McConihe v. Fales — 12 N.Y. St. Rep. 279

Majority

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Isaac McConihe, Resp’t, v. Francis A. Fales et al., App’lts.^[1]

(Court of Appeals,

Filed November 29, 1887.)

Headnote

Assignment fob the benefit of creditors—Priority of mortgage— Liens.

One of the partners in a firm sold his interest in certain real estate owned by the membe s of the firm, taking back a mortgage thereon in part payment. Subsequently the firm failed, and made an assignment for the benefit of creditors. The assignees sold the said property to defendant and conveyed it by deed, subject to existing liens and incumbrances. The defendant alleged that at the time said mortgage was given there were large outstanding debts against said firm; that'the liens of said debts were superior to said mortgage', and that he was entitled to the benefit thereof as

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a defense. The firm was solvent at the time the mortgage was made. Held, that by reason of said solvency the mortgage was superior to the assignees”' deed, and took priority of it; that even S said liens of said debts had been established, the defendant could not claim the advantage of thi_m, as. he took subject to existing liens and incumbrances.

Appeal from the supreme court, general term, third department, affirming a judgment in favor of plaintiff, entered upon the report of a referee.

Isaac McConihe brought this action against Augustus. Clark, Thomas A. Fales and wife, and John Consalus, to-foreclose a certain mortgage made by said Clark on property subsequently sold to Fales, who had contracted to-convey it to Consalus. Fales and wife and Consalus appeal from judgment of the general term.

E. F. Bullard, for app lts; Chas. E. Patterson and Orin Gambell, for resp’t.

In considering crus case, it is desirable to-keep in view some of the elementary principles bearing upon the questions involved and which seem to us to be decisive of the merits of this appeal.

A defense to the foreclosure of a purchase money mortgage on the part of the mortgagor, alleged to have existed, at the time of its inception, can only arise when fraud has-been practiced by the mortgagee in procuring its execution, or there is a failure of consideration. Thus it is held that-a purchaser of land who has given a bond and mortgage-thereon to secure the purchase money and is in the undisturbed possession thereof, cannot resist the foreclosure of the mortgage on the mere ground of a defect of title, there being no allegation of fraud in the sale nor any eviction, Abbott v. Allen, 2 Johns. Ch., 520 ; York v. Allen, 30 N. Y., 105 .

In such case he is remitted for relief, if any he has, to-the covenants contained in his deed, and if there are no-such covenants he is remediless. Banks v. Walker, 2 Sandf. Ch., 344 ; Parkinson v. Sherman, 74 N. Y., 88 ; Frost v. Raymond, 2 Caines, 188; Leggett v. M’Carty, 3 Edw. Ch., 124 ; Edwards v. Bodine, 26 Wend., 109 .

‘1 The rule (says Mr. Justice Swayne, in Peters v. Bowman, 98 U. S., 56 ) is founded in reason and justice. A different result would subvert the contract of the parties and substitute for it one which they did not make. In such cases the vendor by his covenants, if there are such, agrees, upon them, and not otherwise, to be responsible for defects of title. If there are no covenants, he assumes no responsibility, and the other party takes the risk. The vendeeagrees to pay according to his contract, and secures payment by giving a lien upon the property.

A purchaser of mortgaged premises who takes á deect

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thereof subject to the mortgage and agrees to pay the saméis estopped from contesting the consideration or validity of the mortgage, and when the mortgage is given by his grantor to secure the purchase money such grantee cannot, so long as he remains in possession of the premises, defend against the mortgage because of failure of title. Parkinson v. Sherman, supra; Ryerson v. Willis, 81 N. Y., 277 .

The mortgagee’s title cannot be questioned in defense of a bill for foreclosure. If he takes by virtue of his mortgage any estate, whatever, which is still subsisting, he is. entitled to a decree and the court will not inquire what interest he has in the mortgaged estate. Jones on Mortgages, § 1491. The mortgage sought to be foreclosed in. this action was given by Augustus Clark to Edward McDonnell in August, 1880, to secure the purchase-price of certain real estate conveyed by the mortgagee to the mortgagor at the same date, The property consisted of thereat estate pertaining to a manufacturing establishment in the city of Amsterdam, and McDonnell’s deed purported, to convey an undivided third part of such estate to Clark, who, thereupon, took possession of such property and continued to possess and enjoy it in common with the other owners, until December 3, 1883, when the whole property was transferred by Clark and his co-partner to certain assignees for the benefit of their co-partnership creditors. The property was in March, 1884, sold and conveyed to the. defendant Fales by the assignees subject to all liens and incumbrances existing against it, and Fales subsequently entered into a written contract to sell and convey it to the. defendant Consalus.

