I think there is no difficulty in granting the plaintiff relief, so far as the Prospect Park Company is concerned. The trustees under the $125,000 mortgage are under obligation to protect the rights of the holders of such bonds as are outstanding, and, as already stated, there are some such, at least some who have taken the bonds in payment of debts or in exchange for bonds issued under the $60,000 or $99,000 mortgages. Their rights would of course be affected by the restoration of this $10,000 mortgage as a lien upon the forty-nine acres prior to the mortgage under which their new bonds were issued. There is no evidence as to the circumstances

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under which they took their bonds, or whether they were bona fide holders; that is, whether they understood this $10,000 mortgage had been discharged when they took their bonds. So far as the record was any notice to them, it negatived the idea of a discharge of that mortgage. They are not parties to this action. We do not know who they are. They are only represented here, if at all, by the trustees under the mortgage. The guild was very careless in the transaction. It should have expressly provided in its letter sending the papers that the mortgage should not be discharged until the change in bonds should be fully effected, so as to release the three prior mortgage liens and leave this latter one a first lien on all the property. It is not improbable that the guild understood the two mortgages on the nine and four-tenths acres existed and that relief could not be afforded the plaintiff, its successor, on the ground of fraud or false representations with reference thereto. The theory really is that the papers were delivered in trust, the $10,000 mortgage not to be discharged until the bonds issued to the guild were made first liens. The referee finds against the plaintiff upon this issue of fact, a conditional delivery of the discharge, but I am hardly inclined to agree with him on this subject. I think it should be found that the discharge was delivered conditionally, to be used and recorded only when ...

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