Opinion
01-17-1912
KNICKERBOCKER TRUST CO. v. CARTERET STEEL CO. et al.
On exceptions to a Master's report in a foreclosure suit by the Knickerbocker Trust Company against the Carteret Steel Company, John P. Jones, and others. Exceptions overruled, and report confirmed.
On January 10, 1898, the Carteret Steel Company owned an undivided interest in property in Morris county, known as the "Copperas Mine Tract," which it mortgaged to the complainant, as trustee, to secure an issue of bonds aggregating $100,000. The mortgage contained a provision that it should cover after-acquired property, and a note of this provision was inserted in the bonds secured thereby. Some, if not all, the bonds secured by this mortgage were negotiated on behalf of the Carteret Company. On January 1, 1899, the Carteret Company made another mortgage to the complainant, as trustee, which described the same lands, to secure an issue of bonds aggregating $500,000. This mortgage also contained a provision covering after-acquired property, and a note thereof is contained in the bonds secured thereby. There was a reservation of $125,000 of the second bond issue with which to take up and pay off the bonds of the first issue. Some, if not all, of the second issue, excepting the above-named reservation, were negotiated on behalf of the Carteret Company. There was at that time an undivided one-half interest in the mortgaged premises, which was held by one Condit, as trustee of the Cobb estate, and also an outstanding life estate during the life of Sarah J. Bell. On November 29, 1898, an agreement was entered into by the Carteret Company for the purchase of these two outstanding interests for $30,000, of which sum $10,000 is said to have been the purchase price of the life estate. While these outstanding interests were controlled by different persons, it is quite certain that their purchase was considered by all parties to be a single transaction. The agreement for the sale of these outstanding interests was performed on January 29, 1899, by the conveyance thereof to the Carteret Company. At the time the contract was performed, $10,000 was paid in cash to Mrs. Bell for her life estate; but the purchase price of the undivided half interest in the laud was not paid or satisfied to Condit, trustee, the vendor. He took, as security for its payment, the bond of the company, guaranteed by the defendant John P. Jones, for $31,000, and bonds of the second issue of the Carteret Company, aggregating $62,000. Subsequently Condit sued Jones on his guaranty of the bond of the Carteret Company, and recovered judgment for the amount thereof, which judgment "Jones subsequently paid. By virtue of this transaction, he claims to be subrogated to any right which Condit, trustee, may have had in the premises. The defendant Jones did not answer the original bill, but allowed a decree pro confesso to be taken against him. Three or four years later he filed an answer to a supplemental bill in the cause, setting up (1) that, by virtue of the conveyance from Condit, trustee, to the Carteret Company, on January 29, 1899, without payment of the purchase money, a vendor's lien arose in Condit's favor which, notwithstanding the provision in the trust mortgages to the complainant, by which the lien thereof was attempted to be attached to after-acquired property, took precedence over the said mortgages, and was a first lien upon the land conveyed, and that, not only did the lien arise by operation of the principles of equity jurisprudence, but that there was a positive oral agreement between thevendor and the Carteret Company that such lien should be created and established; (2) that, inasmuch as he was obliged to. pay to Condit the purchase money evidenced by the company's bond, on which he was surety, he became subrogated to all the rights of the vendor to a vendor's lien, and he therefore insists that he is entitled to a first and prior lien on the half interest in the said tract of land which was conveyed to the company by Condit, and also upon the life estate to which the company derived title from Mrs. Bell. It may be said that there was a further outstanding interest in the title to the lands in question which was got in about the same time.
The issues in the case were submitted, by consent of parties, to the master, to whom the cause was referred. To his report, exceptions were filed; subsequently the Jones claim appeared, and it was referred to the master with the other issues. The master reported upon the rights of the parties, and against the claim of Jones. To his original and supplemental report, exceptions are filed. The only point that was argued was the validity of the Jones claim.
John B. Humphreys, for complainant. John W. Harding, for defendant John P. Jones. Frederick W. Hope and William J. Leonard, for certain bondholders.
HOWELL, V. C. (after stating the facts as above). The question was raised in limine that the defendant Jones was not in a position to assert any right whatever, for the reason that he could not be subrogated to Condit's rights. I think, however, that it is quite clear that Jones, by virtue of the doctrine of subrogation, is entitled to stand in the shoes of Condit, and to assert any claim which Condit might have asserted, and to litigate the same. He was a surety for the vendee, and, having paid the vendee's debt, he is entitled to the place which the vendee had. This is justice, and it is supported by the cases. Meux v. Smith, 11 Sim. 410; Nottingham Building Society v. Thurstan (1903) A. C. 6; Sheldon on Subrogation, § 97.