The defendants Clark, Fales and wife, and Consalus interposed answers to the complaint and defended the-action, but judgment having been rendered for the. plaintiff upon the trial the defendant Clark dropped out of the controversy, and appeals from the judgment were taken, by Fales and wife and Consalus alone.

The defendant Fales claims title to the property through Clark, and inasmuch as he took it with full notice of all of the facts which then affected it, he, Of course, took no-greater or different interest than that possessed by his-grantor.

All claims set up in the several answers founded upon, charges of fraud or misrepresentation by McDonnell, the-mortgagee, upon Clark, the purchaser, at the time of the. execution of the deed and mortgage, have been disposed of by the findings of the referee, and no longer remain in the case as questions to be considered upon this appeal. The question here to be considered consists solely of that

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.arising under the first count of the defendant Rales’ answer. The allegations of this count are as follows: “ That on or about August 14, 1880, Perry Kline, Thomas Harvey and Lucy McDonnell were partners, doing business at Amsterdam, N. Y., under the firm name of McDonnell, Kline Co.; that as such partners they then owned and occupied the real estate described in the complaint which had been purchased and paid for with the partnership funds •of said firm and its predecessors; that at that time the legal title of one undivided third part of said real estate was nominally vested in one Edward McDonnell for "the benefit of Lucy McDonnell; that at that time the said firm owed a large amount of debts exceeding $100,000, and their firm property at that time was not worth sufficient to pay the amount of such indebtedness, and said firm was in fact then insolvent; that said debts were equitable liens upon all of the partnership property then owned by said .firm, including the real estate in question; that on or about -said 14th day of August, 1880, said Edward McDonnell -agreed to sell his interest in said real estate, and the interest which the said Lucy McDonnell had owned in said firm property, to the defendant Augustus Clark, for the consideration of $20,500, to be paid by said Clark to the said Edward McDonnell therefor, but the sale to be subject to the payment by the said Clark of one-third of the partnership debts aforesaid; that in pursuance of said agreement .said Edward McDonnell acquired the interest of said Lucy McDonnell in said firm property subject to the payment of the firm debts, and then and there conveyed and.transferred such interest to the defendant Clark who, thereupon, paid toward the purchase price $10,500, and to secure the bal-ance gave the mortgage mentioned in the complaint to this action.”

The answer then proceeds to state that Clark thereupon became a partner in said business with Kline and Harvey, and that subsequently, in 1882, Harvey sold out his interest to Clark and Kline, who continued the business until December, 1883, when, being insolvent, they made a general assignment of all their property to assignees for the benefit of their creditors; that on or about March, 1884, said .assignees sold and conveyed said real estate, With other partnership property, to the defendant Francis A. Fales for $35,000, subject only to two mortgages, one for $25,000 and the other for $15,000, whereupon it alleged the title of said real estate became vested in Francis A. Fales free from any lien under the mortgage in suit.

It was also alleged that the indebtedness of the old firm •of McDonnell, Kline & Co. had been renewed or extended by the succeeding firms to the amount of $110,000, and that

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at no time after August, 1880, was the interest of either partner in such partnership- property worth anything over and above the payment of the partnership debts.

The relief asked for was “that the title conveyed to said .Fales be declared superior and prior to any lien or claim of the plaintiff under the mortgage set out under the complaint, and that said mortgage be removed from the record as a cloud upon the title of said Fales.” It is not claimed that the facts set forth in this count constituted any defense to the mortgage so far as Clark the mortgagor is concerned, but the contention is that the defendant Fales, by his deed from the assignees, has acquired some other interest which gives him an equitable defense to the mortgage.

