Mechanics' Bank v. Edwards

Edmonds, J. It is unquestionably á rule in equity that where one creditor has a lien on two funds, and another creditor has a lien upon only one of those funds, the latter has a right to demand that the former shall have recourse first to the fund on which he alone has a claim, before resorting to the other, to which alone the latter can betake himself for satisfaction of his claim. I will not stop to consider the question raised at the bar, whether the matter now before me is in such a shape as to allow that principle properly to be carried out in this case; because if I shall fin'd it to be applicable, and there is this difficulty in the case, I can at all events stay all proceedings on the distribution of the surplus, until the question can properly be brought before the court. The first thing to be ascertained is, whether the principle is applicable to the case before me. The decree of the Farmers’ Loan and Trust Company being prior in point of time, to Cotheal’s mortgag'e, is entitled, in equity, as well as at law, to be first paid; unless some superior equity has been created in favor of the mortgage. The mere fact that the mortgage is a specific lien only on the premises out of which the surplus in question has flowed, while the decreé is a general lien upon other property of the debtor, as well as on these premises, is not of itself enough to establish such superior equity. Therefore, other grounds on which to build such superior equity were sought after on the argument, and I how proceed to consider them. I will first consider that which was most strenuously urged on the argument, namely, that the first claim of the company was merged in the subsequent release, and that therefore the premises affected by those arrangements, were discharged from that claim, and were thereby subjected to the lien of the decree, and thus constituted a fund to which resort must first be had in satisfaction of the decree. This aspect of the claim is found [277] ed entirely on the technical doctrine of merger, a doctrine never regarded with favor in a court of equity. (3 Prest, on Est. 558. 1 Alk. 592. Shep. Touch. 121. Phillips v. Phillips, 1 P. Wms. 41.) For it as frequently violates, as effectuates, the intention of the parties. This case, if the doctrine should be applied, would be a striking illustration of this truth; as no one can for a moment imagine that it was the intention either of the company or of Smith and Edwards, by the release of 1842, to discharge the 85 lots from the claim of the company, and subject them to the other debts of Smith and Edwards. On the contrary, the intention is very plain, that the object was to preserve and enforce that claim and make it available to the company. On the other hand, merger is never allowed in equity, except for special reasons and to promote the intention of the parties. (3 Prest, on Est. 408. 1P. Wms. 41.) Thus, where there is a confusion of rights, so that at law there would be an immediate merger, equity acting upon the intent, express or implied, will preserve them distinct. (Lord Compton v. Oxenden, 2 Vesey,jun. 264.) So where a tenant for life, paying off an incumbrance, takes an assignment, connecting it with the legal estate of inheritance, prima facie it might be a merger; unless there is evidence of an intention to continue the charge. (St. Paul v. Dudley Ward, 15 Ves. 173.) So, in equity, the mortgage is not necessarily merged by union with the fee; the actual intention, not established by the acts of the party, will be presumed, from the greater advantage, against the merger. (Forbes v. Moffat, 18 Ves. 384.) The doctrine in equity is laid down very precisely by the master of the rolls in this case. “ It is very clear that a person becoming entitled to an estate subject to a charge for his own benefit, may, if he chooses, at once take the estate, and keep up the charge. Upon this subject a court of equity is not guided by the rules of law. It will sometimes hold a charge extinguished where it would subsist at law, and sometimes preserve it, where at law it would be merged. The question is upon the intention, actual or presumed, of the person in whom the interests are united.” And Chancellor Kent, (4 Com. 102,) says that merger is not favored [278] in equity, and is never allowed unless for special reasons, and to promote the intention of the parties. The intention is the governing principle in equity, and there it depends upon circumstances, and is governed by the intention, either express or implied, of the person in whom the estates unite, and the purposes of justice. (Gardner v. Astor, 3 John. Ch. Rep. 53. Starr v. Ellis, 6 Id. 393. Lockwood v. Sturdevant, 6 Conn. 373. Denn v. Van Ness, 5 Halst. 102.) This being the rule in equity, it is too decisive of the main ground on which Cotheal’s claim was made to rest, to render it necessary for me to consider the cases in which, for the benefit of the creditors, the estates are kept distinct, notwithstanding the doctrine of merger, and those in which the same rule obtains in respect to strangers, though as to parties and privies there may be a merger. In regard to these, it is laid down, (3 Preston, 447,) that notwithstanding the merger of the particular estate, persons who have interests affecting the estate which is merged, will be left in the same condition, in point of benefit, as if no merger had taken place. Upon these principles, the intention of the parties, and the interest or benefit of the party in whom the estates unite, alike forbid my holding the estate of the Farmers’ Loan and Trust Company under the deed of 1836, so merged in the release of 1842, as to let in the decree of 1839 to become an incumbrance on those premises, and entitled to priority of payment out of them. This renders it necessary for me to consider the other grounds on which it is sought to set aside the claim of the company under the trust deed of 1836. 1. As to the usury. It is well established that this is a personal defence, and cannot be set up by a stranger to the original transaction. (Reading v. Weston, 7 Conn. 413. De Wolf v. Johnson, 10 Wheat. 367.) The chancellor, in Cole v. Savage, (10 Paige, 583,) attempted to overturn this rule, upon the strength of the revised statutes, (1 R. S. 772,) and the statute of 1837, (Sess. L. of 1837, p. 487, § 4,) and to extend the defence beyond the “ borrower” and his sureties, heirs, devisees, [279] and personal representatives, and confer it also upon the subsequent grantees of premises subject to a usurious mortgage. But the court for the correction of errors, in Post v. Bank of Utica, (7 Hill, 391,) overruled his decision, and even under our peculiar statutes, confined the defence to those persons only who were bound by the original contract to pay the sum borrowed. (Livingston v. Harris, 11 Wend. 329.) So that within those two cases, in our court of last resort, Cotheal has no right to set up that defence in this case. And it is therefore, unnecessary for me to inquire whether the transaction of 1836, between Smith and Edwards and the company, was usurious or not. 2. As to the alleged illegality of the transaction, under the acts incorporating and relating to the company. Under the second section of the act of 1822, relating to this company, it was authorized to take and receive, by deed or devise, any effects and property, both real and personal, which might be left or conveyed to it in trust, and to assume, perform, and execute any trust which might be created or declared by any deed or devise as aforesaid. This is the general power of the corporation; and the trust created is, in form, at least, a strict compliance with the terms of the statute. The original application was for the company to receive the lands in trust. And the final arrangement was consummated by deeds which declared that they were so received, in trust to sell and pay certain money, or to reconvey. However strong, then, may be the suspicion that this whole arrangement was a mere devise to cover a loan secured by mortgage, or a transaction in violation of some of the restrictions attempted to be thrown around this company, I am not at liberty, upon the evidence before me, to pronounce it to be otherwise than a strict trust conformable to the power specially conferred on it by the legislature. There is indeed, no evidence before me that the transaction was any thing else than one of its authorized trusts; and I see nothing in the case to authorize me to set it aside. The conclusion, then, at which I have arrived is, that there was no other fund on which the Farmers’ Loan and Trust Company had a lien, or in which it had an interest, in respect [280] to the decree of 1839, and to which, on the application of Cotheal, they might have been compelled in the first instance to resort; and that therefore it had a lien on the surplus in court prior to Cotheal’s mortgage. The master’s report must be confirmed, and the exceptions be overruled with costs. y \ -