201 F. 962 | E.D. Ky. | 1912
This cause is before me on motion to reconsider an order, heretofore entered, on a petition for review, approving an order of the referee. The petition was filed and the motion is made by the trustee. The order complained of was the allowance of the mortgage of Alice P. Watson, the bankrupt’s mother, as a preferred claim against a parcel of ground on the southwest corner of Latonia and Sanford avenues in the city of Covington, Ky., with a dwelling house, saloon, clubhouse, bowling alleys, and other improvements located thereon, near the Latonia race track, subject to a prior mortgage in favor of the Covington Savings Bank & Trust Company for $6,000. The mortgage originated in this way. The real estate was acquired by the bankrupt from his mother. Prior to February 16, 1909, she had sold and, on that date, she duly conveyed it to him. The deed recites the consideration to be “$1.00 and other consideration paid and to be paid.” She claims that the purchase price of the property was $10,800, of which $4,000, part of a loan of $4,500 made by the Farmers’ & Traders’ National Bank to the bankrupt with William Reidlin as surety, who was indemnified by a first mortgage on the property, was paid to her in cash, and for the remainder of which, to wit, $6,800, the bankrupt gave his five notes, one for the sum of $700 payable in one year, and four for the sum of $1,525 each, payable, respectively, in two, three, four, and five years, each note bearing 5 per cent, interest, and, further, that on that date the bankrupt and his wife executed a mortgage to her on the property, subject to that in favor of Reidlin, to secure the payment of this unpaid purchase money, This mortgage was not recorded until August 16, 1910. In the meantime, to wit, on April-, 1910, the bankrupt obtained a loan from the Covington Savings Bank & Trust Company for the sum of $6,000, out of which the loan for which Reidlin was surety was paid and secured same by a mortgage on the property which was at once recorded. It is this mortgage to claimant which the referee allowed as a preferred claim, subject to the $6,000 mortgage, and of whose allowance complaint is
The mortgage is attacked on several grounds. It is questioned whether the bankrupt really owes the claimant the amount of money thereby secured, and also whether he and his wife executed it at the time claimed. It is, however, very doubtful whether it is seriously urged that either of these things is so. It is urged seriously that the mortgage was fraudulently withheld from record, and is therefore void. Besides these, there are two grounds of attack not involving the meritoriousness of the debt or mortgage. I will dispose of them first. In dealing with them I assume that the purchase price of the property on the sale from the claimant to the bankrupt was $10,800, of which $4,000 was paid in cash and for the remainder of which, to wit, $6,800, notes were given as hereinbefore stated, no part of which has ever been paid; that the mortgage to secure those notes was executed simultaneously with the conveyance of the property; and that the mortgage was not fraudulently withheld from record. Whether what is assumed is true will be considered after these two grounds of attack have been disposed of. The question, whether it is, has no pertinency to either, of them.
One is, that the mortgage is a voidable preference. Is this so? We have seen that it was made February 16, 1909, and recorded August 16, 1910, 18 months afterwards. It was made, therefore, before the enactment, June 25, 1910, of the amendment to section 60b, relating to voidable preferences, and recorded subsequent thereto. This presents a question whether that amendment is applicable to this case. The trustee contends that it. is, and that under it the mortgage is a voidable preference. He would, if necessary, contend that it is such under the act as it stood before the amendment, but, however this may be, he is quite sure that it is a voidable preference under that amendment, and that it applies. Of the two questions involved — i. e., as to whether under that amendment, if it applies, the mortgage is a voidable preference, and, as to whether it applies, the former is the more important, and, as I think that the mortgage is not a voidable preference under that amendment, I will limit the discussion thereto, and pass the other by.
In the Eighth circuit, where the view which I combated in Debus v. Yates has been much adopted, the application of it to a deed of trust to secure a present loan was expressly denied in the recent case of In re Jackson Brick & Tile Co. (D. C.) 189 Fed. 636. It was questionable whether the amendments of 1903 applied, as the deed of trust, though recorded August 8, 1906, and within four months of the filing of the petition in bankruptcy, had been given December 2, 1902, before the enactment of those amendments, which Judge Dyer in his opinion noted. He continued ás follows:
“But, even if it be assumed that the amendment of 1003 is applicable to the transfer here in question, it still seems clear that the transaction cannot properly be treated as a voidable preference because the deed of trust was given to the bank as security for a present loan, and not for an antecedent indebtedness.”
He said further:
“But, while the statute postpones the time within which the transfer can be attacked, the statute cannot properly be so applied as to materially alter the essential character of the transaction. If the transfer is one which is required to be recorded, the four-month period during which it may be attacked does not begin to run until the conveyance is recorded, but, if the transfer when made was based upon a present consideration, a delay in recording the instrument does not warrant us in treating the conveyance as if it were made as security for an antecedent debt, because to do so would be to create by construction a transaction different from the actual one.”
