Case ID: ohio-st_50/html/0167-01.html
Source: Caselaw Access Project
Author: {"author": "Dickman, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Holmes v. Gardner.
    
      Bona fide purchaser for a vahcable consideration without notice, from a fraudulent mortgagee.
    
    1. Where a debtor executes a mortgage on real estate with intent to defraud his creditors, a bona fide purchaser for a valuable consideration without notice, from the fraudulent mortgagee, of a part of the pretended mortgage debt, will be protected against the claims of the general creditors of such mortgagor.
    2. Where such pretended mortgage debt is evidenced by a single promissory note for a gross and entire sum, such purchaser of a fractional part of the debt will be protected, on a pro rata basis, in his equitable interest so acquired.
    (Decided March 7, 1893.)
    Error to the Circuit Court of Brown county.
    On the 1st day of January, 1884, the plaintiff, C. C. Holmes, filed his petition in the Court of Common Pleas of Brown county, against John W. Gardner, Nancy Gardner, W. A. Coburn, John Kirkpatrick, E. M. Gardner, Charles Gardner, W. W. Gilliland, John Goslett, Jr., Henry Bennington, The Farmer’s National Bank of Ripley, Ohio, and William H. Sly, as assignee of John W. Gardner, defendants, seeking to set aside a mortgage deed as fraudulent, made by John W. Gardner to E. M. Gardner on the 29th •day of January, 1878, and recorded on the 31st day of January, 1878, to secure a certain promissory note then executed and delivered by the said John W. Gardner to E. M. Gardner or order for the sum of $6,000, two years after the date thereof, with eight per cent, interest thereon from date, and to adjust liens upon the mortgaged premises.
    The petition as amended, avers that on the 23rd day of August, 1881, the plaintiff having then for the first time, discovered the fraud entering into said mortgage, filed his petition in the court of common pleas against said defendants to set said mortgage aside for the same reasons set forth in the petition in this action. And such proceedings were had in said action that on the — day of September, 1882, on appeal to the district court the same was dismissed without prejudice to the right of the plaintiff to bring another action, and thereupon on the 24th day of December, 1882, William H. Sly as assignee of the said John W. Gardner, an insolvent debtor, filed his petition in the probate court of Brown county, Ohio, for the sale of said mortgaged premises and for the adjustment of the liens thereon, making all the defendants herein parties thereto, in which proceedings the said E. M. Gardner and W. W. Gilliland answered, setting up the lien of said mortgage as they do in this action; and the said William H. Sly as such assignee answered to the answers and cross-petitions upon being indemnified by the plaintiff, setting up among other things, that the said mortgage was fraudulent and void for the same reasons set forth in the petitio'n mentioned in the record in this action; and upon said action being appealed from the probate court to the court of common pleas, that court found that said mortgage was fraudulent and void as to $3,000, thereof, but valid as to the $2,000.00 thereof assigned to Gilliland, to which finding and judgnent of the court of common pleas the defendants, W. W. Gilliland and E. M. Gardner prosecuted a petition in error to the district court to reverse said finding and judgment, and on the 20th day of September, 1883, the district court reversed said judgment and decree on the ground that the court of common pleas had no jurisdiction sitting as a court of probate upon appeal to hear and determine the question in dispute,* and thereupon reversed said judgment and dismissed said action, and the'plaintiff thereupon on the 1st day of January, 1884, filed his petition as shown by the record in this case to set said mortgage aside for reasons therein stated. And said action having come on for hearing in the court of common pleas, the same finding and decree was made by that court as before, and thereupon William H. Sly having died in February, 1886, and W. W. Gilliland having been appointed trustee of John W. Gardner, said action was again appealed to the circuit court, and that court on the 26th day of November, 1887, heard the case and made the following findings of fact and conclusions of law:
    
