INS. CO. et al.

In Error to the District Court of the PETERSON et al. v. METROPOLITAN LIFE United States for the District of Nebraska; Joseph W. Woodrough, Judge.

On petition for rehearing. Modified.
For former opinion, see 16 F. (2d) 568.

Arthur F. Mullen, of Omaha, Neb., for plaintiff in error Silk.

George A. Keyser, Asst. U. S. Atty., of Omaha, Neb. (James C. Kinsler, U. S. Atty., Ambrose C. Epperson, Asst. U. S. Atty., and Andrew C. Scott, Asst. U. S. Atty., all of Omaha, Neb., on the brief), for the United States.

Before VAN VALKENBURGH and BOOTH, Circuit Judges, and PHILLIPS, District Judge.

District Court, S. D. Iowa, W. D. March 10,

1926. No. 4120.

1. Cancellation of instruments

30-Borrower

not receiving proceeds of loan negotiated by local loan company, acting as trust company's agent in applying funds advanced, may cancel mortgage as against trust company and assignee of nonnegotiable note.

Local loan company held borrower's agent for negotiating building loan, on paper purchased by insurance company through trust company, but also trust company's agent to receive, disburse, and see to application of proceeds, and borrower, not receiving proceeds of nonnegotiable note and mortgage, was entitled to cancellation as against trust company and insurance company.

2. Courts 366(1)—Federal courts are bound by state court decisions construing local statutes.

On questions of construction of state statute, local in its nature, federal courts deem themselves bound by decisions of highest court of state.

3. Courts 372(1)—Federal courts are not bound by state court decisions on general principles of commercial law.

Federal courts, in their recognition and ap

PHILLIPS, District Judge. Silk and Meek were jointly charged by indictment containing seven counts. The first count charged them with a conspiracy to violate the National Prohibition Act (Comp. St. § 101384 et seq.). The second, fourth, and sixth charged them with unlawful transportation of intoxicating liquor. The third, fifth, and seventh charged them with unlaw- plication of general principles of commercial ful sale of intoxicating liquor. Meek was found guilty upon counts 1, 2, 3, 4, and 6. Silk was found guilty upon counts 1, 5, and 7. In our former opinion, we directed that the judgment be affirmed as to Silk on counts 1, 5, and 7, and reversed as to Meek upon counts 1, 2, 3, 4, and 6. Silk has filed a petition for rehearing.

While the indictment charged a conspiracy between Silk, Meek, and other persons to the grand jurors unknown, a re-examination of the record convinces us that the proof supported the charge only as to Silk and Meek. It follows that we erred in affirming the judgment upon count 1 as to Silk and reversing it as to Meek, for the reason that, where the conspiracy is limited to two defendants, error requiring the reversal as to one of them carries with it a reversal as to the other. Morrow v. U. S. (C. C. A. 8) 11 F. (2d) 256, 260; Turinetti v. U. S. (C. C. A. 8) 2 F. (2d) 15.

We have examined the other contentions made in the petition for rehearing and find. they are without merit.

The former opinion is therefore modified, to the extent of directing that the judgment as to Silk upon count 1 be reversed and remanded, with instructions to grant him a new trial on count 1. It is so ordered.

law, are not bound by decisions of state courts. 4. Courts ~372(1)—Federal courts will recognize state statutes modifying general commercial law principles, and will follow state court decisions interpreting such legislation.

Where state Legislature by statute has modified principles of general commercial law, federal courts will recognize such modification, and, to extent that such legislation is modified, federal courts will follow highest court of state in its interpretation of such modified legislation. 5. Courts 372(4)-Federal courts are not bound by state court decisions interpreting contracts, unless rules of property have been settled by local interpretation.

Federal courts are not to be deemed bound

by decisions of highest courts of states on questions of interpretation of contracts, except where by their settled local interpretation rules of property have been established.

6. Courts 372(1)—Federal courts are not bound by state court decisions construing statute declaratory of common law.

Federal courts will not be deemed bound by decisions of state courts in their construction of statutes which are merely declaratory of common law.

7. Courts 372 (7)—Federal court is bound only by superior federal court decisions in determining note's negotiability, where state law merely declares principles of commer. cial law (lowa Negotiable Instrument Law).

Where Iowa Negotiable Instrument Law (Acts 29th Gen. Assem. c. 130), so far as bear

19 F.(2d) 74

ing on negotiability of particular note, is merely declaration of well-settled principles of commercial law, federal court, in determining negotiability of note, is bound only by decisions

of superior federal court.

8. Bills and notes 161-Note incorporating mortgage authorizing holder to pay taxes in default, for which note was security, held nonnegotiable, as being uncertain in amount (lowa Negotiable Instrument Law).

Note incorporating provisions of mortgage authorizing holder, on default in payment of taxes, to pay same, and requiring makers to repay such amount on demand, note to stand as security therefor, held nonnegotiable, as being uncertain in amount, as contemplated by the law merchant and the Negotiable Instrument Law of Iowa (Acts 29th Gen. Assem. c. 130). 9. Estoppel 83(3)-Owner held not estopped to sue to cancel mortgage because of membership in firm examining title and certifying mortgage was first lien thereon.

