In re Howe

1 Paige Ch. 125

Opinion

The Chancellor :—If the division of the property between the original owners, threw the whole mortgage previously given by Tompkins upon his undivided half of the premises released to himself and Dunham on that division, Banks would clearly be entitled to the funds in the hands of the master, to satisfy the balance now due on his mortgage. That balance would still remain a lien upon so much of that undivided half as was not sold under the decree of foreclosure. But if, after that division, as I am inclined to believe, under the circumstances of this case, the mortgage remained a lien at law upon the one-fourth of the two lots conveyed to Howe and his wife in severalty, the foreclosure was a nullity as to these lots, Howe and wife not being parties thereto. And the balance due on the mortgage being a subsisting lien on the undivided fourth part of the two lots, it may still be enforced against them. Howe and wife have therefore a direct interest in having this balance paid out of the moneys arising from the sale of that part of the property which they gave him in exchange on the original division. As between Howe and wife and Tompkins, there could be no doubt of their equitable claim to have those moneys thus applied. If Banks had filed his bill to foreclose the mortgage immediately after that division, and had made Howe and *wife and Dunham parties to the same, there can be no doubt that this court would have decreed a sale of the share assigned to Tompkins on that division, to satisfy the mortgage. And the question which now arises is this: Are the equitable rights of Howe and wife altered or divested by the general assignment of Tompkins for the benefit of his creditors, or by the judgments which have been recovered against him subsequent to that division? It is a well settled rule of equity, that the general assignees of a bankrupt take his estate subject to every equitable claim which exists against it by third persons;

Footnotes

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[1] and that they cannot avail themselves of the legal estate thus acquired, to defeat a prior equity, of which they had no notice at the time of the assignment, They differ in this respect from bona fide purchasers of the legal estate, and from mortgagees who have advanced their money on the credit of the land, and who are considered quasi bona fide purchasers.

I can see no good reason why a different rule should be applied to general assignees, for the benefit of all the creditors, created by the voluntary act of the debtor, from that which prevails in respect to those created by operation of law. Neither can be considered as bona fide purchasers, who are protected because their legal estate is united to an equal though subsequent equity. Sir Simon Stuart’s case, referred to by the counsel and by the Lord Chancellor, in Burn v. Burn, (3 Ves. jun. 576,) was an actual conveyance to trustees for the benefit of creditors; and yet it was held that a prior contract for a mortgage was entitled to a preference. The case might be different where creditors, without notice of the prior equity, had released their debts in consideration of an assignment made to trustees for their benefit.

The judgment creditors of Tompkins are in no better situation than his general creditors in relation to this fund. Their judgments were not specific liens on the land to which the petitioners’ equity attached. They were general liens on all the estate of the judgment debtor; but as such they cannot prevail as against the prior equity of the petitioners.[1] I have not found any reported case in this state, where this question has been examined. It has frequently been discussed *in the English courts, and sometimes in the courts of this country; and I have once had occasion to examine it in the equity court for the fourth circuit.

The earliest case on this subject which I have found, is Burgh & Burgh v. Francis & others, decided by Lord Keeper Finch, in 1670. (Cases Temp. Finch, 58; 1 Eq. Cas. Abr. 320, S. C.) In that case, a bill was filed by the executors of an equitable mortgagee against the heir at law of the mortgagor, and his judgment creditors, to perfect a defective conveyance by way of mortgage, and to be relieved against the judgments, which at law were a lien upon the mortgaged premises. The court decreed a perpetual injunction against the judgment creditors, unless they should choose to come in and redeem the mortgage, which the heir at law was directed to give. This decree is said to have been after-wards affirmed by Lord Nottingham. (Per Vernon, arguendo, 1 Peer Wms. 279.) There is a note in Fonblanque’s Treatise on Equity, (1 Fonb. 34, note r,) referring to that case, and by which its authority is attempted to be shaken. But the annotator is evidently wrong in supposing that is the only case to be found in the books where a court of equity has interfered, in prejudice of a defendant having a legal interest for a valuable consideration and without notice. The decision in the Suffolk case, referred to in Nelson’s Reports, (1 Nels. Ch. Rep. 184,) supports the decision in Burgh v. Francis; and in 1715, the same principle was most distinctly recognized by Lord Cowper, in the case of Finch v. The Earl of Winchelsea, (1 Peer Wms. Rep. 282.) In Burn v. Burn, (3 Ves. jun. 576,) the counsel, Sir John Scott, attorney-general, (afterwards Lord Eldon,) and Mr. Mitford, solicitor-general, (afterwards Lord Redesdale,) state it as a well known principle, that courts of equity constantly control the effect of judgments subsequent to a contract for the sale of the estate. And in the case of Sir Simon Stuart's estate before referred to, it was also held that the equitable mortgagee was entitled to a preference over subsequent judgment creditors.

In Delaire v. Keenan, (3 Desauss. Rep. 74,) the Court of Chancery of South Carolina decided, that an agreement for *a mortgage was in equity a specific lien on the land; and that the mortgagees were entitled to a preference over subsequent judgment creditors. Chancellor Desaussure, in delivering his opinion, refers to the decision of Lord Cowper, in Finch v. The Earl of Winchelsea, and says the opinion delivered in that case has been the settled doctrine ever since. The same principle was sanctioned by the Supreme Court of Pennsylvania, in the case of Foster v. Foust, (2 Serg. & Rawle, 11,) and by Washington, Justice, in the case of Hurst v. Hurst, in the Circuit Court of the United States. (2 Wash. C. C. Rep. 69; 3 Binney, 347, note, S. C.) The same principle is recognized by several elementary writers, as the established doctrine of the courts of equity in England. (Sugden’s Law of Vendors, 336; 2 Cruise's Dig. 64, tit. 14, Estate by Statute, Merchant, &c., sec. 50.)

In the matter before me, I can decide in favor of the manifest equity of the case, not only without disturbing any known legal or equitable principle, but in perfect accordance with the settled doctrines of this court. I shall therefore direct the moneys in the hands of the master to be paid over to Banks, in satisfaction of the balance due on his mortgage.

The assignee .succeeds only to the rights of the assignor: Luchenbach v. Brickenstien, 5 Watts & S. 145, takes the property subject to all equities: Moody v. Litton, 2 Ired. Eq. 382; Leger v. Bonnaffe, 2 Barb. S. C. 475; Addeson v. Burckmyer, 4 Sanf. Ch. 498: and to all liens, Corning v. White, 2 Paige, 567; Haggerty v. Palmer, 6 John. Ch. 437; if on buildings, for building materials; Twelves v. Williams, 3 Whart. 485, and he takes deposits in banks, subject to any lien of the bank existing when the assignment was made, Beckwith v. Union Bank, 4 Sanf. S. C. 604, and land subject to the interest of Devisees; Swoyer’s Appeal, 5 Barr. 377. See further Am. Ch. Dig. by Waterman, tit. Assignment.

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See Dwight v. Newell, 3 Comst. 185.