Allan J. Gray, Appellant, v. Richmond Bicycle Company, Respondent

Allan J. Gray, Appellant, v. Richmond Bicycle Company, Respondent. ■Glaim upon a promissory note when merged in a judgment — under what circumstances the holder of the note cannot successfully assert that it was induced by misrepresentations and fraud to enter the judgment. A creditor of a corporation, upon being informed by its president that the corporation had executed a mortgage to secure certain- notes made .by it, including one held by the creditor; that" the assets were sufficient to pay the preferred claims, and that it would be advisable for the creditor to enter judgment upon its claim, authorized the entry of judgment accordingly, and a few days after-wards wrote that, before proceeding further^ it would like to know what advantage it derived from the judgment, and requested a copy of the mortgage, which was sent to it. Subsequently, in an action brought on behalf of the mortgagees, a receiver of the corporation was appointed, and the creditor, upon being notified to do so by the attorneys for the corporation, sent a representative to protect its interest. Thereafter the mortgaged property was sold, the proceeds of the sale being insufficient to satisfy such creditor’s claim. In an action upon the note; brought by the assignee thereof, the corporation interposed an answer alleging that the note had been merged in the judgment. Held, that the assignee could not avoid the effect of the judgment by asserting that, it was entered upon the faith of false representations made by the president of the corporation to the effect that the mortgaged property would be sufficient to pay the preferred claims in full, and that he would see that the creditor was protected—-the statement of the president as to the advantage to be derived under the mortgage being not as to a present fact but of future expectation, and there being no evidence that it was intentionally false, or that there had been bad faith on the part of the attorneys; That as the creditor had a copy of the mortgage, and had sent a representative ■who had an opportunity to ascertain all the facts connected with the mortgage and entry of judgment, it was called upon to make some disclaimer or take some positive action, if it intended to subsequently assert that it had been ■ overreached or defrauded. Appeal by the jdaintiff, Allan J. Gray, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of New York on the 9th day of February, 1899, upon the verdict of a jury rendered by direction of the court, and also from an order entered in said clerk’s office on the 7th day of February, 1899, denying the plaintiff’s motion for a new trial made upon the minutes. This action was brought by the plaintiff, as assignee of the Allerton-Clarke Company, an Illinois corporation, having a place of business in New York, to recover on a promissory note made to the order of that company by the defendant, a corporation organized under the laws of Indiana, and located at Richmond in that State. The .-answer sets up a merger of the note in a judgment recovered in the State of Indiana against the defendant, stating that the defendant had executed a mortgage on its property to various creditors, among which, and last in order of preference, was the Allerton-Clarke Company ; that on notice thereof sent, the Allerton-Clarke Company had directed certain attorneys who represented the other creditors, to be its representative in the mortgage foreclosure proceedings, which were duly had and a receiver appointed, and that the plaintiff was fully aware of these facts when the assignment of the note in suit was made. On the trial the plaintiff endeavored to show that the judgment referred to was procured by fraudulent representations and concealments on the part o.f the defendant. It appeared that the note was made August 14, 1897, payable within sixty days, and was transferred to the plaintiff on November 5,1897; that on September 23, 1897, the defendant failed, having-on the same day executed two mortgages, the first to the Second. National Bank, its principal creditor, and the-other to certain other creditors in order of preference, including the Allerton-Clarke Company, last mentioned in the mortgage, thereby intending to secure to the Allerton-Clarke Company payment on two noteSj one of which; was the note in question. ' On September 24, 1897, the defendant’s president wrote to the plaintiff’s assignor : “Ata meeting of the directors * * * it was decided, best to give you a mortgage for the amount of our - indebtedness to you. * * "* The same mortgage cover notes of D. G. Reid, Mary Snodgrass, Henry Schurman and Main & Munroe. You will find that the property will be ample to pay the notes. * $ *» _A_ second letter, on the following, day, informed the Allerton-Clarke Company: “The Richmond Bicycle Co. has executed a mortgage, securing your claim along with the claims -of Daniel G. Reid, Mary Snodgrass, W. N. Wilson, George Schurman and Main & Monroe.