BRENNAN v. PERSSELLI

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Docket Number

No. 21605. Judgment affirmed.

Attorney(S)

MOSES, KENNEDY, STEIN BACHRACH, (WALTER BACHRACH, ARTHUR MAGID, and PHILIP M. GLICK, of counsel,) for plaintiffs in error. LORD, LLOYD BISSELL, (JOHN S. LORD, and A.C. WETTMSTORM, of counsel,) for defendant in error.

Judges

Mr. JUSTICE DEYOUNG delivered the opinion of the court:

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Smart Summary

Factual and Procedural Background

Plaintiffs (J.F. Brennan and others, trading as Stein, Alstrin Co.), stock brokers, sued J.R. Persselli in assumpsit in the Superior Court of Cook County. A writ of attachment in aid was served on the National Bank of the Republic of Chicago as garnishee, which answered that Persselli had $12,000 on deposit but that M. N. Elsenau Company and Harris Trust and Savings Bank claimed the fund. Judgment by default was rendered against Persselli for $24,850. The two claimants filed intervening petitions; after hearings the Superior Court dismissed the petitions and entered judgment for the plaintiffs against the garnishee for $12,000. The intervenors appealed; the Appellate Court reversed and rendered judgment against the garnishee for $11,000 in favor of Harris Trust and Savings Bank (and $1,000 in favor of the plaintiffs in the assumpsit suit). A writ of certiorari brought the record to the Supreme Court of Illinois for further review.

Material transactional facts: Persselli purportedly sold to Gus Anders 1,000 shares of Fox Film Corporation class "A" common stock; Anders paid $12,000 on account. M. N. Elsenau Company agreed to borrow $19,000 from Harris Trust and Savings Bank, pledging twenty stock certificates (purporting to represent the shares) as security. The bank advanced $19,000 to Elsenau; Elsenau issued three checks at Anders' request—$4,000, $3,000 and $11,000. The $11,000 check payable to Persselli was deposited by Persselli in the National Bank of the Republic, increasing his balance to $12,000. An attachment was levied Dec. 24, 1930. On Dec. 26 the Harris Trust discovered the pledged certificates were forged, demanded repayment, received only $523.80 from Elsenau's remaining funds, and notified the National Bank that $11,000 of Persselli's deposits had been obtained by fraud and should be retained for Harris Trust.

Legal Issues Presented

Whether $11,000 of the deposits held by the garnishee to Persselli's credit should be awarded to the plaintiffs in the assumpsit suit (plaintiffs in error) or to Harris Trust and Savings Bank (defendant in error), which claimed equitable ownership based on fraud and sought enforcement of a constructive trust.

Arguments of the Parties

Plaintiffs in Error (Stein, Alstrin Co.)

Contended the transaction resulting in the bank loan was not fraudulent and therefore could not create a constructive trust.
Asserted that, given the pleadings, rescission for mutual mistake could not be granted.

Defendant in Error (Harris Trust and Savings Bank)

Contended that a definite portion ($11,000) of the deposits in the garnishee bank was obtained from Harris Trust by fraud.
Asserted the bank could disaffirm the loan and have Persselli declared constructive trustee of the portion of the deposits so derived, enforcing equitable ownership against the garnishee funds.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Schweizer v. Tracy, 76 Ill. 345	Attachment lien does not exceed debtor's actual interest and is subject to equities.	Supported proposition that attachment is subject to prior rights and equities affecting the property.
Walsh, Boyle Co. v. First Nat. Bank of Hiawatha, 228 id. 446	Same rule re attachment lien and equities.	Used in same context to show attachment cannot displace prior equities.
Wilson v. Kruse, 270 id. 298	Same rule re attachment lien and equities.	Reinforced that attachment is subject to equities existing in debtor's hands.
May v. Disconto Gesellschaft, 211 Ill. 310	Interpleading by other claimants under Attachment Act; issue is right of property.	Supported authorization of interpleading and framing the dispute as right of property.
Springer v. Bigford, 260 id. 495	Same principle re interpleading and determination of property rights.	Applied to show statute permits claimants to contest right to attached fund.
Juilliard Co. v. May, 130 id. 87	Same principle re interpleading and property rights.	Used to support procedural posture concerning competing claims to attached funds.
Noll v. Peterson, 338 Ill. 552	Affirmation of what one does not know to be true is unjustifiable; misrepresentation liability.	Cited for the rule that misrepresentations, whether knowingly false or not, can impose liability on the affirming party.
Wisherd v. Bollinger, 293 id. 357	Same rule on misrepresentation and liability.	Reinforced that a false affirmation by one who does not know its truth is unjustifiable.
Borders v. Kattleman, 142 id. 96	Same rule on misrepresentation and liability.	Used with other Illinois cases to state the general equitable rule concerning misrepresentations.
Leather Manufacturers' Bank v. Merchants' Nat. Bank, 128 U.S. 26	If forged paper is presented and payment made in ignorance of forgery, recipient may be liable to recover the money as it remains the bank's property in equity.	Applied to hold that payment procured by presenting forged paper can be recovered and treated as funds still belonging in equity to the defrauded bank.
Ruhe v. Ruhe, 113 Md. 595	Property obtained through fraudulent practices of a third person may be held under a constructive trust for the person defrauded, even if recipient was innocent.	Supported imposition of constructive trust on funds obtained through fraud regardless of recipient's collusion.
Doane v. Lockwood, 115 Ill. 490	Right of rescission upon discovery of fraud.	Cited to show the bank had the right to rescind the loan when the fraud was discovered.
Leary v. Geller, 224 N.Y. 56	Support for right of rescission in contexts of fraud.	Used alongside Doane to justify rescission by the bank upon discovery of forgery.
Brewster v. Burnett, 125 Mass. 68	Forged securities are worthless and rescission does not require return of worthless forged instruments.	Applied to the bank's tender and to justify that return of forged certificates was unnecessary.

