Washington Life Insurance v. Clason — 45 N.Y.S. 27

Majority

p. 27

(16 App. Div. 434.)

WASHINGTON LIFE INS. CO. v. CLASON et al.

(Supreme Court, Appellate Division, First Department.

April 23, 1897.)

Headnote

Mortgage to Insurance Company—Validity—Statutory Requirements.

A mortgage to an insurance company to secure a loan is not void because the mortgaged premises were not of the value prescribed by Laws 1892, c. 690 (Insurance Law) § 16, which provides that the deposits with the superintendent of insurance may be in bonds and mortgages on real property “worth 50 per cent, more than the amount loaned.”

p. 28

Appeal from special term, New York county.

Action by the Washington Life Insurance Company against Augustus C. Clason and others to foreclose a mortgage. From a judgment of foreclosure and sale, defendants appeal.

Affirmed.

Argued before VAN BRUNT, P. J., and RÜMSEY, WILLIAMS,. PATTERSON, and PARKER, JJ.

L. L. Kellogg, for appellants.

David Thomson, for respondent.

This action was brought for the foreclosure of a mortgage and. the sale of the mortgaged premises. The mortgage was made by the defendant Augustus Clason, and was given as collateral security to a bond, the consideration of which was. money loaned. The plaintiff is a corporation carrying on the business of life insurance. It made a loan, and took the security of the mortgage, apparently in the course of its business, and as an investment of so much of its corporate funds; the transaction being directly between the plaintiff and the defendant Clason. That defendant interposed an answer to the complaint, and set up as an affirmative defense that, at the time the consideration money of the bond and mortgage was advanced to him by the plaintiff, the premises covered by the mortgage were not unincumbered, and that there was then outstanding upon such premises a mortgage of $100,000, which was an amount equal, at the least, to 50 per cent, of the value of the mortgaged premises, and that, therefore,, such premises were not worth 50 per cent, more than the sum loaned by the plaintiff, and secured by the mortgage sought to be foreclosed, and that the security given by the defendant and taken by the plaintiff was so given and taken in contravention of the statute of the state of New York relating to loans upon bond and mortgage made by insurance corporations; and that the transaction,, as to the security, was and is against public policy, and void. On the trial at the special term the defendant offered to prove the facts which it was claimed would establish the defense of the illegality and invalidity of the security, and the offer was overruled. Judgment was afterwards ordered for the plaintiff, and from that judgment this appeal is taken.

The contention of the appellant is that the security is void, and that an action cannot be maintained upon it. It is not claimed that the whole of the transaction is vitiated, so that there could-be no recovery on a naked demand for the money loaned; but the argument is that the provisions of the statute show it to be the policy of the state that securities of this character shall not be enforced, and that the effect of the statute is to render them unenforceable. The act of the legislature referred to (chapter 690, § 16, Laws 1892) provides that the cash capital of insurance companies shall be invested, and kept invested, in the kinds of securities in which deposits with the superintendent of insurance are required to be made; that the residue of the capital and the surplus moneys and funds of every domestic insurance company, over and above its capital stock and the amount- deposited with the

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•superintendent, may be invested on the pledge of any securities in which deposits are required to be invested. Section 13 of the same .act prescribes that the deposits made with the superintendent of insurance shall be in the stock and bonds of the United States or the state of New York, or in county bonds, or bonds of incorporated cities of this state, authorized to be issued by the legislature, “or in bonds and mortgages on improved, unincumbered, real property in this state, worth fifty per cent, more than the amount loaned thereon.” It will be seen from these provisions of the statute that .the only vice in this mortgage, which it is claimed avoids it, is referred to in the allegation of the complaint that the mortgaged premises were not unincumbered and worth 50 per cent, more than .the amount loaned. There is nothing in the statute which declares that securities such as this mortgage shall be void, nor are bonds and mortgages on real estate prohibited securities. On the contrary, they are lawful securities. They are of the character authorized by the statute. If the statute had declared them void, or if, in their nature, they were strictly prohibited securities, the discussion would be ended, tn all the cases in which the securities have been declared to be unavailable and unenforceable in the hands of the holder, the statute has either declared them void, ■or they have been altogether prohibited securities, or it has been adjudged that investment in them would run counter to the policy •of the law. As the legislature has not enacted that mortgages of this character are void,—as there is no prohibition upon investing the surplus moneys or funds of insurance companies in bonds and .mortgages,—the only subject that can require further consideration is whether it can be inferred, reasonably, that it was the intention of the legislature to destroy, in the hands of insurance companies, securities like that in suit, where there is merely an excess of the amount of the loan over the proportion, named in the act, of value of the mortgaged property. It would seem as if the statement of this proposition carried with it its own answer. The purpose of the statute is to protect the creditors and the policy holders, and not to allow a debtor, after giving security, upon the faith of which, in reality, money is advanced him, to withdraw the security, and take away from the corporation that alone upon the faith of which the transaction was in reality made. The question of the enforceability of securities in which a corporation is not authorized to invest its moneys has been passed upon by the supreme court of the United States in cases arising under the national banking law. In the case of Bank v. Matthews, 98 U. S. 621 , a deed of trust on real property in Missouri was given by debtors to secure a promissory note, which note and deed of trust passed to the Union National Bank of St. Louis as security for a loan, which loan not being paid, an effort was made by the bank to sell the premises. Matthews thereupon applied for an injunction to restrain the sale of the premises, on the ground that the ■security was one the bank was forbidden to take by a statute of the United States. The injunction was sustained in the state •court, but the decree of that court was reversed by the supreme

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court of the United States, and it was held that the security was enforceable; that—

“The statute does not declare such a security void. It Is silent upon the subject. If the congress so meant, it would have been easy to say so; and it is hardly to be believed that this would not have been done, instead of leaving the question to be settled by the uncertain result of litigation and judicial decision.”

What was decided in that case was -reasserted in the case of Bank v. Whitney, 103 U. S. 99 . The court there remarked that the question of the effect of taking such securities was not an open one in that court since the decision in the Matthews Case, and repeated that the prohibitory clause of the banking law did not vitiate real-estate securities taken for loans, and “that a disregard of that only laid the association open to proceedings by the government.” It is further remarked “that whatever objection there may be to it as security for such advances, from the prohibitory provisions of the statute, the objections can only be urged by the government.” Fleckner v. Bank, 8 Wheat. 338 -355. We think these views are applicable to this case, the question being essentially the same. The securities are* not declared to be void; no-penalty is imposed by the statute upon talcing them with a smaller margin of value than that mentioned in the statute; and it can.not be presumed that it was the intention of the legislature to-sanction a construction of that statute that would destroy, instead of strengthen, the investments of insurance corporations. A check upon the company remains, and it is a serious one. The penalties that may be imposed by the government of the state upon a corporation for carrying on its business in violation of law are of the gravest nature. This case is plainly distinguishable from that of Pratt v. Short, 79 N. Y. 437 . There the securities condemned were-made void by the statute, and there was a total prohibition upon the corporation investing in commercial paper; and that total prohibition, coupled with the declaration that such an investment should be void, clearly distinguished that case from this.

The judgment of the court below was right, and should be affirmed, with costs. All concur.

Cases cited

National Bank v. Matthews 98 U. S. 621 SCOTUS p. 29
National Bank v. Whitney 103 U. S. 99 SCOTUS p. 30
Fleckner v. President of the Bank of the United States 8 Wheat. 338 SCOTUS 1823-02-28 p. 30
Pratt v. Short 79 N. Y. 437 N.Y. 1880-01-13 p. 30