Opinion
December, 1911.
Arthur B. Hyman, for plaintiff.
William R. Rust (Thornton Earle, of counsel), for defendants.
Assuming that article 10 of the Lien Law, section 230, is as broad in its protection as the recording acts relating to real property, yet the assignee of the junior mortgage has not brought himself within that protection.
I am convinced that the assignor of this mortgage, Johanna Magurk, was not a mortgagee in good faith, and that at the time she accepted the mortgage from Carl Boeger she knew that the brewing company had a first mortgage upon the same property for $3,500. If she did not know, it was because she authorized and permitted her husband to transact all her business as her agent and his knowledge would be imputed to her. Little doubt exists but that Mr. Magurk knew that his wife's mortgage was a second mortgage. It is true that the Magurk mortgage was filed February 14, 1911, one day before the plaintiff's first mortgage, but this gave the Magurk mortgage no preference over that of the brewing company's, as Johanna Magurk, the junior mortgagee, had notice and was not a first mortgagee in good faith. The assignment of this junior mortgage from Magurk to Henry Reis was made fifteen days after the plaintiff's mortgage was filed, that is, on March 2, 1911. Unless protected by the Lien Law or filing act, Reis took, according to the general rule of assignments, no better title than his assignor, Mrs. Magurk, had; and the mortgage in his hands was subject to the plaintiff's mortgage because it was so subject while the assignor held it. If the Lien Law be given the same meaning in this particular as the real estate recording acts, Henry Reis, the assignee, was not protected by it simply because the mortgage he took was filed before that of the plaintiff; the latter was filed before he took the assignment and thus became a first lien.
An assignee in good faith and for a valuable consideration of a recorded mortgage gets no preference over a prior unrecorded deed or mortgage by reason of such record, when his assignor could not claim it by reason of notice. If, however, the assignment is recorded before the recording of such prior deed or mortgage, he thereby obtains a preference. Decker v. Boice, 83 N.Y. 215; Stevenson Brewing Co. v. Iba, 155 id. 224.
Henry Reis, I find, was an assignee for value and in good faith, but under the above rule is subject to the notice and knowledge possessed by Johanna Magurk.
But it is claimed by Henry Reis that he takes the assignment free of all equities and contrary to the general rule of assignments of choses in action, as the chattel mortgage in this case was given to secure promissory notes, also negotiated to him, and that the mortgage assignment takes on the nature of negotiable paper.
It is stated in the text books that some States have adopted the rule that a mortgage given to secure negotiable paper is subject to none of the equities existing between the original parties, when in the hands of a bona fide holder for value, while it would have been different had the mortgage been given as security for a bond. All States have not adopted this rule, as can be seen by reference to 1 Jones on Mortgages (6th ed.), § 834. Where the law is that no other defenses are allowed in foreclosure than would be allowed on the notes at law, the equities shut out are those always spoken of as existing between the original parties. I can find no case where the equities existing in favor of third parties, called latent equities, against the lien of the mortgage, and not against the notes or debt, have been said to be cut off, except the case cited in 1 Hilliard on Mortgages (4th ed.), 573, to support the statement in the text, "the assignee is not subject to the latent equities of strangers of which he has no notice."
In this State, Gould v. Marsh, 4 T. C. 128; 1 Hun, 566, applied the rule that the mortgage given to secure negotiable paper was subject to no more defenses than the notes; but even in that case the notes and mortgage had passed to a bona fide holder before the prior mortgage was filed. In this case the notes and mortgage were taken by Reis, not before but after the plaintiff's mortgage was filed. The Gould case cites as an authority and follows Carpenter v. Longan, 16 Wall. 271. The same year in which the Gould case was decided, the Court of Appeals decided the case of Trustees of Union College v. Wheeler, 61 N.Y. 89, 107, in which Commissioner Dwight said: "Reference is also made to a class of cases appearing in the law reports of a number of States, holding, in substance, that when a mortgage is given to secure a negotiable note, which is itself transferred before maturity for value, it is taken by the assignee free from all equities. * * * These cases have not yet become established in this State." Citing Carpenter v. Longan, supra.
The search which my time has permitted does not reveal any other case in this State upon this point, and counsel in their briefs have cited none. If it be the law that in such instances the equities between the original parties are cut off, I do not believe the equities of third parties touching the mortgage securities are affected.
Thomas on Mortgages, section 315, says: "Curious questions will be presented in connection with negotiable promissory notes secured by mortgages as between the endorsees or transferees of such notes (whose rights were perfected subsequently to the perfecting of a lien upon or a conveyance of the mortgaged premises) and the lienor or grantee. As against the maker of the note the endorsee will acquire a perfect title free of all defenses, but it does not at all follow that if a valid lien is obtained upon the land before the note comes into the hands of a bona fide purchaser, the holder of the lien may not assert any of the defenses which existed against the note at the time his right accrued in order to protect his title." This is the situation here.
There is another ground, however, which prevents this junior mortgage from becoming a first lien, and that is the constructive notice to the defendant Henry Reis. At the time the plaintiff filed its mortgage, February 15, 1911, there was no other lien ahead of it. True, the Magurk mortgage was filed the day before, but Johanna Magurk, the mortgagee, had notice of the plaintiff's right to a first lien, and so was not a bona fide mortgagee. Not until March 2, 1911, did the Magurk mortgage pass into the hands of a purchaser or assignee for value and in good faith, the defendant Henry Reis; but at that time the plaintiff's mortgage had been filed and its lien protected as a first lien by section 230 of the Lien Law.
The plaintiff's mortgage contained a statement that it was intended as a first mortgage, so that an examination of the record or files would have disclosed this fact, or very suspicious statement; and, therefore, the assignee Henry Reis is charged with that knowledge which reasonable inquiry would have disclosed. Sweet v. Henry, 175 N.Y. 268.
Even those States adopting the rule that the mortgage follows the note hold that a prior recorded assignment is notice to the holder of the note. Strong v. Jackson, 123 Mass. 60. See also David Stevenson Brewing Co. v. Iba, 1 N.Y. Ann. Cas. 356; affd., 155 N.Y. 224.
At the time Reis took the note and mortgage, he had constructive notice of what the files and records would have disclosed and was, therefore, aware of the plaintiff's claim, and not an innocent purchaser or assignee. Upon the foregoing statements, judgment must be given to the plaintiff.
Judgment for plaintiff.