Wadford v. . Gillette

Brogden, J. Two questions of law are presented for determination: 1. What is the legal status of a negotiable note executed by an insane person and secured by deed of trust upon the property of such person, when the payee in the note and the trustee in the deed of. trust had no *420 knowledge of the mental incapacity of the maker of said note or of the grantor in said deed of trust, and when the entire transaction was in good faith and free from fraud? 2.Is such a note enforceable by a holder in due course? The evidence supporting the findings of fact by the referee is not included in the record, but the trial judge approved the findings of fact and conclusions of law contained in the referee’s report. Therefore, the findings of fact are not reviewable in this Court if there was evidence to support them, and as the evidence is not included in the case on appeal, it must be presumed that the evidence supported the findings. Miller v. Groome, 109 N. C., 148; Thompson v. Smith, 156 N. C., 345; Dumas v. Morrison, 175 N. C., 431; Caldwell v. Robinson, 179 N. C., 518; Hardy v. Thornton, 192 N. C., 296. The principle of law governing contracts of insane persons may be stated substantially as follows: 1. The contract of a person not judicially declared to be insane is voidable and not void. If the insanity has been formally adjudicated, subsequent contracts made by such person are void. 2. A party dealing with an insane person, knowing his mental condition, is deemed to perpetrate a fraud upon such insane person, and upon his rights. 3. When a contract with an insane person is executed and completed, and is fair and made in good faith, without notice of mental incapacity, and the parties cannot again be put in statu quo, such contract is valid and enforceable. 4. However, when mental incapacity is shown, the burden is so far shifted that the agreement will be set aside unless the party claiming under the contract, by proper proof, establishes the fact that he was ignorant of the mental incapacity, and had no notice thereof which would put a reasonably prudent person upon inquiry, and that no unfair advantage was taken, and that the insane person is not able to restore the consideration or to make adequate compensation therefor. Carr v. Holliday, 21 N. C., 344; Odom v. Riddick, 104 N. C., 515; Creekmore v. Baxter, 121 N. C., 31; Sprinkle v. Wellborn, 140 N. C., 163; Beeson v. Smith, 149 N. C., 142; West v. R. R., 151 N. C., 231; Godwin v. Parker, 152 N. C., 672; Ipock v. R. R, 158 N. C., 445; Craddock v. Brinkley, 177 N. C., 125. The referee, in his 30th finding of fact, declared that “Rachael Frances Baker has received no such valuable consideration for the $3;750 note signed by her and her husband and the deed of trust securing the same as is necessary to bind the estate of a person non compos mentis, and no property of any appreciable value has ever passed to her, or ,been paid to her estate in exchange for the said note.” *421 If this statement of the referee should be construed as a finding of fact, exclusively, then it would be necessary to affirm the judgment as such finding has been approved by the judge, and is therefore not reviewable ; but as all the facts are set out in the referee’s report, this finding, upon fair construction, would seem to be a conclusion of law. So that it becomes necessary 'to ascertain whether or not, Under the facts as found by the referee, Eachael Frances Baker actually received a fair consideration for the note executed by her and secured by deed of trust upon her property in Nash County. What, then, was the consideration that Eachael-Frances Baker received from the transaction? In the first place, she received an estate by entirety under and by virtue of the deed for the Virginia land, executed by E. Eoy Eicks and wife. She and her husband moved upon this land and lived thereupon for several years, enjoying the rents and profits of the land. The brief for plaintiff states: “It will be noted the deed to the Eicks land in Virginia was made to J. W. Baker and his wife, plaintiff’s ward, as tenants by entireties, but only for a remainder interest, said deed reciting on its face that said land was subject to a first, second, and third mortgage, and attempted to bind grantees to pay off said three mortgages as a part of the considerations for said conveyance.” Hence it appears that the. deed to plaintiffs provided that the plaintiffs, as grantees therein, should assume and pay off the outstanding mortgage indebtedness existing on the Virginia farm. Included in this outstanding indebtedness was a note of $6,000, payable to' the defendant James T. Gillette, guardian, and secured by deed of trust on said property. The proceeds of the note made by John W. Baker and his wife, Rachael Frances Baker, and secured by a deed of trust on her land in Nash' County, was applied to this $6,000 lien. Eachael Frances Baker therefore received the full consideration for this credit for the reason that, having assumed the indebtedness on the Virginia farm in the event of a sale of such farm at a sum less than the outstanding liens, then John W. Baker and Eachael Frances Baker would have been liable for the deficiency and the reduction of the $6,000 liability by applying the $3,500 diminished to that extent, the contingent liability of Eachael Frances Baker. The rule of law applicable is thus stated in Baber v. Hanie, 163 N. C., 591, as follows: “The doctrine of equity is that when the grantee in a deed assumes the payment of the mortgage debt, he is to be regarded as the principal debtor, and the mortgagor occupies the position of a surety, as between themselves, and the mortgagee is permitted to resort to the grantee to recover the deficiency after applying the proceeds of a sale of the mortgaged premises, by the equitable rule that the creditor is entitled to the benefit of all the collateral securities which his debtor has obtained to reinforce the prin *422 eipal obligation, though this right is strictly an 'equitable one, and its exercise at law has been refused.” Jones on Mortgages, 7 ed., vol. 3, sec. 1713; Bank v. Watson, 187 N. C., 107; Parlier v. Miller, 186 N. C., 501. We are therefore of the opinion that Rachael Frances Baker received such consideration for the note in controversy as the law contemplates in order to constitute an enforceable contract. The referee finds that neither John W. Baker nor Rachael Frances Baker has any property except the Nash County property of Rachael Frances Baker. It is therefore apparent that Rachael Frances Baker cannot restore the consideration or place the defendants 'in statu quo. Hence, upon the entire record, it appears that Rachael Frances Baker received full consideration for the note in controversy; that she cannot restore the consideration or place the parties in statu quo; that the contract was fully executed, and that there was an entire lack of knowledge of her mental condition or of such facts as to put a reasonably prudent person upon inquiry. Moreover, it appears that there was no fraud or unfair advantage, but the whole transaction was begun and completed in good faith and in full accord with the principles of fair dealing. The referee finds that the defendant, State Bank of Bortsmouth, Virginia, took the note of Rachael Frances Baker as collateral to the $3,500 note of the defendant James T. Gillette under such conditions as to constitute said bank a holder in due course. C. S., 3033. ' The same principles that control contracts of insane persons apply to negotiable instruments. Bank v. Moore, 78 Pa. St., 407, cited with approval in Odom v. Riddick, 104 N. C., 522; Hostler v. Beard, 54 Ohio St., 398, cited with approval in Ipock v. R. R., 158 N. C., 449. For the reasons given, the judgment is Reversed.