Rolette County Bank v. Hanlyn

Birdzell, J.

This is an appeal from an order sustaining the separate demurrer of the defendant, William H. Allen, to the complaint upon the ground that the complaint did not state facts sufficient to constitute a cause of action against him. The action is one brought primarily to charge land purchased by Allen with a lien in favor of the plaintiff, securing a note purchased by the latter from Thomas J. Clifford, the former owner of the land. The facts pleaded in the complaint, so far as material to the legal question presented upon this appeal, are as follows:

On October 5, 1916, Thomas Clifford was the owner tif certain lands in Rolette county. On that date he entered into a contract with one Josephine Howe, later Josephine Hanlyn, for the sale of the land to her. The terms of payment were $300 upon delivery of the contract, $1200 March x, 1917, $11,555.00 according to the terms of 11 promissory notes for $1000 each, due one each year beginning November 1, 1917, and one note for $555, due November r, 1928. Josephine Howe paid $2500 under the contract, which included all payments due to November 1, 1917- The contract was recorded August 8, 1918. Prior to July 22, 19x8, Clifford transferred to the plaintiff bank the $1000 note which would fall due November 1, 1919, the bank taking the note as a holder in due course. On December 26, 1918, Clifford sold the land covered by the contract to the Farmers National Bank of Hendricks, Minnesota, conveying title by warranty deed. The bank assumed and agreed to carry out the contract with Josephine Plowe. Subsequently the grantee bank, through its cashier, G. h. Peterson, procured a quit-claim deed from Josephine Howe Hanlyn, quit-claiming to him all her interest in and to the land, Peterson agreeing, as part of the consideration therefor, “to pay the balance of the purchase price upon said land, then owing by the said Josephine Howe Hanlyn, including the plaintiff’s note herein, and the whole of said amount remaining due on account of said contract.” (This is the allegation in the complaint; the obligation is not alleged to be contained in the quit-claim deed). The quit-claim deed and all Peterson’s transactions concerning the land were taken and had for the benefit, of the Farmers National Bank and with its full knowledge, consent and authority. Thereafter, on November 6, 1919, the Farmers National Bank sold and conveyed the premises by warranty deed to the defendant Allen for a consideration of $x8,000.00 and Allen is now the record owner. The plaintiff asks that as to it the conveyance of the property by Clifford to the Farmers National Bank and by the bank to the defendant Allen be adjudged null and void; that the plaintiff be adjudged to be the equitable owner of the land by virtue of its ownership of the $1000 note; and that it be adjudged to have a lien upon the land for the payment of this note, protest fees, interest, costs and disbursements, such lien to be prior and superior to the rights of the defendants.

From the facts pleaded as stated above, certain legal conclusions follow as 3 matter of course, none of which are open to serious controversy. They are: Upon the sale of the land under the executory contract an equitable conversion was effected, so that in equity the land was regarded as belonging to Josephine Howe and the purchase price to Clifford. The legal title was retained by Clifford as security for the payment of the purchase price. In a sense the equitable owner, Josephine Howe, mortgaged to Clifford her ownership to secure the purchase price notes. When Clifford transferred one of these notes to the Rolette County Bank the security which was incident to the debt was likewise transferred in equity. So that as against Josephine Howe the Rolette County Bank could avail itself of the security to the same extent that Clifford-could, had the notes íemained in.his hands. When Clifford transferred the legal title to the land to the Fanners National Bank of Hendricks, Minnesota, he effected an assignment of his rights under the sale contract, and when Josephine Hanlyn quit-claimed to Peterson, who was acting for the bank, she released the obligation of Clifford and the Hendricks bank to hold either the title or her equitable interest as security for the payment of the notes, and upon payment to convey to her the legal title. The bank, through Peterson, had assumed the payment of the notes as a principal obligation. In short,, by the quit-claim deed Mrs. PIowe-Hanlyn released her rights under the contract. The simple question presented on these facts, considered in the light of these indisputable, legal conclusions, is this : May Allen, the subsequent purchaser from the bank, safely rely upon the record which shows the chain of legal title running to his grantor and a satisfaction of all equitable claims or liens incident to the land contract by the person in whose favor these equitable claims or liens prima facie exist, or is the purchaser, taking the legal title with record notice of the existence of the contract, charged with notice of the disposition of all the negotiable notes for which the land is security ?

