Opinion
No. 22966
Decided November 25, 1931 Reheard and decided May 18, 1932.
Mortgages — Ohio mortgagor, but mortgagee and trustee both foreign corporations — Mortgage note owners, real parties in interest — Trustee authorized to enforce debtor's obligation — Section 11244, General Code — Foreign trust company not doing business without certificate — Section 178, General Code — Trustee, holding trust deed, collected and paid proceeds to note owners — Foreign corporation's contract invalid, but obligee's contract not invalidated — Section 5508, General Code — Mortgage note owners, holders in due course, when.
1. In this suit the real parties in interest are the owners of the mortgage notes secured by the deed of trust. Under such deed the trustee holds the naked legal title to the mortgaged premises, for the benefit of his cestuis que trust; and as such trustee he is authorized, under the provisions of Section 11244, General Code, to enforce the obligation of the mortgage debtor by suit.
2. A foreign trust company, who engages only to take and hold a trust deed securing underlying mortgage notes and to pay, at its office, the proceeds collected thereon to the note owners, is not engaged in transacting business in this state within the meaning of Section 178, General Code.
3. That provision in Section 5508, General Code, reciting that contracts made by a foreign corporation before it shall have complied with Section 178, General Code, "shall be wholly void on its behalf and on behalf of its assigns, but shall be enforceable against it or them," penalizes only such foreign corporation and the assignee of its contract. The provision does not invalidate the contract upon the part of the obligee, — the other party to the contract.
4. Mortgage note holders acquiring their notes before maturity are prima facie deemed to be holders in due course. Neither the deed of trust nor the notes secured thereby are void by the mere fact that the foreign corporation concerned in their issue failed to comply with the Ohio act requiring registration.
CERTIFIED by the Court of Appeals of Franklin county.
This case was certified to this court by the Court of Appeals of Franklin county because the decision upon which it had agreed was in conflict with the decision of another Court of Appeals in the case of National Sign Co. v. Maccar Cleveland Sales Co., 33 Ohio App. 89, 168 N.E. 758.
C.E. Smith, the successor trustee, brought this suit against the Conrads and others for the foreclosure of a mortgage or deed of trust executed by Pet Ann Rarey to the Union Trust Company of Maryland. After the execution of the mortgage, Rarey conveyed the property to Charles H. Reasor and wife, who assumed and agreed to pay the mortgage. Afterward the Reasors conveyed the property to the defendant Florence Conrad, who likewise assumed and agreed to pay it. The common pleas court found and stated its conclusions of law and fact separately, entered personal judgment against some of the parties, and, finding the mortgage security valid, decreed its foreclosure against the Conrads, the owners of the property. The Court of Appeals affirmed that judgment.
The chief defense to the action is that the Mortgage Security Corporation of America was the real lender and party in interest, and that neither it nor the Union Trust Company of Maryland, both being foreign corporations for profit, had complied with Section 178, General Code, by applying to and receiving from the secretary of state a certificate showing compliance with the provisions of said section before doing business in the state of Ohio. Replies were made to the answer. The case was heard in the trial court and resulted in the judgment of foreclosure.
For the sake of brevity the Rural Mortgage Finance Company will be alluded to as the Ohio corporation, the Mortgage Security Corporation of America as the Virginia corporation, and the Union Trust Company of Maryland as the Maryland corporation.
