Ebling Brewing Co. v. Gennaro

189 A.D. 782, 179 N.Y.S. 384, 1919 N.Y. App. Div. LEXIS 4759

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: December 12, 1919
• Status: Published

Opinions

Blackmar, J.:

The question presented on this appeal is whether a purchaser or mortgagee of real property for a valuable consideration is chargeable with constructive notice of the recitals of an unrecorded deed in the chain of his title. Defendants Dennison had a purchase-money mortgage prior in point of time to that of the plaintiff; but plaintiff’s mortgage was first recorded. By virtue of the Recording Act (Real Prop. Law, § 291) plaintiff’s mortgage is a prior lien provided that plaintiff is a mortgagee in good faith. If plaintiff had notice, actual or constructive, of the prior unrecorded mortgage, it amounted to a fraud to attempt to supplant it, In the language of some of the older decisions, good faith required it to stay its hand. Plaintiff had no actual notice; but the court has found that it had constructive notice and, therefore, did not take its mortgage in good faith and is not entitled to the protection of the Recording Act.

Not only was the purchase-money mortgage to defendant Dennison unrecorded, but the conveyance to plaintiff’s mortgagor was also unrecorded. The conveyance contained a recital that it was subject to a purchase-money mortgage. If the conveyance had been recorded, plaintiff would, therefore, have had constructive notice of the recital and consequently that it was subject to a purchase-money mortgage for $1,000. This notice would have placed on plaintiff the duty of investigating and would have led to defendant Dennison’s mortgage. Plaintiff then could not have proceeded in good faith to take his mortgage to the detriment of defendant Dennison and the Recording Act would have afforded it no protection.

But the conveyance was not on record and the learned court has decided that plaintiff was not an incumbrancer in good faith because it did not search the record and call for the production of the unrecorded deeds, the reason necessarily being that good faith required it to search the record, and that when it was disclosed by the search that there was no record title in the mortgagor, good faith required it to go further and call for the physical production of the title deeds, and that the failure so to do charged it with constructive notice of the recital in the unrecorded deed. I think this is a strange and dangerous doctrine as conveyancing is carried on in this State, and that it rests on no sufficient authority.

It is suggested that certain decisions in England to the effect that a failure on the part of a purchaser or mortgagee to call for the title deeds is evidence that the purchase or mortgage is not in good faith; lend support to this doctrine. (See Worthington v. Morgan, 16 Simon, 547; Whitbread v. Jordan, 1 Younge & Co. [Exch.] 303; Le Neve v. Le Neve, 2 Wh. & Tud. Lead. Cas. 27, 48, n; Finch v. Shaw, 19 Beav. 500; Jones v. Williams, 24 id. 47; Hewitt v. Loosemore, 9 Hare, 449.) These cases hold that a purchaser who does not call for the title deeds is chargeable with notice of an equitable mortgage created by the deposit of title deeds. In England the mere deposit of title deeds against an advance creates an equitable mortgage. (Lloyd’s Banking Co. v. Jones, L. R. 29 Ch. Div. 221; Matter of Morgan, 18 id. 93; Ex Parte Coming, 9 Ves. Jr. 115; Ex Parte Langston, 17 id. 227, where it is said by Lord Eldon that “ a mere deposit of title-deeds upon an advance of money, without a word passing, gives an equitable lien.”) In Ex Parte Kensington (2 Ves. & B. 79) Lord Eldon disapproves but accepts the doctrine as established by authority. Under this doctrine if the title deeds are not in the possession of the grantor it suggests that the possessor other than the grantor may hold them for an equitable lien, and it follows that a purchaser or a mortgagee is chargeable with knowledge of a lien that is suggested by their absence. Upon this doctrine rests the rule that a purchaser must call for the title deeds. But I think that the doctrine with its necessary corollary does not obtain in the State of New York.

