Case ID: dc_10/html/0301-01.html
Source: Caselaw Access Project
Author: {"author": "\n      Mr. Justice MacArthur Cartter, Ch. J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

CHARLES A. ELDRIDGE v. THE CONNECTICUT GENERAL LIFE INSURANCE COMPANY.
    Equity. —
    No. 4561.
    I. A trustee cannot, by his arbitrary act, divest the cestui que trust of legal or equitable rights, where the case presents badges of fraud or unfair dealing.
    II. 'Where an insurance company in another State employs an agent here to invest moneys on real-estate securities, it was held that such company was chargeable with any notice or knowledge acquired by such agent in regard to existing equities on the property; and this rule was applied where the same person was the common agent of the borrower and lender.
    III. A pai-tj"- obtaining a trust deed witli notice, either to himself or his agent, of the fraudulent discharge of a prior incumbrance, is not a bona-fide purchaser; and a court of equity will set aside such fraudulent release and give the party injured the benefit of his security'.
    IY. Where-a purchaser employs the trustee in a prior trust deed to examine the title, such trustee, in respect of that matter, is the agent of the purchaser, and notice acquired by him, in the course of such employment, is notice to the purchaser.
    STATEMENT OE THE CASE.
    On the 17th day of August, 1871, Henry H. Dudley, being seized of lots 1, 2, 3, 4, and 20 in square 204, gave two notes of $3,500 each, payable in one aiid two years respectively, with interest at 7 per cent., secured by deed of trust, to one Joseph Blaekfan. It was recorded on the following day, and in the record the name of the grantee was erroneously written “Blackford” instead of “Blaekfan.” On the production of the original deed subsequently, the deputy recorder entered a correction upon the margin.
    On November 10,1871, Dudley having sold and conveyed to John Van Biswick, the latter conveyed the same to George B. Coburn for $7,734.40, for which Coburn made his three promissory notes to Van Biswick for $2,578.13 each, payable in one, two, and three years respectively, with 7 per cent, interest, secured by a deed of trust to William H. Ward.
    
      On June 15,1872, the firm of Aistrop & Dudley borrowed from the complainant $4,000, for which they gave their note at sixty days. As collateral to this note, Aistrop & Dudley procured Nan Eiswick to endorse two of the notes made by Coburn to complainant without recourse.
    On February 18, 1872, and subsequent to both of said deeds of trust above mentioned, Coburn conveyed to the defendant Edwin E. Mayhew, subject to these incumbrances. Mayhew made a new subdivision of the lots. On September 25, 1872, the first one of the two notes became due, secured by trust to Blackfan, and was paid, leaving one for $3,500 to be afterwards paid, and Blackfan thereupon released several of the lots from the operation of that deed. The other note became the property of the Arlington Fire Insurance Company, which not being paid at maturity, the lots still covered by the deed were sold, and the fire insurance company became the purchaser. The second trust was a subsisting lien upon the remaining lots which had formally been released, as already stated, upon the payment of the first of these two notes. No further account of that trust is necessary to-understand the decision.
    In September, 1872, Mayhew effected a loan from the Connecticut General Life Insurance Company. In this transaction one J. G. Bigelow acted under instructions both from Mayhew, who was the borrower, and the insurance company, who was the lender. The court, as will be seen from the opinion, came to the conclusion of fact, from the proofs and. exhibits, that Bigelow was agent for the company as well as for Mayhew, and that notice to him was notice to them. The testimony on this branch of the case is too lengthy for recital in this statement, and is sufficiently referred to in the opinion.
    On September 25, 1872, the defendant Ward released the trust deed executed by Coburn, without the knowledge or consent of complainant, in order to give the company a first lien to secure the large loan which they were making to May-hew, the amount of the loan being about the sum of $32,000. The fact that the two notes held as collateral by complainant were not in possession of Van K,iswick,the payee, was known to Bigelow. These notes were not paid, and were not produced at the time the trust was discharged. The defendant Dudley represented that he owned them, and assumed that he could control them, and by these representations Ward was induced to sign, acknowledge, and deliver the release complained of. From the evidence in the case, the court came to the conclusion of fact that Bigelow had notice that Dudley had transferred his interest in the notes, or at least had sufficient notice to put him on inquiry. Coburn, Aistrop, and Dudley are, insolvent. The cause was heard at the special term, and a decree was passed setting aside the release and directing a sale of the lots. From this decree the Connecticut General Life Insurance Company repealed.
    
