Fassett et al. v. Smith, Receiver of Oliver Lee & Co.'s Bank of Buffalo, et al.

Fassett et al. v. Smith, Receiver of Oliver Lee & Co.’s Bank of Buffalo, et al. The definition in the 2d Revised Statutes, page 702, section 30, of the term ‘felony,’ when used in a statute, has not so changed the common law as to prevent a purchaser in good faith and for value, obtaining title to goods which the original vendee procured by false pretenses. The case of. Andrew v. Dieterich (14 Wend., 36), in this respect overruled. The possession by a husband of his wife’s real estate is to be taken as her possession, so as not to put a purchaser upon inquiry as to the rights of a third person of whom the husband, to cover his own fraud, took a lease, unknown to the purchaser. A creditor who took from his debtor a mortgage declared to be a continuing security for an amount less than the debt held to have made subsequent advances on the faith of the mortgage, although the original indebtedness was never reduced, but was continually increasing. Appeal from the Supreme Court. The action was brought for the purpose of setting aside the satisfaction of a mortgage, and to reinstate it as a lien,.on the ground that the satisfaction was procured from the plaintiffs, the mortgagees, by the fraud of the mortgagor, Daniel J. Townsend. The mortgage covered a lot of ground situated at Black Bock, in Erie county, on which a steam saw-mill had been erected, which is called, in the pleadings and proofs, the mill property, or mill lots. It was executed by Townsend and his wife to the plaintiffs, the 23d June, 1853, to secure an existing indebtedness and as a continuing security for future advances, to the amount of $35,000; and it was duly recorded. The plaintiffs had other securities for their demand; the particulars of which it is not material to state, as the indebtedness, before and at the time the bank which the defendant represents as receiver took its lien, was greater than the value of all the securities. In January, 1854, Townsend had become desirous of arranging the securities which the-plaintiffs held, in a different manner. He had contracted to sell a part of the mill lot, and proposed to have the mortgage in question and the plaintiffs’ other securities- discharged, and to give them a neV mortgage on the residue of the mill property and on other lands in Erie county, and to assign to them certain stock. The plaintiffs assented to this, and their agent, residing at Buffalo, was authorized to deliver the discharges, and receive the substituted securities; the plaintiffs themselves being at Albany, and Townsend at Niagara Falls. Under this authority the agent received the new mortgage and delivered the discharges, one of which was the satisfaction of the mortgage in question, which Townsend caused to be recorded and the mortgage to be satisfied of record. By a fraudulent contrivance of Townsend, this substituted mortgage, which was executed by himself and his wife, did not cover the mill property or any part of it, but was on a vacant lot of much smaller value, which was substituted in its stead—the agent, who was unacquainted with the boundaries, being induced, by the fraudulent representations of Townsend, to believe that the new mortgage did describe the residue of the mill lot according to his agreement. Subsequently, in April, 1855, the plaintiffs and Townsend having adjusted the debt which the securities were given to secure, at about $50,000, it was agreed to be liquidated by the conveyance of the mortgaged property to the plaintiffs. Townsend and his wife accordingly executed a deed to the plaintiffs of what the former represented, and the latter supposed, to be the residue of the mill lot, but which was the land which had been fraudulently substituted for that lot in the last mortgage, and another deed covering the other property contained in the said last mentioned mortgage, and assigned to them certain stock; and the plaintiffs thereupon released him from the debt. It was parcel of this agreement for the settlement that the plaintiffs should lease to Townsend the mill lot and the other land conveyed to them, for one year, at a rent of $3,500,- payable quarterly; and they accordingly gave him such a lease, and he continued in the possession of the mill lot to the time of the mortgage to the bank. In the latter part of that year (1855), ■when they were pressing him for the rent, he for the first time disclosed to the plaintiffs the fact that they had no title to the mill property. In truth, it had all along belonged to Townsend’s wife; but, as she executed the first mortgage, which really covered it, the plaintiffs had a perfect lien provided they were not precluded by the satisfaction and release. On the 28th May, 1856, Townsend and his wife mortgaged to the Oliver Lee & Company’s Bank (a banking association under the law of 