Ross v. Duggan

5 Colo. 85

• Court: Supreme Court of Colorado
• Decided: December 15, 1879
• Status: Published

Opinion

Stone, «T.

Appellant, as a creditor of Duggan, was secured by a deed from him of certain lands, which deed it is admitted was intended as a mortgage only, and further security was given by a chattel mortgage of personal property.

O’Neil, one of appellees, claims title to the land by virtue of a sale under a junior lien created by a judgment against Duggan.

The two cases of Ross v. Duggan et al. and of O'Neil v. Ross et al., were consolidated in the court below by stipulation, and are to be considered together as one.

The material allegations in the bill of O’Neil, as ground for the relief prayed ara, first, a charge of conspiracy to defraud, and the perpetration of fraud on the part of Smith, Duggan and appellant in the several conveyances of the land to Smith and appellant; and, second, that, admitting the original validity of the lien created by the deed to appellant, it was lost by reason of the negligence with which appellant was chargeable, in the dissipation of the personal property, which was one of the two funds upon which her security rested.

It is contended by counsel for appellees, that “ a deed absolute on its face, but intended as a mortgage only, is fraudulent and void as to creditors.” A few decisions may be found which go to this extent. But the weight of authority, as well as the sounder reasoning upon principle, favors the different doctrine that such a conveyance is an indicium of fraud, as against existing creditors, and is not conclusive evidence of fraud; it is a badge of fraud, merely, which may be removed by evidence of honest intent. Gibson v. Seymore, 4 Vt. 521; Harrison v. Phillips’ Academy, 12 Mass. 456; Stevens v. Hinckley, 43 Me. 440; Emmons v. Bradley, 56 Me. 333; Bank v. Jacobs, 10 Mich. 349. See also, Bump on Fraud. Conv. p. 84, and cases cited.

The allegations of fraudulent intent of conspiring to defraud, and of the perpetration of fraud by the parties to the deeds in controversy, are not well supported by the testimony in the case, and we cannot but conclude from the whole evidence in the record, that the bona fide character of-the indebtedness which the deeds were given to secure, and the good faith of the parties to the transaction, are fairly established.

The second ground upon which the Boss lien is attacked— that it became lost or impaired by the acts of the lienor— raises a more difficult question. "We fully recognize the force of the equitable doctrine applied to creditors having liens on different funds, namely, that a person having two funds to satisfy his demands, shall not, by his election, disappoint a party who has only one fund (Aldrich v. Cooper, 8 Ves. 388), or as stated by Chancellor Kent with his accustomed clearness in Cheeseborough v. Millard, 1 Johns. Ch. 409: “ If a creditor has a lien on two different portions of land, and another creditor has a lien of a younger date on one'of these parcels only, and the prior creditor elects to take his whole demand out of the land on which the junior creditor has a lien, the latter will be entitled either to have the prior creditor thrown upon the other fund, or to have the prior lien assigned to him, and to receive all the aid it can afford him.” This principle, derived from the civil law and incorporated into the English chancery law, is sometimes called the doctrine of substitution, and is most usually applied to the marshaling of assets in bankruptcy cases and the like. The operation of the principle is not affected by the nature of the property which constitutes" the double fund, but applies wherever a paramount creditor holds collateral security, or can resort collaterally to other real or personal estate for the satisfaction of the debt. DeLeyster v. Hildreth, 2 Barb. Ch. 109.

The rule briefly stated by Chief Justice Marshall, in Allston v. Munford, 1 Brockenbrongh, 279, is : if a creditor having a choice of two funds, should, contrary to equity, so exercise his legal rights as to exhaust that fund to which aloue other creditors can resort, then those other creditors will be placed by a court of equity in his situation, so far as he has applied their fund to the satisfaction of his claim. And undoubtedly where a loss of such fund is occasioned by collusion of a creditor with the debtor, or by willful or intentional neglect to preserve the fund, relief, if invoked in the proper time and manner, may be afforded the other creditors who have been injured thereby, under the general principles of equity involved in the case. But it must be admitted,- that in any case the prior incumbrancer is entitled to notice of the existence of the junior claim, and of the intention of the junior creditor to compel the former to make his election in compliance with this principle. Taylor's Executors v. Maris, 5 Rawle, 55; Guion et al. v. Knapp et al. 6 Paige, 35; Clark v. Bancroft, 13 Iowa, 321.

