Opinion
11-08-1897
SCHMIDT v. HEDDEN et al.
John E. Fennell, for complainant. J. O. H. Pitney and Richard B. Moriarty, for defendant National Iron Bank. Theodore Little and W. W. Cutler, for defendant Jones.
Action by Fred W. Schmidt against George Hedden and others to foreclose a mortgage. Heard on pleadings and proofs.
John E. Fennell, for complainant. J. O. H. Pitney and Richard B. Moriarty, for defendant National Iron Bank.
Theodore Little and W. W. Cutler, for defendant Jones.
EMERY, V. C. The bill in this case is filed to foreclose a mortgage given by George Hedden and wife to the Morristown Savings Institution, on lands in Morristown, on June 15, 1871, to secure the payment of $6,000, with interest, in one year, and which was assigned to complainant in April, 1892. There is no dispute as to the validity of this mortgage, and it is admitted that there is due upon the mortgage $5,500, with interest from January 1, 1894, for which complainant is entitled to a decree. The dispute in the case arises between the defendants the National Iron Bank, who hold a second mortgage on the premises, given by Hedden and wife on November 25, 1876, and the defendant Jones, who claims title to the mortgaged premises, under a sale made by virtue of an execution issued on a judgment obtained by one Peter Van Ness against George Hedden, in the supreme court on October 31, 1877. Van Ness died in 1881, and this judgment was on July 22, 1887, assigned to Jones. Execution thereon was issued on February 17, 1891, under which levy was made on the premises in question, which were sold on November 23, 1891, to the defendant Jones, for $100. The mortgage to the bank was given to secure Hedden's notes and negotiable paper then held or discounted, or thereafter to be held or discounted, by the bank, or notes indorsed by him then held or thereafter to be held by the bank. The full proviso of the mortgage is as follows: "Provided always, and it is hereby agreed by and between the parties to these presents, that the said George Hedden, his heirs, executors, or administrators, do and shall well and truly pay or cause to be paid at maturity every promissory note and every negotiable paper of every kind which the said the National Iron Bank now holds or hereafter may hold of him, said Hedden, or which they now have discounted or hereafter may discount of said Hedden. or anypromissory note or negotiable paper which said bank now holds or hereafter may hold, on which said Hedden is indorser or security, and shall at all times hereafter indemnify and save harmless said bank from all payments, costs, charges, and expenses sustained or incurred by reason or on account of any such negotiable paper, as aforesaid, without any deduction or defalcation for taxes, assessments, or any other imposition whatsoever; then and from thenceforth these presents and said obligation, etc., shall be void." The defendant Jones, by his cross bill against the bank, sets up that, at the time of receiving its mortgage, the bank held between two and three thousand dollars of notes made by Hedden, or on which he was indorser, but that all these notes and all renewals thereof were paid, and that at the time of the sale all the indebtedness of Hedden was paid, and the bank had no liability secured by the mortgage. He further alleges that he has been unable to obtain from the bank a statement of the amount which they claimed to be due under the mortgage, and that, if the bank has discounted any notes indorsed by Hedden, they were discounted with full knowledge of the existence of defendant's judgment, and that the property would be sold under it, and were not discounted upon the security of the mortgage, and that the bank has no claim under its mortgage, and it should be surrendered. The defendant bank, by its answer to the cross bill, claims that there is due to it about $5,000 upon notes of Hedden secured by the mortgage, and denies that all indebtedness of Hedden to the bank at the time the mortgage was given has been paid, and by a further answer, put in after exceptions, states that notes of Hedden amounting to $1,750 now held by it are some of the notes or renewals of the notes held by it at the time the mortgage was given, and intended to be secured thereby.
