Three suits were consolidated for trial in this proceeding. Plaintiff, as trustee, brought two actions to foreclose two mortgages given by the defendants, H. Ernest Strubbe, Sr. (hereinafter called "Strubbe") and Eleanor Strubbe, his wife, one on properties located in the City of East Orange and Village of South Orange, Essex County, and the other on property in the City of Elizabeth, Union County. Each of the mortgages was in the sum of $600,000 and was given as security for a note of $600,000, dated July 3, 1956, made by West Albany Warehouses, Inc. (hereinafter called "West Albany"), a corporation of New York. This note was primarily secured by a $600,000 mortgage on property in the City of Albany, New York. All of the aforesaid documents were executed simultaneously, as were two guaranty agreements signed by the Strubbes in which they jointly and severally further guaranteed payment of the West Albany note and mortgage. The West Albany note fell due July 3, 1957 and, demand for payment not being met, foreclosure of the New York mortgage, as well as the New Jersey mortgages, commenced. The complaint involving the two Essex County properties alleges that plaintiff has received payments of upwards of $233,000 on account of the principal of the mortgage. Certain title changes have occurred with respect to the New Jersey properties involved in these two foreclosure actions, but these have no bearing on the result here reached.
Strubbe is now bankrupt and, on October 29, 1957, the defendant, Paul R. Kleinberg, was appointed trustee in bankruptcy in the United States District Court for the District of New Jersey. The trustee filed an answer and counterclaim for right of possession and mesne profits, and
alleging that the $600,000 loan was usurious in that a bonus was exacted and that the actual amount received for the mortgage was only $505,000. He further alleged that while the mortgage papers were signed by West Albany, a corporation, the loan was in fact made to Strubbe, individually, and therefore subject to the defense of usury. The trustee also alleged that the plaintiff has foreclosed the mortgage which he holds on the New York property and has acquired title thereto; that the property has a market value of $600,000 and therefore the plaintiff's New Jersey mortgages are satisfied in full and should be delivered up for cancellation; that the trustee is entitled to possession of the New Jersey properties, together with a judgment for $233,117 against the plaintiff, representing the amount paid on account of the New Jersey mortgages. The trustee also seeks subrogation of any rights which the plaintiff may have against Eleanor Strubbe. A trial by jury was demanded by the trustee on the issues raised by him, but this demand was overruled under the authority of Associated Metals, etc., Corp. v. Dixon, etc., Inc. , 52 N.J. Super. 143 (Ch. Div. 1958), since equitable issues are raised which may only be disposed of by this court.
An answer was also filed by Strubbe, alleging usury and satisfaction of the mortgages. With respect to the Elizabeth property, Strubbe also set up as a defense that this property belonged to Eleanor Strubbe; that the mortgage secured by the plaintiff from her was obtained by fraud and misrepresentation practiced upon her; that she lacked independent advice; that the mortgage was without consideration as to her; that the guaranty agreements had been obtained from her by fraud; that she signed the various documents under a misapprehension as to the effect thereof; that she was not a party defendant to the foreclosure actions, although she was an indispensable party. By amended answer, Strubbe stated that while title to the premises was in fact in his name, he held the property for his wife and it was actually hers.
Eleanor Strubbe filed a separate complaint with respect to the Elizabeth property, alleging that on July 3, 1956, and for many years prior thereto, she was the owner of this property, which is known as 16-22 Stiles Street, Elizabeth, New Jersey. She pleaded in substance the facts above referred to, as set forth in Strubbe's answer, and alleged that she signed the various papers on July 3, 1956 as a result of fraud and misrepresentation; that she had no independent legal advice; that she was then 74 years of age; that this represents her only property; that she had no interest in the West Albany enterprise; that she was induced without consideration to guaranty the debt of West Albany; that her property was free and clear of encumbrances and worth $200,000; that it represented a lifetime of work and effort and constituted her entire assets; that she never received any money as a result of the mortgage or guaranty; that the West Albany mortgage is usurious and void under New York law and it has, in any event, been fully paid and satisfied. She seeks a judgment declaring the guaranty agreements and the mortgage on the Elizabeth property void as to her.
It was agreed by all parties that since proceedings are still pending in the State of New York seeking to have the fair value of the property credited against the plaintiff's mortgage in that state, which credit will directly affect the amount, if any, due on the two New Jersey mortgages, the issues of the accounting for rent collected in New Jersey and the payment of the subsequent lienors in the foreclosure action should be severed and reserved for future determination. The issues thus left for resolution, as set forth in the pretrial order, are:
I. Was the loan on the West Albany property, or any part thereof, a loan to the West Albany corporation or to an individual or individuals?
II. Is the defense of usury available to defendants and, if the loan was tainted with usury, does the law of New Jersey or New York apply?
III. Were the mortgages and guaranty agreements the products of fraud practiced upon Eleanor Strubbe by representatives of the beneficiaries of the trust or others?
IV. Were the mortgages and guaranty agreements void as to Eleanor Strubbe because of lack of consideration or because of mistake, ignorance of the meaning thereof or inadvertence?
