U.S. Supreme Court Zartman v. First National Bank of Waterloo, 216 U.S. 134 (1910)
Zartman v. First National Bank of Waterloo
Argued January 12, 1910
Decided February 21, 1910
216 U.S. 134
ERROR TO THE SUPREME COURT
OF THE STATE OF NEW YORK
The jurisdiction which equity has to decree correction of errors in written contracts caused by mutual mistake is not suspended by the bankruptcy law, and the trustee takes property as the debtor had it at the time of the petition subject to all valid claims, liens and equities, including the power of a court of equity to correct manifest error by mutual mistake in an agreement made prior to the petition.
Where a contract is reformed to correct a mutual mistake and make it conform to the intent of the parties, a new lien is not created, but the original lien is adjudicated and determined.
189 N.Y. 533 affirmed.
This was a suit brought in the supreme court of the State of New York by the First National Bank of Waterloo, New York, against Francis Bacon and George E. Zartman, as Bacon's trustee in bankruptcy, to procure the reformation of a written contract made by plaintiff and defendant Bacon February 15, 1902.
Before the contract was made, Bacon was president of the First National Bank of Waterloo, New York, and also of the Waterloo Wagon Company. He was active in the office of the wagon company, while the business of the bank was looked after by its cashier, Becker. The Waterloo bank had extended credit to the wagon company and to Bacon individually, discounting paper and taking notes.
The Exchange National Bank of Seneca Falls, New York,
held, by assignment from Bacon, 461 shares of the stock of the wagon company and 253 shares of the Waterloo bank as continuing collateral security for any existing or future indebtedness of Bacon or the wagon company.
The contract between Bacon and the Waterloo bank provided that the shares were
"to be held by said bank as a continuing collateral security for the payment to it of any indebtedness or liability of any kind, absolute or contingent, due or not due, now existing or that may hereafter exist, arise, accrue, or be contracted, on the part of himself or of the Waterloo Wagon Company, Limited, to said bank, and the said Francis Bacon hereby agrees with the First National Bank of Waterloo that the said certificates of stock above named are transferred to and may be held by the said First National Bank of Waterloo as a continuing collateral security for the payment to it of any indebtedness or liability of any kind, absolute or contingent, now existing or that may hereafter exist, arise, accrue, or be contracted on the part of the Waterloo Wagon Company, Limited, or himself, to said bank, and said shares of stock, upon their surrender by the Exchange National Bank, shall be deposited with the said First National Bank of Waterloo."
The words in italics were omitted from the contract by mutual mistakes made in preparing and executing it, and the New York supreme court, by its decision, reformed the contract by inserting them. In the meantime, however, Bacon had become a bankrupt, having been so adjudicated May 4, 1904, and defendant Zartman had been appointed trustee.
This action was begun October 17, 1904. The trustee alone defended.
The judgment was unanimously affirmed by the Appellate Division of the Fourth Department, 113 App.Div. 612, and, on appeal to the Court of Appeals, the decision of the appellate division was unanimously affirmed without opinion. 189 N.Y. 533. The remittitur was filed below November 9, 1907, and this writ of error was thereupon allowed.
MR. CHIEF JUSTICE FULLER delivered the opinion of the Court.
The jurisdiction in equity to decree the correction of errors in written contracts which have been caused by mutual mistake is firmly established, and needs no citation of authority to sustain it. In the present case, the evidence of the mistakes in question was undisputed. We are not aware that the bankruptcy law has suspended that jurisdiction.
The position of the trustee in bankruptcy seems to be that the mistake made by Bacon in dictating or writing out the contract between himself and the Waterloo bank "is an asset in his hands, as part of the estate of the bankrupt;" but we cannot agree to that. The trustee claims that he takes the same kind of title as a bona fide purchaser for value; but the rule applicable to this and all similar cases is that the trustee takes the property of the bankrupt not as an innocent purchaser, but as the debtor had it at the time of the petition, subject to all valid claims, liens, and equities. Thompson v. Fairbanks, 196 U. S. 516 , and cases cited. And this is so well settled that our jurisdiction of the writ of error is exceedingly doubtful. Judge Williams, speaking for Appellate Division, Fourth Department, treated of this point thus:
"It is said that the bankruptcy of Bacon constituted a bar to the relief granted in this action. This cannot be true. The trustee took the bankrupt's property in the same condition and subject to the same liens as the bankrupt himself held it. The trustee is in no sense a bona fide purchaser for value, and entitled to protection as such. No new lien was created by the decision and judgment appealed from. The original lien was adjudicated and determined."
We concur in this view, and the judgment is