Cumberland Bldg. & Loan Ass'n v. Sparks

• Decision Date: 06 November 1901
• Docket Number: 1,547.
• Citation: 111 F. 647
• Parties: CUMBERLAND BUILDING & LOAN ASS'N et al. v. SPARKS et al.
• Court: U.S. Court of Appeals — Eighth Circuit

111 F. 647

CUMBERLAND BUILDING & LOAN ASS'N et al. v. SPARKS et al.

No. 1,547.

United States Court of Appeals, Eighth Circuit.

November 6, 1901

G. B Webster, for appellants.

N.W. Norton (J. M. Prewett, on the brief), for appellees.

The Cumberland Building & Loan Association and A. Moore Berry, as trustee, the appellants, on February 12, 1900, exhibited a bill of complaint against G. N. Sparks and Parmelia J Sparks, his wife, and against J. W. Killough and O. N Killough, the appellees, to foreclose a mortgage on certain property, being the S.E. 1/4 of block 5 in Brookfield's Original division of the town of Wynne, Cross county, Ark., which mortgage was executed by the defendants G. N. Sparks and Parmelia J. Sparks on March 25, 1895, to secure a loan evidenced by a promissory note in the sum of $2,000. The bill averred that said loan was made to Sparks and wife to enable them to pay off a prior incumbrance on the property aforesaid in the sum of about $1,800, which was held at the time by R. G. Oliver, as guardian for the minor heirs of C. D. Oliver; and that the sum of $2,000 loaned as aforesaid was in fact used to pay and discharge the last-mentioned incumbrance. The bill further alleged that on May 17, 1897, Sparks and wife conveyed the mortgaged property to the defendants J. W. Killough and O. N. Killough for a consideration which was declared to be the full value of the property, but that said conveyance was in fact made without any consideration, for the purpose of hindering defrauding, and delaying the creditors of G. N. Sparks. It was further averred that the aforesaid loan to Sparks and wife was made originally by the Southern Saving Fund & Loan Company, and that the mortgage or deed of trust securing the same conveyed the property to A. Moore Berry, on e of the complainants, as trustee for said Southern Saving Fund & Loan Company; that the mortgage indebtedness and the mortgage securing the same were assigned to the complainant the Cumberland Building & Loan Association on November 18, 1896, and that default had been made in the payment of the indebtedness secured by the mortgage. In view of the premises, the complainants prayed that a decree of foreclosure and sale might be entered, or, if such relief was not deemed proper, then that the satisfaction of the prior mortgage existing on the premises in favor of R. G. Oliver, as guardian (which mortgage bore date May 1, 1894), might be set aside and for naught held, and that the Cumberland Building & Loan Association might be subrogated to all the rights and privileges of the beneficiaries under the last-mentioned mortgage, and that the property be sold to enforce the payment of the indebtedness evidenced by the Oliver mortgage. To the aforesaid bill the defendants J. W. Killough and O. N. Killough filed an answer, wherein they admitted the purchase of the mortgaged premises from Sparks and wife on or about May 17, 1897. They denied that said purchase was without consideration, or that the purchase was made for the purposes of hindering defrauding, or delaying the creditors of Sparks. They averred, on the contrary, that they paid full value for the mortgaged property, first having satisfied themselves from an examination of the record that the title to the mortgaged premises was clear, and not subject to any lien; and that in point of fact the mortgage of March 25, 1895, in favor of the Southern Saving Fund & Loan Company was not executed in a manner which entitled it to go of record, and for that reason, under the laws of the state of Arkansas, was no notice to them of any subsisting lien upon the property in controversy. They further averred that they took possession of the property, having paid for it in full, shortly after the conveyance of the same to them by Sparks and wife, and had been in the open, notorious, and continuous possession of the same since the date of said conveyance. Sparks and wife filed a separate answer, in which they admitted the conveyance of the property in controversy to J. W. Killough and O. N. Killough on May 17, 1897, but they denied that such conveyance was made by them without consideration, or that it was made with a view of hindering, delaying, or defrauding the creditors of said Sparks. After a trial upon these issues, the lower court held that the bill was without equity, and directed that the same be dismissed, at the complainants' costs. 106 F. 101. From this decree the complainants below have prosecuted an appeal to this court.

Before SANBORN and THAYER, Circuit Judges, and ADAMS, District Judge.

THAYER Circuit Judge, after stating the case as above, .

