Opinion
Decided April 4, 1932.
Chattel mortgages — Mortgage, without consideration, to protect mortgagor from creditors, not fraud — Bona fide holder — Assignee of mortgage and note, where acceleration clause not exercised.
1. Mortgage without consideration to protect mortgagor from creditors held not fraud upon mortgagor.
2. Where installment note containing acceleration clause and chattel mortgage securing it were assigned for value after default in installments, but payee had never exercised acceleration option, assignee held holder in due course against whom defense of lack of consideration in note and mortgage was unavailing.
ERROR: Court of Appeals for Hamilton county.
Mr. Phineas S. Phillips, Mr. F.E. Burnett and Mr. Leon Strikman, for plaintiffs in error.
Mr. S. Rotter, for defendants in error.
This case originated in the municipal court of Cincinnati, wherein judgment was rendered in favor of the plaintiffs, which judgment was affirmed by the court of common pleas of Hamilton county, and is now presented to this court on error from the judgment of the court of common pleas.
Morris and Freda Dennis executed a note for $4,000, payable in installments of $25 per month, to Eugene Adler, and gave Adler a chattel mortgage to secure the payment of the note. The note provided for acceleration upon default of any installment, at the option of the payee.
At the time of the execution and delivery of the note Morris was heavily indebted to creditors, and the giving of the note and mortgage was without consideration and to protect the Dennises, who have since gone into bankruptcy, in which proceeding their obligation upon the note has been discharged.
After the installments were in default, the note and mortgage were assigned to Samuel Rotter for a valuable consideration.
The instant suit is a foreclosure of the chattel mortgage.
There was no fraud upon the mortgagors in taking the mortgage. The facts are conclusive in showing that the mortgage was given to protect the mortgagors, or at least Dennis, the husband, from the just claims and acts of his creditors.
The plaintiffs in error rely upon Baily v. Smith, 14 Ohio St. 396, 84 Am. Dec., 385, as authority for the right of a mortgagor to set up equities he may have against the mortgagee in opposition to the suit in foreclosure of an assignee for value, before maturity and without notice of any defect in the instrument.
While the note in the instant case provided for acceleration, it was only at the option of the payee of the note upon default of an installment. No such option was ever exercised, for the very good reason that it was understood between the parties that no payments were to be made on the note which had been given without consideration.
Rotter, the assignee, was therefore a bona fide holder in due course of the mortgage as well as the note, for value and without notice of any claimed infirmity therein.
Baily v. Smith, supra, has been definitely limited by subsequent decisions to a strict application to facts similar to those in that case. The decision is out of harmony with the majority of cases throughout the country. First National Bank of Wapakoneta v. Brotherton, Trustee, 78 Ohio St. 162, 84 N.E. 794; Leeper v. Hunkin, 22 Ohio App. 204, 153 N.E. 519; Ashland Bldg. Loan Co. v. Kerman, 23 Ohio App. 127, 155 N.E. 245.
We adopt the language of Judge Richards in the case of Ashland Bldg. Loan Co. v. Kerman, supra, on page 132 [ 155 N.E. 247] as applicable to the instant case: "Third: It is further insisted on the authority of Baily v. Smith, 14 Ohio St. 396, 84 Am. Dec., 385, that the indorsement of the promissory note to the plaintiff does not entitle it to the benefit of the mortgage free from equities, even though the note be negotiable. The decision in the case just cited is in conflict with the holdings of nearly all of the states and must not be extended beyond the facts involved. In that case both the note and mortgage were obtained by fraud, while in the case at bar there is not any claim of fraud in the execution and delivery of the note and mortgage. The most that is contended is that the Kermans had a latent equity, in that the entire amount represented by the note had not been advanced to them by the Cleveland Discount Company. The rule of law in such case is clearly stated in First National Bank v. Brotherton, Trustee, 78 Ohio St. 162, 84 N.E. 794, and under the authority of that case this court is of the clear opinion that the plaintiff, having purchased the note and mortgage for value, in due course, before maturity, is entitled to the benefits of a bona fide holder, not only as to the note, but as to the mortgage, which is a mere incident to the note."
In any event, the mortgagors cannot be now heard to disclaim the effect of an instrument they voluntarily executed and which has caused another to innocently part with a valuable consideration.
The judgment of the court of common pleas, affirming the judgment of the municipal court, is affirmed.
Judgment affirmed.
HAMILTON and CUSHING, JJ., concur.