Evans v. Kister

92 F. 828, 35 C.C.A. 28, 1899 U.S. App. LEXIS 2196

• Court: Court of Appeals for the Sixth Circuit
• Decided: March 7, 1899
• Docket: No. 651
• Status: Published

Opinion

LURTON, Circuit Judge;

after making the foregoing statement of facts, delivered the opinion of the court.

Where a jury is waived, and a judgment rendered upon a special finding of fact by the court, the review of such judgment upon a writ of error “may extend to the sufficiency of the facts found to support the judgment.” Rev. St. § 700; Dickinson v. Bank, 16 Wall. 250. It is otherwise if there be only a general finding, and no exceptions to the rulings of the court in the progress of the trial. British Queen Min. Co. v. Baker Silver Min. Co., 139 U. S. 222, 11 Sup. Ct. 523. The note in suit was signed by F. L. Kister, Jr. He did not deny his signature. It was in the possession of the plaintiff in error as indorsee. The burden was therefore upon him to show that a note, which he had signed and delivered, had in fact never been accepted by the payee. The burden was also upon him to show that, if he became bound, he had been released by the subsequent conduct of the creditor. Kortlander v. Elston, 6 U. S. App. 283, 2 C. C. A. 657, and 52 Fed. 180. Where the question for review is, as here, whether the facts found are sufficient to support the judgment, it is of the highest importance to him upon whom the burden rested that such special finding of facts shall include every fact essential to support the judgment. Sneed v. Milling Co., 20 C. C. A. 230, 78 Fed. 925; Wesson v. Saline Co., 20 C. C. A. 227, 73 Fed. 917. In jury trials, it is the rule that, if ihere be special findings and a general verdict, and the former be irreconcilable with the latter, the special findings must control. Larkin v. Upton, 144 U. S. 19, 12 Sup. Ct. 614. The same rule must prevail where a jury has been waived, and a judgment rendered upon a special finding of facts. If the facts so found do not support the judgment, it should, upon writ of error, be reversed, with direction to enter the judgment which the facts demanded.

The ground upon which the plaintiff was denied a judgment was the negligence of the electric company in protecting the Lille to the machinery against subsequent purchasers and creditors by recording this note according to the provisions of section 2496 of the Kentucky Statutes, by Barbour & Carroll. That section is in these words:

“In any written contract oí or for the sale of railroad equipment or rolling stock, deliverable Immediately or subsequently, at stipulated periods, by the terms of which the purchase money, in whole or in part, is to be paid in the future, it may be agreed that the title to the property so sold, or contracted to be sold, shall not pass to or vest in the vendee until the purchase money shall have been fully paid, or that the vendor shall have and retain a lien thereon for the unpaid purchase money, notwithstanding delivery thereof to the vendee; but the terms of credit for the payment of the purchase money shall not exceed twenty-five years from the execution of the contract Such agreement shall not be valid as against subsequent purchasers for value without notice, or against creditors until such contract shall have been acknowledged or proved as deeds of trust and mortgages are required to be, and lodged for record in the office of the secretary of state, where they shall be recorded.”

This note, when delivered and accepted, was without acknowledgment, and could not be recorded. Neither does it appear that it was subsequently acknowledged, or that any effort was made by either the payee company or the surety thereon to obtain such acknowledgment as would admit the note to record. The section of the Code cited above seems to have originated in 1882. Prior to that provision the Kentucky supreme court had construed all contracts for the sale of personal property accompanied by delivery to the vendee, when the title was retained until payment of the price, as absolute sales “with mortgage back” to secure purchase price. Thus, in Greer v. Church, 13 Bush, 430, it was said that, if the facts showed a sale, “it does not matter whether the parties intended the title to pass or not.” “The law, in furtherance of public policy and to prevent frauds, will treat the title as being where the nature of the transaction required it to be.” Baldwin v. Crow, 86 Ky. 679, 7 S. W. 146. All such contracts were, therefore, subject to the general registry laws of the state, whereby all unregistered deeds of trust and mortgages were “invalid against a purchaser for a valuable consideration without notice thereof or against creditors.” Ky. St. § 496.