      a First—The court do find from the evidence that the defendant W. W. Gilliland, for a full and valuable consideration, became the purchaser of two thousand dollars of the amount secured by said promissory note and mortgage, before the same became due, without any notice or knowledge of fraud, and that he is now owner of the same as he has averred and set forth in his answer, and that the same is a valid and subsisting lien on the real estate described in said answer and cross-petition to the extent of said Gilliland’s interest therein. And the court finds the amount of said lien, principal and interest, to the 25th day of November, 1887, to be thirty-five hundred and seventy dollars ($3,570), which said W. W. Gilliland is entitled to recover, with eight per cent, interest on $2,000.00 thereof, from said 25th day of November, 1877. Second—That so much of said mortgage dated January 29th, 1878, as is set forth and claimed in his answer and cross-petition by the defendant E. M. Gardner, namely three thousand dollars, is without consideration, and was so made with intent to hinder and defraud and delay the creditors of him, the said John W. Gardner, and is therefore fraudulent and void as against the creditors of said John W. Gardner, and that so much of said mortgage as is now held and claimed by said defendant E. M. Gardner, should be set aside and held for naught, and that the said answer and cross-petition of E. M. Gardner should be dismissed. Third—That the plaintiff discovered said fraud and the fraudulent character of said mortgage in the spring or summer of 1879, and more than four years next before the beginning of this action. Fourth 
      —That on the 23rd day of August, A. D. 1881, said plaintiff brought an action in the common pleas court of Brown county, Ohio, to adjust liens on the real estate described in the petition in this action and in said mortgage of January 29, 1878, and to sell the same to pay certain judgments which said Holmes then held against the defendant John W. Gardner, on the same notes now set forth in the amendment to his petition in this action, to which suit W. W. Gilliland and E. M. Gardner were made defendants and required to disclose' their liens on .said premises. Said Gilliland and Gardner filed their separate answers find cross-petitions in said action on the 14th day of February, A. D. 1882, and therein set forth the same claim under said mortgage of January 29, 1878, as now claimed by them in this action. On the 15th day of March, A. D. 1882, the plaintiff C. C. Holmes, filed answers to said cross-petitions of Gilliland and Gardner denying the validity of the said mortgage of January 29, 1878, on the ground of fraud, substantially as he does in this action. Said action was dismissed by the district court of Brown county, Ohio, September 14, 1882, without prejudice to another action. On the 17th day of March, 1882, said John W. Gardner made an assignment under the state insolvent laws, to one W. H. Sly, and said Sly on the 14th day of December, A. D. 1882, filed a petition in the probate court of Brown county, Ohio, to sell the real estate of his said assignor by said mortgage of January 29, 1878, to pay the debts, to which petition said Gilliland and Gardner were again made defendants, and required to.set up their.liens, if any, on said real estate, prior to the 14th day of January, A. D. 1882. Said W. W. Gilliland and E. M. Gardner again filed their separate answers and cross-petitions in said probate court, and therein set forth and claimed the same interest under said mortgage of January 29, 1878, as they do in this action.
    “The present plaintiff, C. C. Holmes, appeared in the probate court, and asked to be made a defendant to said petition of said assignee; but his application and motion was denied by the court, and said Holmes then indemnified said assignee, and required him to contest the validity of said mortgage of January 29, 1878, for fraud. And said assignee then, prior to said 14th day of December, 1882, filed his answer to said cross-petition of W. W. Gilliland and E. M. Gardner in said action, attacking said mortgage for fraud, substantially as the plaintiff has done in this action. Said petition of W. H. Sly, assignee, was dismissed by the district court of Brown county, Ohio, so far as the issues made as to said question of fraud were concerned, on the 20th day of September, 1883. And said action as to said issues failed on said day otherwise than upon its merits. Thereafter, on the first day of January, 1884, the plaintiff brought the present action.. And the court does further find that the real estate described in plaintiff’s petition has been sold, and that the proceeds thereof are now in the hands of said trustee of said John W. Gardner. From which findings and conclusions of facts the court does now adjudge, order and decree, that out of the proceeds of the sale of the real estate described in the said mortgage of January 29, 1878, the defendant W. W. Gilliland, as the trustee of John W. Gardner, first pay said sum of $3,570.00, so as aforesaid found to be due and owing to him on said mortgage, together with eight per cent, interest on $2,000 thereof, and the residue of said proceeds that he administer according to law. It is further adjudged and ordered by the court that the plaintiff recover from the defendant E. M. Gardner the costs made on his petition, excepting the costs made on the cross-petition of Gilliland, and taxed to $175.42, and that the defendant W. W. Gilliland recover from the plaintiff the costs by him expended in this action, taxed to $14.70. To all of which findings, conclusions, orders, judgments and decrees the plaintiff, by his counsel, and the defendant E. M. Gardner, by his counsel, except. And it is further ordered that all other cross-petitions in this action, and all the parties hereto, be and they are hereby dismissed. It is further ordered that a special mandate issue to the court of common pleas to carry the above and foregoing judgments into effect.”
    To reverse the judgment of the circuit court a petition in error is filed in this court.
    
