Longan v. Carpenter

1 Colo. 205

Opinions

Beleoed, J.

This was a bill in chancery to foreclose a mortgage filed by the appellee, as the assignee of one Jacob B. Carpenter. The mortgage was given to secure a negotiable note. The mortgage bears date March 5th, 1867, and is payable to Jacob B. Carpenter or his heirs or assigns, and was by him assigned to the complainant on the 20th day of July, 1867. The assignment was properly recorded on the 7th day of February, 1868. The defendant, in her answer, denies all knowledge of the assignment, and avers that at the date of said mortgage, she, in addition to the said mortgage security, delivered to the said Jacob B. Carpenter, as collateral and further security for the payment of the said sum of money, specified in said note and mortgage, one hundred and thirty sacks of good merchantable wheat flour, then of the value of $1,236, and seven thousand five hundred pounds of wheat of the value of $450, which she alleges said Carpenter agreed to sell and apply to the payment of the sum due him on said note and mortgage, or, if not sold, to be returned on payment or tender of payment of said note and mortgage. She further charges that said Carpenter sold said flour and wheat, and appropriated the sum to his own use, and refuses to account to her for the proceeds. This cause has been ably argued by counsel, and has received great consideration from this court., The principle involved has never been before adjudicated in this territory, and in the States where it has received judicial notice the decisions are in direct conflict. It is claimed by the appellee that the note secured by the mortgage is a negotiable note, that it was negotiated before due, and that the assignee being a bona fide purchaser of the note without notice, took it and the mortgage freed and discharged from all equities and defenses that existed in favor of the mortgagor and against the mortgagee. There is no evidence showing that B. Platte Carpenter had, before or at the time of the assignment of the note, any knowledge of the wheat and flour given by Mahala Longan as further security to Jacob B. Carpenter.

It is contended by the appellant, that, having taken security by way of mortgage, that that security qualifies the rights of the mortgagee and those claiming under him, and that, when an action is brought to foreclose the ■ mortgage, that that instrument, together with the note secured thereby, passes into the category of obligations to which defenses and equities may attach and be made available into whosesoever hands they fall. We are free to admit that this question is surrounded with great difficulties, and deeply regret that no settled and uniform rule exists in this country on the subject. The supreme courts of Wisconsin, Michigan and Illinois, so far as we have been able to discover, are the only courts that have passed upon the matter in controversy. In Illinois, the rule is laid down as claimed by the appellant. They hold there that, although the note secured by the mortgage is negotiable, still it is open to whatever defenses existed against the mortgagee. A different rule obtains in Wisconsin and Michigan. Amid this conflict of authorities, we feel at liberty to choose our course, and shall endeavor to follow that which, in pur judgment, is recommended by the better reason. What relation does a mortgage sustain to a note secured by it % In one sense, it is a mere incident to the debt. He who owns the note owns the mortgage. The assignee of the former is entitled to the benefits of the latter, although the assignee did not know of its existence. Kyes v. Wood, 21 Yt. 331. But it must be borne in mind that these principles are the outgrowth of equity, and equity alone. At common law, choses in action were not assignable. For the convenience of commerce, by the statute of Anne, in England, certain choses in action were made assignable, so as to vest in the assignee the legal title, as promissory notes or bills of exchange. We have a statute to the like effect, which prescribes that any promissory note, bill, bond or other instrument in writing, whereby one person promises to pay another any sum of money or article of personal property, or sum of money in personal property, shall be assignable by indorsement thereon.