The effect of section 2496 was to give validity to a contract of sale “of railway equipment and rolling stock,” where, by agreement, the title was retained by the vendor until payment of the purchase money, notwithstanding delivery of the property to the vendee. Registration of such contract is not made essential to its validity, except, as against subsequent purchasers for value without notice and creditors. Nonregistration would, therefore, have no other or different consequence than that resulting from nonregistration of a mortgage under the general registration law cited above. From what we have said, it must follow that the nonrecording of the sale note in suit would be of no consequence to the surety, unless the rights of subsequent purchasers for value and without notice, or the rights of “creditors,” have intervened, whereby the property has been subjected to their claims. One is not a “creditor,” within the protection of the registration statute, cited above, who, at the time of his levy or before sale under execution, receives notice that the property is subject to an unrecorded lien or mortgage. Baldwin v. Crow, 86 Ky. 679, 7 S. W. 146. “To entitle a creditor, as such, to take advantage of an unrecorded mortgage, he should show that he had recovered judgment and sued out execution.” Underwood v. Ogden, 6 B. Mon. 606. But a subsequent creditor may secure priority over an unrecorded mortgage by the levy of an execution or of an attachment. Wicks v. McConnell (Ky.) 43 S. W. 205. A previously existing mortgagee of the property of the railway company is, therefore, not a “creditor,” within the meaning of section 2496. Neither is such a mortgagee a subsequent purchaser for value without notice. Fosdick v. Schall, 99 U. S. 235; U. S. v. New Orleans R. Co., 12 Wall. 362; Myer v. Car Co., 102 U. S. 1.

In Joyce v. Cockrill (decided at the present term) 92 Fed. 838, we had occasion to consider the circumstances under which a surety might be released through the conduct of the creditor, and there stated the general principle to be:

“If a creditor does any act inconsistent with the rights of the surety> and injurious to him, or omits to do any act which his duty to the surety obliges him .to do, and thereby injures the surety, the latter will be discharged to the extent of such injury.”

It is also elementary that the surety is entitled, for his indemnity, to the benefit of any securities which the creditor obtains from the principal debtor. If, therefore, the creditor surrender such securities to the debtor without consent of the surety, or they are lost as a consequence of the failure of the creditor to discharge some duty owing to the surety in respect to their protection or preservation, the surety-will be discharged to the extent that he sustains loss by such misconduct. No “creditor” has acquired any lien upon the machinery for which this note was given, by levy of attachment or execution; nor, so far as this record shows; has the property been acquired by any purchaser for value without notice. How, then, has the surety been injured by the alleged laches of the creditor in not recording this note? Counsel for the surety say that:

“It is not necessary to show any actual injury. If his risk as surety is increased by the negligence of the creditor, he is released.”

To support this, counsel cite the following decisions of the supreme or superior court of Kentucky: Sneed’s Ex’r v. White, 3 J. J. Marsh. 525; Goodloe v. Clay, 6 B. Mon. 236; Ruble v. Norman, 7 ; Martin v. Taylor, 8 Bush, 384; Royster v. Heck, 14 Ky. Law Rep. 266. These cases do announce the principle as being:

“That any agreement or active interference by the obligee, whereby the surety may be injured, or subjected to increased risk, or deprived of or suspended in the assertion of his equitable right to force the obligee to sue the principal, or of his right to pay the debt and occupy the attitude, in equity, of the obligee, will release the surety in equity.” 3 J. J. Marsh. 525.

Without giving our entire assent to the rule as stated, it is clear that it has no application here. The creditors have made no “agreement” with the principal debtor by which the surety has been “deprived of or suspended in the assertion of” any right he might have had against his principal or the obligee. Nor have such consequences resulted from any “active interference” by the creditor. The Kentucky cases cited, and in which the rule stated is found, were cases in which the creditor had affirmatively discharged some lien upon property of the person primarily liable, or surrendered to him property out of which the debt should have been paid. There was, in each case, not mere passive neglect by which some hold upon the debtor had been lost, but conduct which Chief Justice Robertson calls “active interference.” It is true that in the principal case the chief justice did say that where there was such “active interference,” by which a lien was discharged or property surrendered, “it is not material whether the property so exempted was sufficient to discharge the whole debt or not.” “It is,” said the court, “the fact that the creditor interfered, and thereby increased the risk of the surety, and not the extent of the injury resulting from the act, which will relieve the surety from his liability in equity.”

