Hutzler Bros. v. Phillips

The opinion of the court was delivered by Mr. Chief Justice Simpson. O. Phillips, Leonard Phillips, and Leopold Phillips, father and sons, were copartners, doing business as merchants in the town of' Florence, in this State, under the name of C. Phillips & Sons. During the existence of this partnership, C. Phillips, the father, negotiated a loan of $5,000 from the defendants, Louis Cohen & Co., of Charleston, with the understanding and agreement that said loan was to be secured by a mortgage of certain real estate situated in Florence, the titles to which were in the name of the said C. Phillips, except one portion, to which he had a bond for titles from one McRary, under a contract to purchase, upon which a part of the purchase money had been paid. In pursuance of this agreement the title deeds, having been placed in the hands of the said Louis Cohen for examination, were turned over to their attorney, J. N. Nathans, Esq., who .drew a bond and mortgage as agreed upon. These papers were at once forwarded to C. Phillips at Florence by express, but for some, reason the package remained in the office for some days uncalled for. In the meantime, however, the $5,000. had been advanced by Cohen & Co., on drafts of C. Phillips & Sons, drawn (as stated) at the request of the said C. Phillips. When the package containing the bond and mortgage aforesaid was at length received, C. Phillips was quite ill, and he died within a few days, leaving the bond and mortgage unexecuted. Leonard Phillips also died within two or three months after the death of his father, leaving the defendant, Leopold, sole survivor of the firm. Shortly after the death of the said C. — 144 — Phillips and Leonard Phillips, to wit, on the 6th of March, 1884 (the said C. Phillips having died in October previous, and Leonard Phillips in January, 1884), their heirs and distributees, in order to secure the payment of the said $5,000 to Cohen & Co., united in a mortgage of the real estate herein mentioned to the said Cohen & Co., which, on the 8th of March, was placed on record in the clerk’s office for Darlington County. After the death of his copartners, Leopold was left in charge as survivor, and the plaintiffs, not being satisfied with his management, instituted the action below, in which they prayed, in their own behalf and in behalf of the other creditors of C. Phillips & Sons, an injunction, the appointment of a receiver, an accounting from Leopold, and especially that the real estate described in the complaint (to wit, the real estate embraced in the mortgage hereinabove mentioned) be adjudged to belong to the firm of O. Phillips & Sons, and therefore assets for the payment of their debts, and that the same be sold to that end; and also that McRary be required, upon payment made to him of the balance of the purchase money of the land under contract of sale to C. Phillips, to convey the same to the receiver as assets also of the said firm. The defendants denied that the real estate mentioned was the property of the firm, and claimed that it belonged entirely to C. Phillips, their father. They denied also the allegation of fraud in connection with the loan of $5,000 by Cohen & Co., and the execution of the papers intended to secure the same; and Cohen & Co. claimed the benefit of an equitable mortgage growing out of the deposit of titles, under the facts as stated above. The Circuit Judge, his honor, T. B. Fraser, found as matters of fact, that the real estate mentioned belonged to C.' Phillips individually, and was not partnership property, and that there was no fraud in the transaction with Cohen & Co. He also adjudged as matter of law, that an equitable mortgage had: arisen in favor of Cohen & Co., to the benefit of which they were entitled, in preference to plaintiffs and other creditors. He further adjudged, that if there had been no transaction between O. Phillips and Cohen & Co., creating a lien on the real estate, then Cohen & Co. would stand as an individual creditor of C. Phillips, — 145 — and in that event he would hold that while the creditors of the firm were bound to exhaust the partnership assets, they would then have the right to share pro rata with the individual creditors the individual estate of the deceased partners. • The plaintiffs’ appeal questions the rulings of his honor as to the competency of certain testimony, which will be noticed below. Also the findings of fact of his honor as to the alleged fraud, as to the real estate not being partnership property, and as to the knowledge of Cohen & Co. that said real estate had been represented to the plaintiffs as partnership property, and also his holding in reference to the equitable mortgage by the deposit of the title deeds and its application to this case. The defendants, Cohen & Co., excepted on the ground that his honor “seemed to hold that the real estate of C. Phillips, though individual property, is not first applicable to the payment of the said Cohen & Co., as individual creditor in priority to partnership creditors