Lambert v. Morgan , 110 Md. 1 ( 1909 )

The appeal in this case is taken from an order of the Circuit Court of Baltimore City, passed on the 24th of September, 1908, overruling exceptions of the appellants, to Income Account V, filed in the case of Osmun Latrobe et al. v. Mathilde F.Winans et al., distributing the income of the trust estate of DeWitt Clinton Winans, deceased, among the creditors of Ellen Barbara Williams, one of the life tenants. The exceptions of Thomas S. Bray, a judgment on mortgage creditor of the life tenant, were sustained.

The Court below by the order appealed against directed the account to be re-stated and the fund in the hands of the trustees to be distributed in payment of the claims of the appellees, as follows:

(1) To J. Pierpont Morgan, the balance in full of his claim, as filed in the case, on December 21, 1901.

(2) To Hotel Rennert Company, in full for claim filed in above case on June 22, 1905.

(3) To Thomas Sprackman Bray, the balance in full of his claim as filed in the above case, on September 7, 1906.

(4) To the Union Deposit Bank, Limited, of England, on account of claims filed in the above case on March 9, 1907.

The appellants and appellees are mortgage creditors of the life tenant, and there is no dispute as to the validity of these claims, but the questions involved relate to their rights and priorities of lien, in the distribution of the fund held by the trustees.

The fund in Court for distribution amounts to the sum of $3,487.56 and is income of the trust estate of DeWitt Clinton Winans, deceased, collected by the trustees and payable to Mrs. Ellen Barbara Williams, as life tenant, under the will.

Mr. Winans died in 1892, leaving a last will and testament wherein he directed his trustees after the death of his wife to pay the whole of the income of his residuary estate, held by the trustees, to Ellen Barbara Williams during her life, with remainders to third persons. On the 7th day of December, 1895, the Circuit Court of Baltimore City assumed jurisdiction of the administration of the trust estate. Mrs. Winans died shortly after the testator, and it is conceded that Mrs. Williams is the sole life tenant and is entitled to the payment of the income from the estate.

There are six claimants to the fund or income now in Court for distribution and each claim is represented by a mortgage transferring and assigning the interest of the life tenant in the estate as security for loans made to her.

It is contended, upon the part of the appellants, that the execution and recording of their mortgages being prior in date gave them a prior lien and no further notice by them or action on their part was necessary to perfect their lien.

The appellees contend that the transfers were assignments of a fund, to wit, income accruing in the hands of trustees from the trust estate and payable to Mrs. Williams, and to render such assignments a complete transfer of her interest in the trust estate, to effect a prior lien on the fund, notice of these assignments to the trustees was necessary.

The dates of execution, recordation and filing of the various mortgage claims in controversy appear to be as follows:

---------------------------------------------------------------------------
|    Date of    |    Date of    |    Date
NAMES.          |   Execution.  |  Recordation. |  of Filing.
— ------------------------|---------------|---------------|----------------
J. Pierpont Morgan ...... | May   3, 1901 | May  22, 1901 | Dec.  27, 1901
Hotel Rennert Company ... | Nov.  5, 1904 | Feb. 17, 1905 | June  22, 1905
| | Oct. 15, 1896 | ....... ..... | Sept.  7, 1906
Thomas S. Bray .......   | Judgment on   |               |
| |  claim        |               |
|  liquidated   |               |
|  in 1906      |               |
Union Deposit Bank, Ltd., |               |               |
of London, England .... | Nov.  1, 1904 | Nov. 28, 1904 | March 9, 1907
Lambert  Cooper ........ | May  15, 1900 | July  9, 1900 | Dec. 11, 1907
Albert Dixon ............ | Feb. 19, 1902 | March 7, 1902 | Dec. 13, 1907
---------------------------------------------------------------------------

The fund in Court for distribution is the income of the trust estate from July 1, 1907, to January 1st, 1908, derived from interest on railroad bonds, Baltimore City stock and rents collected from real estate and payable to the life tenant under the will.

The Court below held, by its order of September 24, 1908, in effect, that the claims here in controversy were mere assignments of a fund or choses in action, to wit, the income in a trust estate, enjoyed by the life tenant, and that they took effect as among the assignees from the date they were perfected by notice to the trustees, and that notice was given by filing the claims in the Court proceeding and procuring proper orders thereon.

The rule thus applied in the distribution of the fund or income, in this case — that is, that the assignee who first gives notice to the debtor obtains priority — is approved and settled by numerous adjudications of the Courts, both in this country and in England.

The cases of Dearle v. Hall, 3 Russ. 1, and Loveridge v.Cooper, 3 Russ. 30, are directly in point. The LORD CHANCELLOR there said: "In cases like the present the act of giving the trustee notice is, in a certain degree, taking possession of the fund; it is going as far towards equitable possession as it is possible to go, for, after notice given, the trustee of the fund becomes a trustee for the assignee who has given him notice."

