Court Opinion

ID: 3490394
Source: CourtListenerOpinion
Date Created: 2016-07-05 21:20:12.803313+00
Date Added: 2024-06-11T13:54:11.525123
License: Public Domain

On July 30th, 1897, Cecil R. Atkinson executed a mortgage upon a warehouse, owned by him, on South Howard street, in Baltimore City, to Alphonzo J. Steers, which recited that he was indebted to Steers "in the full sum of fifteen thousand dollars, payable February 10th, 1898," and that it was executed to secure the payment of this debt with interest thereon.
The mortgage was in due form, was regularly acknowledged and had attached to it a proper affidavit as to the bona fides of the consideration therein stated, and it was recorded on the day after its date. No note accompanied the mortgage but it contained a covenant to pay the mortgage debt and interest.
About the same time Steers, the mortgagee, applied to the American National Bank to lend him $6,000, offering to assign the mortgage as security for the loan. Schott, the cashier of the bank, explained to him that a national bank could not lend money upon real estate security, but informed him that the appellant savings bank, of which he (Schott) was treasurer, had some money on hand and would lend him $5,000 upon the mortgage if the security proved to be ample, but the matter must first be referred by the appellant to a committee who would investigate and report upon the security. Steers assented to the terms suggested by Schott and a committee from the appellant went upon the mortgaged premises and examined them and reported favorably upon the loan, provided there were no incumbrances upon the property prior to the mortgage. The matter was then referred by the appellant to its attorney to examine the title, Steers placing the mortgage in its hands for that purpose. The attorney examined the title and reported favorably upon it, whereupon the appellant, on August 6th, 1897, lent the $5,000 to Steers, and at the same time took from him an assignment of the mortgage as security for the loan.
The $5,000, so loaned, was given to Steers in the check *Page 499 
of the appellant to his order upon the American National Bank in which the appellant had on deposit at that time more than the amount of the check. Steers endorsed the check to the Eastern Electric Company, which at once deposited it to its own credit in the bank upon which it was drawn, and the $5,000 was passed to the credit of the Electric Company and charged to the appellant upon the books of the bank. The money was then used by the Electric Company to the extent of $2,000, in the payment of a loan which had been made by one Myerdirck upon a previous unrecorded assignment of the Atkinson mortgage, and the remaining $3,000 was almost entirely paid to the American National Bank in satisfaction of obligations due to it by the Eastern Electric Company, or by Geo. H. Atkinson, a brother of Cecil R. Atkinson, the mortgagor. Steers subsequently assigned his equity in the $15,000 mortgage to one C.S. Hinchman as collateral security for a loan of $2,000.
It appears from the record that Cecil R. Atkinson, the mortgagor, and his four brothers, William J., George H., Harry and Richard F., were promotors by profession, and together operated and controlled the Eastern Electric Company and other kindred corporations, all of which proved to be speculative enterprises and soon became insolvent and passed into the hands of receivers. Steers, who was put upon the stand by the appellees, testified that the consideration for the $15,000 mortgage from Atkinson to him consisted of $10,000 of Best Telephone Company bonds and $5,000 of Best Telephone Company stock which he had let Atkinson have prior to the execution of the mortgage, but his testimony was so inconsistent and contradictory in its different portions that it cannot be accepted as reliable. The whole testimony touching the consideration for the mortgage leads to the conclusion that there was no substantial consideration for it, but that it was executed to provide a means of raising money to assist the Atkinson brothers in staving off the impending insolvency of the Eastern Electric *Page 500 
and Best Telephone Companies and the other enterprises which they were then attempting to keep afloat.
On December 29th, 1897, nearly five months after the loan of the $5,000 to Steers by the appellant and the assignment to the latter of the mortgage, Douglas H. Gordon, one of the appellees, obtained a judgment for $5,442.30 against the mortgagor, Cecil R. Atkinson, and his brother, Wm. J. Atkinson, on a note given by them to him on Nov. 13, 1896, for a loan which he then made to them upon Best Telephone Company bonds and stock as collateral. Gordon testified that at the time he made this loan Wm. J. Atkinson stated that his brother, Cecil R., owned the Howard street warehouse, and he, Gordon, suggested that he be given a mortgage on the warehouse as security for the loan about to be made by him. W.J. Atkinson declined to procure the mortgage, saying that it would injure his brother's credit, but stated that Gordon would have the benefit of the property by having its owner, Cecil R. Atkinson, upon the note. Gordon testified that he relied on this statement of Wm. J. Atkinson in making the loan.