of C. Phillips & Sons.” We do not feel áuthorized to disturb the findings of fact by his honor. There is no patent error in these findings, nor is the weight of the testimony against them. As to the real estate being partnership property, the evidence is, that the titles were certainly in C. Phillips when the copartnership was formed, and there was no express change subsequent thereto. Nor do we find any testimony that it was the intention of the parties to embrace the real estate as a portion of the partnership property. The firm seems to have been an ordinary mercantile firm, having no-connection with the purchase and sale of real estate. As to the alleged conspiracy and fraud between Cohen & Co. and C. Phillips & Sons, seeking to put the said real estate beyond the reach of the creditors of the firm, we see nothing to overthrow the findings of his honor thereon. Nor does it appear that Cohen & Co. had any information that the plaintiffs had been informed that said real estate belonged to the firm. Nor was there error in the rulings of his honor upon the competency of certain testimony offered.- The testimony of Louis Cohen relating to conversations and transactions between himself and C. Phillips was objected to as obnoxious to section 400 of the Code. This testimony not being against any one belonging — 146 — to the classes mentioned by this section, there was no error in admitting it. Cantey v. Whitaker, 17 S. C., 530. Certain testimony as to statements made by the sons, copartners, that the real- estate in question was partnership property, was excluded as to Cohen & Co., on the ground that said statements had not been brought home to them before their claim originated, the court holding that they, Cohen & Co., had the right to deal with C. Phillips in reference to property standing in his name as his own — the record showing that this real estate belonged to C. Phillips, and there being no record of a transfer to the copartnership. The reasons given by his honor seem to be sufficient. The main question in the case is the one in reference to the equitable mortgage. And this involves the consideration of the three following points: 1st. What is this doctrine of equitable mortgages, created by the deposit of title deeds ? 2nd. Does it exist in this State ? And, 3rd. If so, do the facts of this case entitle Cohen & Co. to its benefit ? . The leading case upon this doctrine in England is the case of Russel v. Russel, 1 Bro. C. C., 229. In fact, it is from this case, we first hear of it. It was followed by Birch v. Ellames (2 Anst., 429), and although it has been violently attacked and denounced as pernicious by eminent English judges, and especially by Lord Eldon and Sir William Grant, yet it now seems to be well settled and firmly established in the English law, and in many of the American States, to a certain extent, to wit, where the title deeds are deposited as a present security, and with the intent thereby to give a lien upon the land, such deposit shall operate as an equitable mortgage, notwithstanding the statute of frauds. The English courts, however, have manifested a determined disposition to keep within the letter of the precedents, and not to give the doctrine further extension. And accordingly they have held that a mere parol agreement to make a mortgage, or to deposit a deed for that purpose, will not give any title in equity. There must be an actual and bona fide deposit of the title deeds with the mortgagee himself in order to create the lien. These positions will be found sustained, we think, in the following English cases : Ex parte Whitbread, 19 Ves., 209; Ex — 147 — parte Langston, 17 Id., 230; Lord Ellenborough in Doe v. Hanke, 2 East, 481; Ex parte Kensington, 2 Ves. & B., 79; Ex parte Coombe, 4 Mad., 249; Lucas v. Dorrien, 7 Taunt., 279; Ex parte Coming, 9 Ves., 117. Also in 4 Kent, 151, and Washburn on Real Property. ■It appears from these authorities that in England, and also in several of the States, that where the title deeds are actually deposited by the debtor with his creditor upon an advance of money, and perhaps even for an antecedent debt, as a security, that the equitable mortgage will arise without more; the deposit standing in the place of an actual mortgage, and dispensing with the necessity of the execution of such mortgage. But will the deposit of title deeds for the purpose of having an actual mortgage prepared for execution in accordance with an agreement to that effect raise the equitable mortgage ? In other words, where money is proposed to be lent upon the security of a mortgage to be actually executed and delivered, and the titles are placed in the hands of an attorney to prepare the mortgage so as to accomplish the loan, which, although prepared, yet the debtor, from accident or some other cause, fails to execute and deliver, although he has received the money, will these facts create the mortgage ? Mr. Washburn says: “To give the effect of a lien to the possession of title deeds, it must be shown affirmatively that they were deposited as a bona fide, present, immediate security. If left, for instance, with the attorney for the purpose of his drawing a mortgage which had been agreed upon by the parties, it will not be sufficient. Mere possession, even by a creditor, is not enough.” 