Opinion
Opinion filed October 3, 1933.
Chattel Mortgages — License by Mortgagee to Mortgagor To Sell Mortgaged Property as Waiver of Security — Effect of Conditional License To Sell Mortgaged Property — Sufficiency of Evidence To Show Lien Notes Purchased in Regular Course of Business for Valuable Consideration — Waiver — Mortgagee's Right of Action against Mortgagor for Violation of Conditional License To Sell Mortgaged Property as Not Affecting Bona Fide Purchaser — Sufficiency of Evidence To Show Company To Be Bona Fide Purchaser of Notes.
1. Unconditional license from mortgagee to mortgagor to sell encumbered personalty in ordinary course of business and to receive pay therefor operates, when acted upon, as release or waiver of security.
2. License by mortgagee to mortgagor to sell mortgaged personalty may be subject to condition that is binding upon licensee, compliance therewith by him being necessary to justify and validate sale as between him and licensor, and, if licensee violates such condition, licensor may maintain action against him for conversion of property sold; but such conditional license is unconditional as to bona fide purchasers, and operates, when acted upon, as waiver of security as to them.
3. Evidence held to show that credit company purchased lien notes from piano company in regular course of business for valuable consideration, though it took piano company's note payable in installments, personal guarantee of several individuals for payment of lien notes, and piano company agreed to collect installments due on such lien notes and remit to credit company.
4. Mortgagee's license to mortgagor to sell mortgaged pianos held to operate as waiver of mortgages on such property and as to lien notes taken by mortgagor in its own name in payment for such pianos.
5. That mortgagee had right to action against piano company for tortious conversion of pianos sold, by reason of breach of condition under which mortgagor was given license to sell, that proceeds of sales should be turned over to mortgagee, held not to affect rights of bona fide purchaser of lien notes taken by mortgagor in payment for pianos sold.
6. Credit company, purchasing lien notes, in good faith, in usual course of business, and for valuable consideration, covering mortgaged pianos sold with consent of mortgagee, held bona fide purchaser as against such mortgagee.
ACTION OF TORT to recover value of lien notes, covering mortgaged personalty sold with consent of mortgagee, such lien notes having been purchased by defendant from mortgagor. Plea, not guilty. Trial by jury at the March Term, 1933, Washington County, Sherman, J., presiding. Verdict directed for the defendant, and judgment thereon. The plaintiff excepted. The opinion states the case. Affirmed.
H. William Scott and J. Ward Carver for the plaintiff.
The chattel mortgages, being duly recorded, were constructive notice to all the world that there was a lien on the property described and the purchaser of lien notes describing the same property took them with constructive notice of want of title of his vendor. Murphy v. Barnard et al., 162 Mass. 72, 76, 38 N.E. 29.
Since the evidence showed that defendant made no inquiry as to the true ownership of the lien notes covering the mortgaged personalty, verdict should have been directed for the plaintiff. Pierson v. Huntington, 82 Vt. 482, 485.
The license of the mortgagor to sell the mortgaged personalty was not an absolute, but a conditional one, i.e., that the mortgagee should have the avails of the lien notes taken. Being a special and limited authority only, whoever dealt with mortgagor and purchased the lien notes was bound at his peril to know the extent of such authority; and as the purchaser can stand only upon the title of its vendor, its ignorance of the nature of that title will not enlarge the purchaser's title. White v. Langdon, 30 Vt. 599; Thrall, Appt. v. Lathrop, 30 Vt. 307. Theodore E. Hopkins, and Francis E. Taylor (of New York City) of counsel, for the defendant.
A chattel mortgagee waives his security, where with his express consent the mortgaged chattel is sold by the mortgagor in the regular course of the latter's business, Rogers v. Whitney, 91 Vt. 79.
Where a condition is attached to license to sell mortgaged personalty, such condition does not affect third persons, although it creates a contractural relationship between the mortgagee and mortgagor. Reed v. Rowell, 100 Vt. 41; Ufford v. Winchester, 69 Vt. 542; Manley Bros., Inc. v. Somers, 100 Vt. 292; Farmers National Bank v. Missouri Live Stock Comm. Co., 53 Fed. (2d) 991; Luther v. Lee et al., 62 Mont. 174, 204 P. 365.
As against a bona fide purchaser for value, a chattel mortgagee is estopped to assert his title to chattels sold by the mortgagor in the regular course of his business with the express license of the mortgagee. Armington v. Houston, 38 Vt. 448; Rogers v. Whitney, 91. Vt. 79; Andre v. Murray, 179 Ind. 576, 101 N.E. 81, Ann. Cas. 1916A, 87; Indiana Investment Securities Company v. Whisman, 138 N.E. 512; Lewenberg v. Hayes, 91 Me. 104, 39 A. 469.