      Enoch Totten, for complainant.
    There is a most extraordinary similarity between this case and the case of Burnstine v. Ormes, 2 MacArthur, 219. The fraudulent release in each case was made and delivered by this same trustee and to the same insurance company. In the present case Ward made the deed on the 25th day of September, 1872, and in that case, only about four months afterwards, on the 4th day of February, 1873. Bigelow was the agent of the insurance company in both transactions, and received the fraudulent deed in each case and sent it to the company. The cases differ in this: that Ormes falsely represented himself in that case as the holder of the note, and in this case Dudley acted that part. In that case Ward was passive, while iü this he was active. He was. active not only in the capacity of trustee, but also in the other capacity of attorney for the insurance company. In both cases the innocent victim was reposing in fancied security, without notice or any ground of suspicion of the fraud these men were engaged in perpetrating upon his rights. The court in that case used language which is strangely appropriate here. The opinion says:
    
      “In this case the negotiable note which was secured by the first deed of trust was made by John N. Hubbard to James M. Ormes, and the latter endorsed it to the complainant .Burnstiue, who became the purchaser for full value. While the latter was relying upon this security, the trustee, William H. Ward, was induced by a fraudulent imposition and representation to execute a release of the deed of trust without any notice to Burnstine, and without his consent or knowledge. After the property had been -released, the insurance company advanced money, upon the loan already negotiated, to Hubbard, and claims it has obtained a priority of lien by virtue of the second trust deed which had been executed to the company, and -that consequently Burnstine loses his security. We are, however, satisfied from the testimony that Bigelow, -who was the agent of the insurance company, was an active party to the fraud in obtaining the release, and that Ormes acted in concert with him.
    “ It is also clear that they both knew perfectly well that Burnstine held the note, aud relied upon the property as security for its payment. The company, we think, are not justly entitled to the advantage which they claim, when it has been acquired by the active fraud Or imposition of one of their own agents. As Burnstine was an innocent party without notice, or any circumstance that could excite his suspicion, we think he ought to be maintained in his right, even if the loss falls upon the appellant.”
    Ward, in his answer, denies that he accepted the trust confided to him by the deed in question, but admits that he executed and delivered the fraudulent release. This act precludes him from denying that he accepted the trust. It is not necessary that a trustee should signify his acceptance of the trust in a formal manner. Acceptance or assent may be by words or acts. (Scull v. Reeves, 12 Green Ch., 84; Leffler v. Armstrong, 4 Iowa, 482; Skipworth v. Cunningham, 8 Leigh, 271; Spencer v. Ford, 1 Rob., (Va.,) 648; Pope v. Branden, 2 Stew., (Ala.,) 401; Hipp v. Hutchett, 4 Tex., 20; Flint v. Clinton Co., 12. N. H., 432; Hill on Trusts, 214.) The duty of making a release at the proper time was one of the trusts mentioned in the deed. Bigelow was the general agent of the company, as well as its special agent, in this particular transaction, and Ward was also the attorney employed by the company to make the examination of the land records relating to this particular property. Bigelow’s relations to the company during the transactions in this ease were precisely the same as they were when the Burnstine trust was fraudulently released. Bigelow knew perfectly well that Dudley and Aistrop did not hold the notes at the time they undertook to discharge the plaintiff’s security. Dudley told him so. But Bigelow says it was exclusively Ward’s business to look after the title. Ward had the trust deed before him, and saw that the deed was made originally for the benefit of Van Biswick, who in writing, and on the release itself, disclaimed ownership except as to the first note, and that was paid. Dudley, who signed the firm-name of Aistrop & Dudley to the release, did not produce for Ward’s inspection and cancellation the notes they claimed to own, nor did Ward call upon him to do so, as he should have done. The plan was to get this release at all hazards. Ward having been employed by the company to examine the records, and having done so, it will be presumed, even in the absence of all proof, that he saw this deed of trust and knew its contents, and also that he knew that Aistrop & Dudley were strangers to it. (Hodson v. Dean, 2 S. & S., 221; 2 Lead. Cas. in Eq., pt. 1, p. 144.) He undertook to discharge this trust, and of course knew all about it. He was acting as the attorney of the company at the time, and the company is therefore chargeable with notice of the contents of the deed, as well as of the very suspicious circumstances connected with the release.
    The deed of trust showed upon its face that it was made for the security of notes running to Van Biswick, and Van Biswick appeared before Ward with only one of the notes, the other two remaining unaccounted for. In addition to • this, Bigelow had positive proof that Aistrop & Dudley did not own or hold them. Of all these things the company must lie held to have had actual notice through its agents and representatives. (2 Lead. Cas. in Eq., pt. 1, pp. 134, 144, 154, 157, 160, 178 ; Williamson v. Brown, 15 N. Y., 359; Champlin v. Loytin, 6 Paige, 189, 203; Burnstine v. Ormes, 2 MacArthur, 219.)
    A mortgagee with notice of the fraudulent discharge of a prior mortgage, is not a bona-fide purchaser. (Morgan v. Chamberlain, 26 Barb., 163; Ely v. Scofield, 35 Barb., 330 ; Jackson v. Post, 15 Wend., 594.)
    The English and the American courts now apply the same rules in regard tb notices under the registry acts as to all others. Notice, even under the registry acts, which puts the party upon inquiry, is sufficient. (Williamson v. Brown, 15 N. Y., 358; Norton v. Eaton, 91 U. S., 720.)
    In the case of Williamson v. Brown, Judge Selden uses the following language: “ When the purcháser has knowledge of any fact sufficient to put him on inquiry as to the existence of some right or title in conflict with that he is about to purchase, he is presumed either to have made the inquiry and ascertained the extent of such right, or to have been guilty of a degree of negligence equally fatal to his claim to be considered a bona-fide purchaser.” The rule being, that the party m possession of certain information will be chargeable with all the facts which, on inquiry suggested by such information, prosecuted with due diligence, would have disclosed.
    The release in this case having been wrongfully made, and the company being chargeable with notice of the fraud, through both its attorney in fact and its agent, the release was properly set aside and decreed to be null. (Gordon v. Mulhare, 13 Wis., 22; Burnstine v. Ormes, 2 MacArthur, 219; Williamson v. Brown, 15 N. Y., 359.)
    The defendants Aistrop, Dudley, and Coburn are insolvent, and therefore the plaintiff is without remedy on the promissory notes.
    