The English rule has been approved and followed by the Federal Courts. Judson v. Corcoran, 17 Howard, 612; Spain v.Hamilton, 1 Wall. 604; Laclade Bank v. Schuler,120 U.S. 511; Methven v. Staten Island, 66 Fed. R. 113; Third Nat.Bk. v. City, 126 Fed. Rep. 413.

In 2 Story's Eq. section 1047, it is said, as the assignee is generally entitled to all the remedies of the assignor, so he is generally subject to all the equities between the assignor and his debtor. But in order to perfect his title against the debtor it is indispensable that the assignee should immediately give notice of the assignment to the debtor, for otherwise a priority of right may be obtained by a subsequent assignee, or the debt may be discharged by a payment to the assignor before such notice. The same doctrine is also stated in 2 Pomeroy's Eq.Jurisprudence, sections 695 and 698. And in Robinson v.Marshall, 11 Md. 251, this Court approved the doctrine laid down by these eminent text-writers, and held that the assignee of a claim or chose in action cannot recover from the original debtor who had paid it to the assignor after, but without notice of, the assignment.

While some of the State Courts hold to the contrary, we think the doctrine sanctioned by the English Courts, approved by the Federal Courts and by many of our State Courts, is based upon sound reasoning and sustained by the weight of authority.

But it is earnestly contended that Mrs. Williams had at the time of the execution of the mortgages in question such an interest in the trust estate as she could mortgage, and their recordation gave constructive notice to everyone as to the priority of the liens thereunder. It will be seen, however, that the trust property in this case — "the income arising out of the residuary estate" — was but a money interest and could not be mortgaged as realty. The instruments, being mere assignments of the fund, were not within the provision of our Registry Act and their recordation could give no greater effect than the law itself gave.

In Glenn v. Davis, 35 Md. 208, the Court held, when an instrument is not entitled by law to be recorded, placing it on record could not of course operate as constructive notice.

In Burch v. Taylor, 152 U.S. 634, it is said: "It is alleged that the assignments and transfers, under which the defendant claims, were recorded in the Land Office. The argument seems to be that the defendant and his assignors selected filing and record in that office as a means of giving notice to other parties of their rights, and that having made such selection was equivalent to an admission that they would accept a like filing and record as notice to them; but that argument cannot be sustained. The defendant and his assignors may have desired to give as much publicity as possible to the fact of the transfers to themselves, and in seeking to give such publicity may have selected the filing and record in one of the principal offices of the county as a means thereto, but they did not thereby create a new law in respect to notice. They never in terms declared, and their own acts of filing for record carried, no implied declaration of willingness to accept a similar record as notice to themselves. They had a right to rely upon the law of the State as enacted by its legislature, and were not bound by any constructive notice other than those laws provided. If notice was essential to charge them, actual notice should have been given, at least in the absence of a statute providing some means for constructive notice. Indeed, it is a mere and not veryreasonable inference from the fact that they placed theseinstruments on record that their purpose was thereby to givenotice."

We think it is apparent from the terms and provisions of Mr. Winans' will that Mrs. Williams had no interest in the nature of realty thereunder, and upon the well-established principles of equitable conversion the realty must be treated as converted into personalty at the death of the testator. In the recent case ofStake v. Mobley, 102 Md. 408, this Court said, when a testator manifests a clear and unmistakable intention that real property belonging to his estate shall be sold and converted into money, it is in equity generally treated as so converted at the time of his death, in the absence of some provision or expression in the will which contemplates a postponement of the time of conversion. The general rule, "that lands devised to be sold are thereby turned into money and construed in equity as personal estate was recognized by our predecessors many years ago."Hurtt v. Fisher, 1 H. G. 88; Thomas v. Wood, 1 Md. Ch. 296.

In this will the testator clearly intended that his real estate should be sold by his trustees, because he provides as follows:

"I give, devise and bequeath unto Osmun Latrobe (hereinafter called my trustee), now residing at Baltimore, Maryland, United States of America, all my real, personal and mixed estate, of what nature and kind soever and wheresoever situated, upon trust at such time or times by public auction or private treaty, in such manner and for such price or prices and subject to such conditions as he may think fit to sell or concur with any other person or persons or part owners inselling the whole or any part of my said real, personal or mixed estate, to vary contracts for sale and resell, with power to allow a portion of the purchase money to remain upon mortgage of the premises sold; and, notwithstanding such power of sale, I authorize my said trustee to postpone the sale, calling and conversion of all or such part of my said real in personal or mixed estate for such length of time as he in his sole and uncontrolled discretion shall think fit. And I declare that he shall not be liable or responsible for any loss which may arise in consequence of the postponement of such sale."

