This action was brought to set aside a deed purporting to have been made by the plaintiff to the defendant Ella M. Dorthy, of certain real estate in the city of Rochester, also to set aside two mortgages upon the *Page 62 same real estate, executed by Ella M. Dorthy and her husband, John F. Dorthy, one to the Monroe County Savings Bank and the other to Hiram L. Barker.
Ella M. Dorthy is the daughter of the plaintiff, and the wife of the defendant John F. Dorthy.
The Special Term set aside the deed and mortgages as prayed in the complaint and the Appellate Division have affirmed the judgment.
The findings of the Special Term are in part as follows: The plaintiff became a widow in 1891 and received title from her husband of the real estate in question; her family at that time consisted of herself and daughter Ida; the latter married on the 27th day of October, 1892, and removed to Massachusetts. Prior to this, and in contemplation of the marriage, the plaintiff invited her married daughter Ella and her husband, John F. Dorthy, and their two children, to remove to the home of the plaintiff, if Dorthy would pay the taxes, keep things in repair and furnish the plaintiff with board.
In pursuance of this arrangement, and in the month of March, 1892, Dorthy and his family removed to the house of the plaintiff and continued to reside there until June, 1895.
On the 12th of December, 1892, the defendant John F. Dorthy, an attorney and counselor at law, caused to be recorded in the Monroe county clerk's office a deed purporting to have been executed and acknowledged by the plaintiff on the 31st of October, 1892, in consideration of a dollar and other valuable consideration, conveying to the defendant Ella M. Dorthy the premises in question.
On the 6th of May, 1893, the defendant John F. Dorthy delivered to the defendant The Monroe County Savings Bank a mortgage, purporting to have been executed by defendant Ella M. Dorthy and himself, to secure the payment of five thousand dollars, covering the premises.
On or about the 19th of November, 1894, the defendant John F. Dorthy and his wife, Ella M. Dorthy, appear to have executed and delivered a mortgage to the defendant Hiram L. Barker, covering the premises, as a collateral and continuing *Page 63 security in an amount not exceeding thirteen hundred dollars at any one time.
On the 2nd day of April, 1895, the savings bank began an action to foreclose its mortgage, and shortly thereafter this suit was instituted.
As the decision of the Appellate Division was unanimous, I approach the consideration of this case assuming the facts as found by the Special Term.
The additional and controlling facts are, in substance, as follows: The trial court found that, although the signature affixed to the deed is genuine, the plaintiff signed her name to the paper upon which it was written without any knowledge or information that the paper was a deed of her premises.
That the plaintiff never at any time had any intention of selling the property, and her signature was "procured by the defendant John F. Dorthy by some trick or artifice perpetrated by him in some way or manner which does not appear and is unknown to plaintiff."
That the plaintiff never acknowledged the deed before the commissioner whose certificate of acknowledgment is affixed thereto; that the signature of the commissioner to the certificate of acknowledgment is genuine, "but the same was in some manner obtained by the said defendant John F. Dorthy, in what way does not appear, but without any acknowledgment by the plaintiff to said officer, and without her authority given in any manner whatever."
That there was no delivery of the deed; that there was no consideration passing from mother to daughter; that the daughter had no knowledge of the deed until April, 1895; that the daughter, Ella M. Dorthy, executed and acknowledged the two mortgages referred to "without any knowledge or information on her part as to what the said instruments were, or that the said mortgages conveyed any interest in her mother's said premises"; that the deed and the two mortgages were duly recorded in the Monroe county clerk's office at a date prior to the loans made by the two mortgagees, respectively. *Page 64
We have, in brief, this state of facts: The plaintiff invites her son-in-law, Dorthy, a lawyer, and her daughter, his wife, to reside with her; they came in March, 1892; by October, 1892, Dorthy had procured the deed of plaintiff; the loan from the savings bank was made in May, 1893, and from Barker in November, 1894, Mrs. Dorthy executing the respective mortgages; these three conveyances were duly recorded.
The mortgagees, when loaning, found a perfect record title in the defendant Ella M. Dorthy; the signature of plaintiff to the deed is genuine; the signature of the acknowledging officer to the certificate of acknowledgment is genuine; the record of the deed in the county clerk's office is genuine. The mortgagees, relying on this record title, loaned their money, receiving from defendants Ella M. Dorthy and husband, a mortgage, in each loan, the execution and acknowledgment of which is not questioned, except that Mrs. Dorthy did not know what the instruments were that she executed.
