Prot. Bldg. & Loan Ass'n v. Knowles

Full title: PROTECTION BUILDING & LOAN ASS'N v. KNOWLES et al.

Court: COURT OF CHANCERY OF NEW JERSEY

Date published: Jun 11, 1896

54 N.J. Eq. 519 (Ch. Div. 1896)

54 N.J. Eq. 519

Opinion

06-11-1896

PROTECTION BUILDING & LOAN ASS'N v. KNOWLES et al.

Mr. Clymer, W. Bradford Smith, and Mr. Bradner, for complainant. E. S. Atwater, for defendant Chickering, administrator ad pros, of A. L. Van Blarcum, deceased.

EMERY, V. C.

Suit by the Protective Building & Loan Association against Emma J. Knowles and others. Heard on bill, answers, and cross bill, etc.

Mr. Clymer, W. Bradford Smith, and Mr. Bradner, for complainant.

E. S. Atwater, for defendant Chickering, administrator ad pros, of A. L. Van Blarcum, deceased.

EMERY, V. C. The bill in this case is filed to foreclose a mortgage for $2,500, with interest, given to the complainant, a building and loan association, by the defendants Emma J. Knowles and Francis W. Knowles, her husband, upon premises conveyed to Mrs. Knowles by A. L. Van Blarcum; and the question is whether, for the whole or any part of this sum of $2,500, the association mortgage is a lien prior to a mortgage of $5,000 given to the vendor by Mr. and Mrs. Knowles, to secure part of the purchase money of the premises. This mortgage to the association, which bears the same date as the deed from Van Blarcum to Mrs. Knowles, refers to the premises as conveyed to Mrs. Knowles by that deed, andthen recites that "it is given to secure the payment of part of the purchase money mentioned in said deed which has been advanced by the said association." The whole purchase price of the property was, in fact, $6,000; and, upon the delivery of the deed, a payment of $1,000 in cash was made, and a mortgage by Mr. and Mrs. Knowles to Van Blarcum for $5,000, the balance of the purchase money, was delivered to the attorney of the vendor, Van Blarcum. The complainant, before the delivery of the deed, advanced to the purchaser the sum of $1,000, and, subsequent to the delivery of the deed, advanced the further sum of $1,500. The $1,000 advanced before the delivery, or its proceeds, was used for making the cash payment on the purchase to the vendor; but the $1,500 afterwards advanced was not, nor was any part of it, used for purchase money. The grantor, Van Blarcum, who was an uncle of Mr. Knowles, the husband of the grantee, lived in California, and after executing the deed there, on the 15th of December, 1891, sent it through his business agents to Mr. Parker, a counselor at law of New York, to deliver to Mr. Knowles, the husband of the grantee, upon receiving from him the cash payment of $1,000 and a purchase-money mortgage for $5,000. The payment of $1,000 was made, and the Van Blarcum mortgage delivered by Mr. Knowles to Mr. Parker, in New York, on January 11, 1892; and, at the time of the exchange of the papers, Mr. Parker, in order to protect the purchase-money mortgage, proposed to retain the deed, in order to record it at the same time with the purchase-money mortgage, but, upon Mr. Knowles' solicitation, he finally consented to deliver both the deed and the mortgage to Mr. Knowles, for the purpose of recording them. The deed and this mortgage to Van Blarcum, which were both dated December 15, 1891, were, at Knowles' request, delivered to Knowles in New York, od January 11, 1892; were taken by him to Newark; and on January 12, 1892, he delivered the unrecorded deed to Mr. W. Bradford Smith, the solicitor of the complainant, who then advanced to him, for the complainant, $1,500, the balance of the complainant's mortgage, and immediately forwarded the unrecorded deed, together with the complainant's mortgage, to the Union county clerk for recording, and the deed and complainant's mortgage were both recorded on January 12, 1892. Knowles retained the Van Blarcum purchase-money mortgage in his possession until January 20, 1892, when he sent it to the clerk's office for record. The $1,500 advanced by the complainant on January 12, 1892, was made by a check of the association, but whether to the order of Mr. or Mrs. Knowles does not appear. It was not, in fact, used for payment of any part of the purchase money; but the complainant claims that its mortgage was made, executed, and recorded, so far as it is concerned, in good faith, and without any knowledge or notice of the Van Blarcum mortgage for the whole amount advanced, as well the $1,000 advanced before the delivery of the Van Blarcum mortgage as the $1,500 subsequently advanced. Mr. Van Blarcum died shortly before the filing of the complainant's bill, and the defendant William H. Chickering, who has been appointed his administrator ad prosequendum, claims that the complainant had notice of his mortgage, and, by cross bill, alleges also that Knowles was, by reason of facts therein stated, the complainant's agent in recording its mortgage, and that, by reason of his agency, the complainant was chargeable with actual knowledge of defendant's mortgage. This agency of Knowles is denied in the answer to the cross bill, which also denies any knowledge or information of defendant's mortgage until after the advance of its money and the recording of its own mortgage. The answer to the cross bill further alleges (on information) that it was distinctly understood and agreed at the time of the delivery of the Van Blarcum purchase-money mortgage that the Van Blarcum mortgage should be a second mortgage upon the premises. No evidence whatever has been produced in support of this latter allegation, nor was Mr. Knowles called to contradict the statements of Mr. Parker, Van Blarcum's attorney, in reference to the occurrences at the time of the delivery of the deed. These statements show that the deed and mortgage were delivered by Mr. Parker to Mr. Knowles, to be recorded together, and that Mr. Parker, in consenting to this arrangement, relied upon Mr. Knowles' professional integrity, and upon his relationship to Mr. Van Blarcum. At the time of the delivery of the deed and mortgage, Mr. Parker had no information or even cause for suspicion that Knowles and his wife had already executed a mortgage to complainant upon the premises; nor is there any evidence that Van Blarcum, the vendor, knew that any such mortgage was proposed. One of Mr. Knowles' letters to Mr. Parker, dated on March 5, 1892, refers to a letter of Van Blarcum to Knowles, dated February 2, 1892, in which (as Knowles writes) Van Blarcum denies that he made any agreement that his (Van Blarcum's) mortgage should be a second mortgage; but this letter of Van Blarcum's was not produced.

