Myers v. Hazzard

• Decision Date: 01 September 1881
• Citation: 50 F. 155
• Parties: MYERS v. HAZZARD et al.
• Court: U.S. District Court — District of Nebraska

50 F. 155

MYERS v. HAZZARD et al.

United States Circuit Court, D. Nebraska.

September, 1881

Chapman & Hammond and Lamb, Billingsley & Lambertson, for complainant.

E Wakeley, for respondent Coates.

McCRARY Circuit Judge.

It will be observed that this case presents an important question of law respecting the rights of the bona fide purchaser of commercial paper secured by mortgage. Assuming that Coates was such a purchaser, and that he had no notice of the fraud (and such the court finds to be the fact,) the case turns mainly upon the question, which has been elaborately argued by counsel, whether he is to be regarded in the light also of an innocent bona fide purchaser of the mortgage, so as to have the right to enforce it as against the assignee in bankruptcy of George Hazzard.

The question to what extent, and under what circumstances, the bona fide purchaser of negotiable commercial paper secured by mortgage is entitled to the benefits of the mortgage security, unaffected by equities existing as between the original parties, is one of great and growing importance. It is now well settled that the mortgage is only an incident to the debt, and passes with it to the assignee. No formal assignment of the mortgage is necessary. The debt is the principal thing, and the mortgage an accessory, so that the assignment of the debt passes all the mortgagee's interest in the mortgaged property, whether the assignment be before or after the forfeiture. Langdon v. Buel, 9 Wend. 80; Gould v. Marsh, 1 Hun, 566; Johnson v. Hart, 3 Johns.Cas. 322; Ellett v Butt, 1 Woods, 214; Gaff v. Harding, 48 Ill. 148; 1 Jones, Mort. Secs. 813-822, and cases cited. Where there is no question as to the validity or construction of the mortgage, or as to the title of the mortgagor as between the original parties to the instrument, there can be none, of course, as between the mortgagor and the assignee of the secured debt. The cases of doubt and difficulty arise where, as between the original parties to the mortgage, there is a question as to its validity, or as to its force and effect, independent of any question affecting the note, or where a third party claims the mortgaged property and denies the authority of the mortgagor to fasten a lien upon it. In such cases, to what extent can the innocent, bona fide purchaser of the note before due be regarded as an innocent purchaser of the mortgage also, and entitled to protection accordingly against equities existing as between the original parties?

We are confronted in the outset by a conflict of authority upon the principal question. In several of the states it is held that the assignee of a negotiable note, secured by mortgage, takes the latter, as he would any other chose in action, subject to all the equities which subsisted against it while in the hands of the original holder. The argument in support of this doctrine is that a mortgage is in its nature a nonnegotiable instrument, and that the rights of the parties to it cannot be fixed and determined by the law merchant. Mortgages, it is insisted, are not commercial paper, and it is not convenient to pass them from hand to hand, so that they may perform the office of money in commercial transactions, as may be done with notes, bills, and the like. It is accordingly held, in the cases now under consideration, that while the purchaser of a note secured by mortgage may be entitled to all the rights of an innocent purchaser of commercial paper, so far as the note is concerned, yet, if he seeks to foreclose the mortgage, he may be met by any defense which would have been good as against the original mortgagee. Johnson v. Carpenter, 7 Minn. 176, (Gil. 120;) Hostetter v. Alexander, 22 Minn. 559; Olds v. Cummings, 31 Ill. 188; White v. Sutherland, 64 Ill. 181; Fortier v. Darst, 31 Ill. 212; Sumner v. Waugh, 56 Ill. 531; Baily v. Smith, 14 Ohio St. 396. On the other hand, it is held by the supreme court of the United States, and by the courts of last resort in a large majority of the states, that an assignee for value of a negotiable note secured by a mortgage, before due and without notice, takes the mortgage, as he does the note, free from equities existing between the original parties. It is said, in support of this doctrine, that the note, being the principal thing, imparts its character to the mortgage. The mortgage is regarded as following the note, and as taking to itself the same qualities, so that the assignee takes the former, as he takes the latter, free from any existing equities between the original parties. A leading case upon this subject and a controlling one, so far as the federal courts are concerned, is that of Carpenter v. Longan, 16 Wall. 271. In that case the rule just stated was laid down by Mr. Justice SWAYNE as follows:

'The assignment of a note underdue raises the presumption of the want of notice, and this presumption stands until it is overcome by sufficient proof. The case is a different one from what it would be if the mortgage stood alone, or the note was nonnegotiable, or had been assigned after maturity. The question presented for our determination is whether an assignee, under the circumstances of this case, takes the mortgage, as he takes the note, free from the objections to which it was liable in the hands of the mortgagee. We hold the affirmative. The contract as regards the note was that the maker should pay it at maturity to any bona fide indorsee, without reference to any defenses to which it might have been liable in the hands of the payee. The mortgage was conditioned to secure the fulfillment of that contract. To let in such a defense against such a holder would be a clear departure from the agreement of the mortgagor and mortgagee, to which the assignee subsequently in good faith became a party. If the mortgagor desired to reserve such an advantage, he should have given a nonnegotiable instrument. If one or two innocent persons must suffer by a deceit, it is more consonant to reason that he who 'puts trust and confidence in the deceiver should be a loser, rather than a stranger.''

In order to understand the scope of this opinion, it is necessary to note that the defense in the case as against the mortgage was, in substance, that, as between the original parties, it has been satisfied. The mortgagor alleged that at the time of the execution of the mortgage she delivered to the mortgagee certain property, which he agreed to sell, and apply the proceeds to the satisfaction of the note, and that, instead of so doing, he converted the property so delivered to his own use. The sole question was whether the equitable satisfaction of the mortgage in this way could be set up as against the assignee. This case is not, therefore, as some lawyers have assumed, authority for the doctrine that the bona fide purchaser, without notice, of a negotiable underdue note, secured by mortgage, holds the mortgage precisely as he holds the note, subject to no defenses whatever that would not be good against the latter. In that case there was no question as to the title of the mortgagor at the time that the mortgage was given, nor as to the rights of any third party with respect to the mortgaged property, nor as to the validity or construction of the mortgage itself. It seems manifest that it was not the intention of the court to assert broadly the rule that, because a mortgage is given to secure a negotiable note, which, before maturity, is assigned to a bona fide purchaser, therefore no objection can be raised to the mortgage, unless it would be an objection constituting a defense to the note in the hands of such a purchaser. The court decided the case before it, and was careful to qualify its opinion by the words, 'under the circumstances of this case. ' The general rule announced in Carpenter v. Longan has been adopted in Massachusetts, Maine, Michigan, Wisconsin, Nebraska, Iowa, Missouri, and other states. See Jones, Mort. Sec. 834, and numerous cases cited. But the doctrine has not yet been established as the law of New York or Pennsylvania. Union College v. Wheeler, 61 N.Y. 88; Horsman v. Gerker, 49 Pa.St. 282.

For our present purpose we will assume, as we are bound to do, the soundness of the general rule announced in Carpenter v Longan, and similar cases, and address ourselves to the task of determining, if we can, its true meaning and its proper limitations. Although the general language employed in some of the cases might seem to justify the inference that a mortgage transferred with a negotiable note before due is to be treated for all purposes as commercial paper, it is manifest that the rule thus broadly stated cannot be maintained upon principle. In many of the cases the rule is stated to be that the mortgage is regarded as following the note, and as taking the same character; but it must, of course, be understood that the mortgage takes the character of a negotiable note only in so far as in its nature it is capable of having that character imputed to it, and therefore the rule must be subject to certain modifications or exceptions. In any suit brought by the assignee of the note to foreclose the mortgage, the mortgagor may be heard to assert that the mortgage is invalid as to all or part of the property, by reason of anything that appears upon the face of the mortgage, or by reason of anything that the assignee is bound by law to know, whether the same constitutes a defense to the note or not. A third party may be heard to assert, as against the validity of such a mortgage in the hands of the assignee, that the mortgagor, at the time of the execution of the mortgage, had no power to execute it. The mortgage in the hands of the assignee, like the note, is freed from equities existing as between the original parties....