Trustees of Union College v. Wheeler , 61 N.Y. 88 ( 1874 )

The facts of this case show that on October 1st, 1828, one Mellen conveyed a large tract of land, including the premises in question, to Chauncey B. Aspinwall. The consideration for the land was paid by Aspinwall, Philo Stevens and Benjamin Nott, in equal portions, and each were equally interested in the property.

Aspinwall, by deed bearing date January 26, 1830, conveyed an undivided two-thirds part of the property to Stevens, for the consideration of $2,000.

While Aspinwall held the property he executed contracts of sale of portions of the land to a number of distinct purchasers in his own name, for the benefit of himself and Stevens and Nott, to whom he accounted from time to time for the proceeds of sales. After the conveyance to Stevens sales were made of other portions, the contracts being executed by Aspinwall and Stevens, and the proceeds being accounted for to Nott, as before.

While matters stood in this condition Nott, by a quit-claim deed, dated July 18, 1833, in consideration of one dollar, conveyed to Stevens all the lands described in the deed from Mellen to Aspinwall, and also village lots in Oswego, of which two-thirds belonged to Nott and one-third to Stevens.

Stevens, by mortgage bearing date the same day with the last mentioned deed, mortgaged to Nott the property conveyed to Aspinwall by Mellen, whether under contract or not, and also the village property above referred to, to secure the payment of $2,800, with interest, semi-annually. The mortgage was payable in five years from date, was accompanied by Stevens' bond, and duly recorded August 8, 1833.

The bond and mortgage were assigned to the plaintiff July 1, 1834, for the sum of $2,790.87, which was then paid to Nott. The execution of the assignment was proved, by a subscribing witness, December 17, 1853, and the assignment recorded on the twentieth of the same month and year.

While the mortgage, in form, covered the entire property sold to Aspinwall, yet it was conceded, on the trial, that some portions of it had been actually conveyed before the execution of the mortgage, and to this no claim was made by the plaintiff.

It will be observed, from the facts already detailed, that upward of nineteen years elapsed between the execution of the assignment and its record. Within this period, on March 28, 1836, Nott, still assuming to be the owner of the mortgage, released to Stevens some of the village lots embraced in the mortgage, who conveyed them to purchasers about the time that the releases were executed. It appeared that the lots so released were more than sufficient in value, at that time, to pay the mortgage. The purchasers under Stevens had no notice of the assignment to the plaintiff.

There is still due and unpaid on the mortgage the principal sum of $2,800, with interest from January 1st, 1864, amounting on December 3d 1870, to $4,157.28.

The questions raised on the present appeal, under this state of facts are: First. Whether the lien of the mortgage is superior to the claims of the purchasers under the contracts. Second. If the plaintiff is bound by the contracts, whether it is not entitled to the purchase-money unpaid upon them. Third. Whether the release of the village lots by Nott does not, as between the purchasers and the plaintiff, discharge their lots from the lien of the mortgage?

1. In considering the first question it will be necessary, at the outset, to examine the relations between Aspinwall and Nott, as well as between the latter and Stevens. When Aspinwall took the title the common law of trusts was in full operation; he undoubtedly held the property as a trustee, both for Nott and Stevens. In other words, the payment of a portion of the consideration by each of these parties, caused a trust protanto to result in their favor. This could be proved by parol evidence. (2 Washburn on Real Property, 176, par. 17, and cases cited.) When Aspinwall conveyed to Stevens he transferred an estate to him charged with a valid existing trust, of which Stevens had full knowledge. Stevens, according to elementary rules, became himself a trustee for Nott to the extent of the interest conveyed to him. (1 Spence's Eq. Jur., 512; Willis on Trustees, 64; 2 Washb. 178, par. 21.)

