FIRST NATIONAL BANK V. NATIONAL BROADWAY BANK
51 N.E. 398 (1898)

PROCEDURAL POSTURE: The Appellate Division of the Supreme Court in the First Judicial Department (New York) affirmed a judgment in favor of defendant trustees in plaintiff bank's action to recover stock pledged as security for a defaulted loan. The bank appealed.

FACTS: Securities were in the name of Hotchkiss as trustee, and were pledged as collateral for a note. The note was held by plaintiff (P). Hotchkiss was serving as trustee under a trust created by Imlay for his daughter, Georgiana, Hotchkiss1 wife, and her issue. At the time of the loan, P also got a signed writing from Georgiana authorizing her husband to borrow the stock standing in his name as trustee for her benefit and owned by her. Hotchkiss defaulted on the note, and P purchased the shares at a public auction held pursuant to the terms of the note. Broadway (D), refused to transfer the stock. This action was instituted. The lower court ruled mat the successor trustee to Hotchkiss was entitled to the assets because P had constructive notice mat the shares were the subject of trust and mat the pledge was contrary to its terms.

ISSUE: If a party deals with a trustee in a business transaction is he under a duty of inquiry as to the character of the trust and the authority of the trustee to perform the transaction?

RULE OF LAW: If a party deals with a trustee in a business transaction he is under a duty of inquiry as to the character of the trust and the authority of the trustee to perform the transaction.

HOLDING: The income of a trust created for the benefit of the Df Adams cannot be reached by attachment, either at law or in equity, before it is paid to him.

ANALYSIS: The bank accepted the stock as security for a loan to a business that the trustee was conducting for his wife as the sole owner of the business. Because the face of the stock indicated that the owner of the stock was a trustee, the trial court held that the bank acquired no title to the stock because it received the stock with constructive notice that the stock was the subject of a trust. The court affirmed the order of the trial court in favor of the trustees, but held that the bank was entitled to the income interest of the trustee's wife. The bank had constructive notice that the stock was the subject of a trust and had a duty to investigate the authority of the trustee to pledge the stock for an unrelated company. Knowledge as to the trustee's powers was obtainable from the trustee and from other means. The income interest of the trustee's wife was subject to the repayment of the loan because the bank entered into the transaction upon the written authorizations of the trustee's wife that the trustee could pledge the stock. The trustee's wife was estopped by her acts from setting up a claim to the income from the stock.