The mortgagees insist that they are entitled to protection in a court of equity, because they are bona fide mortgagees, without notice, relying on a perfect record title; that the loss must fall on the plaintiff, who is responsible for this state of affairs, and not upon them.
Giving to the plaintiff all the advantage she can claim by reason of the facts as found, upon what does she rest her cause of action demanding the cancellation of the deed, the mortgages, the certificates of record, upon which loans have been made in the due course of business, and that these lenders go out of court losers to the extent of their respective advances?
The plaintiff says, it is true my signature to the deed is genuine, but it was obtained by my son-in-law through some trick or artifice, perpetrated by him in some way or manner unknown to me and which does not appear; the acknowledging officer says, when confronted with his signature, it is genuine, but it was obtained by defendant John F. Dorthy in some manner unknown to me and without plaintiff's *Page 65 acknowledgment; the mortgagor avers that she executed the mortgages "without any knowledge on her part as to what said instruments were."
These are the facts upon which plaintiff rests her cause of action against the mortgagees.
It is argued in her behalf that the issues in this case, while important, were issues of fact, and that the findings in her favor are an end of the case as they have been unanimously affirmed.
The argument is that because plaintiff never knowingly executed and delivered the deed it is nothing but a spurious paper, a forgery; that in order to hold her to the deed she must have consciously executed it; that if the mortgagees acted on a fictitious record, it was one in which the plaintiff had no hand or part in making; that during the time of these transactions the plaintiff was in possession of the property; that the mortgagees omitted a plain duty in not calling upon the parties to this transaction and testing the verity of the record.
This argument closes with the suggestion that the rule to the effect where one of two innocent parties must suffer from a wrong, he must bear the loss who enabled the wrong to be done, has no application to this case.
I am of opinion that the facts referred to as found are no answer to the claim of the mortgagees, and that the plaintiff is estopped from denying the execution, acknowledgment, delivery and due record of the deed, for the reason that the present situation is due to her negligent act. The plaintiff being the victim of a fraud by reason of signing a paper, the nature of which she did not take the precaution or trouble to ascertain, cannot claim protection as against bona fide mortgagees without notice. The plaintiff's counsel argues that it does not appear how the fraud was perpetrated, and that in the absence of proof it cannot be assumed that plaintiff was careless.
The facts as found show gross negligence on their face. If every one who has carelessly and negligently signed a paper *Page 66 can take refuge in the statement that he does not know how it happened, there will be little safety in dealing with instruments under seal, duly acknowledged and recorded.
It is argued that plaintiff at the time of these transactions was in possession of the property, and that consequently the mortgagees had notice of her title. The finding as to possession is that the plaintiff "continued in the possession and occupancy of said premises and of the whole thereof except as hereinafter stated."
The findings that follow show the defendants Dorthy and wife in joint occupancy of the premises with plaintiff during the period in question. This joint occupation was not inconsistent with Ella M. Dorthy's title, but rather tended to confirm it.
It was entirely consistent with the title of the apparent owner by the record. (Pope v. Allen, 90 N.Y. 298, 303; Brown v.Volkening, 64 N.Y. 76.)
The Appellate Division, referring to this argument in favor of the mortgagee appellants, said: "The proposition stated by the appellants appears to be sound, but it is immaterial in view of our assumption that the defendants are bona fide mortgagees without notice."
The suggestion that the mortgagees omitted a plain duty in not calling upon the parties to this transaction and ascertaining whether the record title was to be relied upon is without force, as the Recording Act is designed to do away with the necessity of an inquiry that would not only make the loaning of money on real estate a work of great difficulty, often involving impossibilities, but would create risks that life insurance companies, savings banks and individuals would hesitate to assume.
The public records are necessarily relied upon; they are the foundation to-day of loans representing vast sums of money. (Webb on Record of Title, §§ 4, 89, 90, 154, and cases cited.)
It was such a public record that this plaintiff by her negligent act created.
The plaintiff may set this deed aside as between herself and *Page 67 the grantee, but the intervening rights of bona fide mortgagees without notice she must respect.
In Page v. Krekey (137 N.Y. at page 312) Judge O'BRIEN states this rule with great clearness, although not writing in a real estate case: "If he actually signed the paper, though procured to do it by fraud, and is chargeable with negligence, he is liable to an innocent party who acted to his prejudice upon the faith of the instrument. Such cases are not governed by the rules applicable to the bona fide holder of negotiable paper procured by fraud, but by the equitable rule that where one of two innocent parties must suffer, he who has put it in the power of a third person to commit the fraud must sustain the loss. * * * If this instrument had been a negotiable promissory note the defendant's liability to the plaintiff would depend upon the question of negligence and there does not appear to be any sound reason for a different rule in this case (Chapman v. Rose,56 N.Y. 137 * * *)."
