American National Bank v. Klock

Ellison, J. This action is founded on three negotiable promissory notes, two executed by Clark O. Simpson and the third by Gillies, all payable to O. H. Queal, secured by mortgage on certain real estate in Kansas City. Defendants are not the payors but their liability is sought to be established by reason of their having assumed (as is alleged) the payment of the notes. The judgment below was for plaintiff. Plaintiff obtained the notes before maturity as collateral — 341 — security for a certain other note executed- to plaintiff for money borrowed by O. H. Queal, the payee therein. It appears that Queal and defendants were joint -owners of twenty acres of land in Jackson county, Missouri, and that by an arrangement between them it was agreed that the lands should be platted and laid off into an addition to Kansas City, to be known as Horton Heights. It was further arranged between them that the lots thus laid off should be mortgaged to the amount of $10 per foot, making an incumbrance of $500 on each lot. To carry out this arrangement, these parties deeded the land to Clark O. Simpson and he, retaining a portion thereof, divided the remainder by deeding to other parties. Each of these parties then executed, separately, the notes (of which those in suit are a part) and mortgages, payable to Queal, on the respective portions of the property thus held by them. Queal retained his one-third of the notes and indorsed, without recourse, the remaining two-thirds to these defendants who received the same in New York, where they resided, in due course of mail. Simpson and these other parties to whom he had conveyed, then conveyed the property back to Queal .and these defendants by quitclaim deeds — each deed specifying that each grantee took an undivided one-third interest. Each deed contained a clause assuming the payment of the notes secured'by the mortgages on the lots. The clause in the tAed from Simpson (the other - deeds containing similar clauses) is as follows: “The grantees herein in accepting this deed assume and agree to pay as a part of the above named consideration eighteen certain notes of unequal amount aggregating the sum of $8,900, secured on the above described lots by eighteen deeds of trust, one deed of trust securing one note on each — 342 — lot, dated January 1, 1889, given by Clark O. Simpson,” duly recorded, etc. It should be here stated that Simpson and the others were merely acting as instruments of Queal and these defendants, in thus carrying out the original arrangement. These quitclaim deeds thus executed to Queal and these defendants-were recorded and forwarded to defendants by mail. Defendants received them in due course, examined them, though not critically as they did not discover the clause above set forth assuming the incumbrances until nearly three years thereafter, being some two or ■ three months prior to the institution of this suit. In making and carrying out this arrangement we shall assume defendant’s contention to be the fact, that they were moved thereto by a desire to accommodate Queal, their co-owner, he having been their agent in Kansas City in other real estate transactions or speculations, their preference being to dispose of the land by sale directly to purchasers; and also that Queal was the active party in consummating the arrangement. It was agreed between the parties at the trial that while plaintiff obtained the notes in suit after the quitclaim deeds were executed and recorded, it had no knowledge in fact, until shortly before bringing suit, of the clause of assumption. And it was further agreed that plaintiff did not know that there was any question made about the assumption until defendants filed their amended answer in the cause. I. It is a part of the contention in behalf of plaintiff that the promise of these defendants contained in the clause of assumption in the quitclaim deeds, is a negotiable promise as applied to the notes to which the promise relates, and that since plaintiff is an innocent holder of the notes for value before maturity, any equities between the original parties are not available — 343 — as against plaintiff. In support of this contention plaintiff relies upon the case of Fitzgerald v. Barker, 96 Mo. 661. It must be admitted that that case, at first view, supports the contention. But we are much disinclined to say that such a promise possesses the negotiable qualities, incidents and attributes which pertain to the note to which it relates. The promisor who thus assumes the payment of a note by accepting a deed in which the assumption is recited, is in no worse position when sued by the third party for whose benefit the promise is made than if he had been sued by the grantor in the deed. In the absence of estoppel, such third party in attempting to enforce the promise for his own benefit, is in no better position than the original party since his right is a derivative right and he' stands in the shoes of the promisee. Ellis v. Harrison, 104 Mo. 278; Flagg v. Munger, 9 N. Y. 483; Vrooman v. Turner, 69 N. Y. 280; Kilmer v. Smith, 77 N. Y. 231; Dunning v. Leavitt, 85 N. Y. 30; Crowe v. Lewin, 95 