The trial court, as conclusions of fact, found that neither the Virginia corporation nor the Maryland corporation had qualified to do business in Ohio under the laws relating to foreign corporations or trust companies; that one Joseph D. Rarey, as agent for his sister, Pet Ann Rarey, applied to the Virginia corporation, through the Ohio corporation, for a loan, and that the application therefor was sent to the Virginia corporation and a loan granted by it for the amount secured by the mortgage; the papers necessary for the completion of the loan were prepared by the Virginia corporation and forwarded to the Ohio corporation with instructions to close the loan. Before closing the loan the Virginia corporation forwarded a draft to the Ohio corporation with instructions to procure the indorsement of the mortgagor, cash the draft, pay certain liens against the real estate, and deliver the proceeds to the mortgagor upon her execution of the notes and the mortgage or trust deed securing the notes. These papers were duly executed in Ohio, delivered to the Ohio corporation, and the loan duly closed and financed. The mortgage or deed of trust was executed by Pet Ann Rarey, the mortgagor, to the Maryland corporation as trustee, securing the nine principal notes, aggregating $5,500, which were payable to bearer either at the office of the Virginia corporation or the Maryland corporation. The finding of facts states that it was "not shown who holds the nine principal notes but the same have been negotiated and they are not now owned or held by the Mortgage Security Corporation of America" (the Virginia corporation).
The findings disclose that at the time of making the loan, and prior and subsequent thereto, the Virginia corporation had made a large number of loans involving many thousands of dollars in the state of Ohio, and that both the Virginia corporation and the Maryland corporation were transacting business in Ohio and were organized for profit.
The plaintiff below, C.E. Smith, was duly appointed trustee under the mortgage upon the resignation of the former trustees, including the original trusteeship of the Maryland corporation. The trial court, in stating its conclusions of law, found that the principal notes, aggregating $5,500, and the mortgage deed of trust were valid and enforceable so far as was necessary to secure the payment of the balance due on those notes, but that certain secondary or coupon notes held by the Virginia corporation could not be then adjudicated because the Virginia corporation was not then authorized to do business in Ohio and had not qualified under Section 178, General Code. Upon those secondary notes set up in the second cause of action judgment was reserved.
The Court of Appeals having affirmed the judgment of the trial court, error is now prosecuted to this court by the Conrads.
Mr. H.J. Gardner and Mr. C.S. Druggan, for plaintiffs in error.
Mr. C. Eugene Smith, for defendants in error.
Counsel for the parties have submitted nine briefs, five on one side and four on the other, in support of their several contentions pertaining to the legal principle that should be here applied, but when the peculiar facts surrounding this transaction are considered the legal problem is not difficult of solution.
Section 178, General Code, provides that before a foreign corporation for profit can transact business in this state it shall procure from the secretary of state a certificate that it has complied with the requirements of law, and that its business to be transacted in this state is such as may be lawfully carried on by it. The section then recites: "No such foreign corporation doing business in this state without such certificate shall maintain an action in this state upon a contract made by it in this state until it has procured such certificate."
Section 5508, General Code, reads in part: "Every contract made by or on behalf of any such foreign corporation, affecting the liability thereof or relating to its property within this state, before it shall have complied with the provisions of Section one hundred and seventy-eight of the General Code, shall be wholly void on its behalf and on behalf of its assigns, but shall be enforceable against it or them."
These two sections should be treated as being in pari materia. The Virginia corporation was located at Norfolk, Virginia, the Maryland corporation at Baltimore, Maryland, and the Ohio corporation at Columbus, Ohio. The finding of facts declares that the first two were corporations for profit and were transacting business in Ohio. The plaintiffs in error's contention is that, although the mortgage was executed in this state, since the mortgage transaction was had between the mortgagor, Rarey, and foreign corporations which had not obtained such certificates of compliance, the mortgage, by virtue of those statutes, is wholly void and cannot be enforced by Smith, the present trustee.
Counsel for the defendants in error counter the foregoing argument with the statement that the plaintiffs in error's contention has been otherwise decided against them by this court, notably in List v. Burley Tobacco Growers' Co-operative Assn., 114 Ohio St. 361, 151 N.E. 471, where the second proposition of the syllabus reads: "Acts of such foreign corporation within this state prior to registration within the limitations permitted by the laws of this state are not void." They also cite the case of American Soap Co. v. Bogue, 114 Ohio St. 149, pages 152 and 153, 150 N.E. 743, where the opinion, discussing both of the foregoing statutes, manifestly supports the legal contention of counsel for the defendants in error. Plaintiffs in error claim that neither of those Ohio cases are germane to the subject, and that in the latter case, especially, the remarks of the judge delivering the opinion are obiter. It must be conceded that under statutes similar to these in Ohio, declaring such contracts wholly void, the weight of authority is to the effect that they are not voidable, but void, where the foreign corporation itself attempts to enforce them. The decisions of courts of various jurisdictions upon this feature may be found in the copious notes attached to the case of State of Kansas v. American Book Co., found in 2 Ann. Cas., at page 56. However under the facts appearing in this case, we are not driven to decide the point one way or the other, for the reasons hereinafter stated.
