#### The First National Bank of Wapakoneta *v.*Brotherton, Trustee, et al.

*Bona fide eoidorsee of note and mortgage*— Mortgage *confers lien on real estate to indorsee, when.*

The transfer to a *bona fide*indorsee of a negotiable promissory note with a mortgage on real estate by which the note is secured confers upon such indorsee a lien upon the real estate free from all latent equities in favor of persons who are strangers to the title. *(Baily*v. *Smith,*14 Ohio St., 396, distinguished.)

(No. 10317

Decided April 14, 1908.)

Error to the Circuit Court of Allen county.

Suit was brought in the court of common pleas by Brotherton as trustee in bankruptcy of the estate of the South Side Lumber Company to procure the cancellation of a mortgage upon certain real estate described in his petition, upon the ground that it was fraudulent and void as to the creditors of the lumber company. The real estate which was subject to the mortgage had never been the property of the lumber company. It had been conveyed by one Raudabaugh to Roy J. Dewey, and the mortgage was executed by Dewey to one David C. Dunn to secure a promissory note of $6,000 of even date with the mortgage, and the note and mortgage were transferred and assigned by Dunn to the plaintiff in error, the First National Bank of Wapakoneta. In its answer and cross-petition in the case the bank alleged the’ facts necessary to constitute it a *bona fide*holder of the notes and mortgage. The cause was appealed to the *163circuit court where it was tried and the rights, of the parties determined upon an agreed statement of facts as follows:

“That the defendant, the South Side Lumber Company, is and was a corporation organized under the laws of the State of Ohio with a capital stock of $20,000.00, and at all the times mentioned in the petition said capital stock was fully paid;

“That the said defendant, David C. Dunn, was at said times the owner of $6,700 worth of said capital stock and that said Roy J. Dewey was the owner of $200 worth of said stock, and that, on or about the 15th day of September, 1904, the said The South Side Lumber Company was the owner of a large amount of lumber and other merchandise to the value of about $23,000; that at about said date the said corporation negotiated a sale of said lumber and merchandise to one Joshua R. Raudabaugh for about the price of $23,000; that the said D. C. Dunn was not favorable to said sale unless the said corporation would purchase from him $6000, of his said capital stock at an agreed price of $6000, and the balance of his said capital stock of $700 he transferred to W. W. Leighton for an agreed consideration as between themselves.

“That on the 8th day of September, 1904, the said negotiations for said sale and for the retirement of said stock having, been in progress from on or about the said 8th day of September, IQ04, the Board of Directors of said The South Side Lumber Company passed the following resolution or motion:

*164‘That part of lot 1722 which is accepted from Joshua R. Raudabaugh as part payment for lumber stock at the valuation of $7500, be deeded to R. J. Dewey as trustee and that said Dewey be authorized to procure a loan on same of $6000, which money is to be used to purchase and retire $6000 of the capital stock of the said the South Side Lumber Company now owned by D. C. Dunn’;

“That in pursuance of the aforesaid resolution and as a part of the purchase price paid by said Raudabaugh to the said The South Side Lumber Company for said stock of lumber and merchandise, the said Raudabaugh did, on or about the 31st day of August, 1904, and filed for record September 14, 1904, deed said premises to R. J. Dewey individually, there being no description or designation in said deed that said Dewey was in fact acting as trustee as provided in said resolution;

“That afterwards, to-wit, on the 15th day of September, 1904, the said Dewey executed and delivered to said D. C. Dunn the note mentioned in the petition and set out and described in the answer and cross-petition and amended answer and cross-petition of The First National Bank of Wapalconeta, Ohio, and at the same time said Dewey individually executed and' delivered to the said Dunn a mortgage on said property, being the property described in the petition, for the purpose of securing the payment of said note of $6000, which mortgage was duly filed with the Recorder of Allen County, Ohio, for record on said 15th day of September, 1904, at 1:20 o’clock *165p. m.j and by him recorded in volume 83, page 369, of the records of mortgages of said county, in which mortgage Emma Dewey, wife of said Roy J. Dewey, joined;

“And thereupon the said D. C. Dunn attempted to and did, so far as he had the power, cancel and surrender to said company $6000 of the capital stock of said company so theretofore owned by him;

“That said Dunn, at the time of the transactions hereinbefore enumerated, was an officer of said company, was one of its board of directors and was the acting secretary thereof, and that the said D. C. Dunn did then and there accept said note and mortgage in full payment and satisfaction of his said $6000 of stock in said company thus surrendered and cancelled by the company;

