Smith v. D. Rothschild & Co.

• Decision Date: 26 June 1924
• Docket Number: 4 Div. 102
• Citation: 212 Ala. 276,102 So. 206
• Court: Alabama Supreme Court
• Parties: SMITH v. D. ROTHSCHILD & CO. et al.

102 So. 206

212 Ala. 276

SMITH v. D. ROTHSCHILD & CO. et al.

4 Div. 102

Supreme Court of Alabama

June 26, 1924

Rehearing Denied Dec. 4, 1924

Appeal from Circuit Court, Bullock County; J.S. Williams, Judge.

Bill in equity by Mary A. Smith against D. Rothschild & Co. and the individual members of the partnership, to enjoin the prosecution of an action at law and for cancellation of a deed and mortgage. From a decree sustaining demurrer to the bill, complainant appeals. Reversed and remanded.

Blue &amp Blue, of Union Springs, for appellant.

R.E.L Cope, of Union Springs, and James J. Mayfield, of Montgomery for appellees.

THOMAS, J.

The bill is to declare void deeds and mortgage on the wife's property as procured and given in securing the husband's debts. The injunctive relief prayed against a pending suit in ejectment is denied in the sustaining of respondents' demurrer to the bill.

The statute has often been construed, and forbids the wife, directly or indirectly, to become surety for the husband. Code, § 4497; Leath v. Hancock, 210 Ala. 374, 98 So. 274; Morriss v. O'Connor, 206 Ala. 542, 90 So. 304; Little v. People's Bank of Mobile, 209 Ala. 620, 96 So. 763; Vinegar Bend Lumber Co. v. Leftwich, 197 Ala. 352, 72 So. 538. It is averred in the bill that the several conveyences and procedure thereunder were all parts and parcels of one transaction by which respondents undertook to have complainant indirectly become surety for her husband, and that each of said deeds and mortgage is void under the provisions of said statute. It is further averred that complainant's "husband, G.W. Smith, was largely indebted to respondents as well as other persons, firms, and corporations, and desired to secure or arrange for an extension of said debts, and that the members of respondent partnership knew that security could not be given said partnership, or that said debts could not be secured, unless the same could be accomplished by the means hereinafter recited, and also knowing that a mortgage executed by complainant and her said husband upon her separate property, for the purpose of securing said debts, would be void, suggested to the said G.W. Smith, husband of complainant, that he first have her deed her lands to him, and then join with him in the execution of the mortgage hereinafter mentioned and described; or, if the said members of said partnership did not make such suggestion, they did know that complainant was the wife of said G.W. Smith, and that the plan to have her become indirectly the surety for the said debts of her husband was to be accomplished, in the manner hereinafter shown"; that "complainant further and again alleges that her deed to her said husband, and the said mortgage executed by him, in which she joined, to said Merchants' & Mechanics' Bank, the transfer and assignment of said mortgage to respondents, and its subsequent foreclosure under the power of sale contained therein, and the deed executed to respondents by said auctioneer, all conveying said above-described lands, were all parts and parcels of one and the same transaction, by which respondents undertook to have complainant indirectly become surety for the debts of her husband, and further avers that each of said deeds and said mortgage was and is void under the provisions of section 4497 of the Code of Alabama of 1907, and each is a cloud upon complainant's title to the lands described in the second paragraph of this bill."

In Vinegar Bend Lumber Co. v. Leftwich, 197 Ala. 352, 72 So. 538, it was held:

"Where the wife borrows money from her husband's creditor, and hands it back in payment of her husband's debt, thus becoming nominally the principal debtor on a new obligation, she becomes by indirection a surety of her husband's debt within the provision of section 4497, Code 1907.

"Where the wife conveyed her separate property to the husband and joined with him in the mortgage thereof to secure his debt, with the knowledge by the mortgagee of her rights in the premises, the transaction was void as violative of section 4497, Code 1907."

It is also held that where the wife conveys her separate property to the husband and joins with him in the mortgage thereof to secure his debts, the mortgagee having knowledge of her rights in the premises, the statute is violated. Staples v. City Bank & Trust Co., 194 Ala. 687, 70 So. 115; Evans v. Faircloth-Byrd Mer. Co., 165 Ala. 176, 51 So. 785, 21 Ann.Cas. 1164; Lamkin v. Lovell, 176 Ala. 334, 58 So. 258; Elkins v. Bank of Henry, 180 Ala. 18, 60 So. 96; Hall v. Gordon, 189 Ala. 301, 66 So. 493.