Court's Reasoning and Analysis

The court first observed that an attachment lien is limited to the debtor's actual interest at levy and is subject to prior equities; at the time of the attachment the plaintiffs had no legal interest in Persselli's deposits. The court examined the Uniform Stock Transfer Act provisions (sections 11, 18 and 22) establishing that a transferor for value warrants a certificate is genuine and that general rules of law and equity govern matters of fraud and related invalidating causes.

The court applied general equitable principles: a false affirmation (even if made without knowledge of falsity) imposes liability on the affirming party when another relies on it; presenting forged paper that procures payment makes the recipient accountable to the defrauded bank, and property obtained through a third party's fraud may be treated as held in constructive trust for the defrauded party even if the recipient was innocent.

Applying these principles to the facts, the court found representations (by Persselli to Anders, Anders to Elsenau, and Elsenau to Harris Trust) that the certificates were genuine and had the asserted market value were materially false. The $11,000 credited to Persselli was created by the $11,000 payment Harris Trust made on a check induced by the false instruments; the bank timely discovered the forgery and exercised the right of rescission, tendering the note and alleging readiness to satisfy equitable requirements. Because the pledged certificates were worthless, returning them was unnecessary. Consequently, the portion of Persselli's deposit created by the fraudulent payment is held for the benefit of Harris Trust and to the exclusion of the plaintiffs' claims.

Holding and Implications

Judgment affirmed.

Direct effect: The Supreme Court affirmed the Appellate Court's disposition that $11,000 of the deposits credited to Persselli is held for the benefit of Harris Trust and Savings Bank (the defendant in error) and is to the exclusion of any right or claim of the plaintiffs in the assumpsit suit. The opinion does not announce any broader new precedent beyond applying established equitable principles (constructive trust, rescission for fraud, and attachment subject to equities) to these facts.

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J. F. BRENNAN et al. Plaintiffs in Error, vs. J. R. PERSSELLI. (THE HARRIS TRUST AND SAVINGS BANK, Defendant in Error.)

Mr. JUSTICE DEYOUNG delivered the opinion of the court:

J.F. Brennan and eight other persons, partners doing business as Stein, Alstrin Co., brought an action of assumpsit in the superior court of Cook county against J.R. Persselli. A writ of attachment in aid was issued summoning the National Bank of the Republic of Chicago as garnishee. The bank answered that it carried an account with $12,000 to the credit of Persselli but averred that the M. N. Elsenau Company, a corporation, and the Harris Trust and Savings Bank made claims to the fund. The court rendered judgment by default against Persselli for $24,850. Shortly thereafter the two claimants filed intervening petitions and these petitions were answered by the plaintiffs. A hearing upon the second amended petition of the M. N. Elsenau Company, the amended petition of the Harris Trust and Savings Bank and the plaintiffs' answers to the petitions resulted in the dismissal of the petitions and the rendition of judgment in favor of the plaintiffs and against the garnishee for $12,000. To reverse the judgment dismissing the intervening petitions and awarding the fund in possession of the garnishee to the plaintiffs, the intervening petitioners prosecuted separate appeals to the Appellate Court for the First District. The appeals were consolidated for a hearing and the Appellate Court reversed the judgment of the superior court and rendered judgment against the garnishee for $11,000 in favor of the Harris Trust and Savings Bank and for $1000 in favor of the in the assumpsit suit. A writ of certiorari was awarded by this court and the record is here for a further review.

