
    Julius Loewenthal, Appellant, v. Frances Way Haines, Respondent.
    First Department,
    January 22, 1914.
    Practice — trial of equitable defense and counterclaim interposed in legal action — appeal — failure to except — Code of Civil Procedure, section 974, construed — waiver of right to trial at Special Term.
    Where an equitable defense and counterclaim is interposed in a legal action and both parties notice the cause for trial at Trial Term, and the plaintiff takes no exception to a denial of his motion for the dismissal of the counterclaim upon the ground that it should have been noticed for trial at Special Term, the question is not brought up for review upon appeal.
    But, it seems, that in any event said objection is not tenable where the facts constituting the equitable counterclaim are also a defense to the action. Section 974 of the Code of Civil Procedure, governing the mode of trial of a counterclaim, applies only where the facts do not constitute a defense and are not available as such.
    Moreover, the plaintiff by noticing the cause at Trial Term and trying the same, without taking exception to the ruling aforesaid, waived any right to have the equitable counterclaim tried at Special Term. Laughlin and McLaughlin, JJ., dissented, with opinion.
    Appeal by the plaintiff, Julius Loewenthal, from a judgment of the Supreme Court in favor of the defendant, entered in the office of the clerk of the county of New York on the 2tth day of January, 1913, upon the verdict of a jury, and also from an order entered in said clerk’s office on the 29th day of January, 1913, denying the plaintiff’s motion for a new trial.
    
      Walter Loewenthal, for the appellant.
    
      A. S. Gilbert, for the respondent.
   Scott, J.:

The action is upon a mortgage containing a covenant to pay the sum of $10,000. This mortgage was given as collateral to another mortgage which has been foreclosed and the present action is not for foreclosure, but to enforce defendant’s liability upon her covenant to pay. Two defenses are pleaded: First, that the consideration for the instrument sued on was an usurious agreement for the forbearance of a debt, to wit, an agreement to extend a mortgage; and second, what is described in the answer as a “separate equitable. defense and counterclaim ” in which defendant alleges that the clause by which she undertook to pay $10,000 was inserted in the instrument either by mutual mistake of all parties or by fraudulent purpose and intent on the part of plaintiff and his agents and representatives.

It is unnecessary to review the fact further than to say that the evidence fully justified a finding in defendant’s favor on both defenses. While the evidence of defendant’s husband, who acted as her agent, was in some minor matters confused and perhaps self-contradictory, it was evident that such confusion resulted from lack of memory and not from any intention to deceive, and on all vital points his evidence was sufficiently clear. On the other hand, the evidence given by plaintiff and his attorney who acted in the transaction in his behalf was of such a character that the jury were fully justified in rejecting it altogether.

The appellant’s chief reliance on this appeal is upon what he deems to have been a fatal irregularity in trying the cause at Trial Term, instead of Special Term. Both sides noticed the cause for trial at the Trial Term. When it came on for trial plaintiff moved to dismiss the defense founded upon usury upon the ground that that defense is personal to the borrower and cannot be availed of by a surety. He also moved to dismiss the second defense upon the ground that as a counterclaim it could not be tried at a Trial Term and .that by failing to separately notice it for trial at Special Term the defendant had abandoned it, and that as a defense it was insufficient. All of these motions were denied and exception taken. The trial then proceeded and evidence was received tending to establish both defenses, without any objection from plaintiff, based upon the supposed irregularity involved in trying the issues at Trial Term.

But there is no merit in the contention even if it had been properly presented. The case is in all respects similar to Bennett v. Edison Electric Ill. Co. (164 N. Y. 131), in which, as in this, an equitable plea was interposed asa “ defense and by way of counterclaim.” The claim was, as in this case, that the contract sued upon was not the contract upon which the minds of the parties met and, consequently, that the contract as written was not defendant’s contract. In that case it was charged that the defendant had been induced by fraud to sign a paper which did not express the true contract, while in this case the error is charged to a mutual mistake, but the result is the same and both pleas present a defense available only upon equitable principles. The Court of Appeals pointed out that the facts pleaded constituted a good defense, which was open and available to the defendant in any action at law brought upon a contract. Referring to section 974 of the Code of Civil Procedure, the court said: The provisions of the Code referred to, we think, have no application to an issue of this character, but were intended to provide for the mode. of trial of an issue arising upon a counterclaim in which the facts alleged do not constitute a defense ar.d are not available as such.” City of New York v. Matthews (156 App. Div. 490), upon which appellant relies, was a case in which it was essential to defendant’s plea that the court should grant affirmative relief by way of reforming the contract sued upon. It was not contended that the contract as signed was not precisely what the parties had agreed upon and intended to execute, but it was claimed that they so agreed and intended in ignorance of certain facts which if known to them when the contract was executed would have led to a different agreement. The case was, in the end, decided upon another ground.