      
      C. A. White, for plaintiff in error.
    My proposition is, that the mortgage is an entirety. That it is a mere chose in action. That the assignee takes it subject to every defense and every infirmity that might be urged against the maker or the original payee. That the assignee stands in the shoes of the original payee. That the principles of law applicable to commercial paper do not apply to mortgages. This mortgage was given to secure a single promissory note for the gross and entire sum of $5,000. In this case it appears that both the note and mortgage were obtained by fraud and it falls within the rule laid down b3r this court in the case of Baily v. Smith, 14 Ohio St., 396; Ranneyv. Hardy, 43 Ohio St., 157; Osburn v. McClelland, 43 Ohio St., 284.
    From the findings of the court in this action it is clear that the consideration for the note and mortgage was illegal, and consequently that the mortgage was void. McQuade v. Rosecrans, 36 Ohio St., 442; Widow 'v. Webb, 20 Ohio St., 431; Raguet v. Roll, 7 Ohio, 77; Kahn v. Walton, 46 Ohio St, 195.
    
      G. Bambach & Son, for W. W. Gilliland.
    Plaintiff’s attorney seems to urge two objections against the judgment in favor of Gilliland upon this ground, namely: that the mortgage is an entirety, thereby meaning, we presume, that part of it could not be assigned; and that a mortgage in this state is not commercial paper. The principal case relied on is Baily v. Smith, 14 Ohio St., 396. In reference to the first objection, there would be some room for argument, if this were an action, at law upon the note, prior to the code; but no rule exists so far as we know ‘which precludes the assignee of part of the security of the mortgage to enforce his claims against the mortgage in equit3r. Stanbery v. Smythe, 13 Ohio St., 501. Plaintiffs further maintain “that the principles of law applicable to commercial paper do not apply to mortgages.” Phis, for the sake of argument, may be conceded, though there is high authority against the doctrine. But that is not the question in this record. The question here is, whether a general creditor of the mortgagor, having no specific lien ■on the realty, can assail the lein acquired in good faith, for value and without notice, by assignment from a mortgagee, as against whom part of the mortgage is invalid for fraud. In other words, whether the title of a bona fide purchaser for value of an interest in realty can thus be assailed by •one having only a general claim against the vendor. The proposition argued by the attorheys for plaintiff in error is secondary to this question, and has misled them in the consideration of the real and principal question before us.
    But it is incorrect to say that a mortgage does no more than to create a mere lien upon the property. It operates as a conveyance of the estate by way of pledge or security of the debt, and gives to the mortgagee the benefit of all the doctrines applicable to bona fide purchasers. Harkrader v. Leiby, 4 Ohio St., 611; Raguet v. Roll, 7 Ohio, 2 pt. 70; McArthur v. Franklin, 16 Ohio St., 193; Hill v. West, 8 Ohio 224. The assignments invested the several assignees after E. M. Gardner, to and including the defendant Gilliland, with all the rights secured by the mortgage, as effectually, we claim, as if conveyed by deed. Paine v. French, 4 Ohio, 318; Baily v. Smith, 14 Ohio St., 406; Webb v. Roff, 9 Ohio St., 430; Pierce v. Faunce, 47 Me., 513; Hill v. West, 8 Ohio 224; McGuffy v. Finley, 20 Ohio, 474; Grant v. Ludlow, 8 Ohio St., 38; Bank v. Teeters, 31 Ohio St., 36; Porter v. Barkley, 18 Ohio St., 546; Rooker v. Rooker, 29 Ohio St., 5.
    If then, the assignment of the mortgage had the same effect in equity as a conveyance from the mortgagee, which we think is fairly established by the authorities cited above, it would be a dangerous innovation in our law to subject a bona fide holder of an interest in land under a fraudulent mortgage to the assaults of the unsecured creditors of the mortgagor. Norton v. Beaver, 5 Ohio, 181; Barr v. Hatch, 3 Ohio 538; Manly v. Hunt, 1 Ohio, 257; Minns v. Morse, 15 Ohio, 568.
    Although the authority of Baily v. Smith does not reach this case, as we think, we desire nevertheless to call the attention of the court to the case of Carpenter v. Longan,, 16 Wall. 271; Webb v. Haselton, 4 Neb., 308-19 Am. Rep. 638; Burhaus v. Hutchison, 25 Kan. 625-37 Am. Rep. 274, Lewis v. Kirk, 28 Kan., 497-42 Am. Rep., 173.
   Dickman, J.

