Bluefield National Bank v. Bernard

This controversy is between the bank and Mrs. Helvey, each a holder in due course of a bond of Louvica C. Bernard and husband secured by a deed of trust on real estate, on the one side, and Mrs. Scott, appellant, who purchased the real estate from the Bernards, the deed of trust lien having been released by the trustee therein. The validity of the release made by the trustee is involved, and is the controlling question presented. The decree complained of, found the release to be fraudulent and of no effect, and reinstated the trust lien. Mrs. Scott appeals. On June 3, 1927, the Bernards conveyed the property involved to Ross and Baker, trustees, to secure the payment of the bonds payable to bearer, at three years from date, with interest at 6% payable semi-annually, on December 3rd and June 3rd in each year, evidenced by coupons attached to the bonds. These bonds were dated June 3, 1927, and signed by the Bernards. This trust deed provided for a release in these words: "If the debts hereby secured be fully paid, a good and sufficient release shall be executed by the beneficiaries hereunder, or by W. E. Ross, one of the trustees, who is hereby authorized and empowered to execute such release upon satisfactory evidence being produced to him that the said obligations have been fully paid, which release shall be at the costs and charges of the parties of the first part." These bonds were turned over to Ross, the understanding between him and Bernard being that Ross would advance money to *Page 461 Bernard as he was able to dispose of the bonds. (Neither plaintiffs nor defendant Scott knew of the understanding between Bernard and Ross). Ross took a thousand dollar bond and pledged it to the bank, as collateral security for payment of a large debt owing by him to it, a short time after the trust began, and pledged a two thousand dollar bond to plaintiff Helvey as collateral to secure a note executed to her by him a short time after the trust began. On May 22, 1928, a sale of the real estate from Bernards to defendant Sarah A. Scott was agreed upon, and a deed was tendered to her dated and acknowledged that date, which she declined to receive until her counsel reported on the title. She paid down on that date $500.00, and later, on June 6th, following, she paid in cash the remainder of the purchase price of $7,000.00, took the deed and recorded it on that day. In the meantime, between the 22nd and 25th of May, her attorneys reported to her that the deed of trust was on the property. Before she paid the balance of purchase money and accepted the deed on June 5th, her attorneys reported to her that the trust deed had been released. It appears that Bernard and Ross went together to the county clerk's office on May 25th, where Ross signed and acknowledged the release, and it was recorded on that day. The release reads: "I, W. E. Ross, do hereby release that certain deed of trust made by Louvica C. Bernard and A. B. Bernard (giving date and where recorded) the obligation thereby secured having been fully satisfied." The bill by the holders of the two bonds charged that the bonds held by them were not paid, that Ross had undertaken to release the trust deed well knowing that neither of the bonds had been paid; that the release had been given without their knowledge, consent or approval and was in fraud of their rights. They prayed for a cancellation of the release, validification of the trust deed, a sale of the property in satisfaction of the bonds, and for general relief. Appellant Scott demurred to the bill, and answered averring that she was an innocent bona fide purchaser, and had paid valuable consideration for the land, relying upon the release executed by Ross, trustee; and that she took title with general warranty and free from encumbrances, *Page 462 exhibiting her deed. The parties went to proof, and upon submission of the cause, the court decreed as above set out. The evidence demonstrates that Ross and Bernard well knew that the bonds were held by plaintiffs and no part, not even the interest thereon, had been paid at the time the release was executed and recorded. The evidence further shows that plaintiffs were holders of the bonds in due course and knew nothing of the execution and recordation of the release. The evidence also shows that Mrs. Scott knew nothing of the fraud, and purchased in good faith, relying on the recorded release. Ross has committed a fraud on plaintiffs which will deprive them of their security, unless his fraudulent act be set aside. On the other hand, Mrs. Scott, who relied upon the release given by Ross in pursuance of the power and authority vested in him by the trust deed, will suffer to the same extent as plaintiffs if the release be set aside, and the lien reinstated. The fraudulent scheme and act of Ross, not participated in by either the purchaser or the trust deed lienors, and in no way sanctioned or confirmed by either, will cause one or the other of the parties to suffer loss. Which shall suffer? That is the concrete and controlling question presented. Counsel on each side have favored us with exhaustive briefs, and able oral argument. Appellees argue that because Ross, trustee, fraudulently executed and recorded the release of the trust, the lien of the trust deed continued in force, and Mrs. Scott took the property subject to that lien, relying upon Thompson v. Bennett, 105 W. Va. 191,141 S.E. 784; Bank v. Coal Coke Co., 89 W. Va. 659,109 S.E. 892; Taylor v. Godfrey, 62 W. Va. 677,59 S.E. 631; Fidelity Ins. Co. v. Shenandoah Valley Ry. Co., 32 W. Va. 244,9 S.E. 180, and Demuth v. Old Town Bank, 85 Md. 315, 60 Am. St. Rep. 322. The first two cases cited were instances where releases had been executed by the beneficiaries named in the trust deeds, the notes