Chapman v. Rose (56 N.Y. 137). This case involves the legality of a negotiable instrument. The court held that any one having the opportunity and the power to ascertain, with certainty, the exact obligation he is assuming, yet chooses to rely upon the statements of the person with whom he is dealing, and executes a negotiable instrument without reading or examination, is bound as a bona fide holder for value. The theory is that he is guilty of laches or negligence in signing the instrument without reading it. He had power to know with certainty its contents, but saw fit to trust the statements of another. He thereby placed in circulation what appeared to be, on its face, a valid promise to pay. The purchaser of this promise in the open market, for value, was entitled to rely upon these facts which were disclosed upon the face of the instrument.
This case rests upon a double principle: that the maker of the instrument is liable for the acts of the person he saw fit to trust, and that the transaction may be regarded as an estoppel. This court held that to decide otherwise would be to deal a serious blow to commercial paper. There is no *Page 68 sound reason why instruments involving title to real estate should not be equally protected as to the bona fide mortgagee without notice.
In Simpson v. Del Hoyo (94 N.Y. 189) it was held that as against a purchaser in good faith and for value of a mortgage upon land, executed by one in possession of, and holding the legal title to, the land, the grantor of the mortgagor is estopped from claiming that the conveyance was induced by fraud on the part of the latter.
The rule that a purchaser of a non-negotiable chose in action takes it subject to all the equities existing between the original parties, and to all the latent equities of third persons, does not apply in such case. While the rule is well established in this court, it has a number of exceptions and this is one of them. A mortgage is never purchased on the faith of the assignor, but always in reliance upon the mortgagor's title. (McNeil v. Tenth National Bank, 46 N.Y. 335; Moore v.Metropolitan National Bank, 55 N.Y. 41; Green v. Warnick,64 N.Y. 220; Hill v. Hoole, 116 N.Y., at page 303.)
In Valentine v. Lunt (115 N.Y. 496) it is held that a grantee or mortgagee, for a valuable consideration and without notice, from one who obtained title by fraud and undue influence, acquires a good title or lien and will be protected against the claims of the defrauded vendor.
The court suggests that it would be contrary to natural justice and reason and opposed to the rules and principles of established equity by which courts are governed in cases of this nature to hold otherwise. The court here applied the doctrine of estoppel.
The principle announced in the foregoing cases is fully recognized in England.
In Briggs v. Jones (L.R. [10 Equity Cas.] 92) Briggs was the mortgagee of leasehold property and he loaned his lease to the mortgagor, for the purpose of raising money upon it, but at the same time told the mortgagor to inform the person from whom he proposed to borrow the money that he (Briggs) had a prior charge thereon. The mortgagor borrowed money from *Page 69 his bankers upon the security by a deposit of the lease without giving them notice of Briggs' mortgage thereon.
The court held, Lord ROMILLY, master of the rolls, delivering the opinion, that Briggs' lien on the lease must be postponed to that of the bankers, for the reason that by placing the lease in the mortgagor's hands Briggs had enabled him to mislead the bankers.
In Hunter v. Walters, and two other causes heard at the same time (L.R. [11 Equity Cas.] 291), the facts were as follows: Walters was a solicitor of two mortgagees, Hunter and Darnell, and put up for sale by auction, without authority, the mortgaged estate. Walters professed to have bought the estate and prepared a conveyance which purported to have been made by the second mortgagee under his power of sale. The mortgagees both executed the conveyance to Walters and also signed indorsed receipts for money paid to them, although no money was in fact paid to them. Walters took possession of the estate and continued to pay interest to the mortgagees and afterwards made an equitable mortgage of the estate, representing it to be his own and unincumbered. As to the first mortgagee there was evidence that he was deceived by the solicitor, and as to the second mortgagee there was evidence that he had trusted the solicitor implicitly.
It was held by the vice-chancellor that Hunter and Darnell, though they executed the conveyance in ignorance of its contents, had passed the estate to Walters; that they had, by signing receipts for the purchase money, armed Walters with power dealing with the estate as the absolute owner and had thereby given priority to the lien of the subsequent mortgagee. This decision was affirmed. (L.R. [7 Chancery App.] 75.)
Lord HATHERLY, lord chancellor, wrote the main opinion, and two of the lord justices also writing.