1838,) several parcels of land, including the unsold part of the mill lot mortgaged to the plaintiffs. The mortgage was conditioned to pay all checks, notes, bills, &c., which the bank held, or should hold, against Townsend and the Buffalo Car Company, of which he was president; and at the foot of the instrument it was stated that it was “ executed as a continuing security for an amount hot exceeding $93,600.” At the date of the mortgage, Townsend was liable to the bank for about the sum of $145,000. This debt was increased by subsequent loans so that on August 27, 1859, it had risen to over $281,000. The defendant, the receiver, claimed that the bank was a bona fide mortgagor without notice, and it did not appear that its officers had any notice of the circumstances constituting the plaintiffs’ equity. The foregoing facts in substance were found by Mr. Justice Harris, before whom, the case was tried without a jury.- He also stated, as a conclusion of fact, “ that the bank had not any actual notice of the fraud practised upon the plaintiffs by Townsend nor of the plaintiffs’ rights, and had no other notice thereof than such as arose from the fact that the plaintiffs executed the lease aforesaid to Townsend, and his occupation of the premises.” Judgment was rendered at the special term in accordance with the decision of Judge Harris, by which it was declared that the satisfaction of the mortgage which the plaintiffs had executed was void on account of having been procured by the fraud of Townsend, and that the said mortgage was a valid incumbrance and superior to the lien of the mortgage executed to the bank; but, on appeal that judgment was reversed, at the general term, and a new trial was ordered. The plaintiffs appealed to this court with the usual stipulation in such cases. John H. Reynolds, for the appellants. John Ganson, for the respondents. [MAJORITY — James, J.] James, J. The fraud of Townsend being established as between himself and the plaintiffs, the discharge was a nullity, and the mortgage continued a valid lien upon the premises. Those who obtained liens subsequently from Townsend stood in no better condition than himself, unless they were bona fide purchasers, or incumbrancers, for value, without notice; and not then, if Townsend’s fraud amounted to a felony. The first position assumed by the plaintiffs’ counsel is, that this fraud was a felony by the provisions of the statutes. (2 R. S., 677, § 53; id., 702, § 30.) The section first cited declares that “ every person who shall, by any false pretence, obtain the signature of any other person to any written instrument, shall, on conviction thereof, be punished by imprisonment in a state prison, county jail, or by a fine,” &c.; and the section secondly cited declares that “the term 1felony,’ when used in this act, or any other statute, shall be construed to mean an offence for which the offender, on conviction, shall be liable by law to be punished by death or by imprisonment in a state prison.” This question incidentally arose in the case of Mowrey v. Walsh (8 Cow., 238), where it was held that the obtaining of money or goods by false pretences, with intent to defraud the owner, was a criminal offence, punishable by imprisonment in a state prison, or county jail, in the discretion of the court. Still, it was not a felony at common law, nor had it been made a felony by statute. This decision was before the adoption of the Revised Statutes containing the section last above cited. The effect of that section of the statute has been several times before the court, and considerable conflict of opinion seems to prevail in regard to it. In Andrew v. Dieterich (14 Wend., 36), it was held that this statute had declared all offences which rendered the offenders liable to punishment in a state prison, felonies, and that a fraudulent vendee could no longer transfer a valid title to property thus obtained, even to a bona fide purchaser, without notice. In Peabody v. Fenton (3 Barb. Ch., 463), the Chancellor doubted whether that view of the operation of that section of the Revised Statutes was correct, but expressed no definite opinion on the subject. In Robinson v. Dauchy (3 Barb., 20, 29), the court said “ the goods in question were purchased of the plaintiffs under false pretences, amounting to a felony,” citing the section of the statute above referred to. Thus stands the question upon authority; and its final determination is one of considerable importance. Hone of the cases cited give evidence that the question was examined with any considerable degree of care. The section of the statute relied upon is found near the close of a chapter relating to “ crimes, and their punishment.” It purports to give a statutory definition to the term “ felony,” when used in the statutes. The other sections of the same chapter, which follow it, define certain other terms. It