Opinion
Decided January 23d 1933.
Complainant, a judgment assignee, sues to set aside three assignments of a mortgage made by the judgment debtor to N. Evidence examined and held, that the testimony in support of the asisgnments under attack comes wholly from the lips of the parties vitally interested in maintaining their validity; that such testimony is discredited by the circumstances and by the improbability of transactions being carried on in the manner testified to; that the assignments were all made for past due consideration and at a time when the judgment debtor was becoming or was involved in the financial difficulties which later caused him to file a petition in brankruptcy; and that the burden of sustaining the bona fides of the transaction was on N. and had not been sustained. Decree for the complainants.
On appeal from a decree of the court of chancery advised by Vice-Chancellor Fielder, who filed the following conclusions:
"The Mechanics Trust Company recovered a judgment November 13th, 1929, for $46,490.25 against Pasquale Fuoco and others, which judgment was assigned to the complainant United States Fidelity and Guaranty Company. Said complainant filed its bill July 9th, 1931, to set aside three assignments made by Maria Fuoco to Joseph Nardelli and Antonio Nardelli of a mortgage given by Albert Frank to said Maria Fuoco to secure the payment of $52,500, covering property in Hackensack. Maria Fuoco is the wife of Pasquale Fuoco and it was proven to my satisfaction that he and not his wife was the true owner of the mortgage. It is alleged that said assignments were made without consideration and for the purpose of concealing that asset from Fuoco's creditors. Two days after the bill was filed, Fuoco filed a petition in bankruptcy and his trustee was thereafter admitted as a party complainant, so that the suit is practically one by the trustee in bankruptcy to recover assets for the benefit of the bankruptcy's creditors.
"The Nardellis and Fuoco say that the former loaned the latter $20,000 in 1923 and to substantiate the loan they produced a check for said amount drawn by Joe Nardelli to the order of Pasquale Fuoco, dated July 23d 1923, and cashed by Fuoco the following day. They also produced a bond and mortgage for the same amount dated July 1st, 1923, payable July 1st, 1926, with interest at six per cent., made by Fuoco and his wife to Joseph and Antonio Nardelli covering property in Hackensack, which mortgage was acknowledged July 17th, 1923, but not recorded, which they say was given as security for said loan. They say that thereafter the Nardellis loaned Fuoco an additional $10,000 and they produced a bond and certified copy of a mortgage for $30,000, dated November 14th, 1923, payable November 14th, 1926, with six per cent. interest, made by Fuoco and wife to Joseph and Antonio Nardelli, covering the Hackensack property, which mortgage was acknowledged November 14th, 1923, and recorded December 2d 1923, which bond and mortgage they say were intended to secure the first loan of $20,000 and the additional loan of $10,000. They say that the additional loan of $10,000 was made up as follows:
"Check Joseph Nardelli to the order of Pasquale Fuoco, dated October 8th, 1923, and cashed the same day for .......... $3,000.00 Check of same to same dated December 4th, 1923, and cashed December 5th, 1923, for ................................ 668.25 United States Liberty bonds for $6,000 with coupons attached, delivered by the Nardellis to Fuoco about November 15th, 1923, valued by the parties at .......................... 6,331.75 ___________ $10,000.00"From 1918 to 1927 title to the Hackensack property covered by said mortgages, was held in the names of Pasquale Fuoco and Maria Fuoco. By deed dated September 1st, 1927, and recorded the same day the title was conveyed, through their daughter, to said Maria Fuoco, which transfer was without consideration. By deed dated October 15th, 1928, Fuoco and his wife conveyed the property to Albert Frank for the consideration of $67,500, to pay which Frank gave his purchase-money mortgage to Maria Fuoco for $52,500, dated October 15th, 1928, and recorded the next day. The balance of the consideration was received and expended by Pasquale Fuoco for his own purposes. The $30,000 mortgage held by the Nardellis was canceled of record October 16th, 1928, they say without consideration, on Fuoco's promise to secure its amount by assignment of an interest in the $52,500 mortgage. I leave this part of the case for the present to state other testimony.