The plaintiffs in the assumpsit suit, the partnership of Stein, Alstrin Co., are stock brokers in the city of Chicago. The defendant in that suit assumed the name of Persselli and his business is not disclosed, except that he sold certain forged stock certificates. M. N. Elsenau Company, a domestic corporation, is engaged in buying and selling securities in Chicago. On or about December 16, 1930, Gus Anders bought from Persselli one thousand shares of class "A," common stock of the Fox Film Corporation at $24 per share, less a discount of $1000 from the whole purchase price. Anders paid Persselli $12,000 on account of the purchase and to enable Anders, among other things, to complete the purchase, the M. N. Elsenau Company agreed to borrow $19,000 from the Harris Trust and Savings bank on the security of the Fox Film Corporation's shares. Persselli delivered to Anders twenty certificates each purporting to represent fifty shares of the stock. These certificates were issued in the name of the purchaser. Anders endorsed the certificates; his signature was guaranteed by Stein, Alstrin Co. and on December 18, 1930, the certificates were delivered to the M. N. Elsenau Company. On the same day that company borrowed $19,000 from the Harris Trust and Savings Bank upon the former's note made payable January 8, 1931. The payment of this note was secured by the twenty certificates purchased from Persselli. The bank placed the sum borrowed to the credit of the M. N. Elsenau Company. At the request of Anders three checks were drawn by that company, one on December 18, 1930, for $4000, another on the next day for $3000, and the third on December 20, for $11,000. The first and second checks were paid by the bank and charged to the company's account. The third check, payable to Persselli's order, was given to complete the purchase made by Anders. Persselli deposited this check to his credit in the National Bank of the Republic of Chicago, and the check was paid by the Harris Trust and Savings Bank. By this deposit Persselli increased the balance to his credit in the former bank to $12,000. This sum remained intact, when, on December 24, 1930, the attachment writ was served on the National Bank of the Republic as garnishee.

On December 26, 1930, the Harris Trust and Savings Bank ascertained that the certificates of stock pledged as security for the payment of the M. N. Elsenau Company's note were forged. The bank thereupon demanded the return of the $19,000 it had lent that company, but was informed by the borrower that it was unable to comply with the demand. Only $523.80 remained to the credit of the company's account, and the bank applied that sum upon the note it held. No other payment was made in reduction of the note. The Harris Trust and Savings Bank notified the National Bank of the Republic that $11,000 of the deposits in its possession and credited to Persselli had been obtained from the former bank by fraud and should be retained for it.

The M. N. Elsenau Company demanded of Anders that he refund the money paid on the three checks it had issued at his request and offered to return the forged stock certificates to him. He answered that he was unable to do so. The company also notified the National Bank of the Republic that it was the equitable owner of the proceeds of the check for $11,000 deposited in the bank to Persselli's credit. Anders informed Persselli that the stock certificates were forged and worthless and demanded the return of the $23,000 he had paid for them. Persselli replied that his account in the bank had been attached and that he could refund no part of the money. The market value of class "A," common stock of the Fox Film Corporation, when the forged certificates were deposited as collateral security for the loan to the M. N. Elsenau Company, was $28 per share.

The question to be determined is whether $11,000 of the deposits held by the garnishee to the credit of Persselli should be awarded to the plaintiffs in error, the plaintiffs in the assumpsit suit, or to the defendant in error, the Harris Trust and Savings Bank. The plaintiffs in error contend that the transaction which resulted in the making of the loan by the defendant in error was not fraudulent and hence could not give rise to a constructive trust, and that, in no event, when the state of the pleadings is considered, could rescission for mutual mistake be granted. The defendant in error, on the contrary, contends that because a definite and ascertained portion of the deposits with the garnishee to Persselli's credit was obtained from it by means of fraud, it may disaffirm the loan it made to the M. N. Elsenau Company and have Persselli declared a constructive trustee of the portion of the deposits so derived.

The lien of an attachment does not exceed the actual interest the debtor had in the property at the time of the levy. It does not displace prior rights or equities but is subject to all the equities to which the property was liable in the debtor's hands. ( Schweizer v. Tracy, 76 Ill. 345; Walsh, Boyle Co. v. First Nat. Bank of Hiawatha, 228 id. 446; Wilson v. Kruse, 270 id. 298). Under section 29 of the Attachment act (Cahill's Stat. 1931, p. 148; Smith's Stat. 1931, p. 177), interpleading by other claimants of the fund sought to be attached is authorized, and the issue is the right of property. ( May v. Disconto Gesellschaft, 211 Ill. 310; Springer v. Bigford, 260 id. 495; Juilliard Co. v. May, 130 id. 87). At the time the writ of attachment in aid was issued, the plaintiffs in error had no legal interest in the funds on deposit with the garnishee to the credit of Persselli.