Harry W. Boreau, the other appellee, obtained a judgment for $503.80 against Wm. J. Atkinson and Cecil R. Atkinson, on Sep. 29, 1897.
On Dec. 18, 1897, after Boreau had obtained his judgment and after Gordon had sued the Atkinsons, but before he had gotten his judgment, the appellees instituted the present case, which is a creditor's suit in equity against the appellant, Cecil R. Atkinson, Steers and Hinchman. The bill of complaint alleged that the mortgage from Atkinson to Steers and the successive assignments of it by him to the appellant and Hinchman were all without consideration and fraudulent and prayed to have them declared void. The appellant answered the bill denying its material allegations and setting up its title to the mortgage to the extent of the $5,000 loaned on it and interest as a bonafide purchaser for value without notice of any infirmity in it. Neither Hinchman nor Steers answered and a decree pro confesso
was entered against them. *Page 501 
The case against the appellant came regularly to a hearing and the Court below at first filed an opinion sustaining the appellant's claim, but upon a rehearing of the case the learned judge changed his views of the case and filed another opinion of a contrary tenor and signed the decree appealed from, denying the appellant's claim to a lien on the property and directed it to be sold for the benefit of the creditors of the mortgagor. In his second opinion the learned judge held, upon the authority of theCumberland Coal and Iron Co's. case, 42 Md. 598, that the appellant, although he found it to be a bona fide purchaser for value of the mortgage without notice, was not entitled to a lien for its loan to Steers and interest, made upon the faith of the mortgage, because the latter not being accompanied by a negotiable obligation was a mere chose in action which the appellant must be treated as having taken subject to all equities that might have been urged against it in the hands of Steers, the mortgagee.
Under the facts of the case the appellant must be regarded as abona fide purchaser for value of the mortgage without notice. It advanced its $5,000 upon the mortgage in the ordinary course of business after a careful inquiry into to the value of the property and an investigation of the title upon the public records. It was not concerned in the disposition made by Steers of the borrowed money, not one dollar of which went back into its hands or was expended for its benefit. It was not put upon inquiry as to the bona fides of the mortgage by the fact that Schott, its treasurer, was also cashier of the American National Bank, where Steers and the Eastern Electric Company and one or more of the Atkinson brothers kept their accounts, and that he might have seen, by an examination of the books of the bank, what disposition was made of the borrowed money. There was, in fact, nothing in the use made of the money to suggest any infirmity in the mortgage.
The next question to be determined is what are the rights of the appellant, as such bona fide purchaser, against *Page 502 the claims of the appellee. As there was no attempt by Steers to assign the mortgage debt to one person and the mortgage to another, we are not called upon to consider the relative equities of one who claims as assignee of the debt and another who claims as assignee of the mortgage, as the Court were in the cases ofClark v. Levering, 1 Md. 178, and Byles v. Tome,39 Md. 461, which were in part relied on by the appellees. What we have to consider is the attitude of the appellant as the bona fide
purchaser of both debt and mortgage towards the creditors of themortgagor, who were such at the time the mortgage was made.
The mortgage was not given to secure an actual indebtedness of fifteen thousand dollars as it professes on its face to have been. Its execution was evidently a means adopted by the parties to it to clothe Steers, the mortgagee, with the appearance of a good title to a large debt secured by a valid mortgage in order to enable him to raise money upon it. It was not fraudulent in the sense that its execution had been procured by fraud, misrepresentation or constraint practiced on the owner of the land who executed it, as was the case in Central Bank v.Copeland, 18 Md. 305, and The Cumberland Coal and Iron Co. v.Parrish, 42 Md. 598, in each of which the defrauded mortgagor
was protected in equity against the assignee of the fraudulent mortgage. In the present case the execution of the mortgage was the voluntary and deliberate act of the mortgagor from which he had no equity to be relieved, even as against the mortgagee.Snyder v. Snyder, 51 Md. 77; Cushwa v. Cushwa, 5 Md. 44. We have, therefore, no question before us of subjecting the rights of the appellant as assignee of the mortgage to any equities to which the assignor would have been liable in favorof the mortgagor, for here it is plain that there were no such equities.
