Schultz v. Sroelowitz

Mr. Justice Carter delivered the opinion of the court: This case is the outgrowth of a fraudulent transaction of Theodore H. Schintz which must result in loss to one of two or more innocent parties. It is often a difficult matter in such cases to determine upon which of such parties the loss should fall. The suit was brought by Schultz to foreclose, as a mortgage, the deed of trust, which, with the note, had been assigned to him by Schintz. It is well settled that the mortgage was assignable only in equity, and that in a proceeding to enforce the lien created by it, it is subject to all equitable defenses existing between the original parties but not to the latent equities of third persons. The rule is, that the assignee, to protect himself from payments by the mortgagor to the mortgagee, must give notice to the mortgagor, actual or constructive, of the assignment to him. (Olds v. Cummings, 31 Ill. 188; McAuliffe v. Reuter, 166 id. 491; Towner v. McClelland, 110 id. 542; Buehler v. McCormick, 169 id. 269; Johnson v. Carpenter, 7 Minn. 120.) In the case at bar, if Schultz, the assignee, had made inquiry of Krasa at the time of his purchase of the securities, or had given him notice of the assignment, no reason would have been disclosed why the notes should not be paid; but in case Krasa had afterward made payments on his obligation such notice would have prevented payment to the wrong person, or at -least Schultz would have done all that the law required, and he would have been protected in his right to enforce the lien. But Krasa never made any payments, and this is not a case where the maker has made payments to his mortgagee after the latter had assigned the note and mortgage, not knowing of such assignment, but, as we view the case, it is one where a third person, unknown to the assignee, had assumed and agreed to pay the mortgage debt, and in undertaking to comply with his agreement and make such payment has paid the wrong person. Schultz, prior to such payment, had no knowledge, actual or constructive, that appellees had purchased and procured conveyance of the property to them and had assumed and agreed to pay the mortgage debt. He was not charged with such knowledge by the recording of the deed to appellees, inasmuch as it was subsequent to the recording of his deed of trust. True, had he taken a written assignment of the mortgage and placed it on record it would have been notice to subsequent purchasers, as appellees were, of the assignment; but without any written assignment the mortgage, as an incident to the note, passed to him as assignee, and was enforceable in equity as an equitable assignment. His deed of trust was not only of record and so was notice to appellees when they purchased, but they had expressly assumed and agreed to pay the debt which it secured,—not as a debt to Schintz, but a debt evidenced by a note payable to the order of the maker and by him endorsed in blank, fully described in the deed of trust. Appellees were bound by their agreement to pay this debt to the one entitled to receive payment, and they would not be discharged from that duty by the fraud of Schintz, in the absence of the fault or negligence of Schultz. As we have seen, Schultz was not bound to give notice to appellees of the assignment, but only to Krasa, the mortgagor. That was a duty which he owed to Krasa—not to third persons of whose interests he had no knowledge. Had he notified Krasa of the assignment, it could not, from such notice, be presumed that the information would have been imparted to appellees and the fraud of Schintz thus prevented. It follows that no connection exists between the failure of Schultz to give notice to Krasa and the fraud of Schintz in procuring payment from appellees. Why-, then, should the lien in favor of Schultz be defeated because the appellees allowed Schintz to practice a fraud on them? Thus, it was said in Olds v. Cummings, supra, (p. 192): “There are many cases in which the assignees have been protected against latent equities of third persons, whose rights, or even names, do not appear on the face of the mortgage. And the reason is, that it is the duty of the purchaser of a mortgage to inquire of the mortgagor if there be any reason why it should not be paid; but he should not be required to inquire of the whole world, to see if some one has not a latent equity which might be interfered with by his purchase of the mortgage, as, for instance, a cestui que trust.” Then, again, it was said in Towner v. McClelland, supra (p. 551): “Where a mortgage is assigned, and the mortgagor, without notice, pays the payee, who has parted with the note, that will discharge the mortgagee, and in a suit to foreclose, such payment may be set up in bar of a decree for its foreclosure. The mortgagor, to release himself from liability on his note, must see that he pays the money to the holder of the note, who has received it by assignment before maturity, but not so to discharge the mortgage, because it is not assignable at law. The equitable assignee, to protect his rights against a payment by the mortgagor to the mortgagee, must give the former notice, actual or constructive, of its assignment. He may place the assignment on record or give notice of the assignment to the mortgagor.” And in Buehler v. McCormick, supra, it was said (p. 275) that “the purchaser knows from the papers who the mortgagor is, and may, by notice and inquiry, protect himself in making the purchase much more readily than the mortgagor may, if for any reason he is unable to obtain at once the cancellation and return of his obligations. The assignee is charged with knowledge of the law that a mortgage is assignable only in equity and subject to the equities between the original parties to it, and he cannot relieve himself from the consequences of his own negligence by simply showing that the mortgagor failed to take up the note and mortgage when he paid the debt to the then legal holder.” But we are unable to see how this equitable doctrine can be applied to the case at bar, for, as before said, the assignee, Schultz, had no knowledge that appellees had any interest in the matter or had assumed Krasa’s obligation to pay the mortgage debt. Their equities must be classed with those mentioned as the latent equities of third persons. ' (Silverman v. Bullock, 98 Ill. 11.) As between appellees and Krasa, appellees, by their assumption of the mortgage debt, became principals and Krasa a surety. It being their duty to pay, they could not release themselves or the mortgaged property in their hands from their obligation, and leave the burden still resting upon Krasa as the maker of the note. Krasa’s interest is to maintain the lien, and not to defeat it. The property became the primary fund for the payment of the debt. This court said in Drury v. Holden, 121 Ill. 130, that “it is well established that when a party purchases premises which are encumbered to secure the payment of indebtedness, and assumes the payment of the indebtedness as a part of the purchase money, the premises purchased are in his hands a primary fund for the payment of the debt, and it is his duty to pay it.” How did appellees discharge this duty? They simply relied on Schintz’s representations that he was the owner and holder of the note and mortgage, and, knowing that they could neither read nor understand the English language, they depended on Schintz’s explanations of the contents of the papers which he produced and destroyed in their presence, and paid him. The fact that Schintz declined to cancel and deliver to them the note and deed of trust on their request, but destroyed them instead, should have been sufficient to arouse their suspicions as to his good faith in the transaction and to put them on their guard. Ordinary care, under the circumstances, would have required them to procure some competent person to look into the matter for them. This they did not do, but relied wholly on the swindler who was then engaged in perpetrating the fraud. It is no answer to say that if Krasa had been sodmposed on or had paid Schintz with- • out taking up the securities, such payment, as between him and Schultz, in the absence of notice of the assignment, would have operated to discharge the lien, for, as before shown, appellees were not entitled to notice and they took the property subject to the encumbrance, and by their contract, in legal effect, agreed that it should stand as the primary fund in their hands for the payment of the mortgage debt. They were at their own peril bound to pay the debt to the one entitled to receive it. There was no proof that Schintz was the agent of Schultz, and their payment to Schintz was not good as to Schultz, Schintz’s assignee, nor was it a compliance with their obligation to Krasa, who parted with his land upon the pledge that it should be held for the payment of his debt. The judgment of the Appellate Court is reversed and the decree of the circuit court is affirmed. Judgment reversed. Cartwright and Boggs, JJ., concur in the conclusion, only; Hand, J., dissenting.