Opinion
(Decided 15 March, 1898.)
Claim and Delivery — Chattel Mortgage — Agreement Between Mortgagor and Mortgagee for Substitution of Other Property for Property Mortgaged — Conditional Sale — Notice — Registration.
1. An agreement between a mortgagor and a mortgagee for the substitution of other property for that conveyed in the mortgage, while good as between the parties and enforcible in equity, is not a mortgage so as to give a lien in preference to creditors and purchasers for value. Semble, that in the absence of an agreement between the mortgagor and mortgagee the latter may follow and subject property for which the mortgaged property has been exchanged before third parties have acquired rights therein.
2. Where registration of an instrument is required, no notice, however full and formal, will supply the place of registration.
3. Where A., as mortgagee of personal property, agreed that the mortgagor might exchange the mortgaged property for other property which should stand as security in place of the former, and the mortgagor executed to B. a mortgage upon the property so received in exchange: Held, that the mortgage to B. is superior to that of A., although B. had notice of the agreement between A. and his mortgagor.
4. In such case, even if the mortgagor had acted as the agent of the mortgagee in the prior mortgage in making the exchange, the agreement that the property received in exchange should stand in the place of that described in the mortgage, made it a conditional sale and invalidated it as to creditors and purchasers for value notwithstanding they had notice of the agreement.
(284) CLAIM AND DELIVERY, tried before Adams, J., and a jury at August Term, 1897, of ORANGE. There was a verdict for the defendant, and from the judgment thereon the plaintiff appealed. The facts appear in the opinion.
C. D. Turner for plaintiff.
J. W. Graham and S. M. Gattis for defendant.
The defendant Strain, in 1884, executed a mortgage on two horses to Burch, which was registered. Subsequently in 1888 Burch gave Strain the following paper-writing: "This is to certify that I, A. P. Burch, grant H. Q. Strain the privilege to exchange one bay mare and one bay horse (which I, A. P. Burch, hold a mortgage on) for two black mules, which shall stand in the place of the above mentioned horses as security. 4 August, 1888. A. P. Burch. (Seal.)" This was not registered. Thereafter in 1890 Strain executed a mortgage on these two black mules to the plaintiff, and the mortgage was duly registered.
This action was brought to recover the mules in order to sell them and apply the proceeds to the debt secured by plaintiff's mortgage. Burch interpleaded and claimed them under his mortgage on the horse and mare and his agreement with the mortgagor, above set out, that the mules received in exchange for the horse and mare should be substituted in their stead. There was a conflict of evidence whether the plaintiff had notice of this agreement between Burch and Strain, and his Honor told the jury that if the plaintiff knew of this agreement (285) between Burch and Strain when he took the mortgage on the mules, the claim of Burch was superior to his, and that the agreement need not have been registered, but that if he took the mules without notice of such agreement, then the plaintiff's claim was superior. The plaintiff excepted, and this raises the point which is decisive of the case.
The agreement between the mortgagor and mortgagee was good as between themselves and enforcible in equity, but it was not a mortgage. Parties cannot thus, by side agreements between themselves, substitute from time to time other property for that described in the mortgage and claim a lien on it in preference to "creditors and purchasers for value." Code, sec. 1254. To do this would destroy the whole purpose and tenor of our registration laws and restore the evils they were enacted to prevent. Sharpe v. Pearce, 74 N.C. 600; Powers v. Freeman, 2 Lans. (N. Y.), 127; 1 Cobbey Chat. Mort., sec. 158. It is true that in Sharpe v. Pearce, supra, it was held that the agreement for substitution was invalid as to third persons without notice. The defendant there bought without notice, and it was not necessary to decide, and it was not decided, what would have been the effect if he had bought such substituted property with notice. But our courts have repeatedly held that where registration is required "no notice however full and formal will supply the place of registration." Quinnerly v. Quinnerly, 114 N.C. 145; Bank v. Mfg. Co., 96 N.C. 298; Todd v. Outlaw, 79 N.C. 235; Blevins v. Barker, 75 N.C. 436; Robinson v. Willoughby, 70 N.C. 358; Fleming v. Burgwyn, 37 N.C. 584; Barber v. Wadsworth, 115 N.C. 29. (286) If this were not so, a piano could be named in a mortgage and a subsequent purchaser or mortgagee from such mortgagor of a pair of mules, or any other property, would be liable to have it taken from him by proof of an agreement between the mortgagor and mortgagee for the substitution of the mules for the piano, and would be dependent upon the uncertainties of oral testimony as to whether or not he had knowledge of such agreement. This would destroy, as we have said, the very object and the efficacy of our registration laws. His Honor was correct in saying that it was immaterial that the agreement for the substitution was not registered. Not being a new mortgage, the constructive notice from registration, if any, would not have added to its validity, though essential to a mortgage.