We have found this question to be more difficult of solution than might appear from the simple statement of it. Its various phases have undergone extended discussion in the various authorities that have had occasion to consider it and the conclusions arrived at have not been harmonious; nor have the conclusions reached even by individual authorities, at various times when the question has been under consideration, reflected either permanency or consistency. The question has sometimes turned upon doctrines of priority as between successive assignees of equitable interests, where one had drawn to himself the legal title or had acquired a superior right to call for it. The solution in these circumstances has been held to depend upon the application of the maxim that where the equities are equal the legal title will prevail. Under similar facts it has sometimes been thought more appropriate in determining priorities between- the assignee of an interest under a mortgage, no assignment being of record, and a subsequent purchaser or encumbrancer, to apply the equitable maxim that, as between equal equities, the one prior in point of time should prevail. In the more recent cases, however, where the question has arisen, it has generally turned upon the construction and application of the recording statutes with relation to assignments of mortgages. It will be seen upon examination of modern recording statutes that they are generally so framed as to embrace assignments- of mortgages, both legal and equitable, as well as other instruments affecting legal title or equitable interests in real property. The tendency thus to enlarge the scope of the registry acts is indicated in the 7th ed. of Jones on Mortgages, § 476, as follows:

“Equitable mortgages are generally held to be within the recording acts as much as are legal mortgages. At first a different interpretation was put upon the acts, and a mortgage of an equity or of an equitable estate was not constructive notice when registered. But at an early day in this country it was established, either judicially or by statute, that all rights, incumbrances, or conveyances touching or in any way concerning land, should appear upon the public records, and that conveyances of equitable interests as well as legal were within the registry acts. * * *

Generally the record of an agreement constituting an equitable mortgage is notice to a subsequent purchaser of the legal estate from the same grantor.”

See also § 479.

In this state the recording statutes have uniformly been construed in the liberal manner prevalent elsewhere. It is held that a bond for deed may be recorded, Shelly v. Mikkelson, 5 N. D. 22, 63 N. W. 210; also that a purchaser under an executory contract has a mortgageable interest and that a mortgage given by him is within' the recording statutes. Simonson v. Wenzel, 27 N. D. 638, 147 N. W. 804. The statutes relating to mortgages make specific provision for the recording of assignments. §§ 6742-3, Comp. Laws 1913; Henniges v. Paschke, 9 N. D. 489, 84 N. W. 350; Merrill v. Luce, et al. 6 S. D. 354, 61 N. W. 43. And the effect of failure to record is elsewhere specifically stated. § 5594, Comp. Laws 1913.

Where the decisions turn upon the recording statutes the assignee of an interest in the mortgage who fails to record it is either considered at fault or not, depending upon the application of the statute. If he is at fault, his interest is not protected as against a subsequent bona fide purchaser who relies upon the record for the reason that, as between the two, he whose omission of duty has made the loss possible should suffer. Our examination of the cases dealing with the question of priority in the general circumstances stated leads us to the conclusion that the best considered ones indicate a trend in favor of supporting titles to real property acquired in good faith and in reliance upon a record, as against equitable claims resulting from transactions not noted on the title records. It would seem'that sound policy would require the giving of stability to titles acquired by persons who, in good faith, rely upon the public .records. Stability would certainly be impaired if protection is accorded to those whose interests are of an equitable character and w'ho have not been sufficiently diligent to cause to be entered upon the records the evidence thereof. An apt expression of this policy is found in the case of Williams v. Jackson, 107 U. S. 478. In that case it appeared that land had been conveyed to trustees in fee in trust for the payment of certain negotiable notes thereby secured. The trust deed was recorded and the notes transferred to an endorsee in good faith and for value. Before the maturity of the notes and while they were thus in the hands of the endorsee, the payee and the trustee released to the grantor of record the trust deed, whereupon the grantor obtained a second loan upon the same property by executing and recording a second trust deed. In disposing of the questions of priority between the holders of the notes secured by the first and second trust deeds, the court, among other things, said:

“It was suggested in argument that as the first deed of trust showed that the notes secured thereby were negotiable and were not yet payable, and that the land was not intended to be released from this trust until all the notes were paid, Williams was negligent in not making further inquiry into the fact whether they were still unpaid. But of whom should be have made inquiry ? The trustees under the first deed and the original holder of the notes secured thereby having expressly asserted under their own hands and seals that the notes had been paid, and Sweet and wife having apparently concurred in the assertion by accepting the deed of release and putting it on record, he certainly was not bound to inquire of any of them as to the truth of that fact; and there was no other person to whom he could apply for information, for he did not know that the notes had ever been negotiated, and he had no reason to suppose that they had not been canceled and destroyed.

“To charge Williams with constructive notice of the fact that the notes had not been paid, in the absence of any proof of knowledge, fraud, or gross or willful negligence, on his part, would be inconsistent with the purpose of the registry laws, with the settled principles of equity, and with the convenient transaction of business. Hine v. Dodd, 2 Atk. 275; Jones v. Smith, 1 Hare, 43; S. C., 1 Phill. 244; Agra Bank v. Barry, Irish R., 6 Eq. 128, and L. R., 7 H. L. 135; Wilson v. Wall, 6 Wall., 83 (73 U. S. XVIII., 727); Norman v. Towne, 130 Mass., 52.

“The equity of Williams being at least equal with that of the plaintiffs, the legal title held for Williams must prevail, and he is entitled to priority. The decree appealed from is, in this respect, erroneous and must be. reversed.”

This doctrine has heretofore been specifically approved in this state in the case of Henniges v. Paschke, supra, where the purchaser of a promissory note secured by a real estate mortgage, who neglected to take and place on record an assignment of the mortgage was held to have a right inferior to that of a purchaser of the premises who took title in reliance upon the record together with a satisfaction of the mortgage executed by the mortgagee. The applicable holdings in the case are:

(a) Assignments of real estate mortgages are conveyances within the recording acts and if not recorded are void as to subsequent mortgagees;

(b) Upon the equitable principle that where one of two or more innocent persons must suffer for the wrongful acts of the third, he must suffer who left it in the power of the third person to do the wrong; and

(c) According to this principle (b), the purchaser of a secured note who neglects to take and place of record an assignment of the security must yield to a good faith purchaser of the premises. The following authorities will be found to support the same conclusions: Newman v. Fidelity Savings Ass’n. 14 Ariz. 354, 128 Pac. 53; Ogle v. Turpin, 102 Ill. 148; Howard v. Ross, 5 Bradw. (Ill. App.) 456; Conn. Mut. Life Ins. Co. v. Talbot, et al. 113 Ind. 373 (where the provisions of a recording act authorizing recording of assignments of mortgages led the court to adopt a rule contrary to its previous decisions in Reeves v. Hayes, et al. 95 Ind. 521; Bank v. Anderson, 14 Iowa 545; McClure v. Burris, 16 Iowa 591; Bowling v. Cook, 39 Iowa, 200; Parmenter v. Oakley, 69 Iowa, 389; Livermore v. Maxwell, 87 Iowa 706, 55 N. W. 40; Central Trust Co. of Ill. v. Stepanek, 115 N. W. (Iowa) 891, 15 L. R. A. (N. S.) 1025; James, et al. v. Newman, et al. 126 N. W. (Iowa) 781; Jenks v. Shaw, 99 Iowa, 604; Lewis v. Kirk, 28 Kan. 356; Swasey v. Emerson, 168 Mass. 118; Ferguson v. Glassford, 68 Mich. 36, 47; Whipple v. Fowler, 41 Neb. 675, 60 N. W. 15; Ames v. Miller, 65 Neb. 204, 91 N. W. 250; Schwartz v. Laist, 13 Ohio State, 419; Henderson v. Pilgrim, 22 Tex. 464; Ladd v. Campbell, 56 Vt. 529; Friend v. Yahr, 126 Wis. 291, 104 N. W. 997; Marling v. Nomensen, 127 Wis. 363, 106 N. W. 844; Marling v. Jones, 138 Wis. 82; Note, 15 L. R. A. (N. S.) 1025 and Note, L. R. A. (N. S.) 1915F 554; 19 R. C. L. 364, 365; Jones on Mortgages, 7th ed. § 479 (note change in text between 1 Jones on Mortgages, 4th ed. § 474, and 1 Jones on Mortgages, 7th ed. § 474); 2 Jones on Mortgages, 7th ed. § 820.