The judgment should be affirmed, with costs.

Ingraham, P. J., and Clarke, J., concurred; Laughlin and McLaughlin, JJ., dissented.

Laughlin, J. (dissenting):

This is an action to recover the sum of $10,000, and it is based on an agreement contained in a mortgage on real estate made by the defendant on the 24th day of September, 1909. The indenture recites that one Franklin Haines and the Haines Realty Corporation were indebted to the plaintiff in the sum of $25,000, as specified in an extension agreement bearing even date therewith, and that the consideration for defendant’s agreement was the making of the extension agreement. It contains the proviso that if either of said debtors should pay the indebtedness as provided in the extension agreement and in a bond and mortgage therein mentioned, then the mortgage and agreement executed by the defendant should be void, and that in no event should the defendant or the property covered by the mortgage be liable for more than $10,000 and interest on account of the said indebtedness. These provisions were followed by a clearly expressed agreement on the part of the defendant to pay said indebtedness to the extent of $10,000, and it was provided that in default thereof the plaintiff, who was the party of the second part to the indenture, was to be at liberty to sell the premises according to law.

The plaintiff alleges the failure of the primary debtors to pay the indebtedness and the foreclosure of the mortgage, to which the extension agreement related, and the sale of the premises and the entry of a deficiency judgment in that action against said debtors for the sum of $26,727.88, and that no part thereof excepting the sum of $1,721.11 has been paid. Judgment was demanded against the defendant for the sum of $10,000 together with interest thereon and costs. By the answer of the defendant the allegations of the complaint stand admitted. The defendant pleaded as a first defense that the instrument on which the action is based is void for usury exacted for the making of the extension agreement. The defendant pleaded as an equitable defense and counterclaim that when the bond and mortgage on which the deficiency judgment was entered became due an agreement was made by the plaintiff, who then held and owned the same, for the extension thereof upon the guaranty of one Corn, who agreed to guarantee it on being indemnified and held harmless to the extent of $10,000 by said Haines Realty Corporation, which indemnity was to be secured by a mortgage to be executed by the defendant; that the defendant did execute the mortgage upon which this action is based for the purpose of indemnifying Corn to the extent of $10,000; that the instrument upon which the action is based “in no manner, shape or form imposed any personal obligation upon this defendant; ” and that there was no demand or request or agreement or understanding that the defendant should personally guarantee the mortgage or obligate herself to pay any part thereof; that “the only paper or instrument which the parties understood and agreed should be executed and delivered, was a mortgage which should bind the property of this defendant to the extent of $10,000;” that pursuant to this arrangement the attorneys for the plaintiff prepared the instrument on which the action is based, and that it was assumed by all parties that it was the usual form of mortgage “with apt language necessary under the circumstances, making it collateral to the original debt, but in no way binding or obligating this defendant personally, but imposing a lien upon her property to the extent of $10,000 as additional security to the original debt; ” but that either by a mutual mistake of all parties, or by fraudulent purpose or intent on the part of the plaintiff and his agents and representatives, the instrument prepared contained the covenant obligating defendant to pay the indebtedness, as already stated; that at the time the defendant executed and delivered said mortgage she did not know or understand that “ the language thus used was intended to, in any way, obligate her personally, but assumed that it was general language necessarily used in a mortgage form in order to properly bind the property; ” and that she had no knowledge that the plaintiff claimed any personal liability on her part by reason thereof until the commencement of this action. The defendant prays judgment reforming the mortgage by striking out the provision imposing a personal liability upon her, and for the dismissal of the complaint.