The mortgage here, therefore, cannot be a' voidable preference under the act as it was before the amendment of 1910 to section 60b, because made for a present consideration, and that, notwithstanding the introduction of the prolonging words by the amendments of 1903 to sections 60a and 60b. But why is this so ? Why is it that under the act as it then was no transfer for a present consideration could be a voidable preference? It is important to understand just why this is so. This takes us back to the act as it was before the amendments of 1903 to sections 60a and 60b. Clearly before then no transfer for a present consideration.could be a voidable preference. And this was. so' simply because a transfer for a present consideration did not come within section 60b. That section, then as now, was the only section of the act relating to voidable preferences. It contained a single sentence, and that a conditional one. The protasis thereof, on its surface, called for two things only — the giving by the bankrupt of a preference within a certain time, and the having, by the person to whom the preference was given, described as the “person receiving it or to he benefited thereby” or, his agent acting therein, reasonable cause to believe that it was intended 'to give a preference thereby. This latter thing has been, held to imply a third one, to wit, the intending by the bankrupt thereby to give a preference. The apodosis was that in case of the existence of these things the preference should be voidable and recoverable. To understand what the first of these three things, from the existence of which this followed, was, it is necessary to go to- the immediately preceding section 60a, the sole function of which was to define what should constitute the giving by the bankrupt of a preference. It, too, contained a single sentence, and that a conditional one. It recognized two kinds of preferences which might be given, to wit, judgment preferences, and transfer preferences. We have to do only with the latter, and hence any further reference to the former will be omitted. The protasis of the sentence as to transfer preferences also called for three things, to wit, the making by the bankrupt of a transfer of any of his property, insolvency on his part, and the enforcement thereof having the effect of enabling any one of his creditors to obtain a greater percentage of his debts than any other of such creditors of the same class. The apodosis was that, in case of the existence of these three things, the bankrupt would be deemed to have given a preference. In providing for the first of the three things called for it is not said to whom the transfer must be made. The underlying thought, however, is that it must be made to or for the benefit of the creditor, who, by the enforcement thereof, will be enabled to obtain the greater percentage; for not otherwise will he be so enabled. In the language of section 60b he must receive or be benefited by it. In l'Boveland on Bankruptcy, p. 987, it is said that the transfer must be to a creditor. Of course, it is not meant thereby to exclude
The trustee, proceeding upon the idea that the fact that section 67d was amended at the same time in 1910 as section 60b was has no bearing on the matter, because the amendment thereto made no change, argues that the amendment of 1910 to section 60b, being the later law, impliedly repeals section 67d in so far as it conflicts therewith, citing Sutherland on Stat. Const. (1904) § 247. He would have it, therefore, that instead of every lien given for a present consideration in good faith and recorded according to law, if recordable, not being affected by the act as provided by section 67d, that this is so, provided at the time it is recorded it is not the case that the bankrupt is insolvent, the lien operates as a preference, and the lienholder has reasonable cause to believe that it would effect a preference, in which case it would be affected by the act, thus to this extent qualifying or modifying section 67d. But this argument begs the question, to wit, that there is a conflict between the two provisions. According to the Sutherland citation relied on, in order to an implied repeal, it is essential that the terms and necessary operation of the later act cannot be harmonized with the terms and necessary effect of the earlier one. Now the amendment of section 60b in 1910 in its terms says nothing whatever as to transfers to secure debts created simultaneously with the making of the transfer — i. e., for a present consideration — and it can be made to include such a transfer only by holding that where it calls for a transfer by the bankrupt of any of his property, without saying to whom, it was intended to include such a transfer as well as a transfer to or for the benefit of a then existing creditor, the only sense in which those words had theretofore been and were then used in section 60a. The necessary effect of the amendment is not to include such a transfer, and there is not the slightest indication that it was intended to include it. It is only by giving the words a broader meaning than given them in the source from which they were drawn that it can be made to include it, and the fact that thereby section 60b will be brought into conflict with section 67d is sufficient reason for not so doing. That it was not thought that the amendment of 1910 had any qualifying or modifying effect on section 67d is evident from the fact that it was amended at the same time so as to make it say in words what it had theretofore been held to mean, without any indication that it was thought to.have any lesser effect after the amendments of 1910 than before.
The trustee in this connection has much to say on the question whether the mortgage in question here is protected by section 67d. He thinks that, because it was not promptly recorded, it does not come within its protection. But I am concerned here only with the question whether it is a voidable preference under section 60b, and the allusion to section 67d is to enforce the position that it is not, for thereby section 60b would be brought into conflict with it. I am not
“The policy of the bankrupt law respecting liens for a present consideration differs radically from its treatment of preferences generally or as security for an existing indebtedness.”
. I