Reference must be made to pertinent provisions of the Uniform Stock Transfer act (Cahill's Stat. 1931, p. 770; Smith's Stat. 1931, p. 808). By section 11 of the act it is provided that a person who for value transfers a certificate, unless a contrary intention appears, warrants that the certificate is genuine. Section 18 provides that in any case not provided for by the act, the rules of law and equity, including the law merchant, and in particular the rules relating to the law of principal and agent, executors, administrators and trustees, and to the effect of fraud, misrepresentation, duress or coercion, mistake, bankruptcy or other invalidating cause, shall govern. By section 22 a purchaser includes a mortgagee and pledgee.

It is well settled that it is immaterial whether a party misrepresenting a material fact knows it to be false or makes the assertion of the fact without knowing it to be true, for the affirmation of what one does not know to be true is unjustifiable, and if another act upon the faith of it, he who induced the action must suffer, and not the other. ( Noll v. Peterson, 338 Ill. 552; Wisherd v. Bollinger, 293 id. 357; Borders v. Kattleman, 142 id. 96; 1 Story's Eq. Jur. (14th ed.) sec. 272). One who, by presenting forged paper to a bank, procures the payment of the amount thereof to himself, even if he makes no express warranty, in law represents that the paper is genuine, and, if the payment is made in ignorance of the forgery, is liable to an action by the bank to recover back the money which, in equity and good conscience, has never ceased to be its property. ( Leather Manufacturers' Bank v. Merchants' Nat. Bank, 128 U.S. 26; 5 Michie on Banks and Banking, sec. 265). So property obtained by one through the fraudulent practices of a third person will be held under a constructive trust for the person defrauded although the person receiving the benefit is innocent of collusion. If such person accepts the property, he adopts the means by which it was procured; or, as Lord Chief Justice Wilmot said, "Let the hand receiving the gift be ever so chaste, yet if it comes through a polluted channel, the obligation of restitution will follow it." (1 Perry on Trusts and Trustees, (7th ed.) sec. 211; Ruhe v. Ruhe, 113 Md. 595). In cases of fraud a court of equity will treat the offending party as a trustee and make the property in his possession or under his control subservient to the proper purposes of recompense by way of equitable trust or lien. 3 Story's Eq. Jur. (14th ed.) sec. 1673; 1 Perry on Trusts and Trustees, (7th ed.) secs. 166, 170.

The M.N. Elsenau Company stated in its second amended intervening petition that it obtained the loan from the Harris Trust and Savings Bank as an accommodation to Anders. The defendant in error, in its amended intervening petition, charged that the M.N. Elsenau Company made representation of which it had no knowledge; that these representations were false, and in equity were regarded as fraudulent; that the defendant in error was the equitable owner of $11,000 of the fund in the possession of the garnishee sought to be attached by the plaintiffs in error, and that, in consequence, a constructive trust to the extent of that sum, with the beneficial interest in the defendant in error, would be enforced against the funds held by the garnishee to Persselli's credit. Representations were made by Persselli to Anders; by Anders to the M.N. Elsenau Company and by that company to the Harris Trust and Savings Bank that the certificates in question were for one thousand shares of Fox Film Corporation class "A," common stock. These material representations were false. The company also represented to the bank that the stock had a market value of $28 per share.

No consideration was paid by the M.N. Elsenau Company for the certificates which it pledged with the Harris Trust and Savings Bank. Anders gave nothing of value to the company for the check drawn on that bank. No part of the loan has been re-paid. The effect of the transaction is that the bank paid to Persselli, the payee in the check, $11,000 and holds only the forged stock certificates as security for the money so advanced. Persselli's credit with the garnishee, to the extent of $11,000, was created by the money which he obtained from the Harris Trust and Savings Bank on the check drawn to his order by the M.N. Elsenau Company. The portion of the fund so created is held for the benefit of the defendant in error and to the exclusion of any right or claim of the plaintiffs in error.

Upon the discovery of the fraud, the Harris Trust and Savings Bank had the right of rescission. ( Doane v. Lockwood, 115 Ill. 490; Leary v. Geller, 224 N.Y. 56; 3 Black on Rescission and Cancellation, sec. 643). The bank tendered the note and alleged in its petition that it was ready to comply with the requirements of equity and good conscience. The forged certificates were worthless and it was unnecessary for the intervening petitioner to offer to return them. Brewster v. Burnett, 125 Mass. 68; 3 Black on Rescission and Cancellation, secs. 626, 672; sub-section ( a), par. 2 of sec. 480, vol. 2, American Law Institute's Re-statement of the Law of Contracts, p. 916.

The judgment of the Appellate Court is affirmed.

Judgment affirmed.