Reeves v. Hayes

Elliott, C. J.

John S. Hayes executed to William E. Reeves, guardian, a mortgage to secure the payment of three promissory notes evidencing the unpaid purchase-money of land sold to him by the guardian, and dated September 1st, 1873; afterwards Hayes sold the land to Len M. Copeland, who executed nine promissory notes for the purchase-money and also executed a mortgage; three of these notes were paid; prior to November 6th, 1874, one of them, number four in order of priority, wasassigned to the First National Bank of Newcastle; on the day named Hayes assigned to Reeves, guardian, the notes,in order of priority numbers six and eight, in exchange for the first notes executed by the former to the latter, and delivered, at the time, the mortgage executed by Copeland; on the 7th day of June, 1875, seven months after Reeves, guardian, had acquired the notes and mortgage by assignment, his assignor and original debtor, executed a release to Copeland which was placed on record; after the execution of this release and its entry of record, William Wilson lent to Copeland $2,000, and took as security a mortgage on the land bought of Reeves, guardian. The contest is as to who has the prior lien Wilson or Reeves and the Bank of Newcastle, the court below holding that Wilson’s lien was superior to that of the appellants.

Prior to July, 1877, there was no law in force in the State authorizing assignments of mortgages to be recorded. This was the ruling in Hasselman v. McKernan, 50 Ind. 441, and while some of those who concur in this opinion regret that decision, we feel bound by it, for the reason that it has never been disapproved, but, on the contrary, has been repeatedly approved and followed. Coombs v. Carr, 55 Ind. 303; Dixon v. Hunter, 57 Ind. 278; Cain v. Hanna, 63 Ind. 408; Hosford v. Johnson, 74 Ind. 479. There is, therefore, an unruffled current of decisions upon this subject, but there is more, the Legislature accepted the court’s construction of the statute and passed an act providing for the recording of assignments, so that we have the concurrent action of two of the great departments of government. R. S. 1881, section 1093.

It is perfectly well settled that notice is never imparted by the recording of an instrument which the law does not authorize. In Deming v. State, ex rel., 23 Ind. 416, it was held that a mortgage, not acknowledged according to law, could not be legally recorded, and that, although actually entered of record, it did not constitute notice, the court, by Frazer, J., saying: “ We suppose there can be no question, that the fact that the mortgage was actually recorded, without being acknowledged or approved, as the statute required to entitle it to be recorded, is not notice.” If it be true, as undeniably it is, that such a registration is not notice, much stronger the reason for holding the record not notice where there is no law authorizing the recording of the instrument. That is the case here, for there is not merely a defective execution of an instrument, but an absolute absence of authority for recording it. Caldwell v. Williams, 1 Ind. 405; Brown v. Budd, 2 Ind. 442; Taylor v. City of Ft. Wayne, 47 Ind. 274; Westerman v. Foster, 57 Ind. 408. Judge Story says, in speaking of the registry of instruments: "If they are not authorized or required to be registered, or the registry itself is not in compliance with the law, the act of registration is treated as a mere nullity.” 1 Story Eq., section 404.

The appellants could not have done more than they did do. The recorder could not have recorded the assignment without a violation of his duty, and even if he had actually recorded it, his action would have been a mere nullity. There can be neither fault nor negligence where one does all the law permits him to do. Purdy v. Huntington, 42 N. Y. 334 (1 Am. R. 532). See opinion, Sutherland, J., 1 Am. R. 541. It was impossible for the appellants to have given notice, for there was no-way in which it could be done. They acquired rights in good faith, have been guilty of no fault, they are " equal in equity, and prior in point of time, and we know of no principle which will warrant the courts in depriving them of their rights.

The contesting parties in this case are equal in equity, for both parted with value, and the appellants, as we have seen, were not, in anywise, in fault; therefore the maxim, " Where there are equal equities, the first in order of time shall prevail,” must be the governing rule. 1 Pom. Eq., section 413.