"Title to another piece of property situate in Bayonne stood in the name of Fuoco and his wife. They executed their bond to the two Nardellis with a mortgage covering this property, dated September 15th, 1924, to secure the payment of $10,000 September 15th, 1927, with interest at six per cent. They say this mortgage was given to secure several loans totaling said amount, to substantiate which they produced four checks drawn by the Waterbury Trust Company to the order of Joe Nardelli and endorsed by him and Fuoco, as follows:
"Check dated March 4th, 1924, and deposited in or cashed at Fuoco's bank March 5th, 1924 ........................... $3,000.00 Check dated April 15th, 1924, and deposited in or cashed at Fuoco's bank April 19th, 1924 .......................... 1,000.00 Check dated July 17th, 1924, and deposited in or cashed at Fuoco's bank July 19th, 1924 ........................... 1,000.00 Check dated August 5th, 1924, and deposited in or cashed at Fuoco's bank August 9th, 1924 .......................... 1,000.00 ___________ $6,000.00 "Joseph Nardelli testified that he paid Fuoco and Fuoco testified that he had received, the balance of $4,000 which made up the total of the Bayonne mortgage, but no written evidence of such payment was produced."October 17th, 1928, Fuoco and his wife conveyed the Bayonne property to the two Nardellis in fee by full covenant and warranty deed free from encumbrance, the consideration expressed therein being `one dollar and the further consideration set forth in an agreement bearing even date herewith,' and on October 26th, 1928, the two Nardellis entered into an agreement with one Armstrong to exchange said property for other property in Bayonne, the exchange being practically at even values. The exchange was consummated by deeds dated December 5th, 1928, the two Nardellis conveying their property to Armstrong, but Armstrong, instead of conveying her property to the Nardellis, conveyed to Maria Fuoco. The mortgage for $10,000 on the Bayonne property was not canceled of record, it evidently being considered that it had merged in the title conveyed to the Nardellis. Nardelli and Fuoco say that this mortgage was to merge and that the Armstrong conveyance to Maria Fuoco was agreed to, on Fuoco's promise to assign to the Nardellis an interest in the $52,500 mortgage given by Frank to Maria Fuoco on the Hackensack property, as security for said $10,000 mortgage on the Bayonne property and the $30,000 canceled mortgage which the Nardellis had held on the Hackensack property. By assignment dated November 7th, 1928, recorded November 7th, 1928, Maria Fuoco assigned an interest in the Frank mortgage to the extent of $40,000 to Joseph and Antonio Nardelli, which, the parties say, was in performance of said promise.
"Joseph Nardelli and Fuoco say that subsequently the latter became indebted to the former for further moneys and Nardelli made the following statement of such additional debt:
"Balance due on a $5,000 loan ................................... $2,500.00 Balance due on a $4,000 loan .................................... 2,000.00 Loan Carmella Nardelli to Fuoco ................................. 1,500.00 Two years' interest on loan of Carmella Nardelli at 8% .......... 240.00 One years' interest on $40,000 mortgage indebtedness at 7% ......................................................... 2,800.00 One-half year's interest on $40,000 mortgage indebtedness at 7% ......................................................... 1,400.00 Loan evidenced by check Joe Nardelli to Fuoco dated January 9th, 1929, cashed by or deposited in Fuoco's bank .......................................................... 1,500.00 Interest due October 15th, 1929, on $40,000 mortgage indebtedness at 7% ......................................................... 1,500.00 Interest paid on money borrowed by the Nardellis and loaned to Fuoco ............................................... 575.00 ___________ $13,895.00 Credit for interest received by Joe Nardelli on the Frank mortgage ...................................................... 1,125.00 ___________ $12,770.00 "By assignment dated November 25th, 1929, recorded November 26th, 1929, Maria Fuoco further assigned an interest in the Frank mortgage to the Nardellis, to the extent of $12,500, which with the assignment of that mortgage dated November 7th, 1928, to the extent of $40,000, consumed the full amount of that mortgage and by a third assignment dated November 25th, 1929, recorded November 26th, 1929, Maria Fuoco assigned her entire interest in said mortgage to the Nardellis. The defendants say that the consideration for the second and third assignments was the $12,770 indebtedness stated above owing by Fuoco to the Nardellis. The consideration stated in all three assignments is one dollar and other valuable consideration."The first assignment is dated November 7th, 1928, and is for an interest in the $52,500 mortgage to the extent of $40,000. The defendants claim that it was given in consideration of an indebtedness created several years before. At the date of the assignment, the indebtedness also existed for which the judgment now held by complainant United States Fidelity and Guaranty Company was afterward entered and at the date of said assignment Fuoco had