Will, however, be observed that this section does not assume to define the meaning Of the term “felony,” except when used in a statute, and that this term is not used in the statute relating to false pretences. This section does not declare that every offence punishable in a state prison is a felony, nor does such a conclusion naturally follow from its language. At common law, the term “ felony” had a well known and definitive meaning. It was, any offence which occasioned a total forfeiture of lands or goods, or both; to which capital or other punishment might be superadded. (4 Bl. Com., 94; Bouv. Dic., 517.) That term is frequently used in the Revised Statutes (2 R. S., 698); and as all common law punishments for offences specified in those statutes were abolished (id., 701), the term would have been without a distinct and positive meaning had not the section under consideration been inserted. I am of the opinion that the common law rule, as to the character of the crime of obtaining goods, &c., by false pretences, was not changed by the provision of the Revised Statutes above cited. If, therefore, the bank was a bona fide holder for value without notice, its lien is entitled to priority over that of the plaintiffs. The plaintiffs insist that the bank was not a bona fide holder, without noticé, upon two grounds: 1st. Because its mortgage was taken as Security for a precedent debt; and, 2d. Because, when the mortgage was taken by the bank, Townsend was in the actual possession by virtue of a lease from the plaintiffs as their tenant, of which the bank and all other persons proposing to acquire any interest in the property from him were bound to take notice at their peril. The facts of the case, I think, conclusively dispose of the first point. It is true that Townsend’s indebtedness to the bank, at the date of the mortgage, was $145,000, and the mortgage only $93,600: still, the mortgage was given, not only as applicable to that liability, but as a security for such future advances as the bank might thereafter hold against him, and was also declared a continuing guaranty for the amount expressed on its face. Townsend continued to do business with the bank, paying in and drawing out money, so "that, when this action was commenced, he was indebted $281,000.' Thus it appears that future advances were made to Townsend by the bank, and it is fair to presume they were made in part on the faith of this additional security; so that, whether or not the prior indebtedness was reduced below the amount by the mortgage secured makes no difference, because the mortgage security being applicable, by its terms, to any indebtedness of Townsend, any advance made upon its faith before notice constituted the bank a holder for a valuable consideration. The second question is also, to a great extent, disposed of , by the facts. The lease from the plaintiffs to Townsend was unknown and unrecorded. It was not known that Townsend . ever took possession from the plaintiffs. The title was in his ' wife, and they were married before the act of 1848; and the lot was unincumbered. It is true that possession of a third person puts a purchaser upon inquiry, and makes it his duty to pursue his inquiries with diligence; but it is not absolutely conclusive upon him. (Williamson v. Brown, 15 N. Y., 361.) The rule laid down in that case is, that, when a purchaser has knowledge of any fact sufficient to put him on inquiry as to the existence of some right or title in conflict with that he is about to purchase, he is presumed either to have made the inquiry and ascertained the extent of such prior right, or to have been guilty of a degree of negligence equally fatal to his ■ claim to be considered a Iona fide purchaser. This presumption may, however, be repelled by proof. Under the facts and circumstances of this case,- the possession of the premises by Townsend was not sufficient to put the bank upon inquiry as to the existence of any. right inconsistent with that which it proposed to acquire. Townsend’s possession was consistent with the record title. He was not a third person to the transaction, but joined in the deed with the owner of the fee. In the absence of proof of actual notice, nothing appeared calculated to excite suspicion, or which should have put the bank upon inquiry. But had inquiry been made, and the facts ascertained, it would not have shown Townsend in possession under the plaintiffs. The plaintiffs never had the title or the possession of the mill lot. Townsend never had the title to give them. It is true,' when Townsend gave them a deed of another piece of land, he took from them a lease of the mili lot; but he did not enter into possession of the mill lot by virtue of that lease. He continued in possession under the right obtained from his wife. The lease gave. him no right: the plaintiffs could give him no right, for they had none