During the whole period from October 1, 1828, to the time of the execution of the mortgage, the relation of trustee andcestui que trust existed between Aspinwall and Nott, or Stevens and Nott. These trustees were accountable to Nott in a court of equity. They had the management of the estate, had the legal power to sell, and their acts were acquiesced in by the cestuique trust and ratified by the accountings held from time to time. Under these circumstances the purchasers under the contracts had an equity superior to that of Nott. At the moment when he conveyed to Stevens, they could have enforced the agreements against him, on payment of the residue of the purchase-money, and against Stevens, his successor in interest. Nott and Stevens held the legal title, as trustees for the purchasers under the contracts.

The sale by Nott to Stevens and the execution of the mortgage to the former worked no change in this state of things. At the moment of sale he was a trustee for the purchasers under the contract. By a familiar rule in the law of trusts, he could not buy or sell to the prejudice of the cestui que trusts. His sale to Stevens, and taking back a mortgage for the purchase-money, left him precisely where he was before the transaction was entered into — still charged with the execution of the trust in favor of the purchasers under the contracts. It was, therefore, quite immaterial, as far as Nott was concerned, to show that he had constructive notice of the contracts by the possession of the purchasers. His duty toward them did not depend upon notice, but upon the inherent equities of the case. Suppose that after he had sold to Stevens he had immediately repurchased from him; would he not have been subject to the same equities as he was liable to before the sale? The authorities are distinct that he would.

A mortgage could give him no more rights than an absolute purchase. It is thus clear that if Nott had remained owner of the mortgage of July 18, 1833, and had sought to foreclose it, he would have been bound by the same equities as before his sale of that date, and would have been required to allow the claims of the purchasers under the contract.

Does the plaintiff occupy the position of Nott, or can it urge that it is a purchaser in good faith, and for value, and thus shut out the equities between the contractees and Nott, or is it governed by the rule that the assignee of a mortgage takes subject to the equities between the original parties? According to the reasoning thus far, this is a case of an inherent equity as between a person having an interest in the equity of redemption and the mortgage. The mortgage, in form, covers the property claimed by the contractees; if they do not fulfill the contract, it certainly embraces it in full. What they say to the mortgagee is this: "Owing to certain equities between us and you, it is inequitable to enforce the mortgage against property which, as a matter of law, is actually covered by it, except you respect our rights."

Is, then, the plaintiff in any better position than Nott, the mortgagee? It is well settled that an assignee of a mortgage must take it subject to the equities attending the original transaction. If the mortgagee cannot himself enforce it, the assignee has no greater rights. The true test is to inquire what can the mortgagee do by way of enforcement of it against the property mortgaged; what he can do the assignee can do, and no more. In Clute v. Robison (2 J.R., 612), the rule, as stated by KENT, Ch. J., is, that a mortgage is liable to the same equity in the hands of the assignee that existed against it in the hands of the obligee. (2 Vern., 692, 765; 1 Vesey, 122.) The rule is not simply that the assignee takes subject to the equities between the original parties, though that is sound law. (Ingraham v. Disborough, 47 N.Y., 421.) It goes further than this, and declares that the purchaser of a chose in action must always abide the case of the person from whom he buys. (Per Lord THURLOW, in Davies v. Austen, 1 Vesey, Jr., 247.) The reason of the rule is, that the holder of a chose in action cannot alienate any thing but the beneficial interest he possesses. It is a question of power or capacity to transfer to another, and that capacity is to be exactly measured by his own rights. (Bebee v. Bank of New York, 1 J.R., 552, per SPENCER, J., and 549, per TOMPKINS, J.) KENT, Ch. J., in a dissenting opinion in the same case, would have confined the rule to the equities between the original parties to the contract. (Id., 573.) The opinions of SPENCER and TOMPKINS, JJ., were, however, recognized as the correct exposition of the law in Bush v. Lathrop (22 N Y, 535). A considerable number of authorities are cited by the plaintiff as tending to show that the assignee of a chose in action is only subject to the equities between the contractor (assignor) and the debtor, and not to the so called latent equities of third persons. Such cases as James v. Morey (2 Cowen, 298, opinion of SUTHERLAND, J.); Bloomer v. Henderson (8 Mich., 402); Mott v. Clarke (9 Barr, 404), and others of the same class, were reviewed as to their principle or specifically in Bush v. Lathrop (22 N.Y., 535), and repudiated. The doctrine of Lord THURLOW, in England, and of SPENCER and TOMPKINS, JJ., already considered, was thus adopted rather than that of KENT, Ch. J. The law of some of the other States undoubtedly coincides with the views of KENT, but since the decision in Bush v. Lathrop must be regarded as without authority here.