become involved in financial difficulties. His petition in bankruptcy shows liabilities over $132,000 and about $50,000 assets, part of which assets he had assigned to a creditor as security. In this situation the burden of proving the bona fides of this and the two subsequent assignments is on Fuoco and the two Nardellis. Fuoco lived in Bayonne. He is a barber by trade and at various times engaged in other business, such as the purchase and sale of grapes; dealing in mortgages and real estate and conducting a restaurant, and he kept no books of account or other record of any of his business affairs. I place little credence in his testimony for the reason that he had endeavored to protect the mortgage asset here in question by holding it in the name of his wife and in two other suits brought against him by said complainant United States Fidelity and Guaranty Company, and tried before me, he was found to have concealed two other assets by holding them in the name of a cousin, Antonio Cortellesa, namely (85-323) real property at Hohokus purchased by deed dated October 4th, 1928, and (86-13) a mortgage for $2,500 dated November 10th, 1930, covering property at Shrewsbury. The Nardellis are also Fuoco's cousins. They live at Waterbury, Connecticut, where they operate two stores for the sale of groceries, fruit, confectionery, cigars, tobacco and ice cream. When business was good their gross sales amounted to $30,000 or $35,000 a year. In 1930 their gross sales were about $25,000, while in 1931 they fell to about $14,000. They do a cash business and keep no books of account and have no book record of their dealings with Fuoco. The answer filed for them in this suit is merely a denial of the allegations of the bill; it sets up no affirmative defense and gives no intimation of the case they attempted to make out. On the trial only one of them, Joseph, testified. I say here that although Joseph Nardelli and Fuoco produced certain checks drawn by the one to the other, neither produced any check books and we are without such evidence as entries on check stubs might disclose.
"To substantiate the first loan of $20,000 the defendants produce a check dated July 23d 1923, and a bond and unrecorded mortgage dated July 1st, 1923, the latter having a certificate of acknowledgment dated July 17th, 1923. Why the date of the check and the date of the bond and mortgage are not the same was not explained. By the bond Fuoco agreed to pay interest on $20,000 from July 1st, although he did not receive the check for that amount until July 24th. The Nardellis left it to Fuoco to have the bond and mortgage prepared and they sent the check from Waterbury to him at Bayonne and they had no attorney or other person acting for them in the transaction. When, if ever, they received the bond does not appear and their mortgage security, for what must have been to them a large sum of money, was not recorded. Fuoco says the mortgage was not recorded because the Nardellis had promised him an additional loan of $10,000 and he intended giving them another mortgage to cover both loans. Nardelli says he left the bond and mortgage with Fuoco and thought Fuoco had recorded the mortgage. This situation existed four months and until the next bond and mortgage were executed to the Nardellis by Fuoco, dated November 14th, 1923, but not recorded until December 3d 1923. This is the $30,000 mortgage which they say was to include the $20,000 unrecorded mortgage indebtedness and a further loan of $10,000. Why was this mortgage not recorded immediately after its acknowledgment on November 14th instead of twenty days later? The mortgage for $20,000 was dated and acknowledged before it is claimed any money was advanced on it, but in the case of the $30,000 mortgage, nearly the whole amount it is said it secures was advanced sometime before it was recorded. $3,000 of this additional debt was incurred October 8th, 1923; $6,331.75 in liberty bonds had been given by the Nardellis the day after the mortgage was acknowledged and only the balance of $668.25 was paid after the mortgage was recorded.
"I am suspicious of the checks produced by the Nardellis and Fuoco to prove the item of the various indebtedness sought to be established in this case. Many more checks passed between them than those which they say relate to such indebtedness, for which other checks no satisfactory explanation was made and I am suspicious of the check for $668.25 just mentioned. The evidence seems to establish that the Nardellis gave Fuoco $6,000 in Liberty bonds on or about November 14th, 1923, and that these bonds were credited to Fuoco's account in his bank November 21st, 1923, but the amount of that credit was $6,069.36, not $6,331.75. Why was the credit $262.39 less than the parties say they valued them? Further interest of a week had accrued on them and the bonds had an established market value which was readily ascertainable. My suspicion is that the true reason why Fuoco received these bonds has not been disclosed and that among the checks given for various reasons by the Nardellis to Fuoco in 1923, were found the two checks for $3,000 and $668.25, and that a value of $6,331.75 was arbitrarily placed on the bonds for the purpose of using that amount and the two checks to force a total of $10,000.