The present mortgage is to be regarded as fraudulent only in the sense that having been made to secure a simulated and not a real indebtedness it operated to hinder, delay or defraud the creditors of the mortgagor, and was, therefore, *Page 503 
obnoxious to the provisions of the Statute of 13th Eliz., ch. 5.
The real question in the case is thus narrowed down to a comparison of the relative strength of the claims on the mortgaged property of the appellant, as assignee of the specific lien of the mortgage, and the appellees, as subsisting general creditors of the mortgagor, having reduced their debts to judgments after the assignment of the mortgage had been made.
If the conveyance under consideration had been a fraudulent deed instead of a mortgage, the right of the appellant as a bonafide purchaser to a lien on the property for the $5,000 advanced and interest could not seriously be questioned. Cone v.Cross, 72 Md. 102; Hull v. Deering, 80 Md. 432; Hinkle v.Wilson, 53 Md. 293; Worthington v. Bullitt, 6 Md. 198. The broader and more general proposition, that a bona fide
purchaser without notice under a deed from a fraudulent grantee takes a good title which is not impaired by the fact that judgments were obtained against the fraudulent grantor prior to the conveyance by the fraudulent grantee, is well sustained by authority. 4 Kent Com., 464; Sleeper v. Chapman,121 Mass. 404; Phelps v. Morrison, 24 N.J. Eq. 195; Totten v.Brady, 54 Md. 170; Swan v. Dent, 2 Md. Chy. 111, note 9, Brantly's ed.; Wait on Fraud Conv., sec. 369.
In the case of Farmers' Bank v. Brooke, 40 Md. 257, the title of a bona fide purchaser of a mortgage note to the lien of the mortgage securing it was upheld against the suit of the creditors of the mortgagor, although it was admitted that the note and mortgage had been given in prejudice of the rights of his creditors, and would have been void as against them in the hands of the mortgagee. The fact that the mortgage in that case was accompanied by a promissory note distinguishes it from the case at bar, but the circumstance of the negotiability of the mortgage debt was not expressly mentioned or dwelt upon in the Court's opinion. See also Danbury v. Robinson, 14 N.J. Eq. 218
-219. *Page 504 
A bona fide mortgagee from a fraudulent grantee has in a number of cases been held to be entitled to protection, to the extent of the debt due him against the creditors of the fraudulent grantor upon the ground that a mortgagee is to be treated as a purchaser to the extent of his interest within the meaning of the term purchaser as used in statutes such as that of 13 Eliz. Ch. 5, and this where the mortgage was not accompanied by a negotiable instrument. Ledyard v. Butler, 9 Paige Chy. 136-7; Murphy v. Briggs, 89 N.Y. 451; Shorten v.Drake, 38 Ohio St. 76; Moore v. Metropolitan Bank, 55 N.Y. 41.
If the mortgage in the present case had been made directly from Cecil R. Atkinson to the appellant no question could be made by Atkinson's creditors as to the appellant's lien upon the mortgaged property to the extent of the money advanced bonafide upon the faith of the property at the time the mortgage was made. When, therefore, Atkinson clothed Steers with the appearance of a good mortgage title of record to the property, for the purpose of enabling him to raise money upon the mortgage, and the appellant, relying upon this appearance of good title in Steers, after a careful examination of the public records and a failure to find any prior incumbrances upon the property, parted with its money in good faith, it is entitled to the favor of a Court of Equity in the consideration of the relative equities of the parties to the controversy. This Court in Seldner v.McCreery, 75 Md. 296, said, "where title is perfect on its face and no known circumstances exist to impeach it, or put a purchaser on inquiry, one who buys bona fide and for value, occupies one of the most highly favored positions in the law."
