Case ID: ohio-st_50/html/0121-01.html
Source: Caselaw Access Project
Author: {"author": "Minsharr, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Pendery et al. v. Allen et al.
    
      Property pledged as indemnity— When inures to benefit of creditor — When mortgage, so given, in contemplation of insolvency, is an assignment in trust, tinder section 6343, Revised Statutes.
    
    1. It is a general principle that where property is pledged as indemnity by one debtor to another, jointly or severally liable with him for the same debt, the security so pledged inures to the benefit of the creditor, who has the right in equity to have the property so pledged applied to the payment of his debt, if it is not paid.
    2. And this principle applies to the case where a stranger in consideration of indemnity agrees to pay the debt of another; the creditor in such case may adopt the promise, and, as an incident, is entitled in equity to the securities pledged, if his debt is not paid.
    3. Where the indemnity so given is in the nature of a mortgage on property, given by a debtor in contemplation of insolvency to secure creditors, other than the party indemnified, the mortgage is, within the meaning of § 6343, Revised Statutes, an assignment in trust for such other creditors, and inures to the benefit of all the creditors of the mortgagor, in proportion to their respective demands. Bagley & Co. v. Waters, 7 Ohio St., 539, distinguished.
    (Decided January 31, 1893.)
    Error to the Circuit Court of Hamilton county.
    'The original action was commenced in the Court of Common Pleas of Hamilton county by Israel H. Pendery against A. C. Allen, E. P. Allen, Eowe Emerson and others, under section 6344, Revised Statutes, to set aside certain conveyances, alleged to be fraudulent, made by the Allens to certain of their creditors. Judgment was rendered for the defendants, dismissing the petition, and an appeal was taken to the circuit court; where the case was again heard upon the merits and the petition dismissed.
    Among the conveyances claimed to be fraudulent, was a mortgage that had been executed by E. P. Allen on certain real estate to Eowe Emerson to secure two notes amounting to $18,500, which it was alleged was without adequate consideration, and therefore fraudulent as to other creditors. During the progress of the trial, leave was given to amend the petition by adding an averment, that this mortgage was made in contemplation of insolvency by E. P. Allen “for the purpose of securing a debt upon which he, Emerson, was surety to J. and G-. N. Rowe for $8,000.00, and to secure a debt of said Edward P. Allen to The Merchants’ National Bank for $10,500.00, on which Emerson was not surety, and that Emerson thereby became a trustee for all the creditors of said Edward P. Allen.”
    With respect to this mortgage, the court found the facts as follows:
    “Said mortgage described in said petition was executed by said Edward P. Allen to said Rowe Emerson; at the time it was executed said Edward P. Allen and Albert C. Allen were insolvent, and were 'jointly indebted to C. J. Rowe in the sum of $6,000 on a note dated May 18, 1885, due in six months, and to Geo. N. Rowe on a note dated May 18, 1885, for $2,000, due in six months, in all to the Rowes in the sum of $8,000, for the payment of which sum Rowe Emerson was a surety.
    “Said E. P. Allen and A. C. Allen were also indebted to The Merchants’ National Bank on notes as follows;
    “ May 1st, ninety days................................... $1,500 00
    “ 12th, three months.............................. 2,000 00
    
      “ 19th, sixty days................................... 2,000 00
    “ 19th, ninety days................................ 2,000 00
    “ 19th, four months................................ 1,500 00
    “ 23rd, three months.............................. 1,500 00
    In all the sum of $10,500.00, for the payment of which notes Rowe Emerson was in no way liable.
    “Said mortgage was to secure two notes •
    The first for..................................................$ 8,000 00
    The second for............................................ 10,500 00
    “The purpose in the execution of said two notes and mortgage was to provide for the payment of said debts to said Rowes and to said Merchants’ National Bank. Both were executed by Edward P. Allen to said Rowe Emerson, dated July 16, 1885, and due in six months from date.
    