The' authority of the mortgagee to release the mortgage terminated with the assignment. A recent writer thus states the rule: "After an assignment of the mortgage note the mortgagee can not discharge the mortgage if the note be ne- , gotiable and it be assigned to an innocent party, before due and for a good consideration, although the note be without any consideration; and satisfaction so entered will be vacated by a court of equity.” At another place this author says:, “ The notes in such a case become the evidence of the mortgagee’s authority to enter satisfaction of the lien.” 1 Jones Mort., section 814. In McCormick v. Digby, 8 Blackf. 99, it was held that the mortgagee had no authority to enter satisfaction after assignment, and this decision has received uniform approval from the text-writers. 4 Kent Com. 194; 1 Hilliard Mort. 230; 2 Washb. R. P. 129; Thomas Mort. 418; 1 Jones Mort., section 814.

The release entered by the mortgagee after assignment of the notes was ineffective, and the only ground on which the assignees can be even plausibly said to have lost their rights is that of negligence. But it is legally impossible to conceive them guilty of negligence, for they had done nothing wrong, and had omitted nothing that they could do. If there had been a law authorizing the recording of assignments, then a very different question would face us.

Promissory notes are articles of commerce, and pass from hand to hand by barter and sale. The transfer of a note carries the mortgage, for the former is the principal and the latter the incident. This is in accordance with the universal rule that the grant of the principal thing carries all the incidents. Matthews v. Wallwyn, 4 Vesey, 118; Jackson v. Blodget, 5 Cowen, 202; Green v. Hart, 1 Johns. 580; Johnson v. Hart, 3 Johns. Cas. 322. In Hubbard v. Harrison, 38 Ind. 323, it was said: “ The assignment of a mortgage, independent of the debt which it is given to secure, is an unmeaning ceremony.” It has always been the law of this State that the assignment of the note carries the mortgage. Blair v. Bass, 4 Blackf. 539. In Hough v. Osborne, 7 Ind. 140, the court said: “The only thing easily perceivable as to the transfer of the mortgage security without the notes, was its futility.” Garrett v. Puckett, 15 Ind. 485; Gower v. Howe, 20 Ind. 396.

The assignment of a note negotiable by the law merchant carries the mortgage security, and in the hands of a bona fide holder the security is protected to the same extent as the note itself. Gabbert v. Schwartz, 69 Ind. 450; Bayless v. Glenn, 72 Ind. 5; Carpenter v. Longan, 16 Wall. 271; 1 Dan. Neg. Inst. 834; Clemens Corp., sec. 158.

Promissory notes may be transferred by delivery. Hancock v. Ritchie, 11 Ind. 48; Speelman v. Culbertson, 15 Ind. 441; 1 Dan. Neg. Inst., section 729. So may a mortgage. 3 Pomeroy Eq. Jur., section 1210; 1 Jones Mort. 813. But. here there was a written assignment of the notes and a delivery of the mortgage. The appellants by the assignment to them of the notes acquired title, and' as they acquired the notes they also apquired the mortgage securing them. It would not have added to the strength of their title to have taken a written assignment of the mortgage, because, under the law as it stood at the time, no assignment could have been admitted to record. The fact that no written assignment was taken does not impair their rights or show them to be in fault, for the reason that had they taken one it would not have enabled them to give constructive notice by registry.