to give; and although the lease may have been good, as a com tract, between the parties to it, the plaintiffs obtained no rights to possession by reason of it, as no possession had passed with it. The question, therefore, comes down to this: Was the fact that Townsend had taken a lease for the mill lot, which was unknown to the bank, and under which no possession had been or could be received, taken or claimed, sufficient to put the officers of the bank upon inquiry as to the nature of Townsend’s possession ? I think it was not. But if it were otherwise, there is another point which entirely disposes of this case. The plaintiffs were guilty of gross laches. The fraud complained of was discovered eighteen months before the mortgage was taken by the bank, and the matter was suffered to rest for fifteen months after that mortgage was given, until, upon the faith of itj in part, Townsend was enabled to increase his indebtedness to the bank from $145,000 to $281,000. As was said in Waldron v. Sloper (19 L. & E., 115), “ it is an elementary principle that a party coming into equity is bound to show that he hás not'been guilty of such a degree of negligence as to enable another party so to deal with that which was the plaintiff’s as to induce an innocent party to assume that he was dealing with his own.” Had ordinary diligence been used in this case, Townsend would not have been able to palm off a mortgage upon these premises to another, and the plaintiffs would have been secured in their rights. As it is, one of two innocent parties must suffer; and as the plaintiffs, by their great neglect, put it in the power of Townsend to commit the fraud, they cannot ask the court to interfere. In any view of the case, the judgment must be affirmed. Comstock, Ch. J., Selden, Lott, and Hoyt, Js., concurred. [DISSENT — Denio, J. (Dissenting.)] Denio, J. (Dissenting.) The fraud of Townsend, by which he was enabled to procure from the plaintiffs the- acknowledgment of satisfaction of the mortgage on the mill lot, is positively found by the judge. The right of the plaintiffs to the relief asked for, and which was afforded them at the special term, was therefore undeniable, unless the bank, of which the defendant Smith is the receiver, as the subsequent mortgagee of Townsend, stands in a better position than its mortgagor occupied. The plaintiffs’ mortgage being satisfied at law, the bank became the mortgagee of the legal title in the land. The right of the plaintiffs to set aside the satisfaction and reestablish the mortgage was an equity merely, and could not be asserted against a bona fide purchaser or mortgagee. The question in the case is, whether the bank can claim the character of a bona fide mortgagee. Its pretension to be so considered is denied, on the allegation that the corporation, or its officers, had notice of the plaintiffs’ equity, by means of the possession by Townsend of the premises, at the time the mortgage to the bank was executed, under the lease from the plaintiffs. The legal title was in the wife of Townsend, and she was one of the mortgagees. Her husband was in the possession of the premises. As there is no evidence that they lived separately, his possession is to be taken as her possession. They were married before the late statutes had weakened the bonds of marriage by creating separate and hostile interests between married persons. Before that change the husband had, during the joint lives of himself and his wife, a life estate in the wife’s lands; and if they had a child, he became a tenant by the curtesy. But, independently of this common-law right, which perhaps did not apply to this property, if it was purchased subsequently to their marriage, as it may have been, I am of opinion that the husband’s possession of the real estate of his wife is not to be considered hostile to the legal title, but, in the absence of any peculiar circumstance, is to be considered her possession. When, therefore, they mortgaged to the bank, the possession of Townsend was in no way inconsistent with the deed, and the bank was not under the necessity of making any inquiry. It is only where a person other than the grantor or mortgagor is in possession that it is necessary, in order to confer upon the purchaser or mortgagee a bona fide character so as to avoid any equity residing in the party so in possession, that he should make due inquiries of him as to his title. In general, the purchaser takes subject to the right of the party in possession. The rule, I conceive, has no application to the present case. Although Townsend had a lease from the plaintiffs, the bank had no notice of that fact. He continued in possession in the same manner ostensibly as before he took the lease, and that instrument constituted no part of the chain of title under which Mrs. Townsend, the real owner, held the land. But it was not enough that the bank