The mortgage, to foreclose which this bill was filed, was given to secure the payment of a promissory note which was assigned by the payee and mortgagee to the complainant. This was in equity an assignment of the mortgage. The note was assignable by the statute, but the mortgage is not nor is it assignable by the common law. The assignee of a mortgage has no remedy upon it by law, except it be treated as an absolute conveyance, and the mortgagee convey the premises by deed. The 22d section of the statute, page 877 (Revised Statutes of Colorado), provides that if default be made in the payment of any sum of money secured by the mortgage on lands and tenements duly executed and recorded, it shall be lawful for the mortgagee, his executors or administrators, to sue out a writ of scire facias, etc. Here the remedy is specifically confined to the mortgagee, his executors or administrators. The assignee cannot proceed at law and sue out a scire facias. To avail himself of his mortgage security he is driven to the court of chancery. His remedy is purely equitable, and seeking equity he must be willing to do equity. He who buys that, which is not assignable at law, relying upon a court of chancery to protect and enforce his rights, takes it subject? to all infirmities to which it is liable in the hands of the assignor, and the reason is, that equity will not lend itself to deprive a party of a right which the law has secured him, if' such right is intrinsically j ust in itself. ‘‘ Mortgages, ’ ’ says Chief Justice Catón, in Olds v. Cummings, 31 Ill. 192, “are not commercial paper. It is not convenient to pass them from hand to hand, performing the real office of money in commercial transactions as notes, bills and the like. When one takes an obligation secured by a mortgage, relying upon the mortgage as security, he must do it deliberately, and take time to inquire if any reason exists why it should not be enforced. While he may take the mere promise to pay the money as commercial paper and depend upon the personal security of the parties to it, it may be said to be a distinguishing characteristic of commercial paper, that it relies upon personal security, and is based upon personal credit. It is a part of the credit system, which is said to be the life of commerce, which requires commercial investments to pass rapidly from hand to hand. Mortgage securities are too cumbersome to answer these ends. The note itself, though secured by a mortgage, is still commercial paper, and when the remedy is sought upon this, all the rights incident to commercial paper will be enforced in the courts of law.- But when the remedy is sought through the medium of the mortgage; when that is the foundation of the suit, and the note is merely used as an incident to ascertain the amount due on the mortgage, then the courts of equity, to which resort is had, must pause and look deeper into the transaction and see if there be any equitable reason why it should not be enforced. He who holds a note and also a mortgage holds in fact two instruments for the security of the debt; first, the note with its personal security, which is commercial paper, and as such may be enforced in the courts of law, with all the rights incident to such paper; and the other, the mortgage with security on land, which may be enforced in the courts of equity, and is subject to the equities existing between the parties. The right of an assignee to set at defiance a defense which could be made against the assignor is an .■arbitrary statutory right, created for the convenience of 1 commerce alone, and must rely upon the statute for its support, and is not fostered and encouraged by courts of equity.”

This doctrine, so clearly enunciated by Chief Justice Catón, is re-asserted and enforced by Chief Justice Walkek in the case of Walker v. Dement, 42 Ill. 273. In delivering the opinion in this latter case he says, that while the purchaser of a note before maturity without notice will be protected against all defenses to the note, still, if it is secured by mortgage or other collateral security, the assignment will not cut off prior equities against the mortgage or collateral fund, although they might be secret and latent. There are many cases in which assignees have been protected against latent equities of third persons, whose rights and even names do not appear upon the face of the mortgage, and the reason is, that it is the duty of the purchaser to inquire of ■ the mortgagor if there be any reason why it should not be paid ; but he should not be required to inquire of the whole world to see if some one has not a latent equity which might be interfered with by his purchase of the mortgage, as for instance a cestui que trust.

In the case of Merry v. Sylburn, 2 Johns. Ch. 441, Chancellor Kent said:

“ It is a general and well-settled principle that the assignee of a chose in action takes it subject to the same equities it was subject to in the hands of the assignor. But this rule is generally understood to mean the equity residing in the original obligor and not an equity residing in some third person against the assignor.” In Westfall v. Jones, 23 Barb. 10, the court said :

“Does the plaintiff, being a bona fide purchaser and assignee of the bond and mortgage, stand in any better condition than the person from whom he derived his title % It is a well-settled principle that the assignee of a chose in action takes it subject to all equities which existed against it in the hands of the assignor.’ ’ The same rule is laid down in Pennsylvania in Mott v. Clark, 9 State, 399, and in Prior v. Wood, 31 Penn. St. It maj^ be objected to these decisions, that the mortgage in each of the cases was given to secure a bond, and that the bond having no commercial character, the party taking an assignment would, as a matter of course, take the mortgage burdened with infirmities which the statute prescribes shall not apply to negotiable notes transferred before due.