secured having passed from the hands of the beneficiaries to others in due course. The trust deeds on their faces put the subsequent purchaser or lienor on notice that the obligations secured might be in the hands of an assignee in due course and that the beneficiary could not therefore execute a valid release. The subsequent purchasers or lienors were not innocent, for the record warned *Page 463 them to ascertain if the obligations secured had in fact been paid. The releases, in those cases, under the recitals of the trust deeds, warned the subsequent purchasers and lienors that the persons who released did not have the right; that the notes might have been purchased from the payee by another in due course, thus carrying with them the liens which secured them. The instant case is different, for in this trust deed, power to release is conferred on the trustee upon satisfactory evidence to him that the obligations have been fully paid. Fidelity Ins.Co. v. Shenandoah, supra, is more nearly in point. In that case the property had been encumbered by first mortgage bonds owned by Central Improvement Company. The mortgage provided that upon payment of the bonds it secured by the grantor according to the provisions in the bonds, they should become void and of no effect, "and satisfaction shall be forthwith duly entered by the said trustee or trustees, for the time being, upon the record of this indenture or mortgage." By a subsequent agreement, the improvement company was to surrender its bonds and take in lieu thereof certain bonds later to be issued. The bonds were delivered to the trustee amounting to $531,000.00 and destroyed by him, but no bonds of the subsequent issue were issued to the improvement company. Upon destruction of the bonds, the trustee executed a release reciting therein that the bonds had been "surrendered". The validity of this release was attacked by a stockholder of the improvement company, and the court held that the mortgage gave right to the trustee to release only upon payment of the bonds, and therefore the release reciting "surrender" and not payment or satisfaction, a subsequent purchaser for value was put on notice and inquiry and was chargeable with knowledge of such facts as a prudent inquiry disclosed. The release was not as broad in its scope as the deed of trust required as a condition precedent to a full release. JUDGE POFFENBARGER said in Bank v. Coal Co., 89 W. Va., at page 663: "If the release is as broad in its scope as the deed of trust and specifically covers all of its possible elements, the purchaser ought to be protected by it, and this view is sustained by authority." In Demuth v. Old Town Bank, cited, one Price sold property to his employee Fowler, and the latter secured therein certain *Page 464 described notes in a mortgage to Price as a part of the transaction. Simultaneously Fowler reconveyed the property to Price. That reconveyance deed was not recorded until 1891, nearly three years later. The mortgage securing the notes was promptly recorded. A few days later, Price borrowed money from the bank and pledged as collateral the $1000.00 note of Fowler, secured by the mortgage; and that note was never paid. In 1891, Demuth opened negotiations with Price (not with Fowler) for purchase of the property and ascertained that Fowler had reconveyed the property to Price by the deed which had been held from recordation, and which had been executed simultaneously with the mortgage securing the notes. Price told him the mortgage had been paid and exhibited three notes purporting to be those secured by the mortgage. Without inquiry from Fowler, Demuth purchased from Price who then released of record the mortgage, recorded his deed from Price executed in 1888, the deed to Demuth being executed the same day. Demuth did not know the bank held the $1,000.00 note secured by the mortgage, and believed the note shown to him by Price was the one secured. The evidence showed that the note exhibited by Price was not the one described in the mortgage. The court held that the purchaser under these circumstances should have made inquiry of Fowler and should have discovered the spuriousness of the note exhibited by Price, as it did not fully correspond with the note described in the mortgage. He was not accorded the position of an innocent purchaser. That case is radically different from the instant one. Appellant relies principally upon the case ofWilliams v. Jackson, 107 U.S. 478, 27 L.Ed. 529, and similar cases which have followed and approved it. In that case, a deed of trust had been given to secure payment of described notes, with authority to the trustees to release upon payment of the notes. Soon after the notes were given, the payee and beneficiary under the trust deed transferred them to a third person for full value. One of the notes was paid to the bank by the assignor, but before the others became due the trustees and the beneficiary executed and recorded a release of the trust deed reciting that the debt secured had been fully paid and discharged. *Page 465 Subsequently, another trust deed was given on the property to Williams who had, by counsel, examined the title and found it clear. The court held that Williams had the right to rely upon the record and assume that the trustees in executing the release had acted in accordance with their duty. It was held that Williams had taken every reasonable precaution that could have been expected from a prudent man. It was there argued that the notes were not due, a fact pointed out by the record of which Williams should have taken notice and made inquiry, and Williams was negligent in not doing so; but the court held otherwise, saying that Williams could rely on the release executed by the trustees and cestui que trust and was not bound to inquire of