
    Marine Midland Bank-Southern, Appellant, v Bradbury K. Thurlow et al., Respondents.
    Argued June 10,1981;
    decided July 7, 1981
    
      POINTS OF COUNSEL
    
      Richard Denton and Edward B. Hoffman for appellant.
    I. Conelec’s equipment was pledged to plaintiff to support defendants’ “indebtedness”, as that word is used in the security agreement signed by them. II. The actions of the parties show they intended that the equipment secured defendants’ loan. III. The parol evidence rule excludes evidence of any oral statement by Mr. Noch which varies or contradicts the written documents. (Thomas v Scutt, 127 NY 133; Nau v Vulcan Rail & Constr. Co., 286 NY 188; Commissioner of Internal Revenue v Dwight, 205 F2d 298, 346 US 871; Green v Wachs, 254 NY 437; Brainard v New York Cent. R. R. Co., 242 NY 125; Hartigan v Casualty Co. of Amer., 227 NY 175.) IV. If defendants claim to be third-party beneficiaries of the letter of January 23,1969 from Conelec to the bank, their claim is subject to equities and defenses between the parties to the letter. (Hanrihan v Parker, 19 Misc 2d 467; Siegel v Henry Fippinger, Inc., 264 App Div 203; Flagg v Munger, 9 NY 483; Beveridge v New York El. R. R.Co., 112 NY 1; Berger & Son Co. v Duys, 174 Misc 976; Muzak Corp. v Hotel Taft Corp., 1 NY2d 42.) V. If the equipment secured the bonds, plaintiff is entitled to recover. (Merritt v Bartholick, 36 NY 44.) VI. If the Conelec equipment secured both defendants’ loan and the bonds, plaintiff is entitled to recover. (Nau v Vulcan Rail & Constr. Co., 286 NY 188; Merritt v Bartholick, 36 NY 44.) VII. The decision of the court below on the first appeal may have decided the jury trial.
    
      James L. Burke for respondents.
    I. There is ample evidence to indicate a three-way oral agreement in which the bank agreed to hold Conelec’s equipment to secure debentures intended to secure the bank’s loan to respondents and violated that agreement. II. The parol evidence rule is inapplicable to this factual situation, for the reason that there is no written integrated agreement in existence. (Mesibov, Glinert & Levy v Cohen Bros. Mfg. Co., 245 NY 305; Ruppert v Singhi, 243 NY 156; Traders’ Nat. Bank of Rochester v Laskin, 238 NY 535; Thomas v Scutt, 127 NY 133; Eighmie v Taylor, 98 NY 288; Rose Stone & Concrete v County of Broome, 76 AD2d 998.) III. The security agreement alone, or in conjunction with any other written document is incomplete and does not bar oral testimony to show the bank’s subsisting obligation to apply the pledged equipment solely to secure respondents’ debentures. (O’Neil Supply Co. v Petroleum Heat & Power Co., 280 NY 50; Lamb v Noverores Bros. Co., 208 NY 427.) IV. Respondents’ proof is that the equipment was pledged to secure the debentures. V. There was no agreement between respondents and the bank that the bank, in event of default, should first proceed against respondents’ filed security before proceeding against the debentures and equipment.
   OPINION OF THE COURT

Jasen, J.

The sole question presented on this appeal is whether the parol evidence rule precludes the defendants from establishing that the plaintiff misapplied the proceeds of certain collateral security held by it.

On January 31, 1969, in order to obtain a $100,000 loan from the plaintiff, the defendants signed and delivered to plaintiff their notes totaling $100,000. In addition, the defendants executed a security agreement in plaintiff’s behalf whereby they pledged $100,000 of Conelec, Inc. (Conelec), convertible debentures and certain shares of stock of Scan-Data Corporation and Data-Ram Corporation. Among other things, this security agreement authorized the plaintiff “without notice or demand and without affecting [defendants’] obligations hereunder, from time to time * * * to take from any party and hold collateral * * * for the payment of the Indebtedness or any part thereof, and to exchange, enforce or release such collateral or any part thereof.” The agreement further authorized the plaintiff, in the event of default by the defendants in the payment of their notes, “to direct the order or manner of the disposition of the Collateral and any and all other collateral and the enforcement of any and all indorsements and guaranties relating to the Indebtedness or any part thereof as [plaintiff], in its sole discretion, may determine.”

The proceeds of the loan were turned over to Conelec in payment for the Conelec debentures which, in turn, were pledged by the defendants to the plaintiff as security for the loan. At the time, Conelec was contemplating a public offering and was in need of interim financing. In order to induce the plaintiff to make the loan to the defendants so that they could purchase the debentures, Conelec also executed a security agreement in plaintiff’s favor whereby Conelec pledged all its machinery and equipment as security for “any and all indebtedness of [Conelec] to [plaintiff], whether now existing or hereafter incurred, of every kind and character, direct or indirect.” A letter from Conelec to the plaintiff which accompanied this security agreement stated that the pledge of collateral was to induce plaintiff into making the loan to the defendants and secured the “obligation” of the Conelec “debentures” pledged by the defendants. The letter further provided that upon default by the defendants on their notes, the debentures would become due, but that before realizing on the security interest in the Conelec machinery and equipment the plaintiff was to proceed first against the security supplied by the defendants and the defendants individually.