Cases decided in States where the law provides for the registry of assignments can not be in point in a State where there is no law authorizing them to be recorded. This is the essential difference between many of the cases cited in argument and the one at bar. We must turn'to the common law for information, because, as there is no statute authorizing assignments to be recorded, we must look to the rights of the parties as they existed in the absence of such statutes. The case of James v. Morey, 2 Cowen, 246, was very ably argued, and the subject very carefully considered. Opinions were read by the Chief Justice and several other members of the court, and it was held that the assignee took absolute title as against subsequent mortgagees and bona fide purchasers, for the reason that there was no law authorizing the assignment of a mortgage to be recorded. Woodworth, J., in the course of his opinion, said : “ I have not met with any case that places the rights of the assignee on other or different ground, or that gives countenance to the suggestion, that the assignee must, at his peril, give notice to a subsequent assignee, or purchaser from the mortgagee. Such a doctrine is not only most unreasonable in itself, but would shake the foundation of security by mortgage assignment, hitherto deemed equal to that of the original mortgage, with the exceptions I have stated. It would, in fact, be no security, beyond the responsibility of the person making the assignment; for the assignee has no means of ascertaining how often, and to whom, the mortgagee may have subsequently assigned. Such notice is not necessary for the protection of a subsequent purchaser. The registry of the original mortgage is notice to him of its existence. If he will deal without asking for the mortgage or requiring it to be cancelled, he comes, without a semblance of equity, to demand that the prior bona fide assignee shall be postponed to his claim.” Again, the judge says: “ But is this pretended hardship anything more than every purchaser of land was liable to, since the existence of this government, until the last act requiring deeds to be recorded? Every grantpr had the power of conveying a second time,r,and no doubt the power was sometimes exercised by fraudulent .individuals. It was never seriously urged that the second purchaser had any remedy against the first purchaser, because his deed was not recorded or notice given.” Sutherland, J., said: “ If I have been successful in showing that the assignee is not bound to record the assignment, and that a voluntary registry would not be constructive notice to any person, then it necessarily follows, that whatever notice is required to be given must be actual and not constructive; for I know of no other act which can be supposed the assignee was bound to perform, from which notice could be inferred, except the act of registering. Now it is utterly impossible for the assignee of a mortgage to know with whom the mortgagee may subsequently deal in relation to the mortgaged premises.” Chief Justice Savage said: “I know of no law requiring the assignment of a mortgage to be recorded. If notice of the assignment is not given to the mortgagor, he is protected in any payments he may make to the mortgagee. And this is the extent of the risk run by the assignee, who neglects to give notice of the assignment.”

A second mortgagee who finds on record a mortgage receives notice of its existence, and he must ascertain whether the release was executed by one having authority, for he is bound to know, as matter of law, that notes secured by mortgage are transferable as articles of commerce, and that, after transfer the mortgagee has no right to release the mortgage. He is bound, also, to know that he can obtain no notice from the record, because the law does not authorize the recording of assignments, and that he must, therefore, look elsewhere for information.

Where notice can not be given by registry, then one who takes an interest in mortgaged property must ascertain that the person assuming to felease the mortgage is the holder of the notes -which it secures. It is unquestionably the law that where notice of title can not be given by record, the person seeking to secure rights must ascertain who is the owner of the mortgage, by tracing the notes to the hands of the assignees. It is said by Jones that “ Purchasers are bound to know that if the mortgagee has endorsed the notes before maturity to' a bona fide holder, the mortgagee has no longer authority to satisfy the mortgage; and therefore they are bound to ascertain whether the mortgagee still held the notes at the time.he discharged the mortgage.” 1 Jones Mort., section 814. In Wolcott v. Winchester, 15 Gray, 461, it was said : “As a purchaser, he must have known that the possession of the debt was essential to an effective mortgage, and that without it he could not maintain an action to foreclose the mortgage. The not finding it in the possession of the mortgagee, and not stipulating for any transfer of such debt, are circumstances that should estop him from setting up any title against a bona fide purchaser of the debt, who had possession of the bond and an assignment of the mortgage in due form to vest the legal estate in him as against the assignor, and only defective as to any others, in not being recorded.” The case of Kellogg v. Smith, 26 N. Y. 18, holds that the purchaser of a bond and mortgage, who fails to require the production of the bond, is chargeable with notice of defects in his assignor’s title. A much stronger case than those cited, or the one at bar, is that of Burhans v. Hutcheson, 25 Kan. 625, S. C. 37 Am. R. 274, where it was held that one who paid a commercial note secured by mortgage, without ascertaining that the note had not been transferred, did so at his peril, even though the statute authorized the recording of assignments ■of mortgages.