"Next to be considered is the mortgage given by Fuoco and wife to the Nardellis, dated September 15th, 1924, to secure $10,000 covering property at Bayonne. Checks for a total of $6,000 were produced to establish this loan. They bear date from March 4th, 1924, to August 5th, 1924. No other checks from Nardelli to Fuoco were produced to prove the balance of the loan and the proof that such balance was advanced rests on the testimony of Nardelli and Fuoco, and such inference as may be drawn from the deposit in Fuoco's bank account in July, 1924, of certain checks of the Waterbury Trust Company for a total of $6,300, which Nardelli says were, at his direction, sent to Fuoco as loans. Thus it will be seen that $9,000 of the alleged total of $10,000 was advanced between March and July, 1924, and the balance of $1,000 was advanced August 5th, 1924, and the question naturally arises: Why did the Nardellis wait until September 15th, 1924, to obtain a mortgage on the Bayonne property to secure this debt? They had required that a mortgage be executed for the $20,000 loan of July 23d 1923, before they claim to have advanced that sum and when the mortgage dated September 15th, 1924, was given, they held a mortgage for $30,000 on the Hackensack property, and according to the story of the parties, Fuoco was not repaying any of his borrowings but was obtaining further sums from the Nardellis without security, until the mortgage of September 15th, 1924, was given. A financial statement made by Fuoco to his bank October 20th, 1927, was produced and shown to Fuoco. I am not sure that it was marked in evidence, but it appeared from the questions put to Fuoco and his answers that he had therein listed the Bayonne property among his assets and had not shown the $10,000 mortgage to the Nardellis as a liability.
"But assume that the $10,000 Bayonne mortgage was a valid mortgage given for a bona fide consideration. Four years after it was given Fuoco conveyed the mortgaged property to the Nardellis free from encumbrance, by a full covenant and warranty deed and the mortgage thereby merged in the title. The defendants' story is that an exchange of this property had been arranged and it was desired to cancel this mortgage so that it could be conveyed free of its lien and to substitute for it an assignment of an interest in the mortgage then held in Mrs. Fuoco's name on the Hackensack property, in the meantime securing the Nardellis by giving them title to the Bayonne property. This strikes me as a ridiculous explanation of the transaction, for an exchange of properties could have been made simply by conveyance direct from Fuoco and wife to Armstrong (the person with whom the exchange was made) and cancellation of the Nardelli mortgage, and since Fuoco had the mortgage on the Hackensack property before he conveyed the Bayonne property to the Nardellis, he could have given them an assignment of an interest in that mortgage in substitution for the $10,000 mortgage on the Bayonne property, if that was the plan, without conveying the Bayonne property to them. I am of the opinion that the conveyance of the Bayonne property to the Nardellis was in satisfaction of whatever sum was due on their $10,000 mortgage on that property, and I am strengthened in my opinion by the fact that the consideration stated in that conveyance is `one dollar and the further consideration set forth in an agreement bearing even date herewith.' The agreement thus referred to was found by Fuoco's trustee in Fuoco's safe deposit box. It is a carbon copy signed by Fuoco and wife and Fuoco and Nardelli say it was not executed by the latter. Even so, I believe it sets forth the true terms and conditions upon which the transaction was made. It states that Fuoco and his wife are not able to pay the amount due the Nardellis on their $10,000 Bayonne mortgage and that the Nardellis will accept a conveyance from the Fuocos in satisfaction of their mortgage debt and will deliver up their bond and mortgage to the Fuocos for cancellation. I shall hold that the delivery and the acceptance of the deed from Fuoco and wife to the Nardellis for the Bayonne property, discharged in full whatever debt may have been evidenced by the mortgage held by the Nardellis on that property. It therefore follows that the assignment of mortgage dated November 7th, 1928, made by Maria Fuoco of an interest in the mortgage held by her on the Hackensack property, which the defendants claim was given partially in substitution for the $10,000 debt on the Bayonne property, is void to that extent.