The text writers state that the doctrine of equitable mortgage by deposit of title deeds is not usually accepted in the United States. Among the States that reject the doctrine New York is not named, apparently on account of Rockwell v. Hobby 2 Sandf. Ch. 10). That case cannot be held to be authority that the doctrine is adopted in this State. The case was considered in Bowers v. Johnson (49 N. Y. 432), and, it seems to me, disapproved. In Stoddard v. Hart (23 N. Y. 556) Comstock, Ch. J., said: “ In this State the doctrine is almost unknown, because we have no practice of creating liens in this manner.” I think it may be said with accuracy that the doctrine is entirely unknown in this State. Every day titles are passed on the evidence furnished by the records, and rarely if ever are title deeds called for. The time has come, I think, definitely to state that the English doctrine that an equitable mortgage is created by merely a deposit of title deeds against advances without words passing does not obtain in this State. The English rule that a purchaser who does not call for the title deeds acts in bad faith does not obtain here because the reason for it does not exist. To avoid misunderstanding, it is well to state that the doctrine that an equitable lien may be created by agreement is unquestioned (Hamilton Trust Co. v. Clemes, 163 N. Y. 423; Chase v. Peck, 21 id. 581), but that the absence of title deeds does not suggest the existence of such a lien.

The rule regarding the purchase or payment of a bond and mortgage without requiring that the original be produced (Assets Realization Co. v. Clark, 205 N. Y. 105; Kellogg v. Smith, 26 id. 18) is akin to the English rule regarding the purchase of land. As in England an equitable lien may be created by a deposit of title deeds against advances, so in New York State a bond and mortgage, which is personal property, may be assigned by delivery without a written instrument. The only safeguard against such an assignment is to require the production of the bond itself. This doctrine, therefore, has no application to land, which cannot under the statutes be so conveyed.

Reference is made to a rule stated in 39 Cyc. 1715, as follows: “A purchaser is affected with notice of the recitals in the instruments forming his chain of title and material thereto, whether recorded or not.” But in the authority from this State given as sustaining this rule (Sweet v. Henry, 175 N. Y. 268) the instruments containing the recitals were recorded, and it was the instruments recited that were not recorded. It is not doubted that a purchaser has constructive knowledge of the recitals of a recorded deed, and, therefore, of the instrument so recited; but that rule has no application to the case at bar.

The fact that the unrecorded mortgage was a purchase-money mortgage does not affect the problem.' A purchase-money mortgage is as much subject to the Recording Act as any other. The case of Dusenbury v. Hulbert (59 N. Y. 541) is not to the contrary. The decision in that case was that the unrecorded purchase-money mortgage was entitled to priority over the mortgage first recorded because the mortgagee of the mortgage first recorded was not, under the Recording Act, a purchaser for a valuable consideration, as the mortgage was given to secure an antecedent debt. The discussion in the Dusenbury case regarding the status of .a purchase-money mortgage has no reference to the effect of the Recording Act, but to the question of priority of right between a purchase-money mortgage and another which took effect concurrently therewith and which the mortgagor agreed should be a first lien. It was held that the purchase-money mortgage representing the vendor’s lien was necessarily prior to any other mortgage placed on the property by the vendee, for there never had been an instant when the vendee had a title free from the lien of the purchase-money mortgage. Such priority may be displaced by the Recording Act, and when the effect of the Recording Act was considered the purchase-money mortgage was given priority only because the other mortgage, first recorded, was not given for a valuable consideration and, therefore, was not within the statute.

The object of this unduly long analysis of cases is only to clear the ground so that we may not be misled by false analogies. Section 291 of the Real Property Law provides: “A conveyance of real property, within the State, on being duly acknowledged by the person executing the same, or proved as required by this chapter, and such acknowledgment or proof duly certified when required by this chapter, may be recorded in the office of the clerk of the county where such real property is situated, and such county clerk shall, upon the request of any party, on tender of the lawful fees therefor, record the same in his said office. Every such conveyance not so recorded is void as against any subsequent purchaser in good faith and for a valuable consideration, from the same vendor, his heirs or devisees, of the same real property or any portion thereof, whose conveyance is first duly recorded.”