2 Wash. Real Prop., 89. See cases referred to in note by Mr. Washburn. And in Ex parte Bolton (2 Cox, 243), it was held, “that the delivery of title deeds to an attorney to prepare a mortgage deed does not amount to an equitable mortgage, otherwise if deposited expressly as a security for a debt.” We think the weight of authority is against this doctrine being applied to cases with facts like those suggested, and that an equitable mortgage resulting from a deposit of title deeds can exist only where such deposit is the matter relied upon without anything further being done. Does this doctrine exist in South Carolina? We have been — 148 — referred to no case where the question has been squarely made, but it seems that the possibility of such mortgages has been recognized in three of our cases, to wit: Welsh v. Usher, 2 Hill Ch., 170; Harper v. Barsh, 10 Rich. Eq., 154; Boyce v. Shiver, 3 S. C., 528. And although perhaps the question was not absolutely necessary to the decision of the points actually involved in these cases, yet we are disposed to regard the recognition made as sufficient to the extent as above. Do the facts of the case bring it under the doctrine as above ? Clearly not. The title deeds were not deposited as an immediate security, nor did Cohen & Co. rely upon them in the least as giving in themselves the lien which he wanted, and for which he contracted. They were placed in his hands as affording the information upon which a bond and mortgage were to be drawn. These ■ papers were actually drawn and sent, doubtless with the titles, to C. Phillips for formal execution, but which his sickness and death prevented. With these facts we do not see how it can be said that the title deeds had been deposited in order to raise by the deposit an equitable mortgage. We concur with the Circuit Judge, that in the absence of a lien in favor of an individual creditor, partnership creditors, after exhausting partnership assets, may share pro rata in the individual property of the partners. The English rule upon this subject is to apply the joint estate to the joint debts, and the separate estate to the separate debts, though this rule has not met the uniform approval of all the English judges. Lord Thurlow disregarded it in the case of Ex parte Hodgson, 2 Bro. C. C., 5, and Lord Eldon failed to give it his cordial approval. It may, however, be regarded as the established rule in the English law. In this State, from 1804 to 1827, the English rule as above seems to have been followed. During this period there are three cases sustaining this view, Tunno v. Trezevant, 2 DeSaus., decided in 1808; Woddrop v. Price, 3 Id., 207, decided in 1811; and the case of Sniffer & Paxton v. Sass, decided in 1827, found in a note to Kuhne v. Law, 14 Rich., 20. But afterwards, from 1827 to 1866, our courts held, in substance, that while private creditors had the right generally to throw the copartnership creditors upon copartnership assets in — 149 — the first instance on the two-fund doctrine, yet that copartnership creditors, after exhausting copartnership assets, had the right to share the individual assets fro rata with the individual creditors. During this period the leading cases on this subject were: Wardlaw v. Gray, Dudley Eq., 112, decided in 1837; Gowan v. Tunno, Rich. Eq. Gas., 369, in 1832; Fleming v. Billings and Belk, 9 Rich. Eq., 149; Gadsden v. Carson, Ibid., 252; and Wilson v. McConnell, Ibid., 500, in 1856 and 1857—in all of whi.ch the rule, as above stated, was recognized as the settled law of the State. Roberts v. Roberts (8 Rich., 15, in 1854) held that of two executions of same date, one in favor of partnership creditors, and the other in favor of separate creditorst and both levied on separate property, the execution of the separate creditors should prevail; but in 1866 this was overruled by the Court of Errors, and in Kuhne v. Law (1866, 14 Rich., 28),‘which was a contest between a senior copartnership judgment creditor and a junior separate judgment creditor, over the proceeds of the separate property of the debtor by rule against-the sheriff in behalf of the separate creditor to have said proceeds applied to his judgment, the court held, Roberts v. Roberts, supra, having been in substance overruled, that a separate creditor could not set up any equity, even if he had any, in .a law court; that in such courts the liens could only be looked at, and that they should be satisfied according to their priority, and the rule was dismissed. In that case it was stated by Judge Wardlaw in delivering the opinion that the Court of Errors, when Roberts v. Roberts was considered, attained no satisfactory conclusion respecting the rule which should prevail in equity in the distribution of separate effects between separate and partnership