"Said assignment was of an interest to the extent of $40,000 in the Hackensack mortgage. The balance of the consideration for that assignment is alleged to be the cancellation, October 16th, 1928, of the $30,000 mortgage held by the Nardellis on that property. I have already expressed doubt as to the reliability of the testimony given in support of the consideration of the canceled mortgage. I now direct attention to the fact that said mortgage was dated November 14th, 1923, and was made payable November 14th, 1926. Between its date and cancellation five years elapsed, and although the defendants say no payment was made on account of it, except interest, canceled checks given by Fuoco to Joseph Nardelli during that period were produced by Fuoco's trustee in bankruptcy for a total of over $23,000. These checks were among those delivered by Fuoco to his trustee but I am not satisfied they comprise all checks which Fuoco could have so delivered. The last check delivered to the trustee is dated in 1928, but Fuoco continued issuing checks after that date (his bank account so shows), yet he delivered to the trustee no canceled check for 1929, 1930 or 1931. The referee in bankruptcy had ordered Fuoco to deliver all his canceled checks and check books to the trustee, but instead of doing so, he and Nardelli had examined his checks the day prior to the trial before me and had, I believe, handed to the trustee only those which the trustee produced. At the trial Fuoco testified that certain of his check books were in Bayonne and that he could produce them. He was directed to do so, but did not. His attitude with respect to his canceled checks and his check books adds to my suspicion and doubt as to the veracity of the story told me by the defendants.
"Title to the Hackensack property was conveyed by Fuoco to Frank October 15th, 1928, and the $52,500 mortgage from Frank to Fuoco was delivered that day. The Nardelli $30,000 mortgage was canceled of record the following day but the assignment to them of a $40,000 interest in the Frank mortgage is dated November 7th, 1928, and was recorded November 9th, 1928, so for over three weeks the Nardellis were without security for their $30,000 claim. Neither of the Nardellis attended the closing of this title and they had no one there to represent them. They sent their canceled mortgage to Fuoco for delivery, waited three weeks for the assignment of mortgage in lieu of it and accepted the assignment without any title examination made to ascertain whether the mortgage assigned to them was a first lien, or whether any previous assignment thereof had been made by Fuoco. They allowed Fuoco to attend to recording the assignment and after it had been made they permitted Fuoco to collect interest on the mortgage. They say this assignment represented a valid $40,000 claim against Fuoco. They were not rich men and in the conduct of a comparatively small business, I do not see how they could have saved $40,000 from their profits to loan to Fuoco, or having loaned that sum, how they could have been so careless and unconcerned over security. Their testimony, the facts and the circumstances seem more consistent with the idea that the mortgages and assignments given them were not held as bona fide creditors but for the purpose of aiding Fuoco to put his assets beyond the reach of his creditors.
"We come to the second and third assignments, dated November 25th, 1929, of the Hackensack mortgage, the consideration for which the defendants say was $12,500 further loans by the Nardellis to Fuoco. For six years the Nardellis — small business men — had been loaning Fuoco large sums of money which he had promised to pay within a definite time, but had failed to do so, until he owed them $40,000. In 1923 they may have thought him a man of means, but his continued borrowings without repayment must have convinced them to the contrary, and yet they say they loaned him $12,500 more. According to their story, they loaned him much more than that sum, some of it money they did not have available and which they borrowed on their notes to give to him. Although they had to give their notes to their bank for money they borrowed, they took no note or other evidence of debt from Fuoco for the same money (or any other money) loaned him, and neither he nor they kept any record of these transactions which ran over a period of six years and in connection with which numerous checks were given and received. The second assignment assigned to the Nardellis an interest to the extent of $12,500 in the Hackensack mortgage (which was the remaining interest held by Fuoco in that mortgage) and the third assignment assigned the entire mortgage. Why two assignments were deemed necessary when either alone would have answered the purpose does not appear. These two assignments were executed in the presence of Joseph Nardelli but were not delivered to him. They were left with Fuoco, who took them to the recording office and, on his instructions, they were returned to his wife after recording. When the Nardellis received them does not appear.