Lord Justice Sir W.M. JAMES said, in the course of his opinion: "To my mind it is almost ludicrous to contend, and it would be most injurious to hold, that a man executing a deed and signing a receipt, as a matter of form, should be able *Page 70 to say that it is a nullity." * * * "I am of opinion that the rule of equity is the rule of common sense; that the principal must suffer for the fraud of his agent and not the stranger who is dealing with the agent; that the man who has made the representations, under whatever circumstances, must bear the consequences of those representations, and not the man who has trusted to the representations so made."
The general principle under discussion has also been recognized in the courts of several of the states.
A very well-considered case, involving these principles, but under a different state of facts, is Heyder v. ExcelsiorBuilding Loan Association (42 N.J. Equity, 403). It was held there that the lien of a mortgage duly registered will not be lost by a cancellation of record effected through accident, or the mistake or fraud of third persons. If the cancellation be the result of the negligence of the owner, he will not be permitted to establish his lien against subsequent bona fide purchasers or mortgagees acting upon the faith of such cancellation of record. In this case the mortgagor was the attorney of the association and had given it a mortgage to secure a loan. The mortgagor subsequently obtained possession of the mortgage and indorsed upon it the name of the association without authority and a certificate of cancellation which was recorded. He then sold the property to a bona fide purchaser as free from incumbrance.
The trial court held that the purchaser, not the mortgagee, should bear the loss incident to the fraudulent cancellation of the mortgage, but the Court of Chancery on appeal reversed this judgment and held that the mortgagee should suffer the loss, as it was directly chargeable to their negligence or fault that the mortgagor was placed in possession of the unpaid mortgage.
Judge STORY, in his Equity Jurisprudence (Vol. I, § 434), in commenting upon the position of a bona fide purchaser for a valuable consideration, without notice, under the circumstances that we have been considering, said: "Such a person is a favorite in the eyes of a court of equity and is always protected, *Page 71 as has been already intimated against claims of this sort."
In Gavagan v. Bryant (83 Ill. 376) the grantor was deceived and told he was signing a five years' lease, when, in fact, it was a deed. He was held negligent and bona fide purchaser protected. (See, also, Lawrence v. Guaranty Investment Co., 51 Kansas, 222.)
It is urged that in some of the foregoing cases the party sought to be charged consciously and voluntarily executed a conveyance or other instrument by fraudulent inducement, and that the principle of equity therein invoked has no application to the case of one whose signature was obtained by trick or device to a paper, the character of which was unknown by reason of the carelessness or negligence of the person so signing. There is no distinction between the cases in sound reason or on authority. If A., by reason of fraudulent representations, knowingly executes a deed, he is estopped from urging the fraud against the subsequentbona fide mortgagee without notice; he trusted to the person who deceived him, and must take the consequences. If B., with utter disregard of results, signs a paper at the solicitation of one occupying a confidential relation to him, the contents of which he does not ascertain, but which was in fact a deed, can it be said that his position in a court of equity is more favorable than that of A.? He stands clearly within the rule that where one of two innocent parties must suffer from a wrongful act, he must bear the loss who enabled the wrong to be done; his position is less favorable than A.'s, for he has been guilty of negligence, while the former trusted a person he believed honest.
The plaintiff, as matter of law, on the conceded facts, is estopped from denying the acknowledgment and delivery of the deed She is, by the findings, ignorant of the trick or artifice perpetrated upon her. The deception, so far as this record goes, is a mere figment of her imagination — a suspicion. She admits her signature and stops there; as to how it was obtained, this case is absolutely silent.
The plaintiff is found to have sigued a paper, of whose *Page 72 contents she was wholly ignorant, which, unexplained, is gross negligence, and, in the absence of evidence to the contrary, it must be presumed that she parted with the instrument by voluntary delivery. (Holbrook v. N.J. Zinc Co., 57 N.Y. at top page 624.)
This case was decided below, ignoring the doctrine of negligence and estoppel, and apparently assuming that the mortgagees' rights depended upon the validity of the deed between the parties.
With all respect, I think to affirm the judgment before us is to disregard well-settled principles which have long been recognized by courts of equity, to cast discredit upon record titles, and to deter capitalists from loaning money on real estate security.
The judgment appealed from should be reversed and a new trial ordered.
O'BRIEN and HAIGHT, JJ., read for affirmance; PARKER, Ch. J., and MARTIN, J., concur; GRAY and BARTLETT, JJ., read for reversal; VANN, J., not voting.
Judgment affirmed.