#### JESSE W. HARDY and Wife, CORA L. HARDY, v. JOE W. FRYER et al.

(Filed 26 October, 1927.)

Deeds and Conveyances — Trusts—Mortgages—Priority of Liens — Title— Registration.

Where the grantee in a deed, takes title in subordination to an existing unregistered mortgage on the lands, specifying the mortgagee with certainty, together with the fact that the title conveyed is subject thereto and the amount thereof in language that amounts to its ratification and adoption, and the deed is recorded, the grantee is deemed a trustee for the payment of the mortgage referred to and those claiming under his rights are bound by the trust created in the-deed, and a later mortgage acquires only a secondary lien under a later but prior registered mortgage to that set out in the original conveyance.

Civil action, before *Crammer, J.,*at May Term, 1927, of Pitt.

The plaintiff instituted this action against the defendant, Fryer, Farmville Building and Loan Association, Bank of Fountain, and all other lien holders, to restrain a sale of his property and to-ascertain the amount and priority of liens thereon. The cause was referred to Hon. H. Gr. Connor as referee to find the facts and to state conclusions of law determining the rights of the parties. The referee heard the evidence and argument of counsel and filed an unusually clear-cut and comprehensive report.

The facts presenting the question of law involved are substantially as follows: On 16 October, 1920, J. T. Harris sold to plaintiff, Jesse "W. Hardy and wife, a lot of land for $9,016.25 and executed and delivered a deed therefor. Contemporaneously therewith plaintiff, Hardy and wifé, executed and "delivered to the defendant, Farmville Building and Loan Association, a note for $3,500, secured by a mortgage upon the property conveyed, and also at the same time executed and delivered to the vendor, Harris, five notes aggregating $5,516.25, and securing same by a deed of trust. The deed from Harris, the vendor, to Hardy and wife, vendee, was immediately recorded. The mortgage from Hardy *421and wife to Harris, securing tbe said sum of $5,516.25, was duly recorded on 25 October, 1920, but tbe mortgage from Hardy and wife to tbe Building and Loan Association was not recorded until 8 February, 1923. Harris, tbe payee, in tbe notes aggregating $5,516.25, before maturity, transferred and delivered said notes to tbe Bank of Fountain, and tbe Bank of Fountain sold tbe notes to tbe defendant Fryer. Tbe deed from Harris, tbe vendor, to Hardy and wife, vendees, dated 16 October, 1920, contained tbe following language: “Witnesseth, Tbat in consideration of tbe sum of $5,000, and tbe assumption of payment of certain mortgage due tbe Building and Loan Association for $3,500, receipt of wbieb is hereby acknowledged,” etc. In tbe warranty clause of said deed tbe following language occurs: “Tbat tbe same is free and clear of all encumbrances except mortgage to tbe Farmville Building and Loan Association, which is hereby assumed by tbe party of tbe second part, which assumption is a part of tbe purchase price hereof.”

Tbe Bank of Fountain contends tbat by reason of tbe fact tbat its mortgage, securing indebtedness of $5,516.25, was recorded prior to tbe recording of tbe $3,500 mortgage to tbe Building and Loan Association tbat its lien is superior to and prior to tbe $3,500 mortgage of tbe Building and Loan Association.

Tbe Building and Loan Association contends tbat, while its mortgage for $3,500 was recorded subsequent to tbat held by tbe defendant bank and transferred to tbe defendant, Fryer, yet tbe notice and reference in tbe deed from Harris, tbe vendor, to Hardy and wife, tbe vendees, was sufficient to preserve its lien.

Tbe referee, upon tbe facts found by him, concluded, as a matter of law, tbat tbe language contained in tbe deed “comes within tbe rule laid down by tbe Supreme Court in several cases, and tbat when Hardy assumed payment of tbe mortgage to tbe Building and Loan Association for $3,500, this assumption of payment passed along to all tbe persons dealing with tbe property thereafter.”

Tbe trial judge confirmed tbe report of tbe referee, and tbe defendants, Bank of Fountain and Joe W. Fryer, appealed.

*John Hill Paylor for Farmville Building and Loan Association.*

*Skinner, Cooper & Whedbee, and Albion Dunn for Bank of'Fountain and Joe W. Fryer.*

Bbogden, J.

Tbe question is this: Under what conditions will reference in a registered instrument, to a prior encumbrance unregistered, constitute a valid and enforceable lien by tbe bolder of such prior unregistered encumbrance ?