No agreement for postponement of the purchase-money mortgage being shown, the question in the case is whether, for the whole or any part of the money advanced upon its mortgage, the complainant is to be preferred to the purchase-money mortgage. The complainant bases its right to preference upon the claim that, for the whole amount of the mortgage, it is "a subsequent bona fide mortgagee, for a valuable consideration, not having notice of defendant's unrecorded mortgage,"and therefore within theprotection of the statute (Revision, p. 706, par. 22). The facts in the case show, in my judgment, that Knowles was not the agent or attorney of the complainant in any part of the transaction, and the question of notice to the complainant depends upon the knowledge or information received by Mr. Smith, the regular attorney of the association, who was the only person acting for the complainant in reference to the loan. No proof of any actual notice of complainant's mortgage on the part of Mr. Smith is shown, and his own statement under oath, when called as defendant's witness was, that, before the mortgage of the association was taken, he did not know from Mr. Knowles that he proposed to give his uncle a mortgage for any part of the purchase money. Knowles, in his letter of March 5, 1892, to Parker, above referred to, had stated that, before executing the two mortgages, he had talked over the matter with Mr. Smith; but Mr. Smith, being asked on the witness stand as to his conversations with Knowles, said that he had many conversations with him, but that he had no conversation with him about their being two mortgages, and that he does not recollect any conversation with Knowles prior to the mortgage that the mortgage he gave to him (Smith) should be prior to the mortgage he intended to give to Van Blarcum for the balance of the purchase money. Knowles was not called by the defendant, nor was he examined by complainant except upon the question of agency. In the absence, therefore, of proof of actual notice of the Van Blarcum mortgage on the part of Mr. Smith, the whole question as to such notice depends upon whether the association is, as to any part of the sum secured by its mortgage, to be charged with constructive notice of the existence of the Van Blarcum mortgage. The provision of the registry laws validating unrecorded deeds or mortgages, in favor of subsequent grantees or mortgagees, are not construed to require actual notice of the unrecorded conveyance, but to adopt the general doctrine of courts of law and equity as to notice. Holmes v. Stout (Err. & App; 1855) 10 N. J. Eq. 419 (Green, C. J., at page 426).