Looking to the substance rather than the appearance, as equity does, to uncover the truth or facts (Richardson v. Stephens, 122 Ala. 301, 25 So. 39; Elba Bank & Trust Co. v. Blue, 203 Ala. 524, 84 So. 748; Henderson v. Brunson, 141 Ala. 674, 37 So. 549; McNeil v. Davis & Son, 105 Ala. 657, 17 So. 101), the facts averred, if proved, will disclose an evasion of the statute which makes the wife indirectly secure the husband's debt.

The statement has been made that the negotiation of a loan through a collusive arrangement with a third person, whereby the wife becomes surety for the loan with which the debts of the husband are paid, and the ultimate purchase of the securities for said loan by the original creditor, does not constitute the said creditor a bona fide purchaser, and the indirectness of the transaction does not cure the invalidity. In Lamkin v. Lovell, supra, Mr. Justice Sayre said:

"But where, as here, it is entirely clear that the transaction is different from what it purports to be, where the parties move circuitously to the end in view, as if to evade the statute, and where the true intent and meaning of what the wife does is to give her obligation, payable in the future and secured by a mortgage, to the husband's creditor--all facts established in this case beyond peradventure--the necessary effect is to constitute the wife's note and mortgage a collateral security for the husband's debt."

The language of the statute is that "the wife shall not, directly or indirectly, become the surety for the husband." Code, § 4497. Equity's invariable process is to look through form to substance. No superficial appearance will be permitted to lead the court away from the truth of the transaction to avoid the statute if such be its effect and purpose.

In Staples v. City Bank & Trust Co., 194 Ala. 687, 689, 70 So. 115, 116, the fundamental distinction is made between a loan secured from the husband's creditor and one secured from a third person who is not interested in the disposition of the fund; and it is said:

"If the debt sought to be enforced against the wife, or any part of it, was infected with this vice in its inception, the infection remains, regardless of renewals or changes of form. And so, with respect to the method by which the proceeds of the loan are returned to the hands of the lender, it is of no consequence whether the payment of the husband's debt is open and direct, or whether the money passes to the creditor through intermediates chosen for the purpose. The law looks to the intention and the result, and not to the means employed."

It is charged in the bill, through facts averred, that the bank in this case was a mere conduit, and the passing of the notes and mortgage and its foreclosure through and by the bank cannot impute validity. The circumstances of the transaction averred will tend to arouse suspicion of the evasion of the statute. Elba Bank & Trust Co. v. Blue, 203 Ala. 524, 84 So. 748. That is to say, if respondents negotiated the loan for the husband with the bank in Columbus, Ga., on complainant's lands in Alabama, later refunded the money to the bank, or purchased from it the evidences of the loan, security, and title to the said lands--if this procedure was a part of the original purpose, it does not make respondents bona fide purchasers, but points to a circuitous method by which the benign influence of the statute may be avoided. It is within the influence of Vinegar Bend Lumber Co. v. Leftwich, 197 Ala. 352, 72 So. 538, and Morriss v. O'Connor, 206 Ala. 542, 90 So. 304.

The decree sustaining demurrer to the bill was laid in error. The facts should be considered under the statute, after full pleading and proof.

The decree is reversed and the cause remanded.

Reversed and remanded.

ANDERSON, C.J., and SOMERVILLE and BOULDIN, JJ., concur.

On Rehearing.

THOMAS J.

In addition to the foregoing authorities see Rollings v. Gunter (Ala.Sup.) 101 So. 446, where the leading authorities on section 4497 of the Code are collected.

In view of the reasons assigned in the decree on demurrer as to the obligation being a "commercial paper," the observation should be made that we have here to do with the right of a creditor who is alleged to have moved circuitously to evade the statute, having the mortgage taken by a third party (in good faith), and by it transferred before maturity to said creditor. The third party here employed is not a defendant to the instant bill, nor is it charged that it knowingly participated in the circumvention of the statute. Are the averments of the original bill sufficient to bring the case within the principle so well stated by Mr. Justice Sayre in Lamkin v. Lovell, 176 Ala. 334, 58 So. 258? The writer believes that it is so ruled on principle, though it was charged in the Lamkin-Lovell Case that the mortgagor and creditor procured Colonel Harris, who had no concern about their purposes, to lend complainant (the wife) the sum desired on the security of her note and mortgage, "the understanding being" that the creditor "would, soon as he desired, reimburse him and take an assignment of the note and mortgage without recourse"; the money was paid to...