Mortgages to secure future advances are now, by the settled law of this state, valid securities as against subsequent incumbrances for all advances made before actual notice of the subsequent incumbrance. Central Trust Co. v. Continental Iron Works (Err. & App.; 1804) 51 N. J. Eq. 605, 607, 28 Atl. 505, and cases cited. This rule was not questioned at the hearing, and the dispute on the facts is as to when actual notice was received by the bank. And, on the facts proved, further questions were raised as to the character of the actual notice which the prior mortgagee must have, and whether, on the facts proved in this case, notice of the character contemplated by law was proved. The notice relied on was given in the year 1881 by John D. Bartine, Esq., the attorney of Van Ness, the plaintiff, to the president of the bank, and perhaps to the cashier also. Both the president and cashier are dead, and Mr. Rartine's evidence is as follows: "Q. After the recovery of the judgment, did you see any of the officers at the national bank in Morristown in reference to the same, and, if so, when? A. It is nearly twenty years ago, and as to the time I am not positive. I was up there two or three times, to Morristown, in relation to this transaction, between the time that the judgment was entered and about 1881, when Mr. Van Ness died. I was there for the purpose of ascertaining what chances there were for the collection of this judgment. I did see the officers of the bank. I saw the cashier and president, and talked with one or both of them in relation to this matter, and the purpose of my visit there. Q. Was anything said by you to them about this judgment? What did take place? A. It is not possible for me now to state the conversation that occurred between myself and either one of the officers of the bank. I was there for the purpose of knowing what their claim was. Q. Can you give the substance of the conversation? A. I can't do that, but I know that in that conversation this judgment that I represented was talked about to them, but what was said I can't state; it is too long ago. I learned from them that they had a mortgage, and my recollection is that that mortgage was intended to secure the indorsements of Mr. Hedden,—those that they already had, and those that they might have in the future. That is my recollection of what they told me, one or the other of them, but which one I cannot remember. I think I saw for the first time at one of those visits the president of the bank. He was in the back room. I was there several times; as many as three times, I am sure. Q. What was the conversation in reference to the judgment on your part, or on the part of both of you? (Question read.) A. I can't answer that question in that shape, except by saying that I talked with this officer of the bank, and perhaps with both of them, but one, I am sure, in reference to their claim; and in that conversation the judgment that I represented was spoken of, but whether by me or by them, why, of course, I can't now remember. Q. by the Court: You can't fix the time of any of these conversations any more definitely than you have? A. No; but I think my recollection is that they were a short time after the judgment was procured, but I am not certain; but they were before the death of Peter Van Ness. Q. by the Court: Which was in what year? A. 1881. Q. Did you mention the names of these officers of the bank? A. I had never met the president before, but I think his name was Marsh. I was introduced to him in the back room. Q. Dead now, you understand? A. Is he? Q. Do you know whether he is or not? A. I don't know. I think I heard he was dead, and the cashier, Mr. Craig. Q. He is dead, too, isn't he? A. Yes, sir; he lived at Basking Ridge at the time. I knew him very well, and Mr. Marsh, I think it was, was president; but I am not sure about these names,— that is, the name of the president." Redirect: "Q. What was the date of the death of Mr. Van Ness? A. It was about the 1st of November, 1881. The inventory was filed in November,1881, about the 10th, I think. I didn't sign the assignment of judgment. I don't want to be understood as being positive Of anything except that I went there and had the talks."
From this evidence of Mr. Bartine, which was given very fairly and conscientiously, it seems to me that I must conclude that the proper officers of the bank, or one of them, had notice that a judgment had been obtained by Mr. Bartine's client against Hedden, their mortgagor, and that they notified Mr. Bartine of the bank's mortgage against Hedden. In view of the death of the other witnesses and Mr. Bartine's inability to give other details, the evidence should not be considered to extend further, I think, than to establish this notice to the bank in 1881 of the existence of the judgment. The question, then, is as to the sufficiency of such notice. Counsel for the bank contend that the notice should be proved to have been given in such a manner as to call the attention of the bank to the rights asserted by the subsequent incumbrance, and to have put the officers of the bank on their guard against further advances. The equity now relied on by the judgment creditor by reason of merely giving the notice is said to be one of a subtle character, not generally understood, and one with which ordinary business men would not be familiar; and it is further claimed that it was especially the duty of Mr. Bartine, a lawyer, to have given notice of such intention to claim preference over subsequent advances. No cases or authorities, however, have been referred to as to the character of the notice required to be given in such cases, and I find no cases which justify me in holding that, so far as the form of the notice is concerned, any information beyond that of the existence of the subsequent incumbrance is required in order to constitute the actual notice which will charge the prior mortgage with the legal effect of making future advances with this knowledge. In Heintze v. Bentley (Err. & App.; 1881) 34 N. J. Eq. 562, there was a statement of the rule in this form by Mr. Justice Dixon (page 500): "The rule in such cases is that, if a first mortgagee have knowledge of the existence of a second incumbrance upon the estate, he cannot make further loans upon his mortgage to the disadvantage of the second incumbrance when it is optional with him whether to make further advances or not." The question as to the form or sufficiency of the notice was not involved in the case, or referred to in the statement of the rule. There is, however, a class of analogous cases where the question as to the character of the notice to be given has arisen. These are the cases where notice of an assignment or other interest on a debt or fund is given or claimed to be