The correct theory is well stated in 2 Story on Equity Jurisprudence, section 1040: "Every assignment of a chose in action is considered in equity as in its nature amounting to a declaration of trust and to an agreement to permit the assignee to make use of the name of the assignor in order to recover the debt or to reduce the property into possession." This theory would lead to the conclusion that the action by the assignee must be precisely commensurate with that of the assignor, as it must be in his name and on the supposition that, for the purposes of the action, he is still owner. The case of Dillaye v.Commercial Bank of Whitehall (51 N.Y., 345), is not opposed to this view, as the question in that case was not one of the enforcement of a mortgage, but concerned the title of the two claimants to the ownership of the mortgage itself. The point was, whether one who held a mortgage in trust with an apparently unrestricted power of disposition could transfer it free from the claims of the cestui que trust to a purchaser in good faith. It was held that he could. This case has no tendency to establish any right on the part of the assignee in enforcing the mortgage beyond that possessed by his assignor.

The plaintiff cites, to support his view, authorities to the effect that an assignee is a purchaser, and to the effect "that a mortgage is in form a conveyance of the land, and an assignment of it is another conveyance of the same land." These cases, which are very numerous in the law books, refer only to the position of a mortgagee or assignee in a court of law, and were decided in England and in States of the Union where more technical views of the rights of a mortgagee in a court of law prevail than in this State. They are of no force in a court of equity, in which the case at bar is assumed to be pending, for in such a tribunal a mortgage is but a chose in action and security for a debt. Reference is also made to a class of cases appearing in the law reports of a number of the States, holding, in substance, that when a mortgage is given to secure a negotiable note, which is itself transferred before maturity for value, it is taken by the assignee free from all equities. It is argued that these authorities tend to show that the mortgage partakes of the nature of the debt, in such a sense that only the direct equities between the debtor and the creditor can be set up as against the assignee. These cases have not yet become established law in this State. (Carpenter v. Longan, 16 Wall. [U.S.], 271; Kenicott v. Supervisors, id., 452; Taylor v. Page, 6 Allen, 86;Croft v. Bunster, 9 Wis., 510.) If sound, they must be made to rest on rules of law attending the transfer of negotiable paper, and cannot be held by indirection to overthrow a rule concerning the ordinary bond and mortgage which has become fixed in our jurisprudence.

The result is that the plaintiff in the present case takes subject to the rights of the purchasers under the contracts, by reason of the equities between them and Nott and without reference to any actual or even constructive notice of such equities as between such purchasers and the mortgagee.

2. The next question is, whether the plaintiff is entitled to the purchase-money unpaid upon the contract from the time of the execution of the mortgage, or if not from that time, from any assignment of a contract subsequent to the execution of the mortgage. It is a plain rule of equity law that as soon as a contract of this kind is made, the vendor becomes a trustee of the vendee as to the land. A subsequent purchaser or mortgagee, with notice of the contract, stands in the position of the vendor and must fulfill the trust. It is equally clear that such a person can become entitled to all future payments, if a purchaser, or to so many as to satisfy his lien, if an incumbrancer, by giving notice to the contractee. It is now well settled in this State that a judgment creditor acquiring his lien subsequent to the contract gains no lien on the payments merely by docketing his judgment. There must also be notice to bind the party holding under the contract. (Moyer v. Hinman, 3 Kern., 180.)