*422Tbe principles deducible from our decisions upon tbe subject of tbe sufficiency of tbe references necessary to impart vitality to a prior unregistered encumbrance, may be stated as follows:

1. Tbe creditor bolding, tbe prior unregistered encumbrance must be named and identified witb certainty.

2. Tbe property must be conveyed “subject to” or in subordination to sucb prior encumbrance.

3. Tbe amount of sucb prior encumbrance must be definitely stated.

4. Tbe reference to tbe prior unregistered encumbrance must amount to a ratification and adoption thereof.

Tbe theory out of which these principles grow, is that tbe reference to tbe unregistered encumbrance, if made witb sufficient certainty, creates a trust or agreement that tbe property is held subject thereto. *Hinton v. Leigh,*102 N. C., 28; *Ward v. Anderson,*111 N. C., 115; *Brassfield v. Powell, 117*N. C., 141; *Bank v. Vass,*130 N. C., 592; *Piano Co. v. Spruill,*150 N. C., 168; *Blacknall v. Hancock,*182 N. C., 369; *Bank v. Smith,*186 N. C., 642; *Hardy v. Abdallah,*192 N. C., 45.

Applying tbe tests specified to tbe case now under consideration, we are of tbe opinion that tbe references in tbe deed measure up to tbe standard prescribed by law. Tbe creditor is identified, tbe amount and imrpose of tbe debt stated, and tbe existence of a prior conveyance and agreement to assume tbe indebtedness fully and definitely disclosed.

Tbe decisions in this State chiefly relied upon to sustain tbe contention of tbe defendants are *Piano Co. v. Spruill, supra,*and *Hardy v. Abdallah, supra.*Tbe reference in tbe *Spruill case, supra,*was as follows: “One MePbail Piano, now in our possession, which is free and clear of all encumbrances except $115 now due tbe Piano Company.” Tbe court held this reference to be insufficienUfor tbe reason that tbe recital did not name tbe piano company, tbe creditor, nor state bow or for what tbe $115 was due.. Tbe opinion states: “Here tbe mortgage to Spruill & Bro. does not recite any prior conveyance nor indicate that tbe mortgagees shall bold tbe property in trust to pay off sucb prior-lien and apply only tbe surplus to their own debt.” In tbe *Abdallah case, supra,*tbe only reference was in tbe warranty clause as follows: “Is free and clear of all encumbrance except one note for purchase money due in 1922.” This reference did not identify tbe creditor nor state tbe amount of tbe supposed indebtedness, nor did it refer to any conveyance at all.

However, tbe defendant contends that tbe references which have been upheld by tbe court as imparting vitality to unregistered liens have all occurred in tbe identical paper held by tbe party endeavoring to exclude tbe prior encumbrance. And, therefore, as there is no reference *423in tbe mortgage wbicb tbe defendant bolds, but only a reference in tbe original deed of conveyance, tbe principles of law referred to do not apply. Now, it must be observed, in tbe outset, tbat tbe reference occurred in a conveyance wbicb is an essential part of defendant’s title. In other words, tbe validity of defendant’s mortgage depends upon tbe validity of tbe deed from Harris to tbe plaintiffs, Hardy and wife. Tbis deed is tbe foundation of defendant’s chain of title so far as tbis controversy is concerned, and when tbe defendants took tbe notes aggregating $'5,516.25, and tbe mortgage or deed of trust securing same, they were charged by law with full notice of tbe provisions of tbe deed upon wbicb their security rested.

In tbis situation tbe defendants are met with tbe principle of law declared in *Holmes v. Holmes,*86 N. C., 206: “And it is a well established rule, tbat where a purchaser in tbe necessary deduction of bis title must use a deed wbicb discloses an equitable title in another, be will be affected with notice, and will be bound by any trust tbat rested upon him from whom be purchased.” *Manwing, J.,*in *Thompson v. Power Co.,*154 N. C., 22, states tbe same principle, quoting from 2 Pom. Eq. Juris. (3 ed.), sec. 626: “Wherever a purchaser bolds under a conveyance and is obliged to make out bis title through tbat deed, or through a series of prior deeds, tbe general rule is firmly established tbat be has constructive notice of every matter connected with or affecting tbe estate wbicb appears, either by description of parties, by recital, by reference, or otherwise, on tbe face of any deed wbicb forms an essential link in tbe chain of instruments through wbicb be must derive bis title. Tbe reasons for tbis doctrine are obvious and most convincing ; in fact, there could be no security in land ownership unless it were strictly enforced.”

Hpon tbe law as written, we bold tbat tbe judgment of tbe referee, approved by tbe trial judge, was correct, and tbe same is

Affirmed.