* The assets of the company are ample to pay all of these preferred claims. On next Tuesday judgments on all. of these claims, except yours, will be taken by our attorneys, Jackson & Starr. It is to your interest to have judgment taken on the same day in the same proceeding. Please wire Jackson & Starr to represent you in the proceeding and protect your claim. We will see that you are protected.” The Allerton-Clarke Company thereupon telegraphed Jackson & Starr, the attorneys for all the creditors, “ Take judgment on our claim against Richmond Bicycle Co. Wire reply.” A letter dated •September twenty eighth, from the Allerton-Clarke Company to Jackson & Starr, says: “We received your telegram, and beg to notify you that we will forward you notes when we receive same from bank. * * * We will be glad to hear that you have obtained a judgment on our claim.” To this the attorneys replied September 30, 1897, “Your judgment is all ready for entry' as soon as we -receive the original notes.” The judgment was entered about September 29, 1897. In a letter to the attorneys, dated October % 1897, tbe Allerton-Clarke Company said: “.Before proceeding furrther in this matter we would like to know from you what advantage we derive by turning our claim into a judgment. Are we not secured by a mortgage, and will we gain anything further by obtaining a judgment ? We would feel obliged if you will send us a copy of the mortgage. * • * * ” A copy of the mortgage was sent them, with a'letter dated October 4, 1897," stating, “It was deemed best by the Richmond creditors under the mortgage to put their claims in judgment and have an execution in the hands of the sheriff so as to ■control the appointment of the receiver. * * * We note that you say, Before proceeding further in this matter we would like to know from yon what advantage we derive.’ * * * We would like to hear from you promptly in view of the explanation above as to whether you wish to join in the application for a receiver which will probably be made- next week. * ‘ * * Awaiting your further instructions.” An action was commenced on October 8, 1897, in behalf of the mortgagees and the Allerton-Clarke Company was notified that a Teceiver was appointed. On October 18, 1897, it was asked if it could have a representative to protect its interest and telegraphed, “ Have wired Main in Pittsburgh to leave for Richmond immediately.” On October 19, 1897, an interview was had in Richmond, Ind., between the Allerton-Clarke Company’s representative and Jackson & Starr. Mr. Main testified that at this interview “ the main subject of our conversation' there was to ascertain what the assets of the Richmond Bicycle Company would pan out and what disposition we would make of the remaining stock. * * * I don’t remember that there was anything said regarding the mortgage. * * * Up to that time I did not know that we were not . equally protected with the others; ” that he remembered nothing being said about a judgment. The report made by him to the company relating to this interview was excluded from evidence under exception. Two of the defendant’s witnesses testified that the facts regarding, the notes were discussed with Mr. Main at the interview. . A. J. Gray, the plaintiff, who is bookkeeper for the Allerton-Clarke . Company, testified, among other things, that'he had seen the mOrt- ' gage in question, but had not read it through, and first heard that a prior mortgage had been given and that the Allerton-Clarke Com- . pony were the last of the preferred creditors from Mr. Main ; that Mr. Main suggested that he should go to Richmond, -and he. did .soon November 8, 1897, and was informed .that judgment had been entered in favor of Allerton-Clarke Company, but “didn’t know that- was on the notes, I thought it was our mortgage claim ; ” that the Allerton-Clarke Company received nothing from the judgment. It further appeal’s that just prior to the failure of the defendant the treasurer of the company withdrew funds and paid notes owing from the company to his father. The company’s assets were no-more than sufficient to pay the claims of two of the preferred creditors. At the close of the case the judge dismissed the complaint,, stating that “ the recovery of this judgment in the Indiana court, effectually merged this cause of action,” and declined to submit the issue to the jury on- the question of fraud. Motion for a new trial was denied and order so entered, from which and- from the judgment this appeal is taken. Payson Merrill, for the appellant, John S. Melcher, for the respondent. [MAJORITY — O’Brien, J.:] O’Brien, J.: The appellant does not question the well-settled principle of law that a note upon which a judgment has been obtained is merged in the judgment, so that thereafter an action cannot be maintained- on the note itself. The appellant is right, however, in contending that-where the judgment was entered without authority and fraudulently/ no merger takes place, and a suit may be maintained upon' the note.. The question, therefore, turns upon whether there was any such fraud practiced upon the plaintiff’s assignor, in inducing it to take-the judgment, as would entitle it, or the plaintiff, to bring an action on the note, regardless of the judgment entered. . To have a judgment'instead of a simple claim, and thus to.become a judgment creditor instead of being a general creditor, is ordinarily regarded as preferable, and it would seem, at first, that it is anomalous to charge fraud after one has obtained something better than was originally possessed. It is a common occurrence to have a debtor, vigorously assail his creditor’s judgment, but it is. rather unusual for a creditor obtaining a judgment to complain of that, fact. We do not mean to imply that the court would not be