had no notice of the plaintiffs’ rights. It was also necessary that it should have advanced money, or other valuable thing, to obtain the mortgage, or in consequence of it. If it was executed simply to secure an existing debt, nothing being advanced and no obligation or security given up, the plaintiffs are not precluded from setting up their equity against the bank as mortgagees ' of Townsend and his wife. (In the Matter of Howe, 1 Paige, 125; Arnold v. Patrick, 6 id., 310.) Upon this point, I think the defendant’s case is defective. When the mortgage was given, Townsend was under liabilities to the bank to the' amount of $145,000, which was many times the value of the property. But it was a continuing security for future advances and indebtedness, go that if this debt had been paid off in whole or in part, so as to reduce the amount remaining unpaid below the limit mentioned in the mortgage, and additional loans had been made without notice of the plaintiffs’ equity, the bank would have been a bona fide mortgagee in respect of such loans. If there had been no limitation of the amount for which the mortgage was to stand as a security, all the subsequent advances might have conferred upon it the character of a bona fide transfer, notwithstanding the inadequacy of the property to secure the old and the new portions of the debt. But it was an express provision in the instrument that it was to be a security for an amount not exceeding $93,600. As the debt for which immediately upon its execution it became a security was much móre than that amount, no subsequent advance could have any relation to the mortgage, unless the existing indebtedness should be reduced below the limit named. If payments had been made on account of that debt, so that so much as $93,600 did not remain due, then every future advance up to that amount would be a loan upon the mortgage security. When that amount of indebtedness was again reached, subsequent advances would not connect themselves with the mortgage until future payments should again reduce the debt below the amount mentioned in the mortgage. The findings of fact at the end of the case do not show that anything was paid after the execution of the mortgage to the bank. The contrary is inferable; for, it is stated that the liabilities of Townsend and of the Buffalo Car Company, at the time the mortgage was given, exceeded $145,000, arid that the amount was increased by subsequent loans, up to August 27, 1857, to over $281,000. No inference can be drawn from this that anything had been paid during the interval; but, as Townsend continued to transact business with the bank, it is very probable the account fluctuated. The evidence of Mr. Davis, who seems to have managed Mr. Townsend’s business and that of the Car Company at the bank, is, that the debt was not diminished at any time after the giving of the mortgage. It may possibly consist with this statement that the whole of the indebtedness constituting tha $145,000 may have been paid, and yet that the aggregate indebtedness of Townsend and the Company was hot diminished; that is, they may have paid up the whole of the old debt while they were contracting a fresh one. As the security was a continuing one, the mortgage would attach, as has been mentioned, to the new loans as soon as the old debt was so far diminished as to leave a place, in the maximum amount for which the mortgage was a security, to be filled up. It is not improbable that the bank may have consented to make fresh advances because it considered so large an amount of the old debt secured by the mortgage; but this would not make it a bona fide mortgagee in respect to such new loans. To have that effect, the loans must have been made on account of the mortgage security, in such a sense as that they might be collected by a foreclosure and sale of the mortgaged premises, if the proceeds were sufficient. If the question were between tire mortgagee and subsequent incumbrancers of the mortgaged premises, the former could not retain more than $93,600 out of the proceeds of the sale, and any residue would belong to the lien holders next in the order of time. If that sum remained due on the debt which existed when the mortgage was given, it is then clear that no advances have been made on account of the mortgage security; and there is nothing to show that so much has not at all times remained unpaid of that debt. I am, therefore, of opinion that the receiver must be considered as succeeding to the case of the mortgagors, and that his title is subject to the plaintiffs’ equity. If this were agreed to, the judgment of the general term would have to be reversed, and that of the special term affirmed; but it appears that different views are entertained by a majority of the judges. Davies and Mason, Js., concurred in this opinion, Order affirmed, and judgment absolute for the defendants.