The doctrines concerning vendors liens are firmly established in our jurisprudence. They give to the grantor or vendor who has parted with the title to his property an equitable lien on the property conveyed, to secure the payment of the purchase money. It is not a right which necessarily arises out of contract; it is rather an equity raised out of the circumstances, on the ground of a constructive trust, to protect the vendor to such extent as may be necessary; and it is difficult to see how, as between the parties, the force or effect of the Hen could be enhanced by a mere agreement that a vendor's lien should be reserved. Graves v. Coutant, 31 N. J. Eq. 763; Stickle v. High Standard Steel Company, 78 N. J. Eq. 549, 80 Atl. 500. This lien, however, may be lost by a distinct waiver of it, or by a transfer of the title by the grantee to a purchaser for value and without notice. A grantee or mortgagee from the vendee who has notice, or is in such circumstances as that he is put upon inquiry, would take title to or a lien upon the premises, subject to the lien of the vendor. These principles are very clear and plain. Vandoren v. Todd, 3 N. J. Eq. 397; Butterfield v. Okie, 36 N. J. Eq. 482.
The situation, however, in this case is complicated by the fact that the vendor's lien and the lien of the mortgage, hostile to each other as they are, arise simultaneously and out of the same transaction. It is the deed from the Cobb estate to the Carteret Company which gives rise to the vendor's lien, and which also places the property within the purview of the mortgages. There thus appears to be at the outset a conflict of liens, each of which is struggling for priority. The situation, however, is not singular. Similar circumstances have been dealt with by our courts in important cases. The first case that I have been able to find in this state which concerns conflicting liens of the character of these in this suit is Williamson v. New Jersey Southern Railway Company.
(1877) 28 N. J. Eq. 277. The proceeding in that case was for the foreclosure of a mortgage on the New Jersey Southern Railway, which mortgage contained a provision that it should cover future-acquired property. One of the controversies related to the priority between the mortgage and certain mechanic's lien claims. The mortgage was made and recorded long before the work and materials were done and provided; the property liable for the mechanics' liens was conveyed to the company before the mechanics' liens were actually filed, and so came within reach of the mortgage provision—a situation very similar to the one at bar. Chancellor Runyon held that a mortgage which was intended to cover after-acquired property only attached to such property in the condition in which it came to the mortgagor's hands; that if it was already subject to mortgages or other liens the general mortgage would not displace them, although they might be junior in point of time. The authority cited for this proposition is New Orleans, etc., Railroad v. Mellen, 12 Wall. 302, 20 L. Ed. 434. The chancellor, by his decree, gave priority to the mechanics' liens. The report of the case on appeal is found in 29 N. J. Eq. 311
(1878) . It was there stated, in the opinion of Mr. Justice Depue, to be a principle of law that, where after-acquired property comes into the hands of the mortgagor, subject to incumbrances or liable to liens, the mortgage attaches to the property in the condition in which it comes to the mortgagor's possession, subject to such liens and incumbrances as are then on it. The decree below was reversed; but not on this point.
Chancellor Runyon held the same rule in United New Jersey Railroad & Canal Companies v. Long Dock Company (1887) 42 N.J. Eq. 547, 9 Atl. 586, and it was dealt with again by the Court of Errors and Appeals, in Campbell v. Roddy (1888) 44 N. J. Eq. 244, 14 Atl. 279, 6 Am. St. Rep. 889, and there applied to the case where an engine and boiler were made subject to a chattel mortgage, which was never registered. The chattels were annexed to the real estate upon which the mortgagor had previously given a mortgage. It was held that the lien of the chattel mortgage should be protected, so far as it would not diminish the security which the real estate mortgage would have had, if the annexation had not been made. The same subject was dealt with by Vice Chancellor Pitney, in Daly v. New York & Greenwood Lake Railroad Company (1897) 55 N. J. Eq. 595, 38 Atl. 202, affirmed 57 N. J. Eq. 347, 45 Atl. 1092. There the controversy was between an unrecorded purchase-money mortgage and a previously executed railroad mortgage, which purported to cover after-acquired property. The vice chancellor says "the general rule seems to be that the holder of a mortgage, who claims by its terms that it is a lien upon after-acquired property, takes such property subject to liens upon it between the parties. This was distinctly decided by the Supreme Court of the United States, in the case of United States v. New Orleans Railroad Company (New Orleans, etc., Railroad Co. v. Mellen) 12 Wall. 362 ," from Judge Bradley's opinion, in which he quotes extensively; and he further says: "It is familiar learning, found in all the cases, that a mortgage upon after-acquired property cannot rise higher than a contract to convey the title to that property when acquired; and a suit for its enforcement is in effect a suit for the specific performance of a contract"—citing Holroyd v. Marshall, 10 H. L. C. 191, Pennock v. Coe, 23 How. 117, 16 L. Ed. 436, and the leading case in New Jersey, Smithurst v. Edmunds, 14 N. J. Eq. 408.