The defendant's counsel contends that the complainant is to be so charged with constructive notice because the evidence in the case shows that Mr. Smith, the complainant's attorney, had actual information of facts which, as he insists, were sufficient to put him upon inquiry as to whether the purchase money was paid; that such inquiry, if it had been prosecuted, would have led to the disclosure of the existence of the purchase-money mortgage; that the failure to prosecute such inquiry was negligence upon the part of complainant's attorney or agent, and, as a result, the complainant must be now charged with notice of the fact, which would have been disclosed but for the negligence of its attorney. The additional facts in the case bearing upon this question of the delivery of the mortgages are as follows (Mr. Smith's connection therewith being specially stated, wherever it occurred): On December 7, 1891, Knowles, who had prepared the deed from his uncle, Van Blarcum, inclosed it to the latter in California, by letter of that date, for execution and acknowledgment. The deed was dated December 15, 1891, and was acknowledged on that day by Van Blarcum, in California. On the same day, Van Blarcum inclosed the deed to Messrs. Coombs, Crosby & Eddy, of New York, with directions to deliver to Mr. Knowles, and receive from him $1,000 cash, and a mortgage on the property for $5,000, payable in two years, duly executed, and directing the employment of Mr. Parker. On January 2, 1892, Knowles wrote Coombs, Crosby & Eddy that Mr. Van Blarcum had written him that he had placed with them a deed for land in Summit, N. J., and had authorized them to deliver the same to him on receipt of $1,000 cash and a mortgage for $5,000, and stating that he would call upon them Monday, January 4th, between 3 and 4 p. m., prepared to close the transaction. What communication had passed between Knowles and the association previous to this time, January 2, 1892, in reference to applying for or obtaining a loan for them on the property, does not appear; but the mortgage to the association was acknowledged on January 4, 1892, and Smith says that it was acknowledged before him on that day, and was in his possession from that day until it was recorded. There is no other proof of any delivery to Smith or the association at any time, or of any express agreement or understanding on the part of Smith, as to the terms of his holding the mortgage, before the actual advance of the money, or of any contemplated future delivery of the mortgage. Knowles had been a student in the office of Port & Smith (in which Smith was a partner) up to June, 1891, when he was admitted to the bar, and at this time had desk room in the office, and was allowed to print his name in the firm's cards and letter heads, but had no connection with or interest in the firm. The complainant's mortgage was, as Smith states, drawn by Knowles, in order to save the expense of Smith's drawing it, Knowles giving Smith the date of his deed, and Smith also witnessed the execution of the mortgage. The source from which this information as to the true date of the deed was derived by Knowles, so that he could communicate it to Smith in time to insert the date and execute the mortgage on the 4th of January, does not appear; but Smith says that Knowles told him the deed was in New York, or he was going to New York for it. He further says: "I told Knowles, in drawing the mortgage, to make it a purchase-money mortgage, and 'whatever of the money is necessary to get your deed you can pay to your uncle, and the making of it a purchase-money mortgage will avoid the necessity of searching forjudgments against your wife.'" The purchase-money clause was inserted, and no searches for judgments against Mrs. Knowles were made. Smith relied on Knowles for the searches. Smith also says that he did not know how much of the $2,500 Knowles required, or whether he required all to get his deed, but that, on the following Saturday (January 9th), Knowles told him that he needed $1,000 of the money to get his deed, and that he (Smith) then went to the treasurer of the association, and asked him for a check for the amount of the Knowles loan, but that the treasurer, on mat application, did not have the whole amount ($2,500) subject to his check; and Smith says that he then told the treasurer that Mr. Knowles required only $1,000 to get his deed, whereupon the treasurer gave him a check for $1,000, payable to Smith's order. On the 9th of January, and before the delivery of the deed in New York, Smith indorsed this check to either Mr. or Mrs. Knowles, as part of the loan. The check is not produced. On January 9th, Knowles went to Parker's office, in New York, with a check for $1,000, to the order of Coombs, Crosby & Eddy, and a mortgage for $5,000; but, on account of a mistake in the description, the mortgage was not accepted by Mr. Parker, and Mr. Knowles took back the mortgage for correction, leaving the check, in the meantime, in Mr. Parker's possession. This mortgage to Van Blarcum was also dated December 15, 1891, was declared to be given to secure the payment of part of the purchase money, and was acknowledged on January 4th, before Joseph K. Pranks, a master in chancery. The mortgage, having been corrected, was, on the 11th day of January, delivered to Mr. Parker, and handed by him to Knowles, to 'record with the deed, under the circumstances above stated, and Mr. Parker retained the check for $1,000 as the cash payment. The unrecorded deed was, on January 12th, handed by Knowles to Smith, who then looked at the deed, and, as he says, he thinks he then examined it, and that he must have noticed the consideration money, which was $6,000. Smith had retained the association mortgage in his possession since its execution, on the 4th of January, and had in the meantime received from the association a check for $1,500, the balance of this loan. Upon receiving the deed from Knowles, he indorsed over this check and handed it to Knowles, without making any search for mortgages by the purchasers since the date of the deed or of its delivery, and without, as he says, making any further inquiry whatever of Knowles as to the payment of any part of the purchase money. In reference to his knowledge of the financial condition of Knowles at this time, Mr. Smith says that the $1,000 which Knowles took from him was all that he knew of his having positively, but that the deed was made to Knowles' wife, and he (Smith) did not know what his wife had, but he knew that the wife's father was a responsible man,—a man of means. This knowledge did not appear to be the result of any inquiries made in this transaction, nor does Smith swear that he made the advance in reliance on the advance of the money by either Mrs. Knowles or her father.