A bona fide purchaser for value of negotiable instruments arising out of the sale of mortgaged chattels to bona fide purchasers for value thereof in the regular course of the mortgagor's business takes with all the rights of purchasers, Anglo-Calif. Trust Co. v. Pacific Acceptance Corp., 70 Cal.App., 232 P. 489; Imperial Finance Corp v. Fidelity Trust Co., 4 D.L.R. 827; Thrall v. Lathrop, 30 Vt. 307; Ufford v. Winchester, 65 Vt. 542; Coffman v. Citizens' Loan Investment Co., 290 S.W. 961; Boice v. Finance Guaranty Co., 127 Va. 563, 102 S.E. 591, 10 A.L.R. 654.
Conversion does not lie against a bona fide purchaser of mortgaged property from a mortgagor with license to sell. Ramsey v. Calif. Packing Corporation, 51 Cal.App. 517, 207 P. 481.
Present: POWERS, C.J., SLACK, MOULTON, THOMPSON, and GRAHAM, JJ.
The plaintiff and the defendant are corporations engaged in the business of buying, discounting, and handling commercial paper; the plaintiff at East Montpelier, Vt., and the defendant in Boston, Mass. At all times material the Littlefield Piano Company, Inc., hereafter called the Piano Company, was engaged in the business of selling pianos and other musical instruments, with its principal place of business in the city of Barre.
On May 10, 1928, the Piano Company executed a chattel mortgage on twenty-five pianos, described therein by name and number, to the plaintiff to secure the payment of its note of even date for $9,500, payable to the plaintiff or order. On January 28, 1929, it executed another chattel mortgage on "a quantity of pianos and victrolas," described therein by name and number, to the plaintiff to secure the payment of its note of even date for $21,000, payable to the plaintiff or order. When each mortgage was executed, it was agreed by the plaintiff and the Piano Company that the latter might sell the mortgaged property in the ordinary course of business, and receive cash or take notes payable to the Piano Company in payment therefor, the same to be turned over to the plaintiff to be applied upon the mortgage indebtedness.
Thereafter the Piano Company sold some of the mortgaged pianos to bona fide purchasers in the ordinary course of business, and in payment therefor took conditional sales contracts, hereafter called lien notes, payable to the Piano Company or bearer. Each note provided that the piano sold and described should remain the property of the Piano Company or bearer until the note was paid. These notes were not recorded.
The Piano Company, for the purpose of obtaining money to finance its business, assigned and delivered a large number of its lien notes to the defendant between March 5, 1929, and October 25, 1929. Several of such notes had been given to the Piano Company by purchasers of mortgaged pianos. The notes were assigned and delivered to the defendant without the actual knowledge or consent of the plaintiff, and the defendant took them without actual knowledge of plaintiff's mortgages.
The plaintiff seeks to recover from the defendant for the conversion of the lien notes given to the Piano Company in payment for the pianos covered by its mortgages. There was a trial by jury. The court directed a verdict for the defendant at the close of the plaintiff's evidence. The plaintiff excepted. There is little, if any, conflicting evidence.
The question raised in this Court is whether the defendant obtained a title to such lien notes that is superior to the title or right of the plaintiff.
The plaintiff contends that the license to the Piano Company to sell the pianos was not an absolute, but a conditional, one; that the fair construction of the license to sell is that the Piano Company could not sell unless it paid the avails of notes it took in payment for mortgaged pianos directly to the plaintiff; that it was a special and limited authority; and it invokes the rule that whoever deals with one having only a special and limited authority is bound at his peril to know the extent of the authority.
This contention is not sound. It is well settled in this jurisdiction that an unconditional express or implied license from a mortgagee to the mortgagor or from a conditional vendor to his vendee to sell the encumbered personalty in the ordinary course of business and to receive the pay therefor, whether it be money or notes, operates, when acted upon, as a release or waiver of the security. Perry v. Dow, 56 Vt. 569; Ufford v. Winchester, 69 Vt. 542, 38 A. 239; Hunt v. Allen, 73 Vt. 322, 50 A. 1103; Colston v. Bean, 77 Vt. 40, 58 A. 795; Rogers v. Whitney, 91 Vt. 79, 99 A. 419; Reed v. Rowell, 100 Vt. 41, 43, 134 A. 641; Cloutier v. Devereaux, 100 Vt. 187, 193, 136 A. 28; Manley Brothers Co., Inc. v. Somers, 100 Vt. 292, 296, 137 A. 336; Manley Brothers Co., Inc. v. Somers, 100 Vt. 439, 441, 138 A. 735.