N. Y. 423; Loeb v. Willis, 100 N. Y. 231; Parker v. Jenks, 36 N. J. Eq. 398; Bull v. Titsworth, 29 N. J. Eq. 73; Benedict v. Hunt, 32 Iowa, 27; Wheat v. Rice, 97 N. Y. 296; Drury v. Hayden, 111 U .S. 223; Ankenry v. Clark, 148 U. S. 358. By an examination’ of the case of Fitzgerald v. Barker in. the different reports in which it is found, it will be noticed that the note assumed was purchased by the plaintiff in that case after the deed reciting the assumption of the note was filed for record. Presumably the purchase was made with a knowledge of its having been assumed by the grantee in the deed and on the faith thereof. It was from this fact that we distinguished the case of Saunders v. McClintock, 46 Mo. App. 216, from Fitzgerald v. Barker. In Saunders v. McClintock we, in effect, held that unless the case presented an element of estoppel in its essential — 344 — facts the party assuming the debt could avail himself of any defense which would lie in his favor were he sued by the original promisee, and to that view we adhere. But it may be suggested here that the same element of estoppel exists in this case as did in the Fitzgerald case, since the evidence here shows the deeds to these defendants containing the clause assuming the notes were recorded before plaintiff obtained the notes. This, however, is met by the stipulation to which we have referred wherein it was agreed that plaintiff had no knowledge of the deeds or the assumption at the time it purchased the notes. We can not allow ourselves, therefore, to presume that plaintiff acted upon the assumption clause in the deed of which it had no knowledge. If the broad language used in Fitzgerald v. Barker, is to be construed as intending to assert that the promise assuming an incumbrance on the land represented by a negotiable note, partakes of all the negotiable character of such commercial paper we believe such meaning is limited -and restrained by the more recent case of Ellis v. Harrison, supra. II. Notwithstanding the foregoing, the judgment for plaintiff should, from other considerations, be affirmed. It was conclusively shown at the trial that the scheme aforesaid, whereby the land was divided into lots and conveyed to Simpson and by him to the other-“straw men,” as defendants term them, including Simpson; and whereby these notes and mortgages on the lots to secure them, were executed by the “straw men” to Queal and then the lots deeded back to Queal and defendants; Queal transferring to defendants their portions of the notes, amounting to $16,000, each; was the scheme of these defendants as well as of Queal. Queal, we have already conceded, was the original deviser of the scheme, but it was nevertheless the — 345 — scheme of defendants, for they assented to it and adopted it in its beginning and end. They accepted their portion of the notes secured on the land, with all the advantages which might have resulted from that mode of utilizing the land. They accepted the deeds and held them for nearly three years claiming title and possession of the property conveyed. In other words, they claim and hold the title and possession under these deeds but reject that portion of the deeds containing the clause of assumption as a part of the consideration; that is to say, they accept the benefits and reject the burdens of the transaction which was consummated by the deeds. They, have never sought to annul the transaction as being a fraud practiced upon them by Queal. They have never sought to re-form the deeds containing the clause of assumption. On the contrary they did not dispute or question their liability thereunder in their original answer. But they contend that they did undertake to re-form the deeds by a prayer to that effect in their amended answer in which they state the imposition on them. We attach no importance to this, since it has not been asserted in a manner to have any effective force towards the correction of the deeds. They took no steps to bring in the proper parties to such an issue. The grantors in the deeds, to say nothing of Queal, one of the grantees, ought certainly to be brought into court if the deeds are to be annulled or re-formed. This, then, being the state of the case as presented by defendants, they might, perhaps, be held to have adopted the transaction in toto and to be liable on the clause in the deed assuming the notes. Keller v. Ashford, 133 U. S. 619, 620; Coolidge v. Smith, 129 Mass. 554; Parkinson v. Sherman, 74 N. Y. 88; Gifford v. Father Matthew, etc., Society, 104 N. Y. 139; Gifford v. Corrigan, 117 N. Y. 257. These authorities may be — 346 — thought not altogether applicable to the facts of this case, since they are cases where the grantee obtained title and possession to lands by reason of the deed and it was held that he could not repudiate the clause of assumption and yet retain the land; while in case at bar the land which these defendants obtained by the deeds was in reality their own land, since it had merely been conveyed to the “straw men” aforesaid for the purpose of carrying out the scheme. In other words, it may, from this fact, be suggested that defendants obtained nothing by the deeds which