The record discloses that on the 29th day of January, 1878, the defendant John W. Gardner, executed a mortgage on the premises described in the original petition to his brother and co-defendant E. M. Gardner, ostensibly for the purpose of ■ securing the paj^ment of a certain promissory note of that date, by him signed, for five thous- and dollars, made payable to E. M. Gardner or order in two years after date, with interest at eight per cent, per annum. On the 1st day of September, 1878, an interest to the amount of two thousand dollars in the above named note and mortgage was assigned and transferred by E. M. Gardner to Bennington, Coburn & Co.; by them to W. T. Galbreath; by him to James Gilliland, and by his executors, to the defendant W. W. Gilliland.

The question in the case before us, which we deem most material to consider, grows out of the following findings of' fact from the evidence, to-wit-: That W. W. Gilliland, for a full and valuable consideration, became the purchaser of two thousand dollars of the amount secured by the promissory note and mortgage, before the same became due, without any notice or knowledge of fraud; that he is the owner-of the same as he has averred; and that the same is a valid and subsisting lien on the real estate described; that so much of the mortgage dated January 29, 1878, as is claimed by E. M. Gardner, namely, three thousand dollars, is without consideration, and was made by John W. Gardner with intent to hinder, delay and defraud his creditors, and is. therefore fraudulent and void as against such creditors, and that so much pf the mortgage as is held and claimed by E. M. Gardner, should be set aside and held for naught.

It is assigned for error, that notwithstanding the design of the mortgage was to defraud creditors, the court below held, that Gilliland, to the extent of the interest assigned to him in the mortgage, acquired a valid lien on the land ■as against the general creditors of the mortgagor.