The Court of Chancery had the same question up in General Electric Company v. Transit Equipment Company (1898) 57 N. J. Eq. 460, 42 Atl. 101. There the controversy was between a mortgage covering after-acquired property and chattels which had been delivered to the mortgagor under a conditional contract of sale. It was held, upon the principles above stated, and upon the authority of the cases, that the right of the conditional vendor must prevail, upon the principle laid down by Mr. Justice Bradley in the New Orleans Railroad Case that a mortgage, intended to cover after-acquired property, can only attach itself to such property in the condition in which it comes into the mortgagor's hands; and that, if that property is already subject to mortgages or other liens, the general mortgage does not displace them, though they may be junior to it in point of time; it only attaches to such interest as the mortgagor acquires.
While in this case the transfer of the property by deed from Condit to the Carteret Company may create simultaneous liens, it must yet be considered that, however instantaneously the liens may arise, there must be, in our contemplation of the transaction, a time when the title leaves the vendor and vests in the vendee; as it leaves the vendor, the vendor's lien attaches; as it reaches the vendee, the lien of the mortgage attaches. It may be better described, perhaps, as a sequence of events, rather than a sequence of time.
The doctrine is thoroughly established by these cases in New Jersey and by the decisions in the federal jurisdiction. Posdick v. Schall, 99 U. S. 235, 25 L. Ed. 339; Irrigation Company v. Garland, 164 U. S. 16, 17 Sup. Ct. 7, 41 L. Ed. 327. The leading case in England is Mackreth v. Symmons (1808) 15 Ves. 329, 1 W. & T. L. C. 447. In that case, Lord Elden held that where there was a contest between a vendor's lien for unpaid purchase money and the right of a person who had subsequently obtained from the purchasers a mere contract for a mortgage, and nothing more, that the vendor's lien had priority.
It was argued on behalf of the complainant that, inasmuch as the vendor's lien was a lien only in contemplation of equity, and that the lien of the mortgage was a legal Hen, the latter took precedence of the former, upon well-known principles and maxims of equity. In my opinion, counsel takes a wrong view of the situation at this point. A provision in a mortgage that it shall cover after-acquired property is a provision which can be only contemplated in equity. I know of no way of effectuating such a provision according to the rules of the common law. Smithurst v. Edmunds, 14 N. J. Eq. 408; Lister v. Simpson, 38 N. J. Eq. 438. The conflict, therefore, from this point of view is not between a legal title and an equitable title, but between two equities; and the equity of the vendor, being prior in the order of events, must take precedence over the lien of the mortgage. The defendant Jones further claims that, in addition to the right which was acquired by Condit by operation of law. Condit must be held to have had a vendor's lien, for the reason that he specially reserved it. I do not think he did make any such reservation; but I shall deal with the question later on.
It was argued on behalf of the complainant that, if the court found that the vendor had ever, by any method, acquired a vendor's lien, he is not now entitled to the benefit of it, because he has either waived his right, or has bound himself by an estoppel not to assert it. It will be remembered that when the conveyance was made by Condit to the Carteret Company he took from the company its bond for the purchase money, guaranteed by the defendant Jones, and also 62 of the bonds which were secured by the second mortgage upon the copperas minetract, a one-half interest in which passed at the same instant to the company; and it was insisted that this fact showed that Condit did not rely upon his vendor's lien, but relied rather upon the personal responsibility of Jones, as guarantor of the company's bond, and further upon such lien as he might acquire upon the property which he had conveyed, by reason of his holding 62 of the bonds issued under the second mortgage. There can be no doubt but that a vendor having a right to assert a vendor's lien may waive or avoid the same by parol, or even orally, or by acts manifesting an intention to discharge the same.