It must be held that the purchaser of a note secured by mortgage, who can not give record notice of his rights, is entitled to protection as against subsequent encumbrances, or we must deny the negotiable value of such instruments. It is well said by Mr. Daniel, in maintaining the soundness of the rule we have stated, that “ The security of the mortgage may impart to the paper its marketable ■ value, as in the case of corporation coupon bonds, which rests mainly upon the basis of such security for their payment. And to sever the basis of credit from the obligation to pay would most frequently defeat the negotiation of these, or similar instruments, at anything like their par value.” Dan. Neg. Inst., sec. 834.

It is impossible for one who acquired title to a mortgage by assignment prior to the act of 1877, to give notice of his title to all who might afterwards become interested'in- the mortgaged premises; all that he could do would be to take an assignment of the note and mortgage. On the other hand, it is both possible and practicable for one about to take a •second mortgage, to ascertain whether the original mortgagee had authority to execute a release. ■ No principle of law or ■equity will justify a holding that one who has omitted inquiry, where a duly recorded’ mortgage suggests inquiry and proclaims that action without inquiry is hazardous, shall be preferred to one who has acquired rights in good faith and has omitted nothing which the law permitted or required at his hands. Campbell v. Vedder, 3 Keyes (N. Y.) 174.

The ease of Trustees, etc., v. Wheeler, 61 N. Y. 88, is not in point, because the person in whose favor the mortgage was released had acquired an interest in the land prior to the assignment of the non-negotiable bond secured by the mortgage. The case of Bank of the State v. Anderson, 14 Iowa, 544, is confessedly against the weight of authority, and is the decision of a divided court, followed in the subsequent case of McClure v. Burris, 16 Iowa, 591, with evident reluctance, and yielded to upon the ground of stare decisis. More than this, the recent case of Bowling v. Cook, 39 Iowa, 200, clearly shows that it is sustainable on the ground that the law authorized the recording of the assignment. In proof of this we quote the following: “The subsequent mortgagee would not be affected by an assignment of a prior mortgage unless charged with actual notice or the assignment has been duly recorded. Following this doctrine, we hold that if the party executing the second mortgage appear from the record to be the one to whom the first was executed and its assignment is not shown by the record, the equities of the second mortgage are superior to the first.” It is apparent, therefore, that the doctrine of the Iowa courts does not apply to a case where there is no law authorizing the recording of the assignment. Summers v. Kilgus, 14 Bush, 449, goes off on two points, one that the mortgage was executed to secure an antecedent debt, the other that the statute of Kentucky authorizes the recording of assignments of mortgages.