given to a debtor, or to a trustee or other person holding a fund, and are cases where, if the notice is sufficient, the person to whom it is given acts with the fund or debt subsequently at the peril of infringing the rights which are fixed by the notice. In these cases, the rule, as stated by Lord Cairns, in Lloyd v. Banks, 3 Ch. App. 488, 491, is that knowledge of the nature of the incumbrance which has come upon the property must be brought to the mind of the trustee, so that a reasonable man or an ordinary man of business would act upon the information, and would regulate his conduct by it, in the execution of his trust. Or, as it was expressed in a later case following the above (Society v. Kayner, 14 Ch. Div. 406, 412): "What is said should be calculated to * * * give an intelligent apprehension of the fact that there had been that kind of notice given to the trustee which they were bound to take as part of the materials in their possession to regulate their course of procedure in dealing with the trust fund." Bramwell, L. J., says (page 415): "If this notice [of an assignment in a trust fund] was communicated in such a businesslike way that the trustees were bound to remember it, no doubt it would be effectual;" and (page 418) that the notice should be such as would lead prudent people to make it part of their knowledge, as a thing by which they were to govern their conduct in the future. These are cases where the notice relied on, if effectual, operated to affect the right of the trustee thereafter to deal with the property as to which notice was given or information was received, so as to impair the rights which, as to the trustee, arose from the fact of giving notice. They seem to me to be strictly analogous to the present case, and the rule as stated seems to be founded on reasonable grounds, and to be applicable here. Notice of the fact of the existence of the subsequent incumbrance called to the attention of the prior mortgagee by the subsequent incumbrancer, in such a manner that the prior mortgagee, as a prudent and reasonable man of business, was bound to remember that such subsequent incumbrance on the premises had been given, and to regulate his conduct accordingly, seems to me to be all that can be required in such cases in order that the parties giving and receiving the notice may thereafter have the rights and duties which arise from notice; and such notice I find to have been given in this case.
In cases of this character the rights and duties arise out of the fact of notice of the subsequent incumbrance, and are such rights and duties as the rules of equity impose by reason of this fact They do not arise from the knowledge or claims of the parties interested as to what these rights and duties are, and cannot, at least in ordinary cases, be qualified or impaired by such knowledge or claims of the parties of what the rights and duties are which equity imposes by reason of notice of the fact of the subsequent incumbrance. Cases might perhaps arise in which the subsequent incumbrancer might, by the manner of notice or of its effect, estop himself, in equity, from an assertion of a different right; but the evidence in this case, so far as respects the manner of notice, discloses nothing fromwhich it could be inferred that Mr. Bartine waived any of his client's rights arising from the notice of the judgment, or said anything to induce the bank to increase its advances or discounts to Hedden on the belief that these subsequent advances would be prior to the judgment. The bank, at the time of receiving the mortgage, held notes of Hedden to the amount of about $8,000, and this amount does not seem to have been increased after the notice of the judgment, but, on the contrary, was diminished, so that the notes now claimed to be secured amount to about $5,000. The sole question on this branch of the case is whether notes discounted subsequently to the notice of the judgment in 1881, and which were not renewals of the notes previously discounted, are, under this mortgage to secure future advances and discounts, to be held to be prior to the judgment. Such priority, if it is to be given to the subsequent discounts, cannot arise, as it seems to me, by reason of any supposed estoppel of the judgment creditor in this case, arising out of the manner of giving the notice; and, unless the other claims set up by the bank are valid, the priority must be denied, under the rule above stated.
A second claim made by the bank arises out of the supposed laches on the part of the judgment creditor in setting up this claim of preference over the subsequent advances. The notice of the judgment was given in 1881, and the judgment remained the property of Van Ness or his estate until 1887, when it was assigned to the defendant Jones, apparently for the nominal consideration of $1. The judgment was for over $11,000, and Jones held it without any proceedings for its collection until February, 1891, when execution was issued, on winch the property was subsequently sold to Jones for $100. The claim of priority of the judgment creditor is asserted by his answer in 1892, after the lapse of over 10 years from the time when notice of his judgment was given. This delay was not only very considerable, but it is also urged that one effect of it has been that in the meantime the only other witnesses to the fact of notice on the part of the bank have died. Mr. Craig, the cashier, died in 1889, and Mr. Marsh, the president, in 1894. As to the effect of laches in a court of equity, it was said by Lord Blackburn, in a late case (Erlanger v. Phosphate Co. [1878] 3 App. Cas. 1218, 1279), that the most distinct and definite rule laid down by the authorities was this: "The doctrine of laches in courts of equity is not an arbitrary or a technical doctrine. Where it would be practically unjust to give a remedy, either because the party has by his conduct done that which might fairly be regarded as equivalent to a waiver of it, or where by his conduct and neglect he has, though perhaps not waiving that remedy, yet put the other party in a situation in which it would not be reasonable to place him if the remedy were afterwards to be asserted, in either of these cases, lapse of time and delay are most material. But in every case, if an argument against relief, which otherwise would be just, is founded upon mere delay (not amounting to a bar by statute of limitations), the validity of that defense must be tried upon principles substantially equitable. Two circumstances always important in such cases are the length of the delay and the nature of the acts done during the interval which might affect either party, and cause a balance of justice or injustice in taking one course or the other, so far as relates to the remedy."
