Opinion
(September Term, 1892.)
Fraud — Contract — Rescission — Innocent Purchaser — Trusts — Mortgages — Registration — Notice.
1. Where a contract of sale has been induced by the fraud of the vendee, it is voidable at the election of the vendor, who has a right, upon the discovery of the fraud, to rescind the contract and recover the property delivered under it.
2. An innocent purchaser for a valuable consideration, from the fraudulent vendee, will, however, be protected against the vendor.
3. While the mortgagee or trustee of land conveyed to secure pre-existing debts is a purchaser for value, yet he takes the property subject to any equity or other right attached to it in the hands of the debtor. ( Brem v. Lockart, 93 N.C. 191, commented upon).
4. While an unregistered mortgage is good inter partes, actual notice of its existence will not affect the rights of a junior registered mortgage.
(104) ACTION tried upon demurrer at Spring Term, 1892, of CRAVEN, by Brown, J.
(105) O. H. Guion for plaintiff.
W. W. Clark for defendant.
The demurrer admits that "W. H. Cohen was insolvent, and well knew of his insolvency at the time of his purchase, and fraudulently concealed his said insolvency from plaintiffs by falsely representing to them his financial condition to be largely in excess of all liabilities existing at the time of such representation, and at such time not having the intention of paying for the goods purchased." (106) The foregoing facts bring the case within the principle of Wilson v. White, 80 N.C. 281; Des Farges v. Pugh, 93 N.C. 35; Donaldson v. Farmer, 93 U.S. 361, and 1 Benjamin on Sales, sec. 571. According to these authorities, the contract of sale, having been induced by fraud, was voidable, and the vendors had a right to rescind the same upon the discovery of the circumstances constituting the fraud. If, however, before rescission, the vendee had conveyed to an innocent purchaser for a valuable consideration, the rights of the original vendors would be subordinated to those of such innocent third party. The defendant Moore is the trustee in a deed of assignment executed by Cohen, the fraudulent vendee, to secure his pre-existing indebtedness, and he claims to be an innocent purchaser for value within the qualifying principle just stated. It is true, as laid down in Southerland v. Fremont, 107 N.C. 565, that such a trustee or mortgagee is a purchaser for value within the Statutes of 13 and 27 Elizabeth, but it is, in that case, conclusively determined, after some confusion in our decisions, that such a purchaser takes the property subject to any equity or other right that attached to the same in the hands of the debtor. This view is abundantly sustained, not only by our own previous decisions, but by the great weight of judicial authority. Bassett v. Norsworthy, White Tudor's L. C. Eq., and notes. As applicable to the present case, the doctrine has been recognized and applied in a large number of decisions. "In order to entitle one to protection as a bona fide purchaser in such a case, he must have advanced some new consideration, or incurred some new liability, on the faith of the fraudulent vendee's apparent ownership." Johnson v. Peck, 1 Woodh. M., 334; McLeod v. Bank, 42 Miss. 99; Hyde v. Ellery, 18 Md. 496; Sargent v. Sturm, 23 Cal. 359; Ratliffe v. Sangston, 18 Md. 383; Pope v. Pope, 40 Miss. 516. Hence, "an assignee of the fraudulent vendee for the benefit of creditors, incurring no new liability on the faith of his title, is not protected." Farley v. Lincoln, 51 N. H., 577; Harris v. Horner, (107) 30 Am. Dec., 182; Stevens v. Brennan, 79 N.Y. 254; Montgomery v. Bucyrus, 92 U.S. 257; Donaldson v. Farmer, 93 U.S. 361. These authorities, with very many others we could cite, are directly in point, and sustain the right of the plaintiffs to recover without fixing the assignee with notice.
We presume that his Honor was misled by the case of Brem v. Lockhart, 93 N.C. 191. In that case there was quite a discussion by the late Chief Justice as to who were bona fide purchasers for value, but he finally quoted with approval the language of Pearson, J., in Potts v. Blackwell, 56 N.C. 449, which enunciated the doctrine as subsequently declared to be the law in Southerland v. Fremont, supra. It is difficult to assume that the learned Chief Justice, after stating that this principle must be regarded as "conclusively settled," intended in the next sentence of his opinion to repudiate the same, by declaring that Mr. Lockhart, the assignee, was a purchaser for a valuable consideration, in the sense now insisted upon on behalf of the defendant Moore. The true ground for the decision seems to be that, although the assignee, Lockhart, was a purchaser for value, and notwithstanding he took the property, subject to the rights and equities attaching to it in the hands of the debtor, there was, in fact, no such right or equity which, under the policy of the registration laws, could be recognized or enforced in favor of anyone. Todd v. Outlaw, 79 N.C. 235. In Brem's case the sale was conditional, and, not being registered, the condition was said to be inoperative. It is true that, as between the parties, the condition was effectual ( Butts v. Screws, 95 N.C. 215), and we can only reconcile the conclusion with the principles previously announced in the opinion by assimilating the case to that of Todd v. Outlaw, supra, in which it was held that though an unregistered mortgage is good as between the parties, even actual notice of its existence will not prejudice the rights of a second mortgagee whose mortgage has been registered. (108)
For the reasons given, we think the demurrer should have been overruled.
REVERSED.
Cited: Walton Co. v. Davis, 114 N.C. 106; Arrington v. Arrington, ib., 166; Bank v. Adrian, 116 N.C. 547; Joyner v. Earley, 139 N.C. 50; Carpenter v. Duke, 144 N.C. 294; McBrayer v. Harrill, 152 N.C. 713; Wood v. Lewey, 153 N.C. 403; Bank v. Bank, 158 N.C. 250; Sykes v. Everett, 167 N.C. 607; Lanier v. Lumber Co., 177 N.C. 205; Starr v. Wharton, ib., 325.