Under this state of facts, it is clear, I think, that, as to the $1,000 which was advanced prior to the delivery of the deed, the association mortgage cannot be preferred to the purchase-money mortgage. A purchaser who receives a deed, and. as part of the same transaction, delivers a mortgage to the vendor for part of the purchase money, has, so far as that mortgage is concerned, only such an instantaneous and temporary seisin that the purchase-money mortgage must be superior to all conveyances or incumbrances executed prior to the inception of his estate. This is the law as settled in reference to prior judgments, mechanics' liens, and other prior claims against the purchaser (Wallace v. Silsby, 42 N. J. Law, 1, 8, and cases cited; Clark v. Butler, 32 N. J. Eq., 664), and must, for the same equitable reasons, be applied to mortgages on the property executed by a mortgagor before he receives his deed. As was said by Church, C. J., in Dusenbury v. Hulbert, 59 N. Y. 541, 545: "A vendor of real estate has no occasion to examine the records for incumbrances created prior to his conveyance. He has the power to protect himself by a qualified or conditional transfer, or by any legal mode of creating a lien to secure himself for unpaid purchase money. When he conveys and instantly takes a conveyance as such security, no authority is needed to demonstrate the gross injustice of permitting a prior mortgage from intervening to his prejudice." In this case there was nothing to put the vendor or his attorney upon inquiry, nor was either of them, under the circumstances of this case, charged with any duty of inquiry in favor of any prior claimant under the purchaser, whether by mortgage or otherwise. As to this $1,000, it should also be noticed that the mortgage registry act only protects subsequent, and not prior, mortgages. If, therefore, the association mortgage is, under the facts above stated as to delivery, to be considered as taking effect as a present conveyance by the purchaser as early as January 4th, the day of its execution and acknowledgment, or on January 9th, the day of advancing the $1,000, the mortgage, to that extent, was a mortgage prior in time to the purchase-money mortgage, and must, as to this amount, rest for priority, not upon the statute, but upon its equity, independent of the statute. For the reasons above stated, no such equity exists as to the purchase-money mortgage, if the association mortgage be considered as delivered at the time of the advance of the $1,000, and prior to the delivery of the deed. If the association mortgage is to be treated as delivered after the delivery of the deed, on January 11th, and as delivered at the time of theadvance of the $1,500, then, clearly, as to the advance of $1,000 made on January 9th, the mortgage must be considered as delivered to secure an antecedent debt, and to that extent the association is not a mortgagee "for a valuable consideration," under the real-estate registry acts. Loom Works v. Vacher (N. J. Sup.; Feb., 1895) 31 Atl. 306, and cases cited, especially Mingus v. Condit, 23 N. J. Eq. 313, and De Witt v. Van Sickle, 29 N. J. Eq. 209, establish that a precedent debt is not a valuable consideration, within the meaning of the registry acts relating to real estate. The only proof as to the time and circumstances of the delivery of complainant's mortgage is, as I have above stated, that it was executed and acknowledged before Smith, on January 4th, and was then taken by him, and retained in his possession, and without any further agreement as to delivery, until January 12th, when it was sent for record with the deed.