In the months that followed, plaintiff made additional loans directly to Conelec based upon the pledge of the security interest in its machinery and equipment. Although initially crediting the Conelec security to the pledge supporting defendants’ loan, the plaintiff withdrew the Conelec pledge in May of 1970. The Conelec machinery and equipment were thereafter listed in plaintiff’s records as security for the loans made directly to Conelec.

Unfortunately, Conelec never was able to make the public offering it had planned and, in February, 1972, the company went bankrupt. The Conelec machinery and equipment were liquidated and the proceeds paid to the plaintiff in partial satisfaction of the loans made directly to the company under the after-incurred debts clause of the Conelec security agreement.

On April 17, 1973, plaintiff demanded payment on the 1969 notes executed by the defendants and then commenced this action to recover the unpaid balance of $95,000 plus interest. As an affirmative defense, the defendants asserted that, contrary to an oral agreement between themselves, the plaintiff and Conelec, the proceeds from the sale of the collateral security of the Conelec machinery and equipment had been misapplied by the plaintiff to satisfy its own loans to Conelec, rather than in satisfaction of the indebtedness owed by the defendants.

Special Term granted plaintiff summary judgment, holding that the parol evidence rule precluded the defendants from establishing that the plaintiff misapplied the proceeds from the sale of the Conelec collateral security. On appeal, a unanimous Appellate Division reversed. While acknowledging that the plaintiff “was authorized to withdraw the Conelec security and [that] to permit parol evidence would render the [defendants security] agreement a nullity”, the court below was of the view that the defendants were attempting to establish that the machinery and equipment were pledged by Conelec as security for the de bentures which were held by the plaintiff as security for the defendant’s loan. As such, the Appellate Division held that this pledge was “separate and distinct from the security agreement of defendants with the [plaintiff] and is not in any way within the parol evidence rule which applies to the loan transaction with defendants by the bank.” (54 AD2d, p 388.) We cannot agree.

The principle of law applicable to the facts of this case is well established. Briefly, absent fraud or mutual mistake, where the parties have reduced their agreement to an integrated writing, the parol evidence rule operates to exclude evidence of all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing. (Fogelson v Rackfay Constr. Co., 300 NY 334; Thomas v Scutt, 127 NY 133.) Although at times this rule may seem to be unjust, “on the whole it works for good” (Mitchill v Lath, 247 NY 377, 380) by allowing a party to a written contract to protect himself from “perjury, infirmity of memory or the death of witnesses.” (Thomas v Scutt, 127 NY 133, 142, supra; see, generally, Richardson, Evidence [10th ed], §§ 601-634.)

In this case, the security agreement executed by the defendants clearly authorized the plaintiff to accept and release additional collateral that might be pledged by “any party” as security for defendants’ loan. This agreement further provided that in the event of default by the defendants, the plaintiff was entitled to direct the “order or manner of the disposition” of all the pledged collateral as plaintiff, “in its sole discretion”, determined. Moreover, in pledging its machinery and equipment to plaintiff, Conelec expressly agreed that its pledge would secure any future loans made directly to it by the plaintiff. Defendants’ attempt to establish the existence of an oral agreement pursuant. to which plaintiff was obligated first to apply the Conelec security in satisfaction of their loan clearly contravenes the express terms of these agreements and completely negates the plaintiff’s right under the defendants’ security agreement to release and apply the Conelec collateral as it deemed appropriate. As such, proof of this extraneous oral agreement is barred by the parol evidence rule.

Nor does the reasoning of the Appellate Division alter this result. Contrary to the opinion of the court below, the Conelec pledge of collateral security was not “separate and distinct” from the defendants’ agreement with the plaintiff. Conelec pledged its machinery and equipment in order to induce the plaintiff to make the loan to the defendants and so that plaintiff would make future loans to Conelec itself. Focusing solely on the transaction between the defendants and Conelec, the court below would admit parol evidence of an agreement concerning the use of the Conelec collateral to secure the pledged debentures. While such evidence may serve to explain the nature of the debt between the defendants and Conelec, the simple fact of the matter is that that transaction is not in issue. The present case concerns the agreement between defendants and plaintiff as memorialized in their security agreement and proof of any oral promise by plaintiff as to the initial application of the Conelec collateral directly contradicts the provisions of that written contract. It is in this sense that the proffered evidence runs afoul of the parol evidence rule and, therefore, should have been excluded.

One final comment is in order. The dissent would allow the introduction of evidence of an oral agreement between the plaintiff and Conelec, supplementing the provisions of Conelec’s letter to the plaintiff dated January 23, 1969 by which the plaintiff is alleged to have agreed to apply Conelec’s machinery and equipment only as collateral for Conelec’s obligations under its convertible debentures. We agree that the rights as between Conelec and the plaintiff might be so determined. What the dissent appears to lose sight of is that we are here confronted, not with the rights of Conelec against the plaintiff, but with the determination of the rights of defendants as individual borrowers against the plaintiff as their lender. The definition of the rights of the plaintiff in this relationship must be determined by the provision of the security agreement dated January 31,1969 between defendants and the plaintiff and no parol evidence, whatever its source, may be received which is inconsistent with the express terms of that written agreement.