The appellant did not trust to the personal responsibility of the mortgagor but lent its money upon the faith of the particular property covered by the mortgage and required an assignment of the mortgage at the time of so doing. On the contrary the appellees trusted to the mortgagor or to such other collaterals as he lodged with them, and the appellee *Page 505 
Gordon, although he knew when he lent his money that Cecil R. Atkinson owned the Howard street warehouse, did not insist upon having a lien on it for his loan, but deliberately relied, so far as the warehouse was concerned, upon his rights as an ordinary creditor of its owner. The equities of the appellant are at least equal to those of the appellees and having the legal title to the warehouse it has the stronger claim thereon, under the familiar principle that where equities are equal the legal title must prevail. Pomeroys' Equity, 417; Wait on Fraud. Conv., 370;Townsend v. Little, 109 U.S. 512; Black v. Cord, 2 H. 
G. 103; Bassett v. Nosworthy, 2 Lead. Cases in Equity, 4th Am. Ed. 1.
In Dyson v. Simmons, 48 Md. 214, it was held, upon the authority of many cases there cited, that if a party makes or affects to make a mortgage, which proves to be defective by reason of some informality or omission even on the part of the mortgagee himself, the conscience of the mortgagor is bound, and equity will recognize and enforce the lien of the defective mortgage and give it precedence over the subsisting creditors of the mortgagor and also over judgments obtained against him after the date of the mortgage. General creditors have no lien on the property of the debtor, and a judgment is only a general lien and is for that reason subordinate to the prior specific equitable lien of such a defective mortgage. The case at bar does not come directly within the principle asserted in the last mentioned case but it is certainly one in which by reason of its peculiar facts the conscience of the mortgagor was especially bound to the appellant and we think that the same course of reasoning might well be applied, within proper limits, to the appellant's protection.
This Court has frequently been called upon to assert and define the rights of the creditors of a grantor as against a conveyance made by him which, by reason of inadequacy or want of consideration or even by design, operated to hinder, delay or defraud them. The Court has not hesitated to strike down such conveyances at the suit of the creditor, *Page 506 
holding that one cannot make a voluntary conveyance of his property as against the rights of subsisting creditors, nor can he, as against such creditors, sell it for a consideration that bears no adequate relation to its real value. When, however, in such cases the rights of the parties, even if they were the immediate grantees under the conveyance, who had in good faith parted with value in reliance upon the conveyance, have had to be measured against those of the creditors, it has uniformly been held that in order to do full justice to all the parties in such cases a Court of Equity in setting aside the deed will allow it to stand as security for the consideration actually paid and apply the balance to the payment of the vendor's debts. These propositions were distinctly upheld in the cases already cited ofCone v. Cross, Hull v. Deering, Hinkle v. Wilson andWorthington v. Bullitt.
We regard the principle of the last mentioned cases, in none of which was the position of the party claiming under the conveyance strengthened by any element of negotiability in the subject-matter of the thing assigned to him, as properly applicable to the one at bar. The mortgaged property should be sold and the proceeds of sale, after deducting proper expenses, applied first to the payment of the $5,000 lent by the appellant to Steers with interest thereon, and then to the payment of the creditors of Cecil R. Atkinson, the mortgagor, who have come or may come into the case, according to their legal priorities.
We do not mean by this decision to disturb the authority of theCumberland Coal  Iron Co.'s case upon which the learned Judge below mainly relied in changing his opinion, nor that ofCopeland's case. In each of these cases the issue on trial was between the owner of property who had been fraudulently induced to execute a mortgage upon it, and an assignee of the fraudulent mortgage and they were both cases of flagrant fraud in fact. The rights of the creditors of the grantor were not in issue in either case. In Cumberland Coal  Iron Co.'s case the Court asserted the *Page 507 
proposition that the transfer of a mortgage is so far within the rule which applies to choses in action that when the assignment is made without the concurrence of the mortgagor, as in that case, the assignee takes subject to the same equities and defences to which the assignor was liable. We do not, however, understand the Court by what was said in that opinion to intimate that when the equities in behalf of the creditors of the mortgagor in such a case came to be asserted, their claims would be enforced without regard to the proposition, so frequently upheld by this Court in setting asside fraudulent conveyances at the suit of the creditors of the grantor, that in order to do justice to all parties in such cases the conveyance will be allowed to stand as security for the consideration actually paid on the faith of it by the party holding the legal title under it.
Decree reversed and cause remanded for further proceedings inaccordance with this opinion.
(Decided January 10th, 1900).