In its inception there were three parties to this contract, viz.: The Virginia corporation, which loaned the money through its local agent at Columbus; the borrower, Pet Ann Rarey, who executed the mortgage in Ohio on her Ohio lands; and the Maryland corporation, who acted as trustee, holding title as such for the security of the mortgage notes or bonds. While it is true there were but three parties to the transaction of borrowing and lending, at its inception, there now appear to be other parties who are represented by the present trustee; they are the parties who had no part in the original transaction, and who are now the real parties in interest, being the note holders, who are asserting their rights to the proceeds of the sale of the mortgaged premises. Smith, as trustee, like his predecessors, has nothing but a naked legal title to the mortgaged lands, holding the title for the benefit of his cestuis que trust.
As we view the finding of facts, the only foreign corporation transacting business in this state unlawfully, if it were unlawful, was the Virginia corporation, acting through the medium of its Ohio agency, as found by the trial court. The findings disclose that Rarey made her application for a loan to the Virginia corporation, who granted the loan; that all papers necessary for the completion of the transaction were forwarded to the Virginia corporation, who later sent them to its agent, the Ohio corporation, with instructions to close the loan. It was the Virginia corporation who forwarded a draft for the amount of the loan to the Ohio corporation with instructions to pay off certain liens against the real estate and deliver the balance of the proceeds of the draft to the mortgagor upon her execution of the deed of trust. Conceding that the Virginia corporation who supervised the details relating to the execution of the deed of trust, and who furnished the money to the mortgagor, had engaged in transacting business in this state, it cannot be said that the Union Trust Company, the Maryland corporation, transacted business in Ohio within the purview of the statute. All that the Maryland corporation did, or engaged to do, was to take and hold the trust deed as a trustee for the underlying mortgage notes, which were payable at its office. When the notes were paid the Maryland trustee merely became the custodian of the money for the beneficiaries under the mortgage. So that whatever may be said as to the connection of the Virginia corporation with the original loan transaction it cannot be reasonably claimed that the Maryland corporation, which was merely a naked legal trustee, was engaged in transacting business in this state; it does not appear that it sought any business in Ohio; it only engaged to be trustee under the mortgage and to pay the notes upon their maturity, at Baltimore. Security Trust Co. of Freeport, Ill., v. Martin, 178 Ark. 518, 12 S.W.2d 870; Monaghan Murphy Bank v. Davis, 27 Ariz. 532, 234 P. 818; Peoples Bldg. Loan Savings Assn. v. Berlin, 201 Pa. 1, 50 A. 308, 88 Am. St. Rep., 764; Martin, Trustee, v. Bankers Trust Co., 18 Ariz. 55, 156 P. 87, Ann. Cas., 1918E, 1240. The syllabus in the latter case is in point, the fifth proposition reading as follows: "In an action by a foreign corporation as trustee to foreclose a deed of trust, bondholders secured by the deed of trust being the real parties in interest, even if the plaintiff were disqualified to act for failure to comply with the requirements relating to foreign corporations, the bondholders would be substituted as plaintiffs and judgment entered according to their rights." That is a sound legal proposition. For if it be conceded, which we do not, that the first trustee, located in Maryland, was prevented from instituting action in this state, the real parties in interest here had no connection with the claimed unlawful transaction and should not be affected by the disqualification of their trustee.
