Opinion
(December Term, 1859.)
1. A stipulation in a deed of trust giving a preference to such of the creditors as will, on receiving one-half of their debts, release the other half makes it fraudulent and void.
2. All persons attempted to be secured in a deed of trust, fraudulent on its face, who claim a benefit under it become participet criminis and are precluded from such benefit.
3. A purchaser, even for a full consideration, under a deed fraudulent on its face gets no title.
4. Whether a deed which is void on account of fraud in respect to some of the trusts not apparent on its face may not, under certain circumstances, be valid to pass the title — quere.
CAUSE removed from the Court of Equity of ORANGE.
Graham for plaintiff.
Fowle and Bailey for defendant.
The main question in this case arises upon the construction of a deed of trust made by James M. Palmer to secure certain creditors therein named. The deed conveys to the trustee, N.J. Palmer, several tracts of land, town lots and personal chattels, among the rest the house and lot in the town of Hillsboro, which is the subject of this controversy, and provides that the same shall be sold on certain terms and the fund disposed of:
First. In the payment of debts in which he had given security.
Secondly. In the payment of a note of $100 due Thomas Lutterloh (and several other notes and accounts to persons named).
Thirdly. In payment of $500 to McIlvaine, Brownly Co.
Fourthly, and lastly, to pay the debts due from the said James M. Palmer to Drummond and Wyche and others, enumerating some twenty other creditors.
In a subsequent clause of this deed, it provides as follows: "And if there shall be a balance, it is to be applied to the payment of the debts due in the cities of Petersburg, Baltimore, and (76) Philadelphia and elsewhere, named in the fourth class; and if there shall not be a sufficiency to pay the same in full, they are to be scaled and paid pro rata, or in equal proportion, according to their amount, including interest, to the time of the execution of the deed, any one or more of them giving in a discharge upon the payment of 50 cents of their debts, to be preferred in this class; and if it should happen, which is not anticipated, there should not be a sufficiency to pay all the debts in the first class, they are to be scaled in like manner."
Under this deed of trust the house and lot in question were sold and conveyed by the trustee to one Thomas Lutterloh at its full value, and the money paid by him to the trustee. Lutterloh, who was the father of Mrs. Palmer, in order to provide a home for her and her children, three in number, conveyed the house and lost so purchased to the debtor, J. M. Palmer, in trust for their sole interest, benefit, and support. Afterwards the property in question was levied on and sold under a judgment and execution against J. M. Palmer as his property and a sheriff's deed made to the defendant Giles for the same. The purchaser, Giles, brought an action of ejectment to recover possession, treating the deed of trust as fraudulent and void, and recovered judgment upon the ground that the plaintiff was entitled to recover the legal estate, which the defendant in the execution had in the land, even though he held it as trustee, irrespective of the question of fraud attempted to be made by the parties. See Giles v. Palmer, 49 N.C. 386. This bill was filed to enjoin the plaintiff at law from enforcing the writ of possession issuing upon this recovery, and praying that the sheriff's deed may be surrendered for cancellation, and for general relief. The defendant answered, alleging the fraud on the face of the deed of trust in the particular above quoted.
At any time before creditors have obtained a (77) lien on his property, a debtor is allowed to make a preference and to devote his property to the satisfaction of one or more of his creditors to the entire exclusion of the others; and although a deed conveying the property to a trustee necessarily has the effect "to hinder and delay creditors," still it is not considered fraudulent, provided it be made with a single eye to the honest exercise of this right of making a preference, and without any stipulation or intent that it shall inure in any way, either directly or indirectly, to the benefit of the debtor, for any such stipulation or intent, whether expressed in the deed or to be inferred from circumstances, "taints it with fraud." This Court has not, before the present case, been called on to decide whether a stipulation giving a preference to such of the creditors as will, on receiving one-half of their debt, execute a release as to the other half, falls within the application of the general principle. But from the numerous cases in which the principle has been stated and applied, among others, Hafner v. Irwin, 23 N.C. 496; Kissam v. Edmondston, 36 N.C. 180, it follows, as a matter of course, that a stipulation of this kind does fall within the prohibition of the principle, and does, "taint the deed with fraud," because it is for the benefit of the debtor. Creditors are at liberty to make a composition, and upon receiving a part may release the residue, but a debtor is not at liberty to pervert his right to make a preference into a means of coercion or use it as a bribe whereby to secure a benefit for himself. Accordingly, we find it settled by many cases in our sister States, where the point was directly presented, that a stipulation of this kind vitiates a deed of trust. Grover v. Wakeman, 11 Wendall, 189; Ingraham v. Wheeler, 6 Conn. 297; Atkinson v. Jordan, 5 Hammond, 293; Brown v. Knox. 6 Miss. 302, and others cited on the argument. In short, it could not be held otherwise without running counter to the whole current of decisions in our reports and those of the other States in respect to deeds of trust.