As to the $1,500 advanced after the delivery of the deed and of the Van Blarcum mortgage, the complainant is, to this extent, clearly a subsequent mortgagee for a valuable consideration; and inasmuch as, at the time of the advance and of the subsequent record of its mortgage, the Van Blarcum mortgage had not been recorded, the complainant is, by reason of priority of record, entitled to priority to this extent, provided it is, within the language of the statute, a bona fide mortgagee, "not having notice" of the defendant's mortgage. And, as is well settled, the complainant may rest on its priority of record, and the burden of establishing notice is upon the holder of the prior unrecorded mortgage. Hendrickson v. Woolley (Err. & App.; 1884) 39 N. J. Eq. 307. The Van Blarcum mortgage, moreover, might have been protected in this case under the registry laws, by recording it immediately, even if the deed were not recorded. Under the rule settled in Semon v. Terhune, 40 N. J. Eq. 364, 2 Atl. 18 (Kunyon, C; 1885), a subsequent mortgagee is bound to search the records for mortgages subsequent to the date of his mortgage, even if his mortgagor's deed is not recorded. And where, under the registry laws, a vendor's mortgage may be fully protected by a prompt registry, it would be against the policy of these laws to impose on a subsequent purchaser or mortgagee the duty of protecting prior rights by inquiry. These prior rights may, under the laws, be fully protected by record; and as was said by Lord Selborne in Bank v. Barry, L. R. 7 H. L. 135, 157, the fact that statutes so provide is one fact or circumstance to be considered in determining whether and to what extent the duty of inquiry arises, and is always a fact of great importance. It is, in my judgment, the fact which, in connection with Mr. Smith's denial of notice, turns the scale in the present case; for although there are some circumstances in the evidence from which it may perhaps fairly be argued that Smith, on making the advance of the $1,500, did not make all the inquiries which a more cautious attorney, and one who placed less reliance on Knowles, would have made, as to the payment of the whole purchase money, yet these circumstances do not seem to me sufficiently decisive to dislodge complainant's mortgage as to the 51,500 from the strong position of priority given to it prima facie by the statute, supported, as this is, by the oath of Mr. Smith, the only witness called to speak directly upon the question of knowledge. The defendant might have called Knowles, as well as Smith, as his witness; and, although not obliged to do so, the failure to call the only other witness who had actual knowledge of the transaction imposes on the defendant, I think, the burden of showing that the indirect or circumstantial evidence relied on clearly establishes a negligence on Smith's part, which deprives his client of the benefit of the statute, and imposes on it all the effect of an actual notice, of which there is no proof. The circumstances are not sufficient to establish that Smith was bound, as against the vendor, to make further inquiries as to the purchase money on advancing the $1,500. Defendant's counsel relied strongly, if not principally, upon the fact that the complainant's mortgage professed to be a purchase-money mortgage for the whole amount ($2,500), and should therefore be considered, on the face of it, an admission on complainant's part that at least this much of the whole purchase money was unpaid. But the explanation given by Smith that, on originally drawing the mortgage, it was supposed that the whole $2,500 might be needed, prevents the form of the mortgage from having the effect which defendant insists upon. At the time of advancing the $1,000, the association was notified that this amount was all that Mr. Knowles required "to get his deed"; and this information then given cannot be considered sufficient to charge Smith, at the time of the subsequent advance of $1,500, with the duty towards the vendor of then inquiring whether or how the purchase money beyond the $1,000 had been paid. It is also urged that as Knowles had no means beyond the $1,000 advanced by the association, and Smith knew this, he was, on receiving information that the total amount of consideration paid was $6,000, charged with the duty of inquiring as to the payment of the balance before advancing this $1,500. But the conveyance being made by the vendor to Mrs. Knowles, and a deed to her being produced to Smith, it seems to me that, in the absence of information that Mrs. Knowles had not paid the purchase money, Smith was not charged with any duty towards the vendor of making these inquiries. As to the $1,500 advanced on January 12, 1892, the evidence, therefore, as I view it, fails to justify a postponement to the defendant's mortgage of the priority given to complainant by the statute; and a decreewill be advised directing that as to this amount, with interest, the complainant's mortgage is a prior lien to the defendant's mortgage, but as to the $1,000 advanced on January 0, 1802, it is a subsequent lien to the defendant's mortgage.