Section 5508, General Code, provides that contracts made by a foreign corporation before it shall have complied with Section 178, General Code, "shall be wholly void on its behalf and on behalf of its assigns, but shall be enforceable against it or them." That section does not attempt to penalize all parties to the contract. It only penalizes the foreign corporation and the assignee of its own contract. Its plain intent is to penalize the foreign corporations who fail to comply with our laws of registration, and so that they may not circumvent our laws by assignment of their contracts it penalizes their assignees as well; the statute does not invalidate such contracts upon the part of the obligee, the other party to the contract. Upon this phase of the case, many of the authorities relied on by the plaintiffs in error are not in point, as they disclose that the foreign corporations themselves were endeavoring to recover upon their outlawed contracts. Such was the case in National Sign Co. v. Maccar Cleveland Sales Co., supra, which the Court of Appeals found to be in conflict with this case. This suit is not predicated upon a liability of the Virginia corporation; that corporation was not even a necessary party to this action. The gravamen of this action is the obligation arising between the mortgage debtors and the note holders or their trustee who is authorized to enforce that obligation by suit. Section 11244, General Code; Citizens Savings Trust Co., Trustee, v. Cincinnati Dayton Traction Co., 106 Ohio St. 577, 140 N.E. 380.
Again the plaintiffs in error contend that contracts inuring to the benefit or "on behalf of (their) its assigns" are voided by the statute. These notes were notes payable to bearer and needed no assignment or indorsement to pass title. It would be a strained construction to hold that the owners of the notes or coupons are " assignees" within the purview of the statute. A case similar to this, where a like statute was involved, is National Bank of Commerce v. Pick, 13 N.D. 74, 99 N.W. 63. There the North Dakota statute provided that every contract made by or on behalf of any corporation doing business in the state without first having complied with the provisions of Sections 3261 and 3263 shall be wholly void on behalf of such corporation and its assigns, but any contract so made in violation of the provisions of this section may be enforced against such corporation. The Supreme Court of that state, in its syllabus, held that: "The word 'assign,' as used in Section 3265, Rev. Codes 1899, does not include the indorsee of negotiable paper who takes the same before maturity, for value, and without notice of defenses thereto." In another proposition of the syllabus it is held that "A negotiable promissory note, void in the hands of the payee because it is a foreign corporation doing business in the state without having complied with our laws, may be enforced by a bona fide purchaser," etc.
There is another aspect of this case which furnishes a reason why this judgment should be affirmed. So far as this record discloses the holders of the nine principal notes or bonds, who are represented by the plaintiff trustee, are bona fide holders in due course. The conclusion of facts states "that it is not shown who holds the nine principal notes but the same have been negotiated and they are not now owned or held by The Mortgage Security Corporation of America" (the Virginia corporation). Because of the failure to make payments, as required by the mortgage or deed of trust, the mortgage was declared absolute by the trustee in accordance with its terms. The stipulation of facts does not find that the noteholders knew anything of the failure of the foreign corporation to comply with the Ohio laws; nor do the answers of the defendants allege that fact. The findings disclose that the bonds were not only negotiated, but that they were held by others than the Virginia corporation. None of the nine principal notes, aggregating $5,500, were due at the time this suit was brought. They became due severally from September 1, 1929, to September 1, 1935, inclusive. It therefore appears that their owners obtained them before maturity. Having procured the bonds before maturity, "every holder is deemed prima facie to be a holder in due course." Section 8164, General Code. In the situation thus presented the following authorities support the right of recovery by the noteholders: National Bank of Commerce v. Pick, supra; Edwards v. Hambly Fruit Products Co., 133 Tenn. 142, 180 S.W. 163. In both of these cases the same defenses were made as in this case, that the foreign corporations had failed to comply with the state regulation acts, but in both cases bona fide holders were protected.
Under the facts recited in the pleadings, and found by the trial court, these holders will be presumed to be holders in due course, and Smith, as their trustee, is entitled to recover in this action. The judgment of the Court of Appeals will be affirmed.
Judgment affirmed.
MATTHIAS, DAY, ALLFN, KINKADE and STEPHENSON, JJ., concur.
MARSHALL, C.J., not participating.