The laws of Arkansas (Sand. & H. Dig. Secs. 707, 5090) require deeds and mortgages conveying real property located in that state to be executed in the presence of two disinterested witnesses, or, if not so executed, that they be acknowledged in the presence of two persons, who shall then subscribe their names to the deed or mortgage as attesting witnesses. The mortgage or deed of trust which was executed on March 25, 1895, by Sparks and wife in favor of the Southern Saving Fund & Loan Company was neither executed nor acknowledged in the presence of two disinterested witnesses, as the local law required, and for that reason it is conceded that it was not entitled to go of record. Moreover, the laws of the state of Arkansas (Sand. & H. Dig. Sec. 5091) contain the following provision:

'Every mortgage, whether for real or personal property, shall be a lien on the mortgaged property from the time the same is filed in the recorder's office for record, and not before; which filing shall be notice to all persons of the existence of such mortgage.'

This statute has been construed repeatedly by the supreme court of the state of Arkansas. Beginning with the decision in Main v.

Alexander 9 Ark. 112, 47 Am.Dec. 732, it has been held in a long line of cases, and the doctrine is so well established as to have become a rule of property in that state which is binding upon the federal courts, that, unless a mortgage is properly acknowledged, the record thereof imparts no notice of its contents to a third party, although he has actual notice of its existence and knowledge of its contents; the theory being that by virtue of the statute aforesaid no lien is created by a mortgage, so far as strangers to the instrument are concerned, unless it is first acknowledged and recorded as the law directs. Under the statutes and decisions of that state, a mortgage is good, as it seems, between the parties thereto, after it is delivered to the mortgagee; but it has no force or effect as against strangers, although they have knowledge of the same, until it is placed or record, first having been properly acknowledged. Jacoway v. Gault, 20 Ark. 190, 73 Am.Dec. 494; Jarratt v. McDaniel, 32 Ark. 598, 602; Neal v. Speigle, 33 Ark. 63, 68; Martin v. O'Bannon, 35 Ark. 62, 68; Ford v. Burks, 37 Ark. 91, 94, 95; Dodd v. Parker, 40 Ark. 536; Wright v. Graham, 42 Ark. 140, 148; Watson v. Lumber Co., 49 Ark. 83, 4 S.W. 62; Milling Co. v. Mikles, 61 Ark. 123, 128, 32 S.W. 493. Such being the local law, it follows, of course, that the defendants J. W. Killough and O. N. Killough, who purchased the mortgaged property on May 17, 1897, from Sparks and wife, the mortgagors, acquired a good title thereto, free from the lien of the mortgage in favor of the Souther Saving Fund & Loan Company, which the complainant, as assignee of the mortgage, seeks to foreclose, unless it be true, as is alleged in the bill, that the conveyance by Sparks and wife to J. W. Killough and O. N. Killough was made without consideration, and with intent on the part of the persons concerned in that transaction to hinder, delay, or defraud the creditors of G. N. Sparks. The finding of the lower court, however, as respects this latter issue, was in favor of the defendants and against the complainants. The evidence of all the witnesses who were produced tended to show that the Killoughs purchased the mortgaged property from Sparks on May 17, 1897, at an agreed price of $2,500, which sum was paid in full at the time of the purchase by conveying to Sparks a one-half interest in a stock of goods valued at about $2,250, and by discharging certain debts which Sparks owed to the purchasers and certain other persons, amounting in the aggregate to something over $1,300. The complainants produced no evidence which tended to show that the mortgaged property was not paid for in the manner aforesaid. It did appear, however, that the Killoughs, as they admit in their answer, were aware of the existence of the outstanding mortgage in favor of the Southern Saving Fund & Loan Company, but, as the laws of the state permitted them to make the purchase notwithstanding such knowledge, and to hold the property exempt from the lien of the mortgage, because it was not properly acknowledged, fraud cannot be imputed to the purchasers because they saw fit to exercise this legal right. Aside from the fact that they did buy the mortgaged property with knowledge of the existing incumbrance, there is no other evidence in the record which will serve to cast suspicion on the conduct of the purchasers, or which would justify the conclusion that they hold the property in secret trust for Sparks, or that their motive in buying it was to enable Sparks to perpetrate a fraud upon his creditors. It is most probable, we think, that the Killoughs were induced to purchase the property because it was offered to them at a low price, and because by so doing they could make a profit by the transaction, and at the same time obtain payment of certain debts...