V. Of the sums disbursed by the plaintiff, was $165,000 thereof a loan to, or for the benefit of, H. Ernest Strubbe, individually, and not to West Albany, and therefore not within the scope of the guaranty of Eleanor Strubbe?
VI. Can there be a recovery against Eleanor Strubbe, as guarantor of the West Albany debt, if she was not made a party nor given notice of the West Albany proceedings?
The evidence in this case is voluminous and no extended discussion of it will be undertaken, except as is required for a proper understanding of the results reached.
The testimony discloses that in June 1956 the West Albany property was owned by a corporation known as West Albany Warehouses, Inc., a New York corporation controlled by a group of New York residents, who held all of the stock. It was represented by Edward M. Segal, an attorney with offices at Albany, New York, who was also a stockholder. His office was the office of the corporation. Prior to July 6, 1956 the Strubbes were not stockholders of West Albany. This property consists of 58 acres of land with 800,000 square feet of floor space in single-floor buildings. It had formerly been used by the New York Central Railroad as a repair shop for its steam locomotives, but is no longer used. At the time of the closing of plaintiff's mortgages, the West Albany property was encumbered by a $250,000 mortgage held by a private banking firm in New York City. This firm, or one of its partners, also held one-third of the West Albany stock.
West Albany had outstanding 1,000 shares of common stock and 525 shares of preferred stock. On June 1, 1956 a company known as Wolf Oil & Gas Company, Inc., of Newark, New Jersey, of which Strubbe was apparently president,
acting through one John Kay, gave a check for $150,000 as a deposit on the purchase of all of the stock of West Albany. This offer, for reasons not given, was never consummated and the check was subsequently returned in August 1956 by Segal to one Harry B. Albert, a New York attorney representing Wolf Oil & Gas Company. In June 1956 Strubbe, individually, made a written offer to the stockholders of West Albany to purchase "all of the issued and outstanding shares of capital stock of the Corporation" upon terms set forth in the offer. Prior to this date, however, Kay, who seems to have been in other financial deals with Strubbe (and who is now in prison), contacted a real estate broker in Newark to secure a mortgage loan on the Albany property. The plaintiff was contacted by the broker and, through him, the persons for whom he is acting as trustee in all of the mortgages were requested to make the loan. A trip to Albany was made by the plaintiff, the broker and some of plaintiff's clients in order to inspect the property. Neither Strubbe nor his wife accompanied them. At Albany plaintiff and his clients met Segal and, after inspecting the property, discussed with him its value, its economic possibilities, and other matters of interest to them in connection with their proposed loan. At the time of the trip the proposed lenders had with them Strubbe's personal financial statement. This statement had been lost prior to trial, but a later statement, dated June 25, 1956, was placed in evidence, showing Strubbe's net worth at that time to be $1,600,000.
The minute book of West Albany discloses that neither of the Strubbes was, as of the date of a special meeting of directors of that corporation held May 31, 1956, a director. The next minutes appearing in the minute book are unsigned carbon copies of minutes of an alleged meeting held March 27, 1957, some nine months after the transaction closed. Plaintiff produced at trial what purports to be a certified copy of minutes of a meeting of the board of directors of West Albany held in Newark on July 3, 1956. These minutes state that Eleanor Strubbe and H. Ernest Strubbe,
Sr., as of that date, constituted the board of directors of the corporation. They signed the certified copy as secretary and president, respectively, of West Albany. If there are other minutes of this corporation, they were not produced and are not in the minute book. There are no minutes showing the change in the identity of the board of directors from the Albany group to the Strubbes.
The evidence of Segal, attorney for West Albany and for stockholders holding two-thirds of its stock, that he did not deliver the West Albany stock to Strubbe until July 6, 1956, and that the remaining one-third of the stock was also delivered to Strubbe on that day, makes it clear, and I find as a fact, that no legal meeting of stockholders of West Albany was held prior to July 6, 1956 to elect the Strubbes as directors; that no legal meeting of directors was held to elect them as officers; and that prior to that date they were neither officers nor directors of West Albany. If a meeting of directors was held July 3, 1956 -- which I doubt -- it was clearly illegal and accomplished nothing. The preparation of these minutes was part of a rather elaborate plan contrived to give the appearance of a mortgage loan being made to the West Albany corporation, rather than to Strubbe, individually, for the purpose of giving to the mortgagee the protection of the New Jersey usury statute, N.J.S.A. 31:1-6, or the New York statute, General Business Law, sec. 374 (McKinney's Consol. Laws, c. 20), whichever might be found applicable.
The fact that usury was exacted is admitted. The mortgage made to plaintiff, as trustee for the benefit of his clients, Feller, Gang, E.E.B. Corporation, Cohen and Madan, is in the sum of $600,000. Admittedly, there was a premium of $70,000 charged, so that the net amount to be paid was $530,000. Out of this there was a further deduction of $25,000 for brokerage and counsel fees, reducing the net amount received by West Albany to $505,000. The mortgage ...