Accordingly, the order appealed from and the order of the Appellate Division brought up for review should be reversed, with costs, and plaintiff’s motion for summary judgment granted.

Chief Judge Cooke

(dissenting). The majority today wholly misapplies the parol evidence rule to a situation where it is simply not involved.

This case involves two separate and distinct agreements, with different parties and different subject matter. The majority overlooks this basic fact.

The parol evidence rule states “that evidence of what was said between the parties to a valid instrument in writing, either prior to or at the time of its execution, cannot be received to contradict or vary its terms” (Thomas v Scutt, 127 NY 133, 137 [emphasis added] ; see, also, 9 Wigmore, Evidence [3d ed], § 2426, p 79; Richardson, Evidence, [10th ed], §§ 601-603, pp 598-599). The majority recognizes that the rule applies to “all prior or contemporaneous negotiations between the parties offered to contradict or modify the terms of their writing” (p 387 [emphasis added]).

As this court stated, “[difficulties may arise in the application of the so-called parol evidence rule, but it has never been held that a written agreement between two parties excludes proof of an additional parol agreement between one of these parties and a third party” (Traders’ Nat. Bank of Rochester v Laskin, 238 NY 535, 542; see, also, Fisch, New York Evidence [2d ed], § 46, pp 26-27; 1 Mottla, New York Evidence, Proof of Cases [2d ed], § 143, p 163).

Here, there were two separate, discrete agreements. One was the security agreement executed between defendants and plaintiff Marine Midland in return for the bank’s loan to defendants of the money to buy Conelec’s debentures. The other agreement involved Marine Midland and Conelec itself. As expressed in Conelec’s letter of January 23, 1969 to the bank, Conelec pledged its equipment as security for both the loans to defendants and for Conelec’s own debentures.

The majority asserts that any attempt to introduce evidence of an oral conversation in which plaintiff allegedly promised to apply Conelec’s equipment first in case of default by defendants on their notes to plaintiff is barred by the parol evidence rule. Standing by itself, this would be correct, because such a conversation would be introduced to contradict or vary the terms of the security agreement between defendants and plaintiff, which stated that plaintiff could accept or release additional collateral for the notes.

The parol evidence rule does not, however, bar consideration of the separate agreement between Conelec and plaintiff. This point seems to be the one missed by the majority. As explained, this is because it is simply a different agreement by different parties, not an attempt by defendants and plaintiff to modify or contradict the terms of their security agreement. With respect to the discrete agreement between Conelec and plaintiff, parol evidence of a promise by plaintiff to apply Conelec’s equipment first upon any default by Conelec on the debentures merely explains Conelec’s letter to plaintiff and does not contradict it. Such evidence is therefore not barred by the parol ‘evidence rule. Although the Conelec-Marine Midland letter states that plaintiff should look to defendants personally before looking to Conelec’s equipment, this condition was applicable only if defendants defaulted on the notes. In fact, Conelec defaulted on its own debentures nearly three years before defendants defaulted, and the condition therefore did not come into play. The evidence concerning plaintiff’s alleged promise to apply Conelec’s equipment to the debentures was therefore not barred by the parol evidence rule, and could be considered in connection with defendant’s claim that plaintiff should have applied Conelec’s equipment to the debentures rather than to direct loans made by plaintiff to Conelec. It should be noted that Justice Herlihy’s opinion at the Appellate Division was joined by all members of the court on this point.

The majority asserts that “no parol evidence, whatever its source, may be received which is inconsistent with the express terms” of the security agreement between defendants and plaintiff. This is not a statement of the parol evidence rule, but rather the creation of a new rule of law that bars introduction of any evidence, even a completely separate contract between other persons, that bears in any way upon the rights of the parties to a security agreement. The majority has given no reason for making such a radical departure from well-settled rules of law.

For these reasons, the order appealed from and the order of the Appellate Division brought up for review should be affirmed.

Judges Jones, Fughsberg and Meyer concur with Judge Jasen; Chief Judge Cooke dissents and votes to affirm in a separate opinion in which Judges Gabrielli and Wachtler concur.

Order appealed from and order of the Appellate Division brought up for review reversed, etc. 
      
       We find any reliance on Traders’ Nat. Bank of Rochester v Laskin (238 NY 535) to be misplaced. There, this court held that the parol evidence rule did not preclude the defendants from introducing proof of an oral promise by the plaintiff as to how certain collateral pledged by a third party was to be applied. Unlike the present case, however, the terms of the oral agreement which the Traders’ Nat. Bank defendants were attempting to establish did not contradict the express provisions of any written contract between themselves and the plaintiff. Hence, the parol evidence rule was no bar to the proof of this additional agreement.
     