These cases are made to rest on another and different ground, namely, that the proceeding was on the mortgage itself, and there being no express statutory provision authorizing the assignment of the mortgage. But it may be urged that the mortgage is accessory to the note, that it is attached to it, and being so attached, it is, and must remain, inseparable. This is true as long as both instruments remain in the hands of the mortgagor. But when he assigns the note there is in law a separation. The assignee can take his note into a court of law and recover a judgment upon it, but he cannot take the mortgage there; he cannot claim the benefit of it there. He is confined simply to his remedy on the note. Whatever judgment he recovers is purely a personal one. He will not be heard to say that the maker of the note pledged a special fund, out of which the debt must be satisfied. The court could reply, and with reason, whatever your rights may be in equity, one thing is certain, there is no law authorizing your assignor to transfer to you the mortgage. It does not follow you into this court. How is it when he brings his action on the mortgage in a court of equity ? Then the mortgage is the foundation of the suit, and the remedy sought is the foreclosure of the equity of redemption. The note is used to compute the amount; it has no other office to perform. The mortgage in one sense, and in an important one too, has a character of its own. If one holds a note, against which the statute of limitations has run, and also a mortgage or pledge of real or personal property to secure it, he cannot sue on the note, but he can take and hold possession of the property, and sell it if it be personal property, with proper precautions, and if real property, he can have a bill in equity to foreclose his mortgage, and if his lien fails to pay the whole of his debt, he loses the remainder, because he can have no action upon it, although he may have proper process founded upon the debt and security to establish his lien and make it available in the payment of his debt. A mortgage may be enforced so long as it is available, although the debt secured by it is barred by the statute of limitations. Parsons on Contracts, vol. 2, 379 ; 20 Mo. 482; Angelí on Limitations, 77, 78. It is also well established that, if a legal tender is made of money due on a bond and mortgage to the mortgagee, or his assignee or attorney, which is refused, the land is discharged from the mortgage though the debt remains. Jackson v. Bowers, 18 Johns. 110 ; 6 Hill, 65; 21 Wend. 467; and 26 id. 541. Hoes not this indicate that the mortgage and the instrument which it secures have separate and independent characters ? This is sufficient to show that it has a character of its own. But it may be urged, if this had been an action at law on the note itself, that the assignee could not have been chargeable with equities or defenses, which might have existed against the same in the hands of the assignee or original payee, and of which the complainant was ignorant at the time of assignment, and that it being commercial paper he could have obtained judgment for the full amount expressed in the note, and on execution this same land described in the mortgage might have been levied on and sold to satisfy the same. Admitting this to be true, yet in this case the purchaser of the land under the sale would hold it subject to the mortgagor’s right of redemption. Thornton v. Pegg, 24 Mo. 247. There is a reason why in an action on the note he would be entitled to recover the full amount, namely, a court of law cannot take cognizance of equities that in a court of chancery would not only be recognized but rigorously enforced. The books are full of cases where a judgment has been rendered in a law court against a defendant one day and the same judgment enjoined by a court of chancery the next.

It is true that the principles governing and controlling a court of chancery are as fixed and certain as are those which control a court of law, and one of those principles governing a court of chancery is, that he who invokes its equitable powers must be ready to do equity. But this discussion has already been protracted to a sufficient length. What was the equity of the mortgagor in this case ? What relation did Jacob B. Carpenter sustain to the wheat and flour received by him as security in addition to the mortgage, and how far is the complainant affected thereby? We think it was a pledge. The contract of pledge is a bailment or delivery of goods and chattels of one man to another, to be holden as a security for the payment of a debt or the performance of an engagement, and upon the express or implied understanding that the thing deposited is to be restored to the owner as soon as. the debt is discharged or the engagement has been fulfilled. The con tract is to be distinguished from the contract of hypothecation by the transfer of the possession or the delivery of the thing intended to be charged to the creditor, and from the contract of mortgage by the absence of a transfer of the ownership and right of property thereof in the premises during the continuance of the trust. If the thing intended to be burdened with the debt or charge remains in the pos¡session-.and under the disposition of the owner, there is no pledge. By a pledge, therefore, of the goods and chattels ¡the right-of possession is altered, but not the right of property. Was the wheat and flour in the possession and under the control of Jacob B. Carpenter? He had the receipt of the warehousemen for it. Mahala Longan could not have conveyed the same to any one freed and discharged from Ms lien upon it. Miller & Williams, the warehouse-men, were liable to him, on their receipt, for the amount expended on it. If any one had carried away and converted the wheat to Ms own use, Carpenter could have maintained an action for it, and the production of the receipt in evidence would have been proof of his title. Part of this wheat and flour, while in the possession and under the control of Jacob B. Carpenter, and before the assignment of the note, was sold, and the money paid to Miller & Williams, his depositaries. He recognized them as his agents by accepting their receipt, and the money paid by them for the wheat and flour sold was equally under his control, and could have been collected by him. If he failed to apply this money on the payment of the note and mortgage, and allowed it to remain in their hands until it was dissipated and squandered, he must suffer the loss, not Mahala Longan, who had no right to the possession of it. .And if, in an action by Jacob B. Carpenter, Mahala Lon;gan would have been entitled to reeoup the amount of imoney paid to Miller & Williams for the wheat pledged, under the rule we have announced in this opinion, his ¡assignee stands in no better position, and this money, so ¡paid, must operate as á satisfaction, pro tanto, of the note mortgage. As to the wheat and flour that remained in the hands of Miller & Williams at the time of the assignment of the note to the present complainant, we express no opinion further than to say, that it never passed to B. Platte Carpenter, and that, if any liability attaches to any one, it must be to Jacob B. Carpenter, and on his liability we purposely refrain from expressing any opinion.

For the failure of the court below to allow credit on the mortgage for the wheat sold prior to the assignment of the note, this case.must be remanded and reversed. It is accordingly reversed, with costs, for further proceedings in accordance with this opinion.