      ‘‘The consideration of the $8,000 note was the assuming by Emerson and his agreement to pay the above two notes aggregating $8,000 owing by E. P. Allen and A. C. Allen to Geo. N. Rowe and C. J. Rowe, on which Emerson was a surety.
    “The consideration of the $10,500 was the assuming by Emerson, and his agreement to pay the above six notes of E. P. Allen and A. C. Allen to The Merchants’ National Bank, aggregating $10,500, on which Emerson was in no way liable.
    “Emerson did pay to Rowe said $8,000.00, and to The Merchants’ National Bank said $10,500.00 on the above several notes as they matured.
    “The court also finds that at the time said mortgage to Emerson was executed, said Edward P. Allen .was indebted to said plaintiff and to said defendants who filed cross-petitions, and is still indebted to them in the amounts claimed by them respectively , as follows:
    Israel H. Pendery..........................................$1,000 00
    R. H. Andrews, (guardian).............................. 500 00
    Gideon G. Palmer......................................... 600 00
    Conrad Jacoby............................................... 2,000 00
    H. Vorhees................................................. 1,500 00
    Remus Gilliard............................................. 400 00
    C. Wolf........................................................ 2,000 00
    with interest on all of said claims as claimed in the pleading.
    “The court, therefore, as a conclusion of law, finds that said mortgage was not given to hinder, delay or defraud said creditors of Edward P. Allen, nor did said Emerson thereby become a trustee for said creditors, and that said creditors are not entitled to the relief prayed for by them in their pleadings; and that said petition and amendment thereto, and said cross-petition should be dismissed.”
    The agreement between the parties touching the mortgage of Allen to Emerson, is in writing, and is here inserted, though not incorporated in the finding of the court beyond its legal effect, since it has been inserted in the briefs on both sides, and commented on by the attorneys.
    
      It is as follows:
    “ Whereas, B. P. Allen is jointly indebted with A. C. Allen, in the sum of eight thousand dollars ($8,000) to C. J. Rowe and G. N. Rowe, of Cincinnati, Ohio, and is liable also upon six certain promissory notes held and owned by The Merchants’' National Bank, in amounts and maturing as follows: (Six notes amounting to $10,500 in the aggre-
    gate). And is wholly unable to pay any of the said notes or indebtedness as the same shall become due.
    “ And whereas, for the purpose of making some arrangement by which said indebtedness may be provided for and secured, the said E. P. Allen has this day executed and delivered his two promissory notes to Rowe Emerson, one in the sum of $8,000 and the other in the sum of $10,500, dated July 16th, 1885, and maturing six months after date, and has also executed a mortgage to said Emerson, in which his wife, Sarah S. Allen has joined, to secure the payment of said notes, wherein and whereby said E. P. Allen conveyed all his real estate.
    
      “Now, therefore, be it known, that in consideration of the premises, and the execution of said promissory notes in the sum of $8,000 and $10,500, and the execution and delivery of said mortgage to said Rowe Emerson, as aforesaid, the said Rowe Emerson does now hereby promise and agree with said E. P. Allen, that he will hold said E. P. Allen free and discharged from further liability upon said indebtedness to said Rowe and to the said Merchants’ National Bank of Cincinnati, and from all further liability upon the notes representing such indebtedness, and said Emerson will provide for the payment or settlement of said indebtedness, as far as E. P. Allen is concerned, at the maturity of the notes representing said indebtedness.
    
      “In witness whereof, the said Rowe Emerson has hereunto set his hand this 16th day of July, 1885.
    “ Rowe Emerson.”
    