For contrary authorities, see Hebert v. Fellheimer, 115 Ark. 366, 171 S. W. 144; Northrup v. Reese, 67 So. (Fla.) 136; Hussey v. Fisher, 94 Me. 301; Jordon v. Cheney, 74 Me. 359; Cooper v. Newell, 263 Mo. 190; 172 S. W. 326.

Up to this point we have dealt with the case in hand as though it were in all ways parallel with a case where a mortgagee, after transferring mortgage notes, releases the mortgage and a bona fide purchaser or incumbrancer acquires an interest in the property without actual or constructive notice of the transfer of the notes. We have done this for the reason that we are of the opinion that the plaintiff cannot possibly stand in a stronger situation with reference to the security of which it seeks to avail itself than as though a mortgage had in fact been given by Mrs. Howe-Hanlyn to Clifford. In reality the plaintiff’s position is, if anything, weaker than that of an equitable assignee of an interest in a real estate mortgage.

We have also treated the circumstances of the transfer of legal title from Clifford to the Hendricks bank and the quit-claim deed from Mrs. Howe-Hanlyn as being tantamount to a release of a mortgage by the mortgagee. We are of the opinion that these transactions do in- law amount to a release of any mortgage interest Clifford acquired in Mrs. Howe-Hanlyn’s equitable estate, as well as a release of all the equitable estate that Mrs. Howe-Hanlyn acquired by the contract. Certainly Clifford parted with all he had when he gave a warranty deed to the Hendricks tank and just as conclusively did Mrs. Howe-Hanlyn release all her right to have the title held as security for her notes when she gave the quit-claim deed. This must at least be held to be the effect ns to third persons, whatever her rights might have been as to Peterson or the bank in case she had subsequently been called upon to pay one of the notes. As to the effect of a quit-claim deed, see 8 R. C. L. 926, 1024. By these transactions the Hendricks bank was clearly put in the position of owner of the legal and equitable title to the property free and clear of all obligations incident to the purchase contract of Mrs. Howe-Hanlyn. In this situation third parties clearly had the undoubted right to deal with the owner on the strength of the title and right thus appearing of record. Of the authorities hereinbefore cited, the following will be found to support the right of the purchaser where he has dealt with a mortgagee on the strength of a conveyance from the mortgagor or on the strength of a satisfaction of a mortgage: Henniges v. Paschke, supra; Ogle v. Turpin, supra; James v. Newman, supra; Jenks v. Shaw, supra: Ames v. Miller, supra; Marling v. Jones, supra; and Woodward v. McCullom, 16 N. D. 42,48.

The allegations in the complaint are not sufficiently definite to enable us to tell with certainty whether or not Allen received through the Hendricks bank and Peterson legal conveyances of the title of Clifford and the equitable estate of Josephine Howe-Hanlyn. This opinion obviously proceeds upon the theory that these are merged in Allen through legal conveyances. The plaintiff, of course, will be permitted to amend the complaint if advised in the light of this opinion that it has a cause of action against Allen.

For the foregoing reasons we are of the opinion that the trial court properly sustained the demurrer of the defendant Allen. The order appealed from is affirmed.

Robinson, C. J., and Christianson, J., concur.

Bronson, J. I concur in result.