creditors. But the judges (he said) were nearly, if not entirely, unanimous in the opinion that at law the supposed preference given to a separate creditor should not be allowed to prevail against a prior lien acquired by a partnership creditor. In Adickes v. Lowry, 15 S. C., 136, the present court, Mr. Justice Mclver delivering the opinion, said: “This question seems yet open in this State.” The above is the state of the authorities upon this subject. Under the circumstances, we think the weight of authority is in — 150 — favor of the rule as decided below by the Circuit Judge. Certainly from 1832 to 1866, from Gowan v. Tunno to Kuhne v. Law, supra, in the courts then under the direction of the most eminent jurists that have ever adorned the bench in this State, such was regarded to be the rule. It was so announced in all of these cases without hesitation or qualification, and it seems to us that the case of Kuhne v. Law, supra (from which it seems that a doubt first came), upon a careful consideration of the principle decided there, instead of raising a doubt, should have affirmed the rule. It was there held, as we have stated, that a senior copartnership judgment creditor had priority to a junior separate judgment creditor upon separate property. Now, unless each of these.creditors had an equal claim upon the separate property before judgment, or, in other words, an equal right to seek payment out of the separate property, it is not clear how either could get priority by obtaining judgment in advance of the other. If separate creditors have a right as a principle of equity or law to postpone copartnership creditors as to separate assets, a judgment obtained, as it seems to us, by the copartnership creditor would be subject to that right, and could not have a lien prior thereto. We think the true doctrine is as stated by the Circuit Judge, with the right of the separate creditor, if any - equity exists in his behalf, such as two funds, to throw the copartnership creditor on the partnership assets in the first instance ; but after the partnership assets have been fully and fairly exhausted, to come in pro rata with the separate creditor. This seems to be the weight of authority with us. Besides, a debt contracted by a copartnership is not only a debt of the firm, but a debt in substance of each individual member of the firm, and the property of the firm, and of each member, is liable for it; but the property of the firm is not liable for the separate debt of a member — only the interest of the member is liable, which is nothing until the firm debts are paid. So that, because a copartnership creditor has an exclusive claim upon the film property, it does not follow that a separate creditor should have an exclusive claim upon the separate property. In the first case, the effect of the contract is to pledge, as a basis of credit, both partnership and private property; in the second case, the — 151 — separate property alone gives the credit. And as to partnership property, there is no separate property until the debts are paid, which is liable to both partnership and separate debts by contract. Kuhne v. Law, supra. While, as we have said, we do not think that an equitable mortgage was created in this case under the facts in favor of Cohen & Co., yet there was a state of facts which presents a very-strong case for specific performance. Or, at least, had C. Phillips lived, and after receiving the $5,000 from Cohen & Co. he had refused to execute the mortgage prepared and agreed upon, Cohen & Co., as against him, would have had a strong equitable claim for specific performance. Or, if the transaction, instead of being a loan to be secured by mortgage, had been a contract of purchase by Cohen & Co., with the purchase money paid down in full, and Phillips had died before the execution of th’e conveyance promised,'could not the titles have been demanded successfully from the heirs ? Or, at least, if the heirs afterwards had voluntarily executed such conveyance, could it be assailed, except by subsequent creditors without notice or for fraud ? How far this principle might operate in a mortgage transaction like that before the court, where the heirs have voluntarily come forward and have attempted to carry out the contract of their ancestor (see Tibbetts v. Langley Manufacturing Co., 12 S. C., 468), we are not now at liberty to consider, as this question was not passed upon or considered by the Circuit Judge. We think, however, without expressing any opinion in reference to it, that it is one which Cohen & Co. should have the opportunity of making before the Circuit Judge, and to this end the case should be remanded. It is the judgment of this court, that the judgment below be reversed, on the ground of error in the ruling of the Circuit Judge as to the equitable mortgage claimed by Cohen & Co.; and while affirming the rulings of his honor in other' respects, that the judgment below be vacated, and the case be remanded for further hearing, in accordance with the principles herein above.