      
      Walter Bavülge and S. R. Bond, for the insurance company.
    There can be no question that unless the company stands charged with notice, its legal title must prevail, even though the release was improperly or fraudulently made.
    A bona-fide purchaser is not affected by any latent equity founded on a trust deed, or otherwise, of which he had not notice. (Scott v. Burton, 2 Ashm., (Pa.,) 312; Valle’s Administratrix v. Am. Iron Mountain Co., 27 Mo., 455; Ely v. Schofield, 35 Barb., 330; Executors of Swartz v. Leist, 13 Ohio St. R., 419; Waters v. Waters and Jones, 20 Iowa, 363.)
    The deed of trust is used by us instead of a mortgage as security for the payment of money; and to hold that a purchaser may not rely upon the act of the trustee in giving a release, but must investigate the particulars of each transaction to see if the trustee has acted properly, would introduce an element of uncertainty into our records, and render dealings in real estate among the most doubtful instead of the most stable and reliable of humau transactions. In the case of Savage v. Gregory, 32 Conn., 250, a bill was brought to foreclose a mortgage by the assignee of the note secured. The mortgagee, after assigning the note, had received the legal title and conveyed it away. The court held that the purchaser took it discharged of the mortgage, and, referring to the equitable maxim that where there is equal equity the law will prevail, say: “ This maxim is, in cases of this sort, entitled to peculiar force with us under a recording system founded upon the policy of having the true state of every title to real estate appear upon our records.” * * * “ It is a familiar law, that a sale of real estate by a trustee to a bonafide purchaser who has no notice of the trust, if made for a valuable consideration, will be good against the rights of the cestui que trust.” And in North v. Belden, 13 Conn., 380, the court say: “ This policy has added greatly to the security of our laud titles, and has prevented much litigation which would otherwise have arisen; and our courts have ever considered it their duty to give such a construction to our statutes as will continue this salutary protection.”
   Mr. Justice MacArthur

delivered the opinion of the court, in substance as follows:

The question principally discussed at the hearing, was whether the insurance company was a bona-fide purchaser for a valuable consideration, and without notice of the complainant’s existing equities. The notice which is imputed to the company is not actual knowledge that the property in dispute was in fact incumbered by a previous equity in favor of complainant, but a notice with which they are to be charged, growingout of the fact and circumstances of the transaction, within the knowledge of their alleged agent, in procuring the fraudulent discharge of the trust deed by Mr. "Ward. This can only be determined upon the facts of the case. For this purpose we need not consider any of the circumstances in proof, except those involved upon this point of the controversy.

Henry II. Dudley was seized originally of all this estate, and executed thereon a deed of trust to one Joseph H. Black-fan to secure two notes of $3,500 each. One of these notes was paid, and the other became the property of the Arlington Fire Insurance Company; and the evidence relating to all this will not be further noticed, as they are not facts essential for our consideration.

Dudley conveyed his equity of redemption to John Van Riswick, who ou the 10th of November, 1871, conveyed to ■George B. Coburn for $7,734.40, for which Coburn made his three promissory notes to Van Riswick for $2,578.13 each, ¡payable in one, two, and three years respectively, with seven per cent, interest, secured by a deed of trust to "William H. Ward.

On June 15,1872, the firm of Aistrop & Dudley borrowed '$4,000 from the complainant, and made their note to him therefor, payable in sixty days, and as collateral security they procured Van Riswick to endorse two of the three Coburn notes to Eldridge, without recourse. Coburn meanwhile had conveyed the property to one Edwin E. Mayhew, who subdivided it into lots from 50 to 65.

At the time Mayhew obtained a loan from the Connecticut General Life Insurance Company, the Coburn deed of trust to Ward was a subsisting incumbrance, and the complainant held two of the three notes secured by it as collateral to the note of Aistrop & Dudley for $4,000, no part of which has ever been paid. The trustee therein executed a release of the same, without the knowledge and consent of complainant, in order that the company might have a prior lien as security for the loan which they had negotiated to Mayhew. The complainant files this bill for the purpose of vacating this release, and the controversy between him and the insurance company is as to which of them shall sustain the loSs arising from this fraudulent discharge. Whether the insurance company is to be considered a bona-fide purchaser, depends upon the question of notice, either to the company or its agent, of complainant’s interest. If the company is to be charged with such notice, the prayer of the bill must be granted, according to well settled principles of courts of equity. This is not a case of actual notice. It is a case of notice to an agent, which, however, if it exist, is equally fatal to the rights of the insurance company as a subsequent purchaser. Our opinion assumes that the proofs establish the fact that Bigelow, who conducted the loan, was the agent of the company, and they are affected as principal by his knowledge. It frequently happens that in purchases of real estate, and in negotiations for investing money in real-estate securities, the same agent acts for both parties; and it is uniformly held that both parties shall be intended to know whatever is in the knowledge of the agent thus mutually intrusted by them, and each principal is affected with notice as much as if different agents had been employed. (Dryden v. Frost, 3 Myl. & Cr., 670; Dunlap’s Paley’s Agency, 263, note.) The company advanced the money which constituted the loan to Mayhew, the borrower. The company relied upon Bigelow to transact the business in their interest, to see to the proper mode of investment, to employ a competent person to examine the title, to have the prior incumbrance paid off) and to effect a large amount of life insurance as part of tbe consideration. In a word, he was the common agent of the borrower and lender; and any notice to him operated constructively as a notice to his employers. The attempt which was made in the testimony to separate his acts into those which he performed for each of the principals in the same transaction, was entirely unsatisfactory; and the effort to make this distinction has only served to show that there is no ground for it in this or any similar ease. The only practical rule to apply in such transactions, is that when the same agent is employed by both parties they are equally bound by his acts, and by any knowledge he may have acquired in regard to the rights of other persons. The conclusion, I think, is inevitable from the circumstances of the transaction we are investigating, that Bigelow is properly considered as the agent of the company as well as of Mayhew.