As a general rule, it is now well established, that if a fraudulent grantee in a deed to defraud creditors, conveys the estate to a bona fide purchaser, for a valuable consideration, without notice, the conveyance is good as against the general creditors of the first grantor, and in favor of the purchaser the first grant will be purged of the fraud. Such a purchaser, it is said, is a favorite in the eyes of a court of ■equity, and will be protected whether he purchases from a fraudulent grantor or a fraudulent grantee. The interests ■of such purchaser are deemed superior to those of creditors, for the reason, that the former has not, like a mere general ■creditor, trusted “ to the personal responsibility of the debtor, but has paid the consideration upon the faith of the ■debtor’s actual title to the specific property transferred.” Seymour v. Wilson, 19 N. Y. 420. On the part of the pur•chaser there has been merely a substitution of property, and the value given or paid by him has taken the place of the property which he received. In regard to a case where a ■bona fide purchaser, without notice, for a valuable consideration, from a grantee, to whom property has been conveyed to defraud creditors of the grantor, Mr. Justice Storj^ said: “Will not a court of equity decree, that the fraudulent grantee shall account to the judgment creditor for the amount of the proceeds of the sale, considering them as a mere substitution for the original fund ? It appears to me, that such a course is within the established doctrine and practice of the court.” Bean v. Smith, 2 Mason, 274. See Farmers' Bank v. Teeters, 31 Ohio St., 37.

The same principles and reasons that govern in the com veyance of the property by a fraudulent grantee, may properly be extended to an assignment bjr a fraudulent mortgagee of a part of the mortgage-debt. In Harkrader v. Leiby, 4 Ohio St., 611, this court has said: “ It is incorrect to say, that a mortgage does no more than to create a mere lien upon the property. It operates as a conveyance of the estate, by way of pledge or security for the debt, and gives to the mortgagee the benefit of all the doctrines applicable to bona fide purchasers.” “A mortgagee is deemed a purchaser sub modo\ he is so regarded every day under the statute respecting fraudulent sales, and protected within the saving clause in favor of subsequent purchasers.” Per Nelson, C. J., Frisbee v. Thayer, 25 Wend. 399. “When I speak of a purchaser for a valuable consideration,” says. Eord Hardwick, “ I include a mortgagee, for he is a purchaser pro tanto.” Willoughby v. Willoughby, 1 T. R. 763. The interest acquired by the mortgagee in the land may not be large, but it may also far exceed in amount the value of the land, and the equity of redemption may therefore be worthless. A resort to the procedure of foreclosure in equity, may clothe the mortgagee with the absolute ownership. “A mortgagee,” says Jones in his treatise on mortgages, “is to the extent of his claim a purchaser of the land, and is entitled to the same protection from all secret equities and trusts of which he had no notice as any other bona fide purchaser. He is not affected by his mortgagor’s, fraud in acquiring his title.” § 710 and cases cited.

While the mortgage itself is certainly a lien for a debt, it is something more. In United States v. Fisher, 2 Cranch, 358, the court declared, “ that a mortgage is a conveyance of property, and passes it conditionally to the mortgagee.” And in Conrad v. Atlantic Insurance Co., 1 Pet. 441, a mortgage is declared to be “ a transfer of the property itself, as. security for the debt.” In Webb’s administrator v. Roff, 9 Ohio St., 430, it is held that a mortgage is a conveyance within the statute of frauds and perjuries.

Such being the nature of a mortgage security, and such the relation of the mortgagee to the estate conveyed, if E. M. Gardner, the mortgagee, had conveyed by deed to W. W. Gilliland his interest in the real estate mortgaged, it. might not have been contended that a general creditor of J. W. Gardner, could,' through a court of equity, avoid the conveyance to Gilliland, even though the mortgage was fraudulent as between 'the parties thereto. In Bailey v. Smith, 14 Ohio St., 406, at the very threshold of the discussion of the question, whether the mortgagor might insist upon the fraud as a defense to an action brought to foreclose the mortgage, Ranney, J., says: “The question is in no way affected by the further question, whether a mortgagee acquires such an interest in the land as to enable his grantee, being also assignee of the note, by deed duly executed, to claim the benefit of the rule which protects bona fide purchasers of real estate.”