Hubbard v. Winborne, 20 N.C. 137, relied on by the defendant's counsel, has no bearing. There, a debtor conveyed a horse and other property to a trustee to pay certain debts, the property being left in the hands of the trustor until the day of sale. Soon after the registration of the deed the debtor exchanged the horse for a mare, and the trustee accepted the substitution. The court held that the trustee, having power to sell or exchange the trust property, could constitute the debtor his agent for that purpose, and having ratified his action and received the mare before the levy of an execution against the debtor, the title had passed to the trustee. This may be true as between a trustor and his trustee, for no lien was acquired as to the substituted property before title passed to the trustee, but the doctrine does not apply as to mortgagor and mortgagee, between whom the relation of mortgagee is not that of one intrusted with the property to apply it for the benefit of the (287) mortgagor. On the contrary, the mortgagor is in possession and, except for the purpose of the security for debt, is the real owner of the property with right to sell it or mortgage it free from any encumbrances not on record. Acts of 1829, ch. 20, now Code, sec. 1254. Whether, if directly brought into question, Hubbard v. Winborne, supra, could be now sustained, in view of the numerous later decisions above cited as to the registration law passed in 1829, which was then new and had not been construed, it is very certain it is not authority as to the relation between mortgagor and mortgagee, and it was so held in Sharpe v. Pearce, supra.
The learned counsel for the defendant ingeniously argued, further, that in the exchange of the horse and mare for the two mules by the permission of the mortgagee Burch, the mortgagor Strain was acting as agent for Burch, who thus in fact became the purchaser and received the title. If we concede that this was so, Strain took possession of them and the agreement provides that they should "stand in place of the horses as security" — that is, that Strain should have a clear title to them (as he would have had to the horses) upon payment of the mortgage debt. This made it a conditional sale and invalid as to creditors and purchasers for a valuable consideration without registration; The Code, sec. 1275, which places such sales on same basis as mortgages, and hence "no notice, however full or formal, would supply the want of registration." Brem v. McDowell, 93 N.C. 191; Clark v. Hill, 117 N.C. 11; Bostic v. Young, 116 N.C. 766; Glasscock v. Hazell, 109 N.C. 145; Kornegay v. Kornegay, ibid., 188; Harrell v. Goodwin, 102 N.C. 220; Butts v. Screws, 95 N.C. 215. (288)
We have already said that as between the parties (if rights of third persons had not intervened) the mortgagee by virtue of his agreement could compel the application of the property received in exchange for the mortgaged property to his debt, and it may be, though we need not pass upon the question, that if, without a mortgagee's consent, other property is received in exchange for the mortgaged property, he might follow up and subject the fund or substitute property before third parties have acquired any rights in respect thereto.
Error.
Cited: Gorrell v. Alspaugh, post, 562; Harris v. Lumber Co., 147 N.C. 633; Piano Co. v. Spruill, 150 N.C. 169; Wood v. Lewey, 153 N.C. 403; Burwell v. Chapman, 159 N.C. 212; Buchanan v. Clark, 164 N.C. 71; Hinton v. Williams, 170 N.C. 117; Springs v. Cole, 171 N.C. 419.