The plaintiff was a purchaser for a valuable consideration. Its mortgage was first duly recorded. The prior unrecorded purchase-money mortgage was void as to it, provided only that it was a purchaser in good faith. If it had actual or constructive notice of the prior mortgage it was not a purchaser in good faith. It had no actual notice. It had no constructive notice of a duly recorded instrument. It seems to me that the respondent’s proposition comes down to this: that one who takes a mortgage of real property acts in bad faith if he does not employ a lawyer or a title company to examine the title, and if a deed in the chain of title be missing, require its production. I do not know of any authority for that proposition or of any principle which supports it. If a purchaser omits such an examination he has notice of instruments duly recorded, but, I think, of nothing else. Even if the instrument affecting the title was not legally recorded although actually transcribed on the records, he has not constructive notice of it (Bradley v. Walker, 138 N. Y. 291); but to sustain this judgment it must be held that plaintiff has knowledge of the contents of an instrument not recorded at all and that because it is not recorded. The evidence is that Gennaro told the plaintiff’s representatives that the mortgage was a first lien. What duty did plaintiff violate in relying on the representation, and to whom did he owe any such duty? It is written in Jones v. Smith (1 Hare, 43) that “ The doctrine of constructive notice applies in two cases; first, where the party charged has notice that the property in dispute is encumbered, or in some way affected, in which case he is deemed to have notice of the facts and instruments, to a knowledge whereof he would have been led by due inquiry after the fact which he actually knew; and, secondly where the conduct of the party charged evinces that he had a suspicion of the truth, and wilfully or fraudulently determined to avoid receiving actual notice of it.”

If this be a correct statement of the law, and I think it is, plaintiff had no constructive notice. There was nothing to suggest to it that there was any incumbrance on the property, so it cannot be said to have willfully forborne to make inquiry. In Acer v. Westcott (46 N. Y. 384) Judge Peckham said: “ Constructive notice may be said to be a knowledge by the purchaser of some facts which should put him upon inquiry, and require him to examine other matters that would generally unfold the true title.” And quoting from the lord chancellor in Ware v. Egmont (4 DeG., M. & G. 460, 473), he said: “ ‘ I must not part with this case without expressing my entire concurrence in what has, on many occasions of late years, fallen from judges of great eminence on the subject of constructive notice, namely, that it is highly inexpedient for courts of equity to extend the doctrine.’ ” Judge Peckham also said: “ The purchaser must be presumed to investigate the title, and to examine every deed or instrument forming a part of it, especially if recorded.” The last three words, “ especially if recorded,” limit the general statement.

The plaintiff had no constructive notice under the Recording Act, for by that it is chargeable only with knowledge of the instruments legally recorded. It had no actual knowledge of any fact which would suggest that there was a purchase-money mortgage extant. There was no possession which indicated any outstanding right. The plaintiff, therefore, acted in good faith and is protected by the Recording Act. The conclusion of law of the learned court, expressed in the fourteenth finding of fact, that the plaintiff had constructive knowledge of the prior unrecorded mortgage, is, therefore, not supported by the findings of fact, and the judgment must be reversed.

I think, however, that a new trial should be directed, as the evidence indicates that there may be questions of fact which should be passed upon directly, viz., whether the deed from Augusto Gennaro to his wife, through which plaintiff takes title, was delivered, and whether the plaintiff’s agent, who acted in accepting the mortgage, had such knowledge of the unrecorded mortgage as is imputable to plaintiff.

I recommend that the judgment be reversed and a new trial granted, with costs to abide the final award of costs.

Jenks, P. J., and Jaycox, J., concurred; Putnam, J., read for affirmance, with whom Kelly, J., concurred, and with a separate memorandum.