It is a rule in equity that a principal is affected by any notice communicated to the agent, or by any knowledge which he has acquired in reference to the business of the agency. It would be useless to cite authorities to a doctrine so familiar. And it is equally true that whatever is sufficient to put a party upon inquiry, is held in equity to be good notice to bind him. (1 Story Eq. Jur., sec. 399.) Now, according to this principle the knowledge of Bigelow, or any notice to him, must be imputed to the company, and is as binding upon them as if they actually knew of the fact. Notice to an agent in making a purchase of real estate affects his employer. (Norris v. Lee, 3 Atk., 23.) The trust deed to William II. Ward was of record, and it disclosed the interest of the cestui que trust. It was, moreover, a naked trust, giving no discretion to the trustee other than to execute the powers therein specified; one of these being the authority to release it upon payment of the indebtedness thereby secured. In this particular he was clothed with no discretion, his only duty and power being to execute a discharge when the notes were paid. It is also a rule in equity that notice of a deed is notice of its contents, and notice to an agent is notice to his principal; (4 Kent Comm., 179;) and in this particular case it seems quite immaterial whether the company is chargeable directly, or through their agent Bigelow, who acted for them in this transaction, with having a knowledge of this instrument; in either case they cannot hold against the prior equitable title of the complainant. They were equally bound to know the fact that Ward was not authorized to discharge the incumbrance unless upon payment of the debt. The facts upon this branch of the case are not the subject of much doubt or dispute. We have seen that the two notes held by the complainant as collateral had been transferred to him by John Van Riswick at the request of Dudley & Aistrop, he retaining the one first falling due. At the time the release was executed, Van Riswick attended before the trustee as holder of that note, and Dudley & Aistrop, or one of them, were present, claiming to be the owners of the other two notes. These were not only not paid — they were not even produced. It appears that Dudley had previously informed Bigelow that his firm owned these two notes, that they were in possession of another party, but that they could control them, and gave him to understand that the person holding them had some claim upon the notes, but that they would satisfy it, and concluded by remarking .- “I will make it all right with Ward, the trustee.” Bigelow then testifies: “ It was that remark that led me to suspect that the party who had the notes might have some claim upon them.” The communication of these circumstances to Bigelow, by the very person with whom he was contracting, was full of suggestion. The notes were not then due; they were-outstanding in the hands of another person. It is not merely presumed that Bigelow had this information; the facts were communicated to him in person by a party who claimed to own the notes, and who declared he could make it all right with the trustee. There was not only strong ground for suspicion, but the witness testifies to his impression that the holder of the notes had an interest in them of some kind. No mind under the same circumstances could help coming to the same conclusion. He had clearly sufficient information to put him upon inquiry and the exercise of diligence; he was bound to inform himself. “ The general doctrine is, that whatever puts a party upon inquiry amounts in judgment of law to notice, provided the inquiry becomes a duty, as in the ease of purchasers and creditors, and would lead to a knowledge of the requisite fact by the exercise of ordinary diligence and understanding.” (4 Kent Comm., 179.) This doctrine is quite applicable to the circumstances of this ease. Bigelow acknowledges that his suspicions were excited, and we cannot fail to see that' the exercise of ordinary diligence would have put him in full possession of knowledge concerning the equities of prior parties. He avoided this knowledge by abstaining from all inquiry, and through his negligence, to say the least of it, this iniquitous fraud was perpetrated. He never saw the notes, he kne.w they were not paid, and could not be paid till they were due, without the consent of the party holding them. Under these circumstances he is not only to be charged with a knowledge of all the facts he might have ascertained by inquiry, but the company is to be credited in the same way and to the same extent. The equities between the two litigating parties to this controversy are quite similar. The defendant advanced a large sum of money without actual knowledge of the fraud and circumvention by which a trust deed had been discharged, and the complainant was entirely ignorant of the whole transaction until long after it was consummated. The claims of both to the equitable consideration of the court are almost equally strong. They appear to be innocent of actual fraud; but, upon the principles just explained, I concur in the judgment which reinstates the rights of the complainant, and to that extent postpones those of the defendant.