Gilliland, according to the finding of facts, became the purchaser of two thousand dollars of the amount secured by the promissory note and mortgage. By what form of assignment he obtained such an interest, it does not appear. If to the extent of the amount paid by him, an assignment by deed could have put him in the place of the mortgagee, and ipso facto operated as a transfer of the premises covered by the mortgage, yet, such mode of transfer was not necessary to vest in him the rights of the mortgagee. The mere assignment of a note in writing and delivery of the mortgage deed would be adequate to transfer all the rights secured by the mortgage. Paine v. French, 4 Ohio, 318. A bank by becoming the owner of the notes, may acquire the equity in the mortgage though delivered without endorsement or assignment. Allen v. First National Bank of Xenia, 23 Ohio St, 97; and see Executors of Swartz v. Leist, 13 Ohio St., 419. And if the note or other debt secured by the mortgage be transferred without even a delivery of the mortgage, the mortgage in equity goes with the debt, unless there be an agreement to the contrary.

As the assignee of a note and mortgage may thus acquire all the right secured by the mortgage with power of foreclosure— the consideration paid being a fund substituted for the benefit of the mortgagor’s creditors — no good reason is apparent, why such assignee, if he purchased bona fide, for valuable consideration and without notice, from a fraudulent mortgagee in a deed to defraud creditors, should not be protected against the general creditors of the mortgagor, in like manner as the rights of a bona fide purchaser of property from a fraudulent grantee, without notice, who has paid a valuable consideration to such grantee, are protected against the general creditors of the first grantor, though such grantor may have been actuated by a fraudulent intention.

No authorities have been brought to our notice by counsel, in which the exact question before us has been considered, but the analogies are such, that we think the same rule should be applied to the purchaser of property from a fraudulent grantee, and the assignee from a fraudulent mortgagee of an interest in the mortgage and note or debt thereby secured. A doctrine different from that we have announced, might result in opening a wide door instead of closing the avenue to deception and fraud. The mortgagor, having colluded with his mortgagee to dispose of the security to an innocent purchaser for value who had no knowledge of the mortgagor’s creditors or their claims, might then direct his creditors to pursue the assignee of his fraudulent mortgagee, and make their claims out of the very property for which he and the confederate mortgagee had received the purchase money.

The case of Baily v. Smith, supra, which has given rise to much discussion and some contrariety of opinion, has been referred to in argument as establishing that, the transfer of a negotiable promissory note, secured by mortage on real estate, to a bona fide indorsee, does not entitle the holder to foreclose the mortgage, when it appears that both note and mortgage were obtained by fraud. In that case the mortgagor was not a party to the fraud, but was inveigled into giving his note for a pretended patent right for an utterly worthless machine, and after paying more than half of the note was deluded into executing a mortgage to secure the balance.

Under such a state of facts, the mortgagor was protected, not in taking advantage of his own wrong, but against the fraud that had been practiced upon him by others. The decision gives no encouragement' to the doctrine, that the mortgagor may conspire with the mortgagee to hinder, delay and defraud his creditors, and then avoid a foreclosure as against a bona fide purchaser, for valuable consideration and without notice, from the fraudulent mortgagee, of the whole or a portion of the amount secured by the mortgage.

It is urged, however, that the mortgage in controversy is an entirety, and was given to secure a single promissory note for the gross and entire sum of five thousand dollars.. But the equitable rights of the purchaser from the mortgagee were entitled to the protection of the court, whether he purchased all or only a fractional part of the mortgage debt. There was no legal impediment on the face of the instruments, or otherwise known to the purchaser, that prevented the mortgagee from disposing of the entire or a portion of the amount secured by the promissory note and mortgage, and the assignee of a part of the mortgage debt became entitled pro rata, as when fractional parts of the same judgment are successively assigned to different persons.. Patrick's Appeal, 105 Pa. St. 356; Moore's Appeal, 92. Pa. St. 309; Thayer's Appeal, (Pa.) 9 Atl. Rep. 498.

Upon an examination of the record we have discovered no error, and the judgment of the circuit court should be affirmed.

Judgment accordingly.