With the exception of the case of Royster v. Heck, cited above, decided by a court inferior to the supreme court, the facts showed that the property surrendered or the lien discharged, was of value sufficient to have paid the debt. The question, therefore, as to whether the voluntary release of a security of less value than the debt would discharge the surety absolutely, or only pro tanto, was not involved. But, however that may be, the rule as stated in the Kentucky cases has no application where the creditor has not actively or affirmatively discharged some lien or security which he ought to have preserved. Here the creditor has made no new agreement with the debtor, nor has he affirmatively discharged any lien or surrendered any property as a consequence of the failure to record this note. It is only claimed that the creditor has negligently failed to record Iris note. If we assume that in this he was lacking in the discharge of a duty owing to the surety, what are the consequences? It is well settled that a surety is discharged absolutely if the creditor, without his consent, enters into a valid agreement for forbearance, or if there be any variation in the contract to which he has not consented. But this results in the latter case because a new contract has been made, and in the former instance for the same reason in effect; for the right of the surety to proceed in equity against his principal and compel payment, or to himself pay and immediately proceed against his principal, has been suspended without his consent, and his risk thereby increased. Rees v. Berring-ton, 2 White & T. Lead. Cas. Eq. p. 1867, and cases cited in note on pages 1876, 1877, and pages 1906, 1907. But these reasons have no application, where, through mere laches, the creditor has lost.some lien or security to which the surety might have looked for indemnity. It is well settled that if, through mere passive neglect, the creditor loses his hold upon a security which it was his duty to protect for the benefit of the surety, he will thereby exonerate the surety only to the extent that the latter has suffered loss. 2 White & T. Lead. Cas. Eq. pp. 1901, 1902; Wulff v. Jay, L. R. 7 Q. B. 763; Burr v. Boyer, 2 Neb. 265; Everly v. Rice, 20 Pa. St. 297; Vose v. Railway Co., 50 N. Y. 369; Capel v. Butler, 2 Sim. & S. 457; Neff’s Appeal, 9 Watts & S. 36; Payne v. Bank, 6 Smedes & M. 24; Hayes v. Ward, 4 Johns. Ch. 123.

We shall not stop to inquire as to the duties owing to the surety in respect to the registration of a mortgage from the principal debt- or, nor consider whether an unacknowledged sale note, such as that here involved, would stand in all respects as an instrument in a condition for registration, when accepted by the creditor. If we assume that it was the duty of the plaintiff in error, or his assignor, to have procured the acknowledgment and registration of this note, and that he has not done so, what then? The indemnity upon which the surety relied has not suffered as' a consequence of nonregistration. The security which the parties intended to provide by a retention of title has been lost, if lost at all, by reason of the attachment of the machinery to the realty of the railway company, thereby becoming subject to a pre-existing mortgage, and not as a consequence of the previous nonregistration of the instrument retaining the title. Such a result would not have been saved by previous- registration. If the subject of the sale was “loose property, susceptible of separate ownership and separate liens,” it would pass under the mortgage, if there was an after-acquired property clause, in the same condition .in which it came to the mortgagor. If, by agreement between' the vendor and mortgagor, the former retained the title or a lien to secure the purchase -price, the lien would be unaffected by any prior mortgage, whether registered or not. Fosdick v. Schall, 99 U. S. 235; U. S. v. New Orleans R. Co., 12 Wall. 362; Myer v. Car Co., 102 U. S. 1. Upon the other hand, if the machinery so purchased and set up has become so affixed as to be a part of the principal thing, it will pass under the mortgage, notwithstanding an agreement between the mortgagor and furnisher that the title shall remain in the vendor until payment. Railway Co. v. Cowdrey, 11 Wall. 459-482; Porter v. Steel Co., 122 U. S. 267, 7 Sup. Ct. 1206; Phœnix Iron-Works Co. v. New York Security & Trust Co., 54 U. S. App. 408, 28 C. C. A. 76, and 83 Fed. 757. Mere registration of an agreement between the mortgagor and vendor, preserving the personal character of property affixed to- the freehold mortgaged, will not prevent the attached property from passing under a previously existing mortgage. To prevent such a result, the mortgagee must be a party to the agreement. New York Security & Trust Co. v. Capital Ry. Co., 77 Fed. 529; Jones, Real Prop. §§ 1743-1748; Snedeker v. Warring, 12 N. Y. 170; McFadden v. Allen, 134 N. Y. 489, 32 N. E. 21; Win-slow v. Insurance Co., 4 Metc. (Mass.) 306. See Bank v. Baumeister, 87 Ky. 6, 7 S. W. 170; Manufacturing Co. v. Garven, 45 Ohio St. 289, 13 N. E. 493; Hunt v. Iron Co., 97 Mass. 279; Pierce v. George, 108 Mass. 78; McConnell v. Blood, 123 Mass. 47; Allen v. Woodard, 125 Mass. 400; Campbell v. Roddy, 44 N. J. Eq. 244, 14 Atl. 279. It may, perhaps, be conceded that the owner of land may make a valid agreement by which articles are to retain their character as personalty, notwithstanding they may be so annexed to the realty as that, without such agreement, they would in law be regarded as having become fixtures. Ford v. Cobb, 20 N. Y. 344. But such agreement will not affect a previous mortgagee who does not assent thereto. Jones, Real Prop. §§ 1750, 1751. It therefore follows that the mere neglect of the creditor to record this sale note has had no effect upon the rights of creditors having mortgages or other liens upon the freehold to which the machinery was attached at the time the note should have been recorded.