“That subsequent thereto, on the 10th day of November, 1904, proceedings were instituted in the United States District Court for the Northern District of Ohio, Western Division, by some of the creditors of said The South Side Lumber Company to have the said The South Side Lumber Company declared an involuntary bankrupt; that on the 2d day of December, 1904, the said The South Side Lumber Company was adjudicated a bankrupt in said proceedings; that on the 19th day of December, 1904, the plaintiff, Cloyd J. Brotherton, was elected trustee in bankruptcy for said bankrupt and immediately accepted the trust and qualified; that at the time of said adjudication in bankruptcy the said The South Side Lumber Company owed debts to the amount *166of $........; that by reason of said proceedings there passed to said Cloyd J. Brotherton, as such trustee, certain real estate of said bankrupt, also certain' accounts then due said bankrupt, of the nominal value of $........; that such property so passing was all the property and assets, at that time or now, of said The South Side Lumber Company, except that the title to the property described in the petition was placed in the name of R. J. Dewey, who in fact was the trustee of the said The South Side Lumber Company, which was in fact the owner thereof, of which fact D. C. Dunn had full knowledge at the time of the execution of the mortgage, and this said property is the only other property in which the said bankrupt had or has any interest whatever, and which is or may become, by the adjudication of this court, assets in the hands of said trustee in bankruptcy; that the real estate so passing to the said trustee in bankruptcy was all incumbered by *bona ñde*niortgage liens; that the trustee in bankruptcy has sold and disposed of all of said real estate, except the real estate in controversy in this suit, under the orders of said bankruptcy court; and after paying the said mortgage liens and the costs of said proceeding to sell the same, there remains in the hands of said trustee the sum of $........; that there have been filed and proven valid claims against said bankrupt which are unsecured, amounting to $........

“It is further agreed that the unpaid and unsecured indebtedness of said The South Side Lumber Company, at the time the petition in this case was filed and now, is largely in excess of the *167assets of said .The South Side Lumber Company; that the said company, at the timé of said adjudication in bankruptcy, was insolvent and unable to pay its debts; and it is further agreed, that the excess of the liabilities of said The South Side Lumber Company over all assets now in the hands of said trustee, or owned by said bankrupt, are largely in excess of the value of the property in litigation in this proceeding.

“It is further agreed that the said D. C. Dunn, shortly after the execution and delivery to him of said note and mortgage of $6000, to-wit, on the 23rd day of September, 1904, borrowed of The First National Bank of Wapakoneta, Ohio, the sum of $6000 and executed to said bank his own note for said sum; and at the same time for the purpose of securing said loan to him, he transferred to said bank the said note and mortgage for $6000 as collateral security, by writing or endorsing on the margin of said mortgage the following words: “For value received I hereby assign the within mortgage and transfer the note which is secured by same to The First National Bank of Wapakoneta, Ohio. D. C. Dunn” and delivering said note and mortgage to said bank, and endorsing his name on the back of said note, which transfer was duly recorded on the margin of the record of said mortgage on November 29th, and that said bank, at the time it so received said note and mortgage, had no knowledge of any of the facts before recited and no notice or knowledge ■ of any claim on the part of any one that said note and mortgage of $6000 was other than the individual property of the said D. C. *168Dunn, or that the property upon which said mortgage was given was or had been other than the individual property of R. J. Dewey; that said note of D. C. Dunn, as collateral to which the said $6ooo note and mortgage were transferred to it, is past due and unpaid and the said bank is still holding said $6ooo note and mortgage as collateral to said indebtedness.

“It is further agreed that Joshua R. Raudabaugh has paid the taxes and assessments as set forth in his answer and cross-petition and that the same is the first and best lien upon said premises for the amount that he claims due him in said cross-petition, with interest as prayed for in said cross-petition.

“It is further agreed that the averments of the answer and cross-petition of Charles F. Ashton herein are true.

“It is further agreed that the above statement of facts shall be taken as the complete evidence in this case.

“It is further agreed that the existing and unpaid indebtedness against The South Side Lumber Company accrued prior to and existed before the 15th day of September, 1904.”

Upon the facts thus agreed to the circuit court decreed the cancellation of the mortgage as against.the bank and ordered Dewey to execute a deed to convey the premises covered by the mortgage to Brotherton as trustee.