While such unconditional license to sell operates, when acted upon, as a release or waiver of the security not only as against bona fide purchasers but also as against the seller (Manley Brothers Co., Inc. v. Somers, 100 Vt. 439, 138 A. 735), the license to sell may be subject to a condition that is binding upon the licensee. If the license to sell is upon the condition that the proceeds derived from the sale shall be turned over to the licensor, the condition is binding upon the licensee, and compliance therewith by him is necessary to justify and validate the sale as between him and the licensor. Such a conditional license is unconditional as to bona fide purchasers, and operates, when acted upon, as a waiver of the security as against them; but, if the licensee violates the condition, and, without the consent of the licensor, retains the proceeds of the sale, the latter may maintain an action against him for the conversion of the property sold. Ufford v. Winchester, supra; Reed v. Rowell, supra; Cloutier v. Devereaux, supra; Manley Brothers Co., Inc. v. Somers, 100 Vt. 292, 137 A. 336; White v. Langdon, 30 Vt. 599, relied upon by the plaintiff, is distinguished in Ufford v. Winchester, where the license to sell the property and to receive the pay therefor was upon the condition that the licensee should turn the proceeds of the sale over to the licensor, and it was held that such a license was unconditional as to bona fide purchasers.
The plaintiff also contends that the defendant did not take the lien notes in the regular course of business, in that it took the note of the Piano Company payable in monthly installments; that it left the lien notes with the Piano Company for collection to apply on its note to the defendant; that it took the written personal guaranty of Mr. Littlefield, the treasurer of the Piano Company, and one G.L. Woodworth, to secure the payment of lien notes purchased by it from the Piano Company; and that the defendant did not pay full value for the notes.
The notes were purchased by the Boston office of the defendant. Wallace J. Eckenrode, who was manager of the office at that time and had charge of the transactions with the Piano Company, was a witness called by the plaintiff. While it appears from the record that the defendant took the personal guaranty of Mr. Littlefield and Mr. Woodworth for the payment of the lien notes purchased by it, and a note from the Piano Company payable in installments, it appears from the uncontradicted testimony of Mr. Eckenrode that the notes were purchased by the defendant in the regular course of business; that all of its transactions with the Piano Company whereby the title to the notes and the property described therein was transferred to it, were done in the regular course of business; that the notes were purchased "for one hundred cents on the dollar"; that eighty per cent of the purchase price was paid to the Piano Company when the notes were transferred to the defendant, with the agreement that the remaining twenty per cent would be paid when all the notes were paid. No evidence has been called to our attention from which it can be inferred that the notes were not taken in the regular course of business or that the defendant did not give a valuable consideration for them. While the Piano Company agreed to collect the installments due on the notes and remit them to the defendant, there is no evidence that the defendant left the notes with the Piano Company or that the latter had possession of them after they were delivered to the defendant.
The plaintiff contends further that its chattel mortgages, being recorded, were constructive notice to the world that there was a lien on the pianos described therein; that when the defendant took the lien notes describing the same pianos by number and name as were described in the mortgages without inquiry, it took them with notice of the lien of the mortgages; that, since it took not only the notes but also the lien contained in them, it was charged by statute with constructive notice of the record title, which showed that the Piano Company had no title to the lien notes, that under such circumstances the defendant was not a purchaser without notice, but a purchaser with constructive notice that its vendor did not have a legal title to the notes sold to it.
In the view we take of the case, the question of constructive notice is not involved. It is true, that, as a rule, the seller of personalty cannot confer upon a purchaser any better title than he himself has. There are many exceptions to this rule, however. The rule that an unconditional license to sell mortgaged personalty operates, when acted upon, as a waiver of the mortgage so far as the purchaser is concerned, is one of the exceptions to the general rule.
The plaintiff claims title to the lien notes in question only by virtue of the lien of its mortgages. As we have hereinbefore said the license from the plaintiff to sell the mortgaged pianos in the ordinary course of business was unconditional as against the purchasers thereof, and it operated, when acted upon, as a waiver of the mortgages on such pianos. It also operated as a waiver of the mortgages as to the lien notes taken by the Piano Company in its own name in payment for such pianos, because, when the mortgages on the pianos were waived, there was no lien left upon which the plaintiff could base a title to the lien notes or to a right of possession as against bona fide purchasers of such notes.
The plaintiff had an action against the Piano Company for the tortious conversion of the pianos it sold, by reason of its breach of the condition that it should turn the proceeds derived from the sales over to the plaintiff, but that cannot affect the rights of a bona fide purchaser of the lien notes taken in payment for such pianos.
That the defendant is a bona fide purchaser cannot be questioned. It appears from the record that it purchased the lien notes in good faith, in the usual course of business, and for a valuable consideration.
The court below committed no error when it directed a verdict for the defendant. Judgment affirmed.