Owner of property held not estopped to bring suit for cancellation of mortgage thereon, because of receiving only partial payment of consideration by reason of fact that firm of attorneys of which owner was a member examined the abstract of title to mortgaged premises, and certified that fee-simple title was shown in owner, and that mortgage in question was a first lien thereon, since the opinion rendered by such firm related entirely to record title as shown by abstract.

In Equity. Suit by John L. Peterson and another against the Metropolitan Life Insurance Company and others, wherein the defendant named filed a cross-bill, after removal from state court. Decree for plaintiffs, and cross-bill dismissed.

of $4,500 upon lot 54, Forest Park addition, Council Bluffs, Iowa, and executed and delivered a written application, promissory note, and mortgage in connection with said negotiations; that all of said instruments were executed as a part of said transaction and are nonnegotiable.

Plaintiffs' petition exhibits the mortgage, but alleges the application and note to be in possession of defendants, and plaintiffs' inability to set forth copies; that about the 11th day of May, 1923, the Wallace Company filed the mortgage for record and made written assignment thereof to the Trust Company, and that the Trust Company, on the 14th day of May, 1923, made written assignment thereof to the Insurance Company, both of said assignments being filed for record on the 15th day of May, 1923; that plaintiffs received only partial payment of the consideration, in the amount of $1,941.43, and the balance of $2,558.57, although demanded of the defendants through the Wallace Company, defendants have failed and neglected to pay.

Plaintiffs offer to repay and tender into court the amount received for the benefit of all defendants who may have paid the same, and aver their willingness to pay such amount, or whatever sum they may be adjudged to have received. Plaintiffs then pray for a cancellation of the mortgage and the quieting of their title as against the cloud created thereby, and for general equitable re

lief.

Decree affirmed, 19 F. (2d) 88. All defendants, except the Trust ComKimball, Peterson, Smith & Peterson, of pany, acknowledged service of the original Council Bluffs, Iowa, for plaintiffs.

Tinley, Mitchell, Ross & Mitchell, of Council Bluffs, Iowa, and Morsman, Maxwell & Haggart, of Omaha, Neb., for defendants.

SCOTT, District Judge. On January 25, 1924, John L. Peterson and Helen Louise Peterson, as plaintiffs, filed their petition in equity in the district court of Iowa for Pottawattamie county, naming therein as defendants the Metropolitan Life Insurance Company, a New York corporation, heleinafter referred to as the "Insurance Company," the United States Trust Company, a Nebraska corporation, hereinafter referred to as the "Trust Company," Robert B. Wallace Company, an Iowa corporation, hereinafter referred to as the "Wallace Company," and Frank H. Binder, trustee in bankruptcy of the Wallace Company.

Plaintiffs in substance allege that about April 27, 1923, they negotiated with the Wallace Company for the securing of a loan

notice and later appeared. The Trust Company, though regularly served in the state of Nebraska, has never appeared. Within the proper time the Insurance Company filed its petition, bond, and notice, with service duly indorsed, in the district court of Pottawattamie county, for removal of this cause to this court upon the ground of separable controversy, and thereupon the cause was removed, and the Insurance Company filed herein its answer and cross-bill.

As no point is made in the record against either the form or substance of the answer, I shall content myself with merely stating the nature of the defenses pleaded. The Insurance Company, after denying the nonnegotiability of the note and the nonreceipt by plaintiffs of the proceeds, pleaded three defenses: First, that it is a purchaser of the note and mortgage and a holder thereof in due course; second, that plaintiffs are estopped by reason of the fact that John L. Peterson was at the time in question a mem

19 F.(2d) 74

the approval and acceptance of the loan the company shall send a remittance to the correspondent, or deposit same to its credit in a New York bank, if so directed by the correspondent."

The sixth paragraph provides that, until the loans are paid in full, correspondent will attend to the collection and remittance of interest, and will see to the keeping up of insurance, payment of taxes, and notifying the company in respect thereto.

The seventh paragraph provides for retention by the correspondent as compensation for services of any excess in the net rate of interest.

The eighth paragraph provides that if any loans are not paid in full when due, or in case of default in conditions, the correspondent requests privilege of repurchasing upon basis of amount of principal and interest accrued, and other costs and expenses. The ninth paragraph provides that the company reserves the right absolutely to determine whether the title is satisfactory.

The contract between the Trust Company and the Wallace Company includes eight paragraphs, and provides:

First. The Wallace Company to make collection of all interest on mortgages and remit to Trust Company in Omaha funds.

Second. The Wallace Company, "as representative of the party of the second part, will collect the principal amount of said mortgages or portions thereof and will forward the same Omaha funds."

in

Third. The Wallace Company to see to it that all buildings are kept adequately insured, etc.

Fourth. That the Wallace Company will see to the payment of all taxes and notify the Trust Company of nonpayment.

Fifth. This paragraph carries the provision that the Wallace Company "guarantees to protect and hold harmless the party of the second part from all loss or damage by reason of any lien or incumbrance upon or defect in the title to the property securing such loan."