In this case the mere delay could not be said, under the circumstances, to be a waiver of the judgment creditor's claim, for he received notice of the bank's mortgage, and presumably of the large amount due on it ($8,000) in 1881, and was under no obligation to the bank to take any immediate action in order to preserve his rights under the judgment and notice. The principal effect of the delay has been to deprive the bank of the testimony of Mr. Marsh and the cashier, the only other witnesses to the conversation with Mr. Bartine. It is not altogether accurate to charge Jones with the effect of delay as to Mr. Marsh's evidence, for he died in 1894, two years after the bill was filed, and more than a year after the filing of the cross bill, which set up that the notes held by the bank were all discounted after notice of the judgment. The cross bill did not specify when or to what officers the notice was given, or by whom it was given; but this omission was not objected to by the bank, and I am not prepared to say that the failure of the bank to have the benefit of Mr. Marsh's evidence can fairly be chargeable to the delay of Jones in setting up his claim, or that he should be solely charged with any supposed results of the failure to secure testimony for his adversary after his bill was filed. While the bank were not called on to disprove the notice until after Jones had proved it, yet the risk of producing their own witnesses on this point, who were living when the bill was filed and the claim was made, cannot be placed altogether on Jones as defeating his claim, as it would be if the laches on this account were held fatal. But, even on the assumption that the loss of Mr. Marsh's evidence was altogether due to the late assertion of Jones' claim, the insuperable difficulty about the effect of it as barring the remedy of Jones arises from this fact: After giving the notice of the existence of his judgment, there was, as it seems to me, no duty imposed on the judgment creditor, and in favor of the prior mortgagee, of asserting his claim by legal proceedings, either immediately or at any subsequent period short of the time fixed by the statute of limitations.
The statutes make the judgment a lien for 20 years, and provide (3 Gen. St. p. 2980, par. 7) that a sale under execution on the judgment conveys the estate in the lands vested in the judgment debtor at the date of the judgment.Our decisions in reference to mortgages for future advances qualify this statutory right by holding that the judgment, as to them, only vests the rights of the debtor from the time of notice of the judgment; but, except for this qualification, the language of the statute must govern; and, in the absence of any evidence showing an equitable waiver or estoppel to set up the estate which is expressly conferred by the statute, I see no ground upon which, after giving notice of the judgment, the mere delay of assertion of rights under the judgment, short of the time fixed by the statute of limitations, can deprive the judgment creditor or the purchaser under execution thereon of his statutory rights. And on the question of effect of laches it is important to note, also, that in this case the judgment creditor or purchaser is not in court simply in the position of complainant asserting his rights. He is brought in as defendant to a foreclosure of the first mortgage, which is undoubtedly prior to both himself and the bank. The bank had the right at any time to foreclose their mortgage, and such foreclosure would have forced the question now raised at the time of their own selection. But the defendant, as judgment creditor, and subsequently as purchaser of the premises, and in possession, was under no such duty to the bank to assert his present claim of priority as to make his failure or delay to do so a bar to relief, when the claim has been set up in a suit to which he is the defendant, together with the bank. As to any equity in favor of the bank based upon the nominal consideration for the property apparently paid by Jones, it is only necessary to say that he stands here in the rights of the original judgment creditor and of purchaser under the statute, and the consideration now paid is not material here; nor is it entirely clear that the existence of the claim of the bank on its mortgage may not have been to some extent an explanation or cause of the low bids for the property at the sheriff's sale. My conclusion is, therefore, that as to all the notes made or indorsed by Hedden, which were discounted by the bank subsequent to November, 1881, and which were not renewals of the discounts previously made, they are cut off by the judgment of the defendant Jones and the sale thereunder. As to the notes which were renewals of notes discounted previously to November, 1881, these are secured by the mortgage of the bank. This is the rule established by the authorities in other states, and should be followed here. 2 Jones, Mortg. § 924, and cases cited.
I will hear counsel at the settlement of the decree as to whether further evidence or a reference should be taken on the point as to which of the notes now held by the bank, made or indorsed by Hedden, are renewals of any of such notes held by the bank in November, 1881. I am not prepared without hearing counsel to say that the evidence as it now stands is sufficiently complete to advise final decree fixing these amounts.