No application was made by either side to have the equitable counterclaim for the reformation of the mortgage first tried at Special Term. The action was brought to trial and tried before the court and a jury. At the opening of the trial counsel for plaintiff moved for judgment on the pleadings on the ground that inasmuch as the Haines Eealty Corporation, which was the borrower, could not plead usury — a point expressly conceded on the trial — the defendant could not plead it; and also moved for a dismissal of the equitable counterclaim on the ground that the defendant in noticing the cause for trial at jury term, without moving for a separate trial of her counterclaim, waived the same, and further that the facts pleaded were insufficient in law to entitle the defendant to the relief for which she prayed. These motions were denied, and an exception was duly taken in behalf of the plaintiff. At the close of the evidence counsel for the plaintiff moved for a dismissal of the defense of usury on the ground that the evidence was insufficient, and of the equitable defense on the ground that no mutual mistake had been shown. The motions were denied, and exceptions were duly taken, and the case was submitted to the jury on both defenses. The trial court submitted no question with respect to fraud in preparing or inducing the execution of the mortgage to the jury. The only point submitted to the jury under the equitable defense was as to whether the clause imposing the personal liability on the defendant was inserted through mutual mistake. The court drew the attention of the jury to the. testimony tending to show that the defendant was represented by her husband, who testified that at the suggestion of the plaintiff he applied to the latter’s attorneys to have the mortgage drawn; that it was agreed between him and the plaintiff that the paper was “to be no more than a mortgage upon the Yonkers property, with no clause ” making the defendant liable for any part of the mortgage debt, and that he informed the attorney who drew the. mortgage that it was to be in the same form as one previously given to Com on an earlier extension of the “main mortgage,” which mortgage did not contain a clause imposing personal liability upon the defendant, and that the attorney assented thereto, and that defendant subsequently received the mortgage from the attorney and that he had his wife execute it without noticing the clause imposing personal liability. The court also drew to the attention of the jury the fact that this evidence was controverted by evidence offered on the part of the plaintiff tending to show that there was no mistake on the part of the plaintiff, or his attorney, as to what the mortgage was to contain, or did contain, and that it was delivered to the defendant’s husband to be examined by him and by her before execution. The court charged the jury that a mistake by the defendant alone would be of no avail, and that it was incumbent on her to show that this clause was inserted in the mortgage by mutual mistake of both parties, so that the mortgage in this regard expresses an obligation which neither party intended, and that that would be “a reason why the written agreement should not be enforced so far as matter was included in it by their mutual mistake.”

With respect to mistake on the part of the defendant, her answer indicates that she observed the clause in question but mistook the legal effect thereof; but her testimony shows that she did not read the mortgage.

The court instructed the jury that if they should render a verdict for the defendant they should specify whether it was on the ground of usury or mutual mistake. The only verdict rendered by the jury was as follows: “The jury say they find a verdict for the defendant on the ground of mutual mistake.” Without further evidence or proceedings in the action, or application to the court, the judgment was entered by the clerk and is based solely on the verdict of the jury. It thus appears that it has not been determined that the mortgage was fraudulent and void, and it could not well be for it is conceded that the defendant intended to execute a mortgage; and it has been neither canceled for excusable mistake on the part of one of the parties (See Jackson v. Andrews, 59 N. Y. 244; Hayward v. Wemple, No. 1, 152 App. Div. 195; affd., 206 N. Y. 692; Moffett, Hodgkins, etc., Co. v. Rochester, 178 U. S. 373), nor reformed on the ground of mutual mistake, by eliminating the clause imposing personal liability on the defendant. The question is, therefore, pointedly presented by this appeal as to whether an action at law on contract may be successfully defended against on the ground of mutual mistake not even in executing the contract but in inserting the provision on which the liability is predicated, without having the contract either canceled or reformed. I am of opinion that this cannot be done. It is well settled, of course, that fraud in inducing the execution of a contract is available as a defense to an action at law for the enforcement of the contract, but that is upon the ground that the contract is vitiated by the fraud (Bennett v. Edison Electric Ill. Co., 164 N. Y. 131; City of New York v. Matthews, 156 App. Div. 490); but, as I understand the law, it has been held in every well-considered case in this and other jurisdictions, where the point was presented for decision, that if a defendant wishes to avoid liability on a contract duly made and executed in writing by him he must have the contract canceled or reformed by a court of equity, although observations to the contrary have been made argumentatively in some judicial opinions. (Born v. Schrenkeisen, 110 N. Y. 55; Johnson v. Johnson, 157 App. Div. 289; City of New York v. Matthews, supra; Brody, Adler & Koch Co. v. Hochstadter, No. 1, 150 App. Div. 527; Thomas v. Bronx Realty Co., 60 id. 365; Rubenstein v. Radt, 133 id. 57. See, also, Moffett, Hodgkins, etc., Co., v. Rochester, supra.) Doubtless the court might have adopted the finding of the jury to the effect that there was a mutual mistake, and have reformed the mortgage by striking out the clause imposing the personal liability on the defendant; but, inasmuch as that was not done, it is unnecessary to consider whether the evidence answers the test applied in such cases to warrant the reformation of a written instrument solemnly executed. (See Christopher St. R. R. Co. v. Twenty-third St. R. Co., 149 N. Y. 57.)

On the new trial, which I think should be ordered, the proper practice which requires that the equitable counterclaim be first tried at Special Term (Goss v. Goss & Co., 126 App. Div. 748) should be followed.

I, therefore, vote for reversal and for a new trial.

McLaughlin, J., concurred.

Judgment and order affirmed, with costs.  