Sixth. That "all loans must be closed, and all sums of money necessary for that purpose advanced by the party of the first part, and the necessary papers recorded before submitting them to the party of the second part."

case of payment in pursuance of certain options in the mortgage, will receive the payment and forward to the Trust Company in Omaha funds.

As stated, these two contracts generally evidence the arrangement. In the first, the Trust Company for certain purposes is denominated a correspondent, and for other purposes an agent; in the second, the Wallace Company for some purposes is denominated the representative of the Trust Company, and for other purposes it appears to be an adverse party. Numerous details, however, were later adjusted in the correspondence of the parties, and as between the Trust Company and the Wallace Company to some extent by parol agreement.

To illustrate: The contract between the two latter companies did not cover the subject of commissions or profits, and this matter seems to have rested upon verbal understanding. For a time, or at least in instances, the Trust Company took 22 per cent. as its profit or compensation, leaving 11⁄2 per cent. for the Wallace Company. The Wallace Company objected to this, and after conversation between Robert B. Wallace, president of the Wallace Company, and A. L. Reed, president of the Trust Company, it was agreed that the Trust Company's charge should be 2 per cent. thus leaving an equal amount for the Wallace Company, as that company, in negotiating the original terms

with the borrower, bound the borrower to pay 4 per cent. In the instant case, however, the Trust Company appears to have charged the plaintiff John L. Peterson 212

per cent.

The evidence indicates that the form of

papers to be used was dictated by the Insurance Company. At the outset, and on July 14, 1921, the Trust Company writes the Wallace Company a letter, marked "Plaintiffs' Exhibit 2":

"We have a letter from the Metropolitan, executing our definite contract with them, and also sending us some of the papers used by their Iowa correspondents, and which I take it they are going to insist on your using. They specifically state, however, that before closing any loans the forms of papers to be used are to be submitted to the law division" (law division of the Insurance Company).

The form of application used, which was Seventh. That if any of the mortgages always signed by the borrower, or holder of are not paid in full when due, or in case of title, was generally in terms an application default in conditions, the Wallace Company to the Wallace Company for a loan of so requests the privilege of repurchasing. many dollars to be secured by first mortgage Eighth. That the Wallace Company, in upon the described property, with note pay

able to or "in favor of such person or corporation as is designated therein," thus leaving it at the option of the Wallace Company as to whom the papers should be made payable. The unvaried custom, however, was to make the papers payable to the Wallace Company, and for that company to indorse and assign to the Trust Company, and that company in turn to indorse and assign to the Insurance Company.

The application contained the following provision for the disbursement of the proceeds of the loan: "You are hereby authorized to pay off any prior mortgages or liens as above named, according to their terms, and any balance remaining above the loan herein applied for will be immediately paid for in cash by me." Thus it appears that the Wallace Company was authorized to disburse the proceeds of the loan to the extent of clearing the property of all liens, which in the case of a building loan, or "loan upon new construction," would include satisfaction of all mechanics' liens growing out of material or labor furnished. The actual practice of the parties was that upon execution and delivery of the papers to the Wallace Company, together with an assignment to the Trust Company was recorded, and the papers forwarded to the Trust Company, where upon the approval of that company it opened an account on its books direct with the borrower, crediting the borrower with the the borrower, crediting the borrower with the face of the loan, and then executed an assignment of the mortgage to the Insurance Company. And, as before stated, when a sufficient number of loans had accumulated, to make up a schedule and forward to the Insurance Company. The account upon the books of the Trust Company in the instant case with John L. Peterson is, as follows (Plaintiffs' Exhibit 49):

1923

pany for $2,250; on May 21st an additional check of $1,125, and at that time Peterson was charged with the 22 per cent. commission, aggregating $112.50, and later on June 16th the balance of the loan, $1,012.50, was remitted to the Wallace Company, a small allocation of interest being adjusted July 5th. Plaintiff testifies that at the time the loan was negotiated he was informed by the Wallace Company that the proceeds of the loan would only be paid as construction progressed, onehalf at a certain stage, an additional 25 per cent. at another stage, and the balance on completion of the house. This appears to have been the exact apportionment adopted by the Trust Company in making these remittances, but the exact stage of construction at the time these remittances were made does not appear. The record without dispute shows that the Wallace Company, after recording and delivering the papers to the Trust Company, made its first disbursement on material and labor bills May 19th in the sum of $5, and continued frequent small disbursements until August 14th, when the total sums disbursed aggregated $1,941.43, and that the balance, subject to adjustment of commission, has never been paid by the Wallace Company to or for the plaintiffs.

One of the material questions for solution in the case is: Whom did the Wallace Company represent in receiving, disbursing, and making application of the proceeds of the loan? The positions and contentions of the respective counsel have not been altogether constant on this point since the case began. Plaintiffs' petition is a bit vague. They plead partial failure of consideration, and a demand upon the defendants through the Wallace Company for the balance, and refusal of said demand, which rather implies the contention

John L. Peterson, in Account with United States Trust Company, Omaha, Nebraska.
Dr.

Cr.

1923