Zeis v. Potter

WOODS, Circuit Judge, after making the foregoing statement, delivered the opinion of the court. To the extent that the certificate of sale represented the $2,000 mortgage, there can be no doubt that Zeis had the right to assert an interest prior to that of E. S. Dreyer & Co., hy whose false representation he was induced to purchase the note in the belief that it was secured by a first mortgage. It is urged that, the $3,000 mortgage being of record, he was hound to take notice of it, and that his situation is the result of his own negligence. As against innocent purchasers buying without notice of his rights, the proposition would he unanswerable, hut equity will not permit it to he invoked in favor of the willful wrongdoer. It is not for E. S. Dreyer & Oo. to say that Zeis may not complain of the deceit which they practiced upon him, because if he had gone to the records “a slight examination would have disclosed the prior mortgage.” Upon the facts stated, it may be said that Zeis had authorized Dreyer & Co. to procure a foreclosure of his mortgage, but he did not thereby sanction the procedure by which the two mortgages were foreclosed together, and merged in one decree in the name of another, representing Drey ex; & Co.; and when he learned what had been done it was his privilege; either to hold Dreyer & Co. liable for a conversion, or to repudiate the entire transaction and proceed to foreclose his mortgage, asserting equitable priority over Dreyer & Co. as holders of the other mortgage, or to assert an interest of like priority in the certificate. By taking the latter course he doubtless must he said to have ratifiedihe foreclosure proceedings, including the. sale under the decree, and [674] the issue of the master’s certificate of sále to the purchaser. In other words, for the purposes of the case, Dreyer & Co. must be regarded as having become the rightful holders of the title to the certificate, subject to the equity of Zeis; and from that starting point it must be determined whether the rights of Zeis were lost or impaired by the assignment of the certificate by Dreyer & Co. to the bank. The contention of the receiver is that by force of the transfer Zeis lost all interest. The court below decided that he had lost the right of priority, and adjudged that he and the receiver, without priority in either over the other, were owners of the certificate in proportions stated, and in the same proportions entitled to have and to. hold as tenants in common the premises described. A certificate of decretal or execution sale of real estate, it is clear, is not negotiable in the sense of the law merchant, though for certain purposes it has been held that a certificate of sale under a decree foreclosing a mortgage is in effect a mortgage during the period allowed for redemption. Wedgbury v. Cassell, 164 Ill. 622, 45 N. E. 978; Stephens v. Insurance Co., 43 Ill. 327. A statute of Illinois (Hurd’s Rev. St. c. 77, § 29) makes such certificates assignable by indorsement, and declares the assignee “entitled to the same benefits therefrom in every respect that the person therein named would have been if the same had not been assigned”; and while, as insisted on behalf of the appellant, the supreme court of the state has held in a number of cases that by force of the statute an assignee takes such a certificate “subject to all equities to which it was subject in the hands of the assignor” (Roberts v. Clelland, 82 Ill. 541; Haworth v. Taylor, 108 Ill. 287; Chytraus v. Smith, 141 Ill. 231, 30 N. E. 450; Bruschke v. Wright, 166 Ill. 183, 46 N. E. 813), it is pointed out, on the contrary, that these cases disclose controversies between the mortgagor or his privies, on the one hand, and mortgagees or holders of certificates, on the other, and therefore do not affect the rule declared in other cases, that the purchaser of a mortgage, for value and without notice, “takes it free from secret or latent equities or interests of third persons in the mortgage itself” (Young Men’s Christian Ass’n Gymnasium Co. v. Rockford Nat. Bank, 179 Ill. 599, 54 N. E. 297; Humble v. Curtis, 160 Ill. 193, 43 N. E. 749; Olds v. Cummings, 31 Ill. 188). This is a distinction which has been recognized as applicable to negotiable instruments assigned after maturity. In paragraph 726b of Daniel on Negotiable Instruments, it is said: “The indorsee of overdue negotiable paper is not subject, it has been held, to equities which may have intervened between remote indorsers and indorsees, but only to those which exist, at the time of the indorsement to him, between the principal parties and the original holder, and between himself and his own indorser. Hill v. Shields, 81 N. C. 250. But, if there he an equity attaching to the hill or note itself, it has been held in England that it may he asserted against an indorsee after maturity by a third party who claimed the right to