      
      Joseph W. O'Hara, and Oliver B. Jones, for plaintiffs in error.
    The issue is fairly presented on the facts, whether or not the mortgage from Allen to Emerson operates as an assignment for the benefit of creditors under the statutes of Ohio. The provisions of the statute applicable to such transactions are as follows:
    Sec. 6343. “All assignments in trust to a trustee or trustees made in contemplation of insolvency, with the intent to prefer one or more creditors, shall inure to the equal benefit of all creditors, in proportion to the amount of their respective claims, and the trusts under the same shall be administered in accordance with the provisions of this chapter.”
    And sec. 6344, which provides in substance, that all transfers to hinder, delay or defraud creditors, shall be declared void at the suit of any creditor, and shall operate and be administered as assignments for the benefit of creditors.
    These provisions are substantially the same as appear in the statutes ever since 1835, and have been before this court in numerous cases where they have been fully and carefully construed and interpreted.
    It being admitted that Edward P. Allen was insolvent, and made the mortgage in question to Emerson in contemplation of insolvency, the only fact necessary to be shown in order to bring this action within sections 6343 and 6344 of the statutes is, that the transfer was made to Emerson in trust with the intent to prefer another creditor. And although the circuit court, as a conclusion of law, has found that this element does not exist, nevertheless, we claim that it clearly appears from the record, and the circuit court erred in so finding.
    We do not rest soley upon the claim, that the statute applies simply because in contemplation of insolvency Allen may have -undertaken to prefer Emerson over his other creditors, for a debt which he might have actually owed him; or even to prefer and indemnify him against a liability which Emerson had theretofore assumed as surety for Allen. The rule as we claim it, and which seems to us clearly to apply to the case at bar, is fully stated in Dixon v. Rawson, 5 Ohio St., 218; Harkrader v. Leiby, 4 Ohio St., 602; Bloom v. Noggle, 4 Ohio St., 45.
    The purpose of the mortgage, in such cases, is to protect the mortgagee. It is not an assignment or transfer, in trust, for its primary object is to protect the mortgagee. Allen was not released by the bank, hence it parted with nothing; it lost no rights, but simply acquired other and additional security for the payment of its claim against Allen. So far as the bank is concerned, the agreement, notes and mortgage all constitute one transaction, and show an intent to secure and prefer the claim of one person through the medium of another, who thereby necessarily becomes a trustee for that purpose.
    The case of Bagaly v. Waters, 7 Ohio St., 359, is relied upon by the circuit court in support of its decision, and will be cited by opposing counsel as conclusive of the question at issue. But there the transaction was a sale outright, and the court is careful to make this distinction.
    But that case also differs from the one at bar, in the fact that there the grantee directly assumed and agreed to pay the debts referred to in the instrument; and the court lays stress upon this personal liability and makes it the main ground for holding that there was no trust. Krumbaugh v. Kugler, 3 Ohio St., 549; Thompsons. Thompson, 4 Ohio St., 353.
    But neither insolvency nor default in Emerson are necessary to create the trust. It attaches immediately on the execution of the mortgage. Dixon v. Rawson, 5 Ohio St., 218.
    The transfer which creates the trust may be in any form ; it may be a general'assignment specifying the terms; by deed, silent as to terms; by judgment confessed; by an attachment on the grounds of fraud, or by mortgage. We need only cite authorities as to creating such a trust by mortgage. Harkrader v. Leiby, 4 Ohio St., 602; Bump on Fraud, page 334; Hunnewell v. Scarborough, 1 Disney, 427; Hyde v. Olds, 12 Ohio St., 591; Woof v. Robb, 19 Ohio St., 216; Hoffman v. Mackall, 5 Ohio St., 131.
    