*Mr. John W. Roby,*for plaintiff *in*error,

cited and commented upon the following authorities: *Holmes*v. *Gardner,*50 Ohio St., 167; *169*Baily*v. *Smith,*14 Ohio St., 396; *Lea*v. *Welsh,*12 C. C., 674; Ohio Digest, “Bona Fide Purchaser”; *Bean*v. *Smith,*2 Mason, 274; *Bank*v. *Teeters,*31 Ohio St., 37; *Frisbey*v. *Thayer,*25 Wend., 399; *Willoughby*v. *Willoughby,*1 T. R., 763; *United States*v. *Fisher,*2 Cranch, 358; *Conard*v. *Insurance Co.,*1 Pet., 441; *Webb’s Admr.*v. Roff, 9 Ohio St., 430; 9 Michie Digest, 738; Pomeroy on Equity, Sections 712 and 715; *Carpenter*v. *Longan,*16 Wall., 275; *Gould*v. *Marsh, 1*Hun, 566; *Taylor*v. *Page,*6 Allen, 86; *Watson*v. *Wyman,*161 Mass., 96; *Pierce*v. *Faunce,*47 Me., 507; *Billgery*v. *Ferguson,*30 La. An., 84; *Dearman*v. *Trimmier,*2 S. E. Rep., 501; *Lewis*v. *Kirk,*28 Kans., 497; *Duncan*v. *Louisville,*13 Bush (Ky.), 378; *Thompson*v. *Maddux,*117 Ala., 468; *Croft*v. *Bunster,*9 Wis., 503; *Kenicott*v. *Supervisors,*16 Wall., 452; *Gabbert*v. *Schwarts,*69 Ind., 450; *Preston, Kean & Co.*v. *Morris, Case & Co.,*42 Ia., 551; *Hagerman*v. *Sutton,*91 Mo,, 532, 4 S. W. Rep., 78; Webb v. *Hoselton, 4*Neb., 318, 19 Am. Rep., 640; *Bamberger*v. *Geiser,*33 Pac. Rep., 610; *Bailey*v. *Seymour,*20 S. E. Rep., 63; *Graham*v. *Blinn,*30 Pac. Rep., 447; *Frost*v. *Fisher,*58 Pac. Rep., 876; Jones on Mortgages, Section 834; *Osborn*v. *McCelland,*43 Ohio St., 304; 20 Am. & Eng. Ency. Law, 1043; *Humble*v. *Curtis,*160 Ill., 193, 43 N. E. Rep., 749; *Himrod*v. *Gilman,*147 Ill., 293; *Murray*v. *Lylburn,*2 Johns. Ch., 441; Mott v. *Clark,*9 Pa. St., 399; *Pryor*v. *Wood,*31 Pa. St., 142; *Moffett*v. *Parker,*71 Minn., 139, 70 Am. St., 319; *Newton*v. *Newton,*46 Minn., 33; *Cordage Co.**170v. *Seymour,*67 Minn., 311; *Brigham*v. *Potter,*14 Gray, 522; *Cazet*v. *Field,*9 Gray, 329; *Swift & Nichols*v. *Holdridge et al.,*10 Ohio, 230; *Webb*v. *Brown,*3 Ohio St., 262; *Hollowell & Co.*v. *Bayliss,*10 Ohio St., 536; *Combs*v. *Watson,*32 Ohio St., 228; *Leaf*v. *Marriott,*4 Ohio Dec., 403; *Railway Co.*v. *Lynde,*55 Ohio St., 23; Sections 4135, 6343 and 6444, Revised Statutes.

*Mr. Frank E. Mead; Messrs. Wheeler & Bently*and *Mr. W. H. Leete,*for defendants in error,

cited and commented upon the following authorities: *Coppin*v. *Greenlees & Ransom Co.,*38 Ohio St., 275; *Morgan*v. *Lewis,*46 Ohio St., 1; *Bank*v. *Carriage Co.,*17 C. C., 253; Loveland on Bankruptcy (2 ed.), Section 159; *Baily*v. *Smith,*14 Ohio St., 396; *Carpenter*v. *Langan,*16 Wall., 271; *Railway Co.*v. *Lynde,*55 Ohio St., 23; *Heller*v. *Meiss et al.,*1 C. S. C. R., 479; *Trust Co.*v. *Railroad Co.,*17 W. L. B., 179; *Helebush*v. *Richter,*2 W. L. B., 127, 37 Ohio St., 222; *Ranney*v. *Hardy,*43 Ohio St., 157; *Osborn v. McClelland,*43 Ohio St., 284; *Kernohan*v. *Manss,*53 Ohio St., 133; *Holmes*v. *Gardner,*50 Ohio St., 167; *Board of Education*v. *Stephenson,*39 W. L. B., 75; *Pinney*v. *Bank,*71 Ohio St., 184; Pomeroy on Equity (3 ed.), Section 704; Sections 3173, *3173b,*4135 and 4135a, Revised Statutes.