The right of the junior creditor to have this principle administered is ordinarily enforced by a decree of subrogation. 2 Lead. Cas. in Eq.'261, 262, and cases cited. He cannot administer this right himself, upon his own assumption that the acts of the prior creditor have conferred such right. This is for the chancery court to pronounce upon. 1 Story’s Eq. Jurisp. Sec. 633, 639, et seq.

So far as the record shows, the acts of the appellant as the prior lienor in this cáse, in so far as they affected the loss of the personal property in question, were not affirmative, directly resulting in the loss, and after proper notice of the rights of other creditors. The cases where this doctrine has been applied are based on affirmative acts of the senior lienor releasing the'fund to the prejudice of the junior. I have been unable to find any case applying the doctrine where there was a loss of the fund by neglect of the senior lienor.

What measure of diligence does the rule impose after no-tie?? It must be borne in mind that the rule itself is based largely on an equity against the debtor, to wit: that the accidental resort of the senior lienor to the doubly charged estate, and the consequent exhaustion of that security, shall not enable the debtor to get back the second estate discharged of both debts. Vide notes to Aldrich v. Cooper, 2 Lead. Cas. in Eq. 264.

"While, therefore, the rule would forbid affirmative acts, and doubtless collusive acts defeating the junior creditor, it would not impose upon the senior any additional care or expense touching the preservation of the second fund. Gross negligence will not charge him; it would not be mala fides, but only evidence of it. His negligence must be wanton, such as to amount to a constructive fraud. He must be a willful party to the dissipation or loss of the fund. Covanhoven v. Hart, 21 Pa. St. 500; Emmons v. Bradley, 56 Me. 337.

The second fund in this case was in its nature an imperfect security. It consisted of chattels remaining in the hands of the debtor. It was peculiarly liable to loss or dissipation, and largely at the mercy of the debtor. One having real estate security would take the other as a contingent, not as a certain security. *

In such case, clearly, the senior is not accountable as for a perfect security. Otherwise, it would be substituting the junior to the first and not the second fund before the prior encumbrancer had been put in default.

If both funds were in existence at the time the execution was issued on the Martin judgment, that judgment became a lien on both funds under the statute; but the judgment creditor was not entitled at his own election to push the older creditor off the real property and compel her to satisfy her debt out of the more precarious security afforded by the chattel mortgage. He was not entitled to thus administer his own rights. All he could demand would be that the senior creditor should not release the second fund, or contribute to its loss by that degree of negligence we have specified. The chattel mort gage executed to Smith must be disregarded in the consideration of the case, for the reason that it does not appear from the evidence that the property described in said mortgage was in existence at the time Smith was chargeable with notice of the junior lien.

What notice, if any, did the appellant have of the rights of the junior creditor? It will not do to say that the Martin judgment furnished sufficient notice. Chancellor Kent, in Cheesboro v. Millard, supra, says:—“If the judgment creditor in this case had given notice to the owner of the first mortgage, before the arrangement and discharge took place, of the equity which ho claimed and expected, I might probably have been inclined to have stayed to a certain extent the operation of a second mortgage. But there is no evidence or even ground for presumption, that either Marvin or Millard, the owners of the mortgages, knew of the existence of the judgment when the arrangement was made and carried into effect. They were not bound to search for the judgment, and the record was no constructive notice to them/ and as this rule of substitution rests on the basis of mere equity and benevolence, the creditor who has thus disabled himself from making it, is not to be impaired thereby, provided he acted without knowledge of the other’s rights, and with good faith and just intentions, which is all that equity in such case requires. ‘ The other debtor and sureties,’ to adopt the observations of Pothier, £ might, as well as the creditor, have taken care of the right of hypothecation which he has lost; they might summon him to interrupt at their risk the third purchasers, or to oppose the decree. It is only in the case in which they may have put the creditor in default that they may complain that he has lost his hypothecation.’ ”

The answer to appellant’s bill alleges that the lien of complainant on the goods of the debtor under the chattel mortgage was lost by her neglect, although she was notified by Browne (the purchaser of the land sold under the Martin judgment), ££ to collect the same and to take possession of the property and sell the same in discharge of the debt.”