Of the case of Fox v. Wray, 56 Ind. 423, it is only necessary to say that the point here in judgment was there neither discussed nor decided. Ayers v. Hays, 60 Ind. 452, does decide this question and against the views here declared, but it is evident that in that case the court proceeded on the theory .that assignments were entitled to record. We quote from the opinion the following: “ In the case at bar, there was nothing on record, when Hays and Butcher purchased the mortgaged property, indicating that Campbell had parted with the note in suit, or that it remained unpaid, or that Campbell was not fully authorized to enter satisfaction of the mortgage, or had made any mistake in such entry of satisfaction.” The whole force of the reasoning in that case is parried when it is considered that as there was no statute authorizing the recording of such instruments, the registry would have been an idle and unmeaning act. There are cases in our reports fully and directly sustaining the doctrine we now lay down. Directly in point is the case of Dixon v. Hunter, 57 Ind. 278, where the precise question was decided,, and was the one on which the. case turned. The language used in that case was very strong, the court saying that the proposition was too clear for argument. The third point decided in Lapping v. Duffy, 47 Ind. 51, is thus discussed: “It is also said,'that it was claimed by the incumbrances whose liens accrued after the entry of satisfaction of the mortgage was made by McClung, that they ought to be protected as purchasers for value, and without notice. We do not think so. According to the allegations of the complaint, McClung, at the time he entered satisfaction of the mortgage, .had no interest whatever in the debt, and made the entry without lawful right or authority. It is impossible that his act could, under these circumstances, be binding or obligatory on Lapping and Kerr, or could in any way affect their rights.” The case cited again came before this court, and although the former decision was expressly referred to, no question was made as to its soundness. The opinion delivered on the second appeal does, indeed, declare a principle which has an important bearing on the present case, for it declares that the recording of an instrument not required by law to be recorded is notnotice. Lapping v. Duffy, 65 Ind. 229. The case of Lapping v. Duffy, 47 Ind. 51, has been cited with approval in other cases than Dixon v. Hunter, supra, among them, Marshall v. Stewart, 65 Ind. 243, Teal v. Hinchman, 69 Ind. 379, Evansville, etc., Co. v. State, ex rel., 73 Ind. 219 (38 Am. R. 129), Hunt v. Elliott, 80 Ind. 245 (41 Am. R. 794); and Dixon v. Hunter, supra, is also cited in the first of these cases. On the other hand Ayers v. Hays, supra, does not, so far as we can ascertain, appear to have been even cited in any subsequent case. Burton v. Reagan, 75 Ind. 77, did not involve the question, for in that case the-answer averred that the appellants had notice of the rights of Hadley before the notes were assigned to them, and the question could not have possibly arisen. The case of Etzler v. Evans, 61 Ind. 56, is in harmony with Dixon v. Hunter, supra, rather than with Ayers v. Hays, supra. It was said in that case by Niblack, J., speaking for the court: “ Did the statement in writing, which the defendant John E. McClellan attached to the mortgage l’ecord, alleging that the consideration upon which the entry of satisfaction of the mortgage had been made had failed, operate- as constructive notice of the matters contained in such statement? We are of the opinion that it did not. It was not an instrument which the-law authorized to be recorded,”and “no one is bound to take-notice of the recoi’d of it.” It seems to us that if a statement attached to the entry of satisfaction, actually although not x'ightfully on the record itself, can not be regarded as impairing rights or putting persons in default, certainly no one can be in default for not recording what, in legal contemplation, it was utteidy impossible for him to record. We feel that it is our duty to follow Lapping v. Duffy, supra, and Dixon v. Hunter, supra, because they are in harmony with our own decisions, and because they are supported by sound principle.

It will be observed that the case of Hasselman v. McKernan, supra, has never been questioned, and that there is an unbroken line succeeding it, while, as between Ayers v. Hays, supra, and Dixon v. Hunter, supra, there is irreconcilable conflict, and we must choose one or the other of them. There is no other alternative. If we overrule Hasselman v. McKernan, supra, we carry down many cases .and overturn the construction of a statute acted upon by the Legislature; while if we follow Lapping v. Duffy, supra, and Dixon v. Hunter, supra, and reject Ayers v. Hays, supra, we simply elect between two contradictory lines of decisions, and we think it far better to make choice of one of the two conflicting lines than to introduce more doubt and confusion by overruling Hasselman v. McKernan, supra. In the one case, we should unsettle what is harmoniously settled; in the other, we elect to follow one of two contradicting views, and disturb no settled and harmonious line of adjudications.

Filed March 25, 1884.

Petition for a rehearing overruled May 28, 1884.

The form which the case assumes in this court by the method of appeal, and by the character of the assignment of errors, precludes us from determining the equities of the appellants as between themselves, but the issues will have to be reopened and the entire proceedings changed and pleadings remodelled, for the error in adjudging Wilson’s lien to be the prior one pervades the entire cause.

Judgment reversed, with instructions to proceed in accordance with this opinion.