follow the bill. In re European Bank, Ex parte Commercial Bank. 5 Ch. App. 358; 1 Ames, Bills, 891; Chaim. Dig. Bills & N. 140. And, if the equity be a claim to some right in the instrument directly attached to It, we perceive no good reason why it may not be asserted against an indorsee after maturity by any party whatsoever.” [675] In a subjoined note it is said: “But see, contra, Crosby v. Tanner, 40 Iowa, 136; Bank v. Everman, 52 Miss. 500; Duke v. Clark, 58 Miss. 466. Compare Warren v. Haight, 65 N. Y. 171.” See, also, Tied. Com. Paper, § 295, and note. The reason generally given for the distinction is thus stated in Silverman v. Bullock, 98 Ill. 10: “Persons dealing in such securities can without difficulty inquire of the makers if any defense exists against them, hut more than that it is not practicable to do. Of course, it would not be possible to discover, even by „ the utmost diligence, all persons that might have equitable rights in the subject-matter of the assignment, and the adoption of a rule that would let in latent equities to prevail against the assignee would be to ensnare dealers in such securities.” In respect to this, while the present case does not require a, definite expression of opinion, it is deemed proper to suggest that the purchaser of overdue or nonnegotiable paper, if required to inquire of the makers whether they have any defense, may equally well be required to inquire into the rights of remote indorsers or others whose names appear on the paper. The payee and each successive indorsee, though he has parted with possession and title, may yet have an interest which, as against all hut innocent purchasers for value and without notice,- equity would protect; and, if convenience of inquiry is equivalent to notice of the rights of the maker, why not of any other, who, by reason of his name being on the paper, or by other means, the proposed purchaser is notified that he once had, and therefore may yet have, an interest? The maker often signs for accommodation, and the apparent indorser may be in fact the principal. The reasonable rule would seem to be that, the purchasers of such paper should take subject to the equities of all who appear or are known to have had an interest in it. We need not, however, go to that extent now. In this case the hank was informed that there was an outstanding interest of $2,000, and that the holders of the certificate had a right to pledge only the remainder. Knowing this much, the bank was hound to inquire of the owner info the character and extent of that interest. The probability is that the name of the owner was given, — at least, it would have been given if asked; and, indeed, it is probable that, if the particulars had been asked of Berger, they would have been frankly stated. The hank was put upon inquiry. On the inquiry made it learned of an outstanding interest, and, hot having gone further, it must he held to have had notice of what by proper effort it would have learned. It would have learned that the equity of Zeis was superior to all rights of E. S. Dreyer & Co. It is urged, on the authority of Mechem, Ag. (1889) § 729, citing Congar v. Railway Co., 24 Wis. 157, and Bridge Co. v. Baker, 75 Ill. 140, that notice to the note teller, Greenshields, was not notice to the bank. It is not denied that Moll, the assistant cashier, to whom Berger presented the list of collaterals, had full power to represent the hank in the transaction; hut, instead of taking the labor and responsibility himself, he simply “glanced over it,” — whether the bundle or list, or both, is uncertain, — and, according to custom, [676] directed Berger to go to the teller, "who had charge of the col-laterals,” to check'them up, to see that everything on the list was delivered. To hold that the knowledge of the teller in this instance, acquired as it was in the very transaction committed in the usual way to his charge, should not be binding on the bank, would be to establish'for such institutions an effective but most unreasonable and unfair method of evading just and wholesome responsibility under the law. It is hardly to' be doubted that the teller communicated to Moll the information which he obtained. No proof to the contrary was offered. Besides, it is to be observed that the certificate of sale was presented to Moll himself with the same indorse'ment upon it which proved sufficient to put the teller upon inquiry; and, if Moll had been careful to observe, he doubtless would have made the same inquiry. If the duty to investigate was his alone, it was negligence on his part, attributable to the bank, that he did not recognize the significance of the notice put under his eyes. The decree below is reversed, with direction to enter a decree which shall declare the interest of the appellant in the certificate of sale and in the property therein described to be prior and superior fo all rights of the receiver.