It is, however, claimed by the plaintiff that the rule applied to a judgment creditor in Moyer v. Hinman does not extend to a mortgagee, and that there is a distinction to be taken between the general lien of a judgment creditor and the specific lien of a mortgagee. To establish this point are cited Gouverneur v.Lynch (2 Paige, 300); Ten Eick v. Simpson (1 Sandf. Ch., 244); Farmers' Loan and Trust Company v. Maltby (8 Paige, 362). The plaintiff would deduce from these cases the proposition that a regular mortgage as distinguished from an equitable one binds the unpaid purchase-money on a contract of sale without notice to the purchaser. Only the first of these cases lends any support to this doctrine. In Ten Eick v. Simpson the purchaser under the contract had notice. In Farmers' Loan andTrust Company v. Maltby the principle could not be applied, as the mortgage was equitable. Gouverneur v. Lynch is briefly reported, and no reasons are given for a somewhat obscure opinion that the unpaid purchase-money would be bound from the registry of the mortgage. The chancellor appears to have been at that time influenced by the notion, which he subsequently wholly renounced, that the registry of the mortgage was constructive notice to the holder of the contract. He appears to have had a like idea inGuion v. Knapp (6 Paige, 42, 43), which seemed so strange to Vice Chancellor SANDFORD, who, when at the bar, had argued the cause, that he attempted to explain it away in Stuyvesant v.Hone (1 Sandf. Ch., 426). Whatever his theory may have been, so far as it holds that the unpaid purchase-money is bound by the registry of a subsequent mortgage without notice, it is radically unsound in principle and should be overruled. The rule as there laid down would make it necessary, on each payment made by a person holding under a contract, to examine the records, to see whether any transfers had in the meantime taken place. Such a rule would be to the last degree inconvenient. It is unsound in principle. The correct doctrine is that stated by DENIO, J., inMoyer v. Hinman, already cited. Payments by the vendee, pursuant to an executory contract, are not to be considered as a fresh dealing with the vendor respecting the land, but are to be referred to the original contract. (P. 186.) That case did not call for a decision of the question whether, if a purchaser from the vendor had obtained a conveyance before a payment was made, he would have a lien upon such payment by mere force of the conveyance, and without any notice. DENIO, J., expressed a clear and distinct individual opinion upon the point in the following terms: "Individually, I am of opinion that a vendee in possession under such a contract may safely continue to pay to the vendor until he has notice that some other person has acquired an interest in the land, or in the contract. If this is not so the vendor may, in any case, make a secret conveyance of the land, and continue to receive the purchase-money from the vendee; and the latter will be without remedy if the vendor be insolvent. The recording of the conveyance would make no difference in the principle, for this is only constructive notice to subsequent purchasers and incumbrancers, and as we have seen, a payment pursuant to a prior executory contract is not to be regarded as a purchase of a new or further interest in the land." (Pp. 187, 188.) He adds that the solution of the whole subject is to be sought in the doctrine of equitable conversion, whereby the vendor becomes a trustee for the vendee, and the vendee the trustee of the vendor for the unpaid purchase-money. The vendee continues to hold that position until he is notified that the trust relation between him and the vendor is at an end by the substitution of another in his place.

This is deemed to be a correct exposition of the law, and is adopted in the present case. The same rule must be applied to assignees of the purchasers under a contract as to the purchasers themselves. The argument in the two cases is precisely the same. An assignee acquires all the rights of the purchaser, not as new rights, but as transferee of those already existing. The arguments, from inconvenience growing out of the necessity of repeated searches as to changes in the vendor's title, are equally cogent. For both purchasers and their assignees there is but one rule: they can be bound only by notice, and record of a transfer is not notice.

3. The final inquiry is as to the effect of the releases. As this question is actually in the case, it is proper to decide it, although the views already expressed, if sound, would dispose of the cause in favor of the defendants.