(78) It was then insisted that by the deed under consideration, this stipulation is confined to the "fourth class" of creditors, and the deed may be void in respect to the trust declared in their favor, but remain valid as to the others. There is ground to contend that, by a proper construction, this stipulation extends also to the "first class" of creditors whose debts, if need be, are "to be scaled in like manner." But waiving this view of it, the stipulation being expressed in the face of the deed, the trustee and all the creditors, who are presumed to have accepted the deed by claiming to take benefit under it, are fixed with a complicity and concurrence as particeps criminis in this unlawful intent of the debtor to impose terms on some of the creditors and secure a benefit to himself, so that this fraudulent intent pervades the whole and spoils all — like one rotten egg broken into the same bowl with many good ones.
Whether a deed which is void on account of fraud in respect to some of the trusts declared may not under certain circumstances be valid to pass the title and support trusts declared in favor of other creditors is a question of much difficulty and about which there is seemingly a conflict of the cases. See Brannock v. Brannock, 32 N.C. 428; Hafner v. Irwin, supra. For instance, suppose a debtor has a secret understanding with some of the creditors that he will insert their debts in the trust, provided they will only claim one-half and release the residue; or suppose the debtor, without the privity of the trustee or the creditors, inserts a feigned debt, with an intent that the supposed creditor shall draw the amount and hold it on a secret trust for him, does this avoid the deed in toto? On the argument of this case this was the point mainly discussed, but we are relieved from the necessity of deciding it, because the fact that the stipulation is set out in the face of the deed fixes the trustee and all the creditors claiming benefit under it with a concurrence in this unlawful intent, and thus makes the deed in toto For this view of the case we are indebted to Judge Ruffin, who conferred with us as one of the Court at our last June term.
It was also insisted on the part of the plaintiffs that, admitting (79) a creditor might have treated the deed as void in toto as against the trustee and the creditors claiming under it, it was otherwise in respect to the plaintiffs, who claim under a purchaser at public sale made by the trustee for a full and valuable consideration and without notice of an alleged fraud.
We will not enter upon the question how far a purchaser from the trustee for valuable consideration and without notice may be entitled to protection in a case where the fraud does not appear on the face of the deed, but is an open question of fact for a jury, or is to be adjudged by the court upon the finding of a fraudulent intent by the jury upon the distinction pointed out in Hardy v. Simpson, 35 N.C. 132, because ours is a case of fraud, manifest on the deed, to be adjudged as matter of law by the court, and with which the jury has nothing to do. It is settled that a purchaser is presumed to know the contents of the deed under which he derives his title, and is fixed with notice of every condition, provision, stipulation, and other matter therein set out. So the person under whom the plaintiffs claim must be taken to have bought with full notice of the stipulation which makes this deed fraudulent as a matter of law, consequently they do not stand in this Court as innocent purchasers, but take the title tainted with fraud. Indeed, it was owing to the circumstance that the person to whom the title was assigned in trust for them happened to be the debtor and the defendant in the execution that this Court acquired jurisdiction, otherwise the alleged fraud was a subject fit for investigation in a court of law. Giles v. Palmer, 49 N.C. 386, and that circumstance does not at all affect the merits of the case.
PER CURIAM. Let the bill be dismissed. Cited: London v. Parsley, 52 N.C. 318; Calvert v. Williams, 64 N.C. 169; Cheatham v. Hawkins, 76 N.C. 338; Eigenbrun v. Smith, 98 N.C. 215; Blalock v. Mfg. Co., 110 N.C. 105.
(80)