If, therefore, the judgment of- the circuit court is to be sustained, it must be upon the ground that the creditor actively aided in so attaching the machinery to the mortgaged realty as that it became subject .to the existing mortgage. It is true that it is provided in the sale note "that the above property shall not be attached to, so as to become a part of, any real estate, but shall remain personalty uniil paid for.” But the facts found show that it was the purpose of all the parties, when the note was made, to attach the property just as was subsequently done, and that the attachment actually made was "absolutely necessary,” in order to use it for ¡he purpose for which it was intended, and that Kister knew this when he signed the note, and knew, at the time the work was being done, that it was being aüacbed as originally intended by all parlies, including himself. To consirue this term of the agreement as forbidding the parties from in fact attaching this machinery to the freehold, when it was well known that such was the intention, and that it was "absolutely necessary” in order to use it for the purposes for which all the parties knew it was intended, would be to do violence to the contract. The provision quoted should be construed as providing only that the intended annexation to the freehold should not have the legal effect which might result but for the agreement. Thus construed, the creditor violated no agreement or obligation owing to the surety when it assisted in placing this machinery iu position according to its contract, all hough the annexation thereby resulting operated to give the existing mortgage precedence over the lien reserved. This is a consequence for which the creditor is not responsible. All parties had constructive notice, at least, of the existing mortgage, and must be regarded as in effect consenting that this machinery should be affixed to the freehold notwithstanding the mortgage. The legal consequences are that the mortgage takes precedence. For this result Ihe creditor is not to be held responsible. The surety has suffered no loss through the creditor’s malfeasance, and no injury through the nonregistration of the sale note.

That this machinery was so affixed to the freehold as to become attached thereto, as between mortgagor aud mortgagee, has been the insistence of counsel for the defendant in error. It was necessarily so found by Judge Barr. We think the facts bring the case within our own decision in the case of Phœnix Iron-Works Co. v. New York Security & Trust Co., 54 U. S. App. 408, 28 C. C. A. 76, and 83 Fed. 757. But, if a different conclusion could be maintained upon the facts and law in respect to whether this machinery has been so affixed as to pass under the mortgage, the result would be the same to defendant in error. In that event, the surety would not have lost his right to recover the machinery upon payment of the debt. It has been argued that the evidence does not show that the creditor ever accepted this note, and that the judgment in favor of the surety should be affirmed, upon this ground. We think the findings of fact must be construed as including a finding that the note was accepted.

The third assignment of error must be overruled. The facts found justified the credit allowed for the armature not sent to replace one returned.

The first four assignments must be sustained. The judgment will be affirmed as to the Park City Railway Company, and reversed as to F. L. Kister, Jr., and remanded with directions to render judgment against him for the same amount found due from his principal.