them. The court held that the trustees having authority to release and having done so, the legal title was vested in the grantor who had later conveyed it to another trustee to secure Williams, and that the note secured thereby was entitled to priority of payment out of the land. It is argued that this case has no application to the one at bar, because there was a statute in the District of Columbia, where the land was located, which permitted the assignee of the notes to put on record an assignment of his rights in such form as would notify the world, and that notice of his rights not having been recorded by the holder of the first mortgage notes, the court was influenced in deciding in favor of Williams. The court simply referred to this statute to show that the assignee of the first mortgage notes could have protected his assignment. Had he done so, litigation would not have followed. That dereliction was not chargeable to Williams, and did not lessen his status as an innocent subsequent encumbrancer. We interpret the decision to be based on the validity of the release which was in strict conformity with the power given in the trust deed, and that Williams was entitled to rely thereon. The opinion says that to charge Williams with constructive notice of the outstanding unpaid notes, "in the absence of proof of knowledge, fraud, or gross or wilful negligence, on his part, would be inconsistent with the registry laws, with the settled principles of equity, and with the convenient transaction of business." The release in question is in conformity with the power to *Page 466 release, given in the trust deed. While it does not recite that the trustee acted upon "satisfactory evidence produced to him that the obligations have been fully paid", it does say that the obligations secured have been fully satisfied. The release is as broad in its scope as the deed of trust requires. The phrase "fully satisfied", means fully paid. It would be unreasonably critical to give it any other meaning. The fact that the bonds were not due, and that there was no acceleration clause in the trust deed is pointed out as requiring Mrs. Scott to make inquiry for them before she purchased. This is the strongest point urged by the appellees. But was she not safe in relying upon the trustees' statement duly acknowledged and recorded? When the bank and Mrs. Helvey accepted these bonds as collateral, they were charged with knowledge of the terms of the trust which secured the bonds. By accepting them, they accepted Ross as trustee. They relied on him to carry out its provisions. They had confidence that he would properly do so; at least they so held out to the world. We think Mrs. Scott would be justified in reliance upon him to the same extent. It is not unusual for debts to be paid before maturity. As above stated, the same argument was advanced inWilliams v. Jackson, supra, and the court answered that the innocent subsequent encumbrancer was justified in relying upon the recorded release by the trustees and beneficiary reciting payment of the debts, although they were not due at the time the release was given, and that he was not required to inquire of the truth of the fact recited in the release, although the notes released were not due. We think Mrs. Scott took every reasonable precaution that could have been expected of her. She pursued the usual course to ascertain if the title was clear and free from encumbrance. In Day v. Brenton, 102 Iowa 482,71 N.W. 538, the trustee had power to release without joining the beneficiary, on payment of the sum secured, but not otherwise. The trustee executed and recorded a release, reciting the payment ("redeemed, paid off, satisfied, and discharged in full") of the sum secured, although it had not been paid. It was held that a subsequent purchaser in good faith was protected by the release. In that *Page 467 case the notes secured had matured at the time of the subsequent purchase. Who placed Ross in position to commit this fraudulent breach of trust? The Bernards selected him to execute the trust and conveyed to him title to the land. The beneficiaries in that trust were the holders of the bonds made payable to "bearer". When the bank and Mrs. Helvey took the bonds as collateral, they assented to and confirmed his appointment, knowing that he had power to release the lien securing their bonds "upon satisfactory evidence being produced to him" that the bonds had been fully paid. Of course, they did not anticipate that he would use that power to their detriment. They imposed confidence in him. For some recondite reason, he has woefully abused that confidence. They left it in his power to do so. Here we have two parties, plaintiffs on the one side and Mrs. Scott on the other, both entirely innocent of any wrong, both acting in good faith, both relying upon the integrity of Ross. Which shall suffer loss? It is a cardinal principle of equity that, "Where one of two innocent persons — that is, persons each guiltless of any intentional moral wrong — must suffer a loss, it must be borne by that one of them who by his conduct, acts or omissions has rendered the injury possible." N. W.Ry. Co. v. Perdue, 40 W. Va. 442, 3rd pt. syl. Further citation of authorities for this principle would be superfluous. We think this principle governs this cause, and calls for reversal of the decree, and dismissal of the bill insofar as Mrs. Scott is concerned. In Williams v. Jackson, supra, the Federal Supreme Court held that as the equities were equal between the holder of the unpaid notes and the subsequent purchaser without notice, the holder of the legal title should prevail. We think the equity rule above quoted is peculiarly applicable here, and prefer to place the reversal on that universally recognized principle. Reversed and remanded.