      
      Edward Richie, and Reuben Tyler, for Rowe Emerson, defendant in error.
    I. Unless there was a trust created by the transaction between E. P. Allen and Rowe Emerson, there was nothing therein wdiich brings it within the provision of section 6343 of the Revised Statutes. Doremus, et al. v. O'Hara, et al., 1 Ohio St., 45; Atkinson et al. v. Tomlinson et al., 1 Ohio St., 237; Dickson v. Rawson, 5 Ohio St., 218; Bagaly & Co. v. Waters et al., 7 Ohio St., 360.
    II. In the transaction between E. P. Allen and Rowe Emerson, there was no trust created, either express or implied.
    Emerson agreed absolutely and unconditionally to pay certain indebtedness of said E. P. Allen’s, maturing at different dates, but all long before the maturity of the notes made by Allen to Emerson. This agreement to pay-said indebtedness was without reference to the amount of the value of the real estate mortgaged, or to the amount that might be realized from said mortgage, or the sale of the property mortgaged.
    Before the agreement was made, Allen was liable for all the Rowe notes and the notes in the Merchants’ National Bank, in all $18,500; after said agreement was made, Emerson was liable for them and Allen was not, as between him and Emerson.
    It became Emerson’s individual indebtedness, not as surety, but as principal. He was not to hold the mortgage as trustee for the bank, and pay the bank what he might receive from the sale of the mortgaged premises or any part thereof. It made no difference whether the mortgage was ever paid or foreclosed, or whether Emerson ever realized anything out of it or not. The contract of Emerson was not secured by the mortgage. Both Allen and the bank were entitled to enforce the contract, but the bank had no interest, right or title to the mortgage, or the notes secured thereby.
    In an action to enforce the contract, either by the bank or by E. P. Allen, Emerson could not set up as a defense the fact that the mortgage notes had not been paid. And such action could have been maintained in law, without resort to a court of equity'-.
    Emerson was not bound to account to the bank for the proceeds of said mortgaged property. It made no difference to the bank whether Emerson ever got anything out of the mortgage or not.
    It was entitled, under the contract between E. P. Allen and Emerson, to have all the notes held by it, paid long be fore the mortgage became due and the mortgage notes payable.
    Emerson paid full and present consideration for the notes and mortgage made to him by E. P. Allen. His position is just the same as if he had paid off all said notes before the mortgage was made to him. He undertook to pay them, and did pay them, before the maturity of the mortgage notes. His obligation to pay said notes was complete upon the delivery of the mortgage and notes to him, by E. P. Allen, in compliance with the terms of the contract between them.
    The mortgage was made to secure the indebtedness of E. P. Allen to Eowe Emerson, and no one else. Emerson had a complete right to secure himself, and paid full value for the mortgage at the time it was executed and delivered.
    ' The Rowes and the bank had a right to look to Emerson for their money, not by virtue of the mortgage, but by virtue of the contract made by Emerson with Allen. It made no difference to them about the payment of the mortgage or the value of the mortgaged premises.
   Minsharr, J.

The mortgage from Edward P. Allen to Emerson, having been made in contemplation of insolvency, the question is, whether, within the meaning of section 6348, Revised Statutes, it should be held to be an assignment to Emerson in trust to secure the claim of the bank as well as his own liability as surety of the Allens. .We think that such was its character, and that the court erred in dismissing the petition as amended. That an assignment in trust for the benefit of one or more creditors of an insolvent debtor may be made b}' the execution of a mortgage, is settled by the decisions of this court. Harkrader v. Leiby, 4 Ohio St. 602; Bloom v. Noggle, Id. 45, 56; Hyde v. Olds, 12 Ohio St. 591. A creditor may secure himself by taking a mortgage ; but in doing so he must deal with an eye single to his own interests; if he attempts to extend the lien beyond the necessity of his own indemnity, and secure the debt of any other creditor, the mortgage is in substance and legal effect an assignment within the meaning of §6343, Revised Statutes, and the mortgagee being a trustee for such other creditors, under the statute becomes a trustee for all the creditors of the mortgagor. Bloom v. Noggle, supra. Whether a grantee or transferee of' any kind is to be regarded as such trustee “depends,” as said in Dickson v. Rawson, 5 Ohio St. 218, 222, “upon the question whether, by the terms of the instrument or by necessary implication, he is liable to account to the preferred creditor for the property in his hands, and for the manner in which he disposes of it. If a court of chancery, at the instance of the creditor, would compel him thus to account, the character of the transfer, and his own position, are thereby determined; and the statute then steps in and enlarges the trust, and makes it inure to the benefit of all the creditors, and distributes the fund to all, in proportion to their respective demands.”