The nature of the notice referred to is not shown in this answer, nor in the cross-bill of O’Neil; but Eyster, a witness for appellees, discloses somewhat the character of this notice, by stating that “ in the fall of 1871 Browne filed a bill in chancery to set aside certain deeds, and to redeem the property from the alleged mortgage; that Smith, Duggan and Boss were made defendants to that bill.”

Counsel for appellees, in their printed briefs, refer to this bill, set out its contents, and state that service was had, an answer filed by Smith, one of the defendants; that the bill was filed September 23, 1871; that on February 7, 1872, Browne sold the land to the wife of the debtor Duggan, and that after-wards, April 6, 1872, the bill was dismissed, and counsel for appellees thereupon insist that Browne thus notified appellant that he was then the owner of the land, and that she must first sell the personal property under the chattel mortgage before she could claim the benefit of her lien on the land.

Counsel on both sides stipulate that this bill of Browne, and the proceedings thereon, together with certain other matters of evidence, may be considered by this court, the same as though incorporated in the record, from which such evidence was by oversight omitted, as the stipulation alleges; but since the stipulation was filed in this court in the first instance, we cannot consider it under our former rulings in the cases of Molandin v. C. C. R. R. Co. 3 Col. 173, and Capelli v. City of Denver id. 235, where it is held that this court cannot consider matters of evidence upon stipulation merely, and not-properly brought up by the record. We are therefore, without any record evidence of what this Browne bill contained, other than we have mentioned; we do not know judicially what proceedings were had upon said bill, and are therefore unable to determine whether the decree of dismissal upon the bill and answer was not res judicata as to the matters therein set up and answered, and whether the same might not be pleaded in bar of the rights now set up by appellee O’Neil, who claims under Browne’s title; or whether the bill contained the necessary averments to constitute it such a notice to appellant as is now claimed for it; or whether, if sufficient, the dismissal of the bill was not a withdrawal of notice to appellant of whatever rights were then claimed by Browne, and of whatever duty appellant could be chargeable with, under proper notice.

Certain it is, however, that the bill of O’Neil is defective in two particulars:

Durst: In not alleging against the appellant such affirmative or conclusive and intentional acts of negligence, resulting in the loss of the chattel fund, as would constitute ground for subrogation of the junior creditor to the prior right of the appellant to the other fund.

Second: If the Browne bill is, relied on as the notice by which the appellant is to be bound, then it should have been shown by the answer or cross-bill of appellees that the Browne bill contained the proper averments to constitute it a sufficient notice, to wit: that at the time of the filing of the Browne bill, the goods and chattels which were the subject of the chattel mortgage were then in existence, were intact and available as a fund from which appellant could realize all or a part of her debt for which such fund was a security. 2 Lead. Cas. in Ecp 238.

Without this, there could have been but one fund at the time the question relating to it was raised, and hence the doctrine contended for would have no foundation'in fact.

Neither the answer to appellant’s bill nor the cross-bill charges such acts of negligence against appellant, nor alleges such notice of her responsibility and duty under the status of the two funds and the several rights of the creditors respecting the same, as are sufficient to cast upon her a liability for the alleged dissipation and loss of the fund created by the chattel mortgage.

There is, therefore, no equity for the decree of the court below to rest upon, and it will be reversed, and the cause remanded, with leave to both parties to amend their pleadings, if they or either of them so elect, without prejudice to the testimony already taken.

Decree reversed.