The plaintiff took an assignment of his mortgage July 1st, 1834. It was not recorded until 1853. In March, 1835, Nott, his assignor, released from the lien of the mortgage certain village lots, which were primarily liable to pay this mortgage, thus casting the burden of it on those which were secondarily liable. This was done by the releaser with knowledge of the equities of the defendants, and the lots were of more than sufficient value to pay the mortgage. It needs no reference to authorities to prove that if Nott had been owner of the mortgage at the time of the release, the defendants would have had a right to insist that the value of the lots should be applied to the reduction of the mortgage, and this, of course, would have extinguished it as to them. It is said, however, on the part of the plaintiff, that it is not liable for the act of Nott, as he was not, at the time, owner. It is argued that this subject is governed by the law of principal and surety, and that the surety will not be discharged by the mere omission on the part of the creditor to do an act such as recording the assignment, unless he is both bound by law to do it and is required by the surety to perform it. (Schroeppell v. Shaw, 3 Comst., 462, and other cases cited.)

These cases are, undoubtedly, good law, but they do not govern the present case. The plaintiff, until he records his assignment or gives notice of it, does not occupy the position of a creditor toward a principal debtor and a surety.

This transaction, occurring in 1835, is governed by the law of equitable assignments. The assignee was a mere cestui quetrust, and the assignor held the apparent title to the mortgage; he had a complete right to deal with it toward all persons except the assignee, unless they had notice. This whole matter must be regarded as though the plaintiff had no participation in it, or rather, as though it was identified with the acts of its trustee. It is well settled that payments made to the mortgagee without notice of the assignment, are to be credited on the mortgage. (Mitchell v. Burnham,44 Maine, 303; Bank v. Anderson, 14 Iowa 544; Johnson v.Carpenter, 7 Minn., 176; James v. Johnson, 6 J. Ch., 427; S.C., 2 Cowen, 246; Williams v. Sorrell, 4 Vesey, 389; N YLife Ins. and Trust Co. v. Smith, 2 Barb. Ch., 82.) A discharge from him under such circumstances would also be valid, when granted to one acting in good faith and for value, for that is no more than saying that complete payment will be recognized. The case is that of an apparent owner being allowed by the real owner to deal with third persons on the faith that he had the title. Notice to him of the equities between the parties must be deemed to be notice to the assignee, as he represents him. If one of two innocent persons must suffer, that one must sustain the loss who has put it in the power of an apparent owner to commit the wrong. It would be extremely severe on innocent parties, holding under these contracts, to maintain that a mortgagee suffered by an assignee to act as owner, might, knowingly, violate all equities in their favor with entire impunity to the assignee, who might, by a slight act of diligence on his part, have prevented the commission of the wrongful act. (1 Story's Eq. Jur., 390; James v. Johnson, 6 J. Ch., 417; N.Y. Life Ins.and Trust Co. v. Smith, 2 Barb. Ch., 82.) Gillig v. Maass (28 N.Y., 191), is not applicable to this case. There the question was as to the effect of a failure to record the assignment of a first mortgage upon the rights of a second mortgagee. It was held that such failure was no fraud upon him, nor did it estop the assignee from asserting his claim against the second mortgage, although the holder of the latter had taken it under an agreement with the first mortgagee that his mortgage should be postponed. Here the transactions were between holders of distinct mortgages. The owner of the first was under no duty to a second, and could not assume that by leaving the title in the original mortgagee he would commit a fraud toward a person who then had no lien. The law of recording assignments did not protect the second mortgagee, as that refers to successive assignments of the same mortgage. But in the case at bar the question was as to the dealing by the mortgagee with the debt which belonged to him and to the security appertaining to it. Before the assignment he had complete power to discharge the debt, as well as the mortgage, either in part or absolutely. That power must be presumed to continue until notice to the contrary. By means of it he may violate the equities of third parties, and his conduct may so react on his own interests as to destroy his lien. If an assignee sees fit to leave him this apparent authority he cannot, as has been already shown, complain of its exercise as to persons acting in good faith, but must be regarded as represented by and identified with the mortgagee. (Bank, etc., v. Anderson,14 Iowa 544.)

The judgment of the court below should be affirmed.

All concur.

Judgment affirmed.