In Brinkerhoff v. Vansciven (1842) 4 N. J. Eq. 251, Chancellor Pennington says: "If the vendor take any other than the personal security of the vendee for his money, as the note of a third person, a transfer of stock, or a mortgage for a part only of the consideration money, these or any other circumstances going to show that he does not look to the land as his security will be taken to be an implied waiver of the lien, and will discharge the land from further liability. Although somewhat disputed, yet, upon examining the oases, it is now settled, and upon good authority, I think, that the taking of a mere note or bond of the vendee will not avoid the lien. If the party looks to the vendee alone for his money, without taking any other or further security, the land is liable." This seems to be the earliest case in New Jersey on the subject. It is based upon Meekreth v. Symmons, 15 Ves. 328; Fish v. Howland, 1 Paige (N. Y.) 20; and Bayley v. Greenleaf, 7 Wheat. 46, 5 L. Ed. 393.
In Dudley v. Dickson (1862) 14 N. J. Eq. 252, Chancellor Green held that the taking of a distinct security, either in the shape of real or personal property, from the vendee, or taking the responsibility of a third person, is an implied waiver of the lien, and that any act which indicated that it was not the intention of the parties that the purchase money should continue a lien upon the land conveyed is a waiver of such lien, citing Gilman v. Brown, 1 Mason, 191, Fed. Cas. No. 5,441; s. c, on appeal, 4 Wheat. 255, 4 L. Ed. 564; Nairn v. Prowse, 6 Vesey, 752; and Copper v. Spottiswoode, Tamlyn, 21. In that case the vendee gave his note to the vendor, payable at 30 days. This was subsequently renewed for 10 days by the vendee, by a note indorsed by Gray. Later the grantee executed a declaration of trust, whereby she stated that she held one-third of the said land, or the proceeds of the sale thereof, for the indemnification of Gray against the payment of the note which he had indorsed; and that whenever the note should be paid to Dudley (the complainant) the obligation should cease. It was held that the complainant was not entitled to an equitable lien by way of vendor's lien upon the whole of the premises conveyed, but that he must he restricted to the security afforded by the declaration of trust.
In Armstrong v. Ross (1869) 20 N. J. Eq. 121, the controversy was over a void mortgage which had been given to secure the purchase money. The mortgagee was given the position of the holder of a vendor's lien, because it was given for the purchase money; the chancellor stating that the taking of a note or bond will not be held evidence of the waiver of the lien and taking the mortgage which they have shows an intention to preserve the lien, which surely will not be held to be a waiver of it.
In Corlies v. Howland (1875) 26 N. J. Eq. 311, it was again declared by Vice Chancellor Van Fleet, on the authority of Chancellor Kent, that the taking of a note, bill, or bond, with distinct security, or taking distinct security exclusively by itself, either in the shape of real or personal property, from the vendee, or taking the responsibility of a third person, is evidence that the seller did not repose upon the lien, but upon independent security, and it discharges the lien. 4 Kent's Com. 151. In that case, Henry Howland purchased land from the complainant which, at his request, was conveyed by the complainant to Henry W. Howland. The vendor gave his promissory note for the whole purchase money, and it was held that the vendor's lien attached, notwithstanding the acceptance of the father's note, for the reason that the son had notice on the delivery of the deed that the purchase money was unsecured and unpaid.
In Acton v. Waddington (1889) 46 N. J. Eq. 16, 18 Atl. 356. Chancellor McGill cited Vice Chancellor Van Fleet's opinion, in Corlies v. Howland, supra, on the point of waiver, although the question of waiver does not appear to have been litigated before him. The subject is discussed by Vice Chancellor Reed, in Harter v. Capital City Brewing Company, 64 N. J. Eq. 155, 53 Atl. 560, where the vendor had agreed to take stock of the defendant corporation in payment of the purchase money. He says that it is not to be conceded that the law is settled that if the contract was such as to permit the corporation to pay in shares of stock the vendor's lien for such portion of the consideration was thereby lost. He further says that the Court of Appeals of New York, in Fisk v. Potter, *41 N. Y. 64, held, apparently without such consideration, that if the price for land is payable in some commodity, other than money, the vendor's lien is lost; that the rule, as settled by the great weight of authority, was that, where the consideration for land sold is other land or personal property, with no mandatory price fixed for which the land or personal property shall be delivered, there can be no lien, but that, where the amount of the purchase price was fixed by the agreement between the parties, the lien would lie, citing Harris v. Hanie,
37 Ark. 348, Young v. Harris, 36 Ark. 162, Plowman v. Riddle, 14 Ala. 169, 48 Am. Dee. 92, Deason v. Taylor, 53 Miss. 697, Real v. Harrington, 116 Ill. 113, 4 N. E. 664, Mackreth v. Symmons, 1 W. & T. L. C. 289, in each of which cases the vendor's lien was allowed.