justified in setting aside a judgment where the creditor was induced by fraud to take it, and was thereby deprived of some other right or remedy.' But such a case being exceptional, the facts upon which the charge of fraud is based must be carefully examined. Here the fraud charged is said to consist of false representations made by the president of the defendant when the mortgage was given to secure the Allerton-Clarke Company claim, to the effect that the assets would realize enough to pay that claim in full, and that the defendant would see to it that the Allerton-Clarke Company was fully protected. It is not made to appear that this statement of the advantages to be derived under the mortgage was intentionally false,, but, rather, the inference is that it was the result of a too sanguine view of the value of the- assets, tad whether it was or not, being a statement, not of a present fact but of future expectations, it was not fraudulent. . After the mortgage was given it was deemed advisable to have a receiver appointed, and in that connection the attorneys, who represented the creditors secured by the first and second mortgages, proceeded to enter judgments for them, first obtaining authority, among the others, from the Allerton-Clarke Company. Here, again, it is not made to appear that the action thus taken was detrimental or fraudulent; but, on the contrary, it appears that, to the extent that the assets would go in paying the claims in their order of preference, it was an advantage to the creditors. As there was, however, a deficiency of assets, and no advantage accrued to the plaintiff’s assignor, the argument, is made that had it been known that there would be such .a result, the authority to enter judgment would not have been given, and that the failure to fully inform the plaintiff’s assignor constituted the fraud. It is true that no direct benefit was derived by the plaintiff’s assignor from the judgment, but there is no evidence that the purpose or intention of the attorneys entering-it was to injure the Allerton-Clarke Company or to deprive it of any advantage which it otherwise might -have obtained. " The most that can be said is, that it was a question of propriety whether the same attorneys who had previously represented the defendant company, and who were charged with the interests of the bank which was secured by the first mortgage, should also appear and act for the creditors named in the second mortgage^ including the plaintiff’s assignor.. In the absence of other evidence tending to show that ■ the attorneys did. not act in good faith, and in view of the fact that when the interests and rights of the creditors became conflicting, the attorneys' immediately notified the plaintiff’s assignor of the necessity of having some one on the spot who would look after and represent its interests, the attorneys’ acts Aere relieved of the imputation of fraud or bad faith. In compliance with the notification, the Allerton-Clarke Company sent a representative, to investigate the condition of affairs,' and this person, had he desired, could have ascertained all the facts connected • with the mortgage .and entry of judgment. He asserts, however, that he was not authorized to act for the Allerton-Clarke Company, and further states that he was npt fully informed of the situation, and insists that he in no way ratified the attorneys’ acts. In' these assertions, however, he is contradicted by two witnesses. If our conclusion depended Upon, what actually occurred after the' representative sent by the Allerton-Clarke Company arrived in Richmond,there might — as the testimony upon this point was conflicting — have been a question for the jury. Considering, however, the fact of his presence at the place and his access to sources of information, together with the further fact that the Allerton-Clarke Company had obtained a copy of the mortgage which clearly stated that they were not preferred equally with the other creditors, but were only ' fifth in the order of payment, our conclusion must be that a situation was presented which called upon tlm plaintiff’s assignor to put in some disclaimer or take some other positive action, if it intended to thereafter assert that it had been overreached or defrauded by the attorneys who induced it to enter judgment. . The AllertonClarke Company, as soon as it found out the facts, could have vacated the judgment, the power to do so being entirely in its own hands. It preferred, however, to wait and then isue on the note regardless of the judgment, and when confronted with the question of merger, to insist that, though it had received a copy of the mortgage, it had not observed its terms; that though it sent a representative it never knew the true state of affairs; and that the defendant and the •attorneys who represented -the creditors in Indiana were guilty of "fraud, the one in asserting that the assets were sufficient to pay all the claims, included in the mortgages, and the other by failing to firing home directly and fully every fact connected with the mortgage and judgment. We agree with the court fielow that the effort to assail the Indiana judgment as .fraudulent was not successfully sustained; and, therefore, the judgment and order appealed from should fie affirmed, with costs. Van Brunt, P. J., Barrett, Rumsey and Patterson, JJ., concurred. Judgment and order affirmed, with costs.