Now, while the time, manner and terms of sale were left to the discretion of the trustees, the fact of sale by the trustees was contemplated at all events, and in such cases the authorities are uniform in holding that this will work a conversion of the realty at the time of the death of the testator. Stake v. Mobley,supra; Sloan v. Safe Deposit Co., 73 Md. 239; ChurchExtension v. Smith, 56 Md. 362; Reiff v. Strite,54 Md. 298; Given v. Hilton, 95 U.S. 591; Clarke v. Denton,36 N.J. Eq. 419.

We are, therefore, of the opinion that Mrs. Williams had no interest in the trust property, under this will, which could be regarded as realty, and the recordation of the mortgages did not create a lien or give such constructive notice as to defeat the claims of the appellees, who were prior in point of time in filing their claims with the trustees.

In Gray v. Smith, 3 Watts (Pa.), 289, it is said, where a testator orders his lands to be sold and the proceeds distributed among certain persons, no interest in the land passes to the legatees. They acquire under the will nothing more than a right to receive a sum of money out of the proceeds of sale — a mere chose in action, a claim strictly of a personal character. Their interest, being merely a chose in action, and not a right in the real estate, is not the subject of mortgage. Such a mortgage could create no lien. Wood v. Reeves, 23 S.C. 382;Horst v. Dague, 34 Ohio, 37; In re Freshfield's Trust, 11 Ch. Div. 198; Lloyd's Bank v. Pearson, 1 Chan. Div. 872.

We therefore hold in this case that under the well-settled doctrine of equitable conversion, all of the trust property in this case must be treated as personalty, and that the instruments executed by Mrs. Williams, the life tenant, were simply assignments of a fund or choses in action, and fall within the principles of law stated herein.

The appellees having perfected their title to the fund by notice to the trustees, prior in time to the notice given by the appellants, they are entitled to priority of payment out of the fund in Court.

In Dearle v. Hall, 3 Russ. 12, SIR THOMAS PLUMMER, M.R., says: "Wherever it is intended to complete the transfer of achose in action, there is a mode of dealing with it which a Court of Equity considers tantamount to possession — namely, notice given to the legal depository of the fund. Where a contract respecting property in the hands of other persons, who have a legal right to the possession, is made behind the back of those in whom the legal interest is thus vested, it is necessary, if the security is intended to attach on the thing itself, to lay hold of that thing in the manner in which its nature permits it to be laid hold of — that is, by giving notice of the contract to those in whom the legal interest is. By such notice, the legal holders are converted into trustees for the new purchaser, and are charged with responsibility towards him; and the cestui quetrust is deprived of the power of carrying the same security repeatedly into the market and of inducing third persons to advance money upon it, under the erroneous belief that it continues to belong to him absolutely, free from incumbrance, and that the trustees are still trustees for him, and for no one else. That precaution is always taken by diligent purchasers and incumbrancers; if it is not taken, there is neglect; and it is fit that it should be understood that the solicitor who conducts the business for the party advancing the money is responsible for that neglect. The consequence of such neglect is, that the trustee of the fund remains ignorant of any alteration having been made in the equitable rights affecting it; he considers himself to be a trustee for the same individual as before, and no other person is known to him as his cestui que trust. The original cestui quetrust, though he has in fact parted with his interest, appears to the world to be the complete equitable owner, and remains in the order, management and disposition of the property as absolutely as ever; so that he has it in his power to obtain, by means of it, a false and delusive credit. He may come into the market to dispose of that which he has previously sold; and how can those, who may chance to deal with him, protect themselves from his fraud? Whatever diligence may be used by a puisne incumbrancer or purchaser — whatever inquiries he may make in order to investigate the title and to ascertain the exact state of the original right of the vendor and his continuing right — the trustees, who are the persons to whom application for information would naturally be made, will truly and unhesitatingly represent to all who put questions to them that the fund remains the sole absolute property of the proposed vendor. These inconveniences and mischiefs are the natural consequences of omitting to give notice to trustees; and they must be considered as foreseen by those who, in transactions of that kind, omit to give notice; for they are the consequences which, in the experience of mankind, usually follow such omissions. To give notice is a matter of no difficulty; and whenever persons, treating for a chose in action, do not give notice to the trustee or executor, who is the legal holder of the fund, they do not perfect their title; they do not do all that is necessary in order to make the thing belong to them in preference to all other persons; and they become responsible, in some respects, for the easily foreseen consequences of their negligence."

There were other subordinate questions argued and presented at the hearing of this case, but as they do not affect the conclusion we have reached they need not be discussed.

For the reasons given, the order appealed from will be affirmed.

Order affirmed, with costs.