The law so clearly declared in New Jersey is in accord with the current of decisions in the other American jurisdictions. Hare & Wallace, in their American notes to the case of Mackreth v. Symmons, 1 White & Tudor L. C. 447, after indicating the conditions under which a vendor's lien is created, says: "On the other hand, the lien will be considered as waived whenever any distinct and independent security is taken, whether by mortgage on other land or pledges of goods or responsibility of a third person, and also when a security is taken upon the land, either for the whole or a part of the unpaid purchase money, unless there is an express agreement that the implied lien shall be retained. The taking of the vendee's obligation does not effect the lien, but the taking of a mortgage on other property, or a bond or note of the vendee with surety, or a negotiable note drawn by the vendee and indorsed by a third person, or drawn by a third person, and indorsed by the vendee, or a draft on a third person and accepted by the drawee, will repel the lien presumptively." See extended note to Royal Con. Mining Co. v. Royal Con. Mines (157 Cal. 737, 110 Pac. 123), re-reported in 137 Am. St. Rep. 165, where all the cases are collected. I think that the American rule may be considered as so established. The English rule, however, appears to be more liberal toward the vendor, and to incline toward the idea that it is a question of the vendor's intention, to he gathered from all the circumstances.
Under the authority of these cases, it must be quite clear that the vendor's lien which Mr. Condit might have insisted upon was either waived by him, or was so acted upon by him as to create an estoppel against its assertion at the present time. I do not think it at all probable that Mr. Condit ever bargained for a vendor's lien upon the premises in question. His evidence on the subject is so uncertain, so indicative of loss of memory about the details of the transaction, and expressed so vaguely and in such uncertain tones, that any tribunal would hesitate to found any right upon it. It seems to me that his notion of a vendor's lien must have been an afterthought; that it is not likely that an ordinary business man would be sufficiently acquainted with the character, the incidents, and the qualifications of a vendor's lien to know how far it would be a protection to him. The subject is abstruse, complicated, and open to many limitations and exceptions. Even well-informed lawyers might doubt their own judgment as to the effect of a vendor's lien without the most careful examination of the authorities. How the ordinary business man—a class to which Mr. Condit evidently belongs—could expect to rely upon a vendor's lien, a security of which he could know so little, and never suggest the making of a mortgage, which was a security with which he must have been perfectly familiar on account of his official position as county clerk of the county of Morris, is a situation that I cannot appreciate. Besides, I think it is fully established by the preponderance of the evidence that Mr. Condit stated to persons about to become purchasers of the bonds of the company, which were secured by the mortgage of this future-acquired property, that the Cobb estate had conveyed the title to the undivided half interest of the lands in question to the Carteret Company, free of all liens and incumbrances. The contention that if he made such statement it referred only to the outstanding fee-simple title, and not to the incumbrances, is, to my mind, a mere quibble, because he must have known, as a business man, that purchasers of bonds of the company would be expecting a first lien upon the property; and that they, as investors, would not be liable to place their money, subject to the unpaid purchase money, to the extent of one-half the laud in question.
The fact that he remained silent as to his vendor's lien, and failed to assert the same when he was being interrogated by intending investors as to the property on which they were expecting a lien, is sufficient, in my judgment, to estop him and his successor, the defendant Jones, from asserting any right as against the holders of the bonds secured by the consolidated mortgage. The evidence of Senator Kline, Mr. Davis, and Mr. Hope on this subject is pointed and clear, and is, to my mind, a complete refutation of the position taken by Mr. Condit.
I therefore hold that, while the situation is one in which Mr. Condit might at one time have insisted upon a vendor's Hen, the evidence shows, either that he waived his right, or that he is estopped from now asserting it; and that upon this point the master's report should be confirmed. The other exceptions, relating principally to the standing of individual bondholders, were not argued, and I suppose were waived.
I will advise an order overruling all the exceptions, and confirming the report of the master.