it is their duty to surrender. And for this reason we prefer not to put our decision on this ground, since there is yet a stronger reason why defendants can not escape liability to this plaintiff. It should be kept in mind in considering the question that there is no fraud charged upon Simpson (or the other grantors to whom Simpson conveyed) in the execution of the quitclaim deeds, including the insertion of the assumption clauses. The only fraud charged is the alleged fraud of Queal, defendant’s co-owner, and defendants’ agent in carrying out and manipulating the scheme. The law invoked by defendants and to which we have called attention in the first part of this opinion (stated in its broadest sense in behalf of defendants) is, that the right of a third party to enforce the promise of assumption made by a grantee to a grantor is a derivative right, and is only such right as the grantor has or would have against the grantee, and that when the grantor could not enforce the promise of assumption against the grantee, then a third party could not. Does the case made by defendants enable them to successfully invoke this principle? I think it does not. While the assumption of the debt owing by the grantor is generally a part of the consideration which the grantee is to pay for the land which — 347 — he purchases, it is also a protection to the grantor on his original liability. The grantor can enforce it as a promise made to him, and whenever it is a valid promise or assumption as it relates to him, the third party for whose benefit the law implies the promise was made may likewise enforce it. In this case there is no doubt whatever that Simpson and the other grantors could enforce the promise of assumption of these defendants. Simpson and the other grantors have not been guilty of any fraud, the only fraud charged is against Queal, who was the agent of defendants. The assumption can not be questióned as to these grantors; it stands for their protection, and being valid as to them it inures, by operation of law, to this plaintiff. In stating this we are not unmindful of a branch of this rule of law to the effect that there must be a debt or duty owing by the grantor (the promisee) to the third party who seeks to enforce the grantee’s promise to the grantor. Phœnix Ins. Co. v. Trenton Water Co., 42 Mo. App. 118; Howsman v. Trenton Water Co., (supreme court of Missouri, not yet reported). This rule is invoked by defendants. The effect of their insistence is that Queal is the third party and that since Simpson, the grantor and promisee, would not be held to owe Queal under the circumstances of this case, therefore, the promise or assumption by these defendants can not be made available against them. This we could readily concede if Queal had remained the third party for whose benefit the law assumes defendants’ promise was made. But the notes were negotiable notes, and have been transferred to plaintiff, thus perfecting and fastening the debt against Simpson and the other grantors, their promise being to pay to whomever the notes might be indorsed before maturity. "We have conceded to defendants the propositions maintained by the eases they cite, but we distinguish them — 348 — from this case. It may, however, be suggested that these grantors signed the deeds without knowing the •clauses of assumption were in them. Simpson testifies that he did not, though as to the other grantors there is nothing shown in this respect, and we must presume that they knew what was incorporated in their deed. But even as to Simpson, the fact that he did not know ■the clause was in his deed will not prevent him now relying uponit and enforcing it, especially as his ■testimony shows that he was in some manner to be protected from the obligation which he took upon him-' self by signing the notes. So, after allowing to •defendants the full breadth of the principle of law stated above, we yet find no escape for them, in this action. III. Even to regard the action as in equity the result is the same. It is well settled that when a grantee assumes the grantor’s debt to a third party as between grantor and grantee the grantee becomes the principal debtor, and the grantor his surety. It is also a rule of equity that whatever securities (and the grantee’s assumption is a security) the surety holds against his principal can be made available to the creditor. This (when considered in equity) arises, not from contract but from equitable principles. Judge Sherwood says in Burnside v. Fetzner, 63 Mo. 107, that this “is too well settled, both on reason and authority, to admit of question.” The following authorities present a comprehensive and lucid state‘ment of this proposition, as applied to the obligatory promise which the surety grantor holds from the principal grantee: Keller v. Ashford, 133 U.S. 623-625; Union Life Ins. Co. v. Hanford, 143 U. S. 187; Willard v. Worsham, 76 Va. 401; Osborne v. Cabell, 77 Va. 467; Crowell v. St. Barnibas, 27 N. J. Eq. 650. We are, in consequence of the foregoing, con — 349 — strained to assert defendants’ liability on the case made by the record. The judgment must, therefore,, be affirmed. All concur.