What then was the character of the mortgage from Allen to Emerson ? On its face it secured an absolute obligation to pay two notes, one of 8,000, and the other of 10,500 dollars. The court, however, found that the consideration for the 8,000 dollar note was the promise of Emerson to pay an indebtedness of the maker in that sum to the Rowes, and for which Emerson was surety; and that the consideration for the $10,500 dollar note was the promise of Emerson to pay an indebtedness of the maker in that sum to the bank, and for which he was in no way previously liable. Hence, aside from the promise of Emerson to pay the Rowes and the bank the amounts named, there was no consideration for the mortgage, and it would have been void as against creditors, under §6344, Revised Statutes, and the court would have been required to set it aside, as prayed for by the plaintiff in his original petition. The promise, however, of the mortgagee to pay these debts furnished a sufficient consideration for the promise .of the mortgagor, evidenced by the notes, and took the mortgage out of the operation of the section just referred to. But what was the nature of this promise? Allen was not actually indebted to Emerson in any sum, and would not be until Emerson should perform his promise by paying Allen’s indebtedness to the creditors named. It is therefore evident that the promise of Allen, evidenced by the notes, was a promise of repayment to Emerson of the amounts he should pay for Allen on his indebtedness to the creditors named; and that the mortgage was designed to secure the performance of this promise of repayment. Without making these, payments, Emerson would have had no right in equity to foreclose the mortgage. So that it was simply a mortgage of indemnity given Emerson to secure him in the performance of his promise to pay certain creditors of Allen; and, as we shall show, inured in equity to the benefit, not only of the Rowes to whom he was a debtor, as the surety of Allen by an express promise, but, also, to the bank, since by promising to pay its claim in consideration of the execution of the mortgage, the promise became obligatory upon the acceptance of the mortgage, and the bank had the right to adopt the promise and enforce it to the extent it would, had the promise been made directly to it. Thompson v. Thompson, 4 Ohio St. 333; Emmitt v. Brophy, 42 Id. 82. In other words, upon the acceptance of the mortgage, Emerson, by reason of his promise to pay these creditors, stood in the relation of a surety for the Allens, not only upon their indebtedness to the Rowes, but also to the bank.

It is a well settled rule in equity, that where a surety for his own indemnity takes a collateral securtiy from his principal, such security is regarded in equity as a trust for the better security of the debt, and chancery will compel the execution of the trust for the benefit of the creditor. Story’s Eq. §502, and cases cited; Vail v. Foster, 4 N. Y. 312; Kelly v. Herrick. 131 Mass. 373; Green v. Dodge, 6 Ohio 80: Fastman v. Foster, 8 Met. 19; Paris v. Hulett, 26 Vt. 308; Chamberlain v. Railroad, Co., 92 U. S. 299; 306 ; Heath v. Hand, 1 Paige, 329.

The rule is not limited, but applies as well to • one standing in the situation of a surety, as to one standing strictly and formally in that relation. Thus in Curtis v. Tyler, 9 Paige, 432, where the owner of a mortgage had assigned the same and covenanted with the assignee that it was due and ■collectible, and subsequently took the bond of a third person as a further security for the payment of the amount due upon such mortgage, it was held by Chancellor War-worth, that the assignee of the mortgage was, in equity, entitled to the collateral bond for the security of the mortgage debt, on the principle, that where a surety or one standing in the situation of a surety for the payment of a debt, receives a security for his indemnity, the principal creditor is in equity entitled to the full benefit of that security; and it makes no difference, as he said, that such principal creditor did not act upon the credit of such security in the first instance, or even know of its existence. And he cited the case of Ex parte Perject, Mont. Bank. Rep. 25, w7here it was decided by the vice-chancellor of England that the endorser of a bill of exchange had an equitable claim to property deposited with the drawee as security against the payment of the bills accepted by him. So in Kramer & Rahm’s Appeal, 37 Penna. St. 71, where one King residing in Pittsburgh, agreed to accept paper to be drawn on him by one Baker, in consideration of pig metal to be shipped him, for his better security, took a judgment-note on which a judgment was obtained and a levy made, from which money was realized by a sale of the property, it was decided that the holders of the acceptances were entitled to the benefit of the security taken by King, although at the time of taking the acceptances they had no knowledge of the existence of the security; citing and relying on Curtis v. Tyler, and emphasizing the fact that the rule as there stated and applied, includes all standing in the situation of surety, and not merely such as technically occupy that relation. Thompson, J., in delivering the opinion, said, “The authorities place the principle upon the ground that as.the security is a trust created for the better securing of the debt, it attaches to it, and hence it is that it may be made available by the creditor, although unknown to him at the time of the purchase of the security, for which it may have been given as an indemnity. The effect of such a transaction is the placing of means in the hands of the surety by the principal debtor to meet liability on account of his contract of suretyship. It is consequently a trust for that specific purpose, and equity will control the legal title to it in the hands of the surety, so that it may be applied to the object intended, viz., the payment of the debt to the holder.” And so in Grant v. Ludlow's Adm’r, 8 Ohio St. 1, 20, it was held, upon the same principle, that where an agent, employed by his principal, to take security from a debtor of the principal, so negligently conducted himself in taking the securit}' as to become liable to the principal, and thereupon took a mortgage from the debtor to indemnify himself against such liability, such mortgage inured in equity to the benefit of the principal, and could be enforced by him against a subsequent mortgagee of the same propertjc