Shauck, C. J.

The present case concedes that the relief sought by the trustee would have been properly granted but for the rights of the *171*bona fide*holder which attached to the interests of the plaintiff in error. This because of the fact that the mere surrender by Dunn of his stock in an insolvent corporation did not constitute a sufficient consideration to sustain either the deed to Dewey or his subsequent mortgage to Dunn. The question we have to determine is, may the invalidity of the mortgage be asserted against the bank which received it with the note which it secured, before due, for a full consideration contemporaneously advanced by it, and without either actual or constructive notice of the circumstances attending the execution of either the deed or the mortgage? The principal, if not the only, reliance of the circuit court for the affirmative answer which it gave to that question is *Baily*v. *Smith,*14 Ohio St., 396. Much care has been taken by this court, and by the courts of two other states which have followed *Baily*v. *Smith,*to limit its authority to the precise point which it decided.. In any view which may be taken of the case, it is an obvious departure from the doctrine generally recognized by the courts of the country. This was clearly demonstrated in *Carpenter*v. *Longan,*16 Wall., 275. Although the case, when reviewed in the later adjudications of this *court,*has been recognized as establishing a rule of property, care has always been taken to limit it to that conservative function. It has not been thought necessary or advisable to give such extended operation to its doctrine as would widen the divergence between the decisions of this court and those of other states and the federal courts with reference to related subjects. *172Renewed attention to the precise conclusion there reached is necessary to the end that it may be distinguished from the conclusion which it is said to require in the present case. If the syllabus of that case is read in the light of the well known rulo of this court that it states the points decided, the relevant proposition of the syllabus, the fourth in number, will plainly suggest the needed limitation: “The transfer of a negotiable promissory note, secured by mortgage 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.” The point decided was that a note and mortgage to secure it having been obtained by fraud, the maker may interpose that defense against the mortgage in the hands of a *bona fide*indorsee, although he may not interpose it against the note. Obviously no other question could have been decided for no other was presented. In the present case, the question is whether against such *bona fide*holder there may be asserted a latent equity in favor of persons who are not parties to the mortgage and as to whom the record contains no disclosure whatever. An affirmative answer to that question derives no support whatever from *Baily*v. *Smith.*Notwithstanding all that was there said, cases of this character are determined by the familiar rule that a mortgage is an incident to a negotiable note which it secures, and is subject to no equity which may not be asserted against the holder of the note. If it should be *173conceded that one in the position of the plaintiff in error might, consistently with the principles of law, be required to ascertain, before purchasing, whether the mortgagor has a defense against a suit to foreclose his equity of redemption, it would not follow that he should be held to inquire of mankind with respect to látent equities. In support of the view here , suggested the cases are numerous and uniform. Types of them are: *Holmes*v. *Gardner,*50 Ohio St., 167; *Railway Co.*v. *Lynde,*55 Ohio St., 23; and *Humble*v. *Curtis,*160 Ill., 193.

Reference to the statement of facts in the present case shows that the plaintiff in error not only received the note by indorsement from Dunn, but that it received a formal assignment indorsed upon the mortgage and that the same was duly entered of record. In view of this fact counsel for plaintiff in. error insists that the amendment of 1888 to Section 4135, Revised Statutes, vested in the bank a legal title to the mortgagee’s interest in the property, and that the point actually decided in *Baily*v. *Smith*is now inconsistent with the statute. It will be prudent to defer a decision of the question suggested until it shall receive from counsel and the court the more careful consideration which it is likely to receive in a case requiring it to be decided.

Without attaching any importance whatever to the amendment of the statute, it seems clear that the judgment of the circuit court was erroneous and that upon the agreed statement of facts upon which the case was submitted the *174judgment should be in favor of the plaintiff in error.

*Judgment reversed and judgment for plaintiff in error.*

Price, Crew, Summers, Spear and Davis, JJ., concur.