It will be observed that no claim is made that any covenants in McDonnell’s deed to Clark have been broken, or that in fact there were any such covenants; and it conclusively appears in the case that Clark received through McDonnell’s deed, all of the property bargained for, and the precise consideration for the obligation executed by him which he contracted for. It also appeared that he then covenanted with McDonnell to pay all the existing debts of the firm, the alleged continued existence of which now forms the sole foundation of the appellants’ claim for relief. Thus the alleged equities which are now invoked by the appellants to defeat the mortgage in suit, are precisely those which the mortgagor covenanted to extinguish, and subject to which covenant the appellants are now in possession of the property, claiming .title thereto.

In view of the authorities heretofore cited, it is difficult to see how any legal or equitable defense to the mortgage in question is presented by this answer, but if any there was, it seems to have been entirely removed by the findings of the referee founded upon satisfactory evidence negativing the material allegations upon which they are founded. Thus the referee finds that the original firm of McDonnell, Kline & Oo. was solvent at the time of the death of John McDonnell; as was also the second firm of the same name, at the time of the sale to Clark. He also finds that there was no proof that any of the debts of the old firm of McDonnell, Kline & Co. were outstanding, as existing claims .against it, at the time the mortgage in suit was given, and he negatives the allegation that Lucy McDonnell ever held the'legal title to any part of the real estate in question, or that Edward McDonnell ever assumed payment of any firm debts, but finds that upon John McDonnell’s death the real -estate descended to his heirs at law, and was sold by virtue of the surrogate’s order for the payment of his debts, and was purchased on such sale by O’Bryan, who conveyed it to Edward McDonnell. He further finds that the property

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in question was sold by the assignees to the defendant Fales in March, 1884, subject to all liens and incumbrances.

These findings are fully supported by the evidence in the case, and seem to dispose of the assumed equities upon which the appellants base their argument for a reversal of the judgment.

There is no question made but that Edward McDonnell had the legal right to the property mortgaged at the time of his conveyance to Clark, and a consequent interest therein capable of being transferred by his deed (Bliss v. Cottle, 33 Barb., 323 ; Wilson v. Wilson, 20 How. Pr., 41 ; Fairchild v. Fairchild, 64 N. Y., 471 ), and there is just as little question but that such interest furnished a sufficient consideration for the bond given back for the purchase money and the mortgage executed to secure its payment.

This mortgage was a valid and subsisting lien at the time of the conveyance to Fales upon the property described in it, for the sum therein mentioned, even though its object was liable thereafter to be defeated by the exhaustion of the fund through the enforcement of prior liens, whether legal or equitable, affecting the property conveyed. It follows as a necessary consequence from these facts the defendant Fales, having acquired title to the property in question subject to all liens and incumbrances upon it, is not and neither can his grantors be at liberty to question the liability of the ’ property mortgaged, for the payment of the mortgage debt. Even if it was in the power of the assignees, as representatives of any creditors, to question the lien of this mortgage they never did so and they transferred no right to do so to their grantees, but, making the deed subject to existing liens and incumbrances, impliedly withdrew such right from them and made their title depend upon the payment of the mortgage. The transfer from the assignees to Fales conveyed simply an equity of redemption in the premises and by the terms of their deeds he took no greater interest in the property than such as remained after the extinguishment of the hens then resting upon it. (Eagle Fire Co. v. Lent, 6 Paige, 635.)

The attempt of the appellants to clothe themselves with any supposed equities existing in favor of creditors, has therefore no foundation in the facts of the case as there were no such equities existing, and even if there were the defendants have not succeeded to them.

But a further answer to the contention of the defendants is found in the fact that there are no such creditors asserting claims which ante-date the execution of the deed and mortgage in suit. The firms existing at that time and previous thereto were solvent, as found by the referee, at the date of McDonnell’s deed, and the individual members of

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such firms had an interest in their assets capable of being sold and conveyed and of being made the subject of security for the payment of the purchase price of the property. In so far as those interests became contributions to the capital of subsequent firms formed to carry on the same business, they could only be used for that purpose, subject to the liens already existing upon them, and the creditors of such firms could acquire no right to contest the validity of such liens except such as belonged to the firm itself.

The attempted defense of the appellants is simply a claim that at the time of McDonnell’s deed to Clark, there were outstanding claims in favor of creditors which might have been used in equity to extinguish McDonnell’s legal title and thus produce a failure of consideration for the mortgage.

This defense is not sustained either in law or equity, or by the facts of the case.

The judgments of the courts below should be affirmed, with costs against the appellants.

All concur, except Rapadlo, J., absent.