These cases and the principle upon which they proceed, make it clear, as we think, that Emerson in accepting the mortgage as indemnity against loss in the performance of his promise to pay the bank, became, within the meaning of § 6343, Revised Statutes, an assignee of the property covered by the mortgage in trust for the benefit of the bank; and, as a consequence of the provisions of that section, held it in trust for all the creditors of Allen according to the amount of their respective demands. The fact that a surety has the right to take indemnity by way of mortgage from his principal, is of no avail, so far-as he assumes the indebtedness to the bank. For this indebtedness he was not previously liable as surety; and, as said by the judge delivering the opinion in Bloom v. Noggle, the statute cannot be evaded by assuming a liability as surety for the insolvent debtor, as part of the transaction by which the mortgage is given. He might safely have secured his liability for Allen to the Rowes; but, having gone beyond this, and accepted a mortgage intended to secure another creditor, he became by force of the statute, a trustee for all, and in respect to all the property covered by the mortgage. Harkrader v. Leiby, 4 Ohio St., 602, 613. And his liability in this regard is to be determined not by subsequent events, but by the nature of the transfer at the time it was made. If by its terms, or necessary implication, it made him liable to account to another creditor of the debtor, it is an assignment in trust within the meaning of the statute. Dickson v. Rawson, 5 Ohio St., 218, 224.

We are, however, confronted with the case of Bagaley & Co. v. Waters, 7 Ohio St., 359. But that case is plainly distinguishable from the case before us. There, Asa B. Waters being insolvent, made an absolute sale of certain property to his brother, Israel I. Waters, in consideration of his agreement to pay certain named creditors of the grantor. The decision was placed on the ground that the sale was an absolute one, conferring on the purchaser the right to dispose of the property as his own, subject to no trust whatever in favor of the preferred creditors. In this view of the case it is hard to find any objection to the decision. It was upon this ground that the judge, delivering the opinion, distinguished the case from the previous decisions of the court on the same subject. Referring to these cases, he said: “ In each of them it will be found that the assignee held the property as mortgagee, or otherwise, in part at least, merely to secure other creditors besides himself, or was to account for a residuum to the assignor. Such instruments might well be declared assignments in trust.” In the case before us there was not an absolute sale. The debtor executed two notes and secured them by mortgage. The only consideration, as we have shown, for these notes, was the promise of the mortgagee to pay the Rowes and the bank, and the court found as a matter of fact, that, “ The purpose in the execution of said two notes and mortgage was to provide for the payment of said debts to said Rowe and said bank.” We have shown, if any thing can be established by reason and authority, that a security so taken, inures to the benefit of the creditor, and that he may hold the person receving it as a trustee, bound in equity to account for it. But, in addition to this, the debtor retained an interest in the property. He still remained liable on his indebtedness to the Rowes and the bank, and hence, as mortgagor, had the right to have the property applied to the payment of these creditors, in exoneration of himself; and, if not so applied, had the right to have the mortgage delivered up and cancelled; and, of this right, the creditors whose debts were to be paid, could have availed themselves, on the ground that the property was subject to a trust in favor of their debtor, which in equity inured to their use. So that, viewed in any light, Emerson, by accepting the mortgage, became, under the terms of the agreement, a trustee of the property for the creditors he promised to pay, which the statute enlarges into a trust for the benefit of all the creditors of the insolvent.

Judgment reversed, and judgment for the plaintiff in error; and catise remanded to the court of common pleas to carry this judgment into execution.

CASES ARGUED AND DETERMINED IN THE SUPREME COURT OF OHIO, .JANUARY TERM, 1893. Hon. JOSEPH P. BRADBURY, Chief Justice. Hon. ERANKLIN J. DICKMAN, j Hon. THAD. A. MINSHALL, Hon. MARSHALL J. WILLIAMS, [ Judges. Hon. JACOB E. BURKET, Hon. WILLIAM T. SPEAR, J