"Taking up the items said to make up the $12,500 indebtedness it appears that the Nardellis claim they borrowed twice from their Waterbury bank on their notes, first $5,000 and then $4,000, and loaned the proceeds to Fuoco. The year of such borrowing was either 1928 or 1929; it is doubtful which. The brief of counsel for the Nardellis indicates that 1928 was the year because he speaks of two checks for $1,000 each given by Fuoco to Nardelli on account of this indebtedness, the one dated May 1st, 1928, and the other dated July 30th, 1928. It is claimed that the proceeds of these notes were loaned to Fuoco and that Fuoco repaid them, $2,500 on account of the first loan and $2,000 on account of the second loan, and that $4,500, with $575 interest, was the balance due in November, 1929. The Nardelli notes to evidence their bank borrowings were not produced, nor were checks shown to evidence the payment of $5,000 and $4,000 to Fuoco, and Fuoco's bank account for the years 1928 and 1929 shows no deposit of such amounts. If Fuoco was indebted to the Nardellis in $9,000 in 1928, why was that sum not included in the assignment recorded November 9th, 1928, of an interest in the Hackensack mortgage? The next two items are for a loan of $1,500 alleged to have been made by Carmella Nardelli, wife of Joseph Nardelli, with two years' interest at eight per cent. No check was produced as evidence that such sum was advanced. Among Fuoco's canceled checks four were found, given by him to Carmella Nardelli for a total of $285 as follows: January 16th, 1925, $60; January 19th, 1925, $100; July 20th, 1925, $55; July 19th, 1926, $70. Such transaction as Fuoco had with Carmella Nardelli seems to have been closed long before 1928, and if the checks stated represent interest payments, it is evident that the last check given one year after the preceding one was not for one year's interest at eight per cent. on $1,500. The next items to be mentioned are for two years' (at least) interest on $40,000 mortgage indebtedness at seven per cent., for a total of $5,700. This refers to the $40,000 debt evidenced by the assignment dated November 7th, 1928, and the first thought that occurs is: Why the portion of this interest charge which was unpaid on November 7th, 1928, was not included in the assignment of that date. That mortgage indebtedness was made up of two mortgages before mentioned, the one on Hackensack property for $30,000 and the other on Bayonne property for $10,000, both of which specify the interest rate as six per cent., and since the one was canceled October 16th, 1928, and the other merged October 17th, 1928, and could for reasons heretofore stated be no longer considered debts of Fuoco, there could be no interest charges thereon. Moreover, since these mortgages carried interest at six per cent., I believe that the claim for interest on this indebtedness at seven per cent. and on the Carmella Nardelli loan at eight per cent., is made solely for the purpose of swelling the account. The remaining item is for a loan of $1,500 by check dated January 9th, 1929. That this check evidences an actual loan is vouched for by the word of Joseph Nardelli, which I consider doubtful, and by the word of Fuoco, which I consider worthless. I am not satisfied that the testimony of Nardelli and Fuoco establishes that a debt of $12,500 from Fuoco to Nardellis existed at the date of the assignment of November 25th, 1929.
"The transactions between the defendants were complicated and I have considered them in detail, with the result that the explanations made by the defendants do not seem to me to be credible. The testimony in support of the three assignments of the mortgage under attack comes wholly from the lips of the parties vitally interested in maintaining their validity, and I consider such testimony discredited by the circumstances, by the improbability of transactions being carried on in the manner testified to and by the light of human experience. The assignments were all made for past due consideration and at a time when Fuoco was becoming or was involved in the financial difficulties which later caused him to file a petition in bankruptcy and the burden of sustaining their bona fides is on the Nardellis. I consider the evidence insufficient to sustain the burden and there will be a decree for complainants."
Mr. William De Lorenzo and Mr. Merritt Lane, for the appellants.
Messrs. McDermott, Enright Carpenter, for Emanuel Weitz, trustee in bankruptcy of Pasquale Fuoco, respondent.
The decree appealed from will be affirmed, for the reasons stated in the opinion delivered by Vice-Chancellor Fielder in the court of chancery.
For affirmance — THE CHANCELLOR, TRENCHARD, PARKER, LLOYD, CASE, BODINE, DONGES, BROGAN, HEHER, KAYS, HETFIELD, WELLS, KERNEY, JJ. 13.
For reversal — None.