The same observations are applicable in great measure to another feature of this case. A primary object of the insurance company was to obtain, if possible, a first incumbrance upon the property in view of the large amount of the loan. Bigelow was therefore instructed to look well to the state of the property and the discharge of existing liens, and for this purpose to employ a competent person to examine the title. He employed Mr. Ward, who was the trustee in the trust deed from Coburn, and for this service Ward received $100 paid out of the loan.

His employment to abstract the title of this property was entirely independent from the duties devolving upon him as trustee, and in that matter he is exclusively to be regarded as the agent of the company. We have seen how limited were the powers conferred upon Ward by the trust deed, and that the release he made was in no just sense an execution of these powers. Ward, of course, must be intended by law to have known the contents of that deed, and the restricted powers it conferred upon him, and yet, after having discharged the security at the request and upon the statements of entire strangers to the record, when he knew that the outstanding notes had neither been paid nor cancelled, he certified the property as free from this incumbrance, without the knowledge or consent of the real parties in interest. We perceive the grossest negligence and irregularity in this conduct; and while it is a matter of regret that innocent parties should be made to suffer the consequences, yet we cannot fail to see that Ward was acting in this regard as the attorney or agent of the company alone, and they are, therefore, chargeable with his knowledge concerning the contents of the deed, and that he had no right to execute the release, or give the certificate of title which he furnished at their request. It is settled by the authorities cited in complainant’s brief, that a mortgagee with knowledge of the fraudulent discharge of a prior mortgage is not a bona-fide purchaser. J3y the principles of law already explained, the defendant is to be charged with such notice or knowledge as Ward had acquired upon the subject of the title; and if this is correct, and I do not see but that it is, the conclusion follows that the company do not occupy the position of a purchaser without notice. The company, by operation of law, is bound by the notice acquired by its representatives in Washington; so that, in either point of view, the complainant is entitled to the benefit of his security.

■ It was urged on the argument that Ward was the trusted agent of the cestui que trust, that they had clothed him with authority to release the deed, and they were concluded by his act, especially as the company had taken their conveyance in good faith. It is scarcely necessary to discuss this view after what has been said. Precisely the same circumstance existed in Burnstine v. Ormes, 2 MacA., 219, which has since been affirmed at the October term of the Supreme Court. There the payee in the note, who had passed it away, repi’esented that he was still the holder thereof, and fraudulently procured Ward to execute ^release of the trust deed, and afterwards, as in this case, a second deed of trust was executed upon the property to secure this insurance company upon a loan of money.

The release was set aside and the first trust deed restored to its priority. The point now under consideration was neither discussed nor decided. The silence of both this court and the Supreme Court is significant that the point was not deemed material. In the present case, however, the employment of Ward by the company is so clearly established by the. proofs that our decision in the present case should not vary from that made in Burnstine v. Ormes, upon the strength of this additional circumstance.

The judge further expressed an opinion that a decree against Aistrop & Dudley for the amount due upon their note to complainant might be entered in this case, with a direction that the company might be subrogated to any benefit arising therefrom upon satisfying complainant’s claim.

Cartter, Ch. J.,

also delivered an oral opinion, in which he expressed himself to the effect, that the legal rights of the pi’incipal parties in litigation were to be determined by the testimony in respect of the relations existing between Bigelow and the company; that, in the better of his opinion, Bigelow was to be regarded, for certain purposes of intelligence and communication, as the agent of-the company, and therefore that-whatever was communicated to him must be regarded as communicated to the company; that, however, he regarded this conclusion as not without doubt, but the doubts were not sufficiently sfrong to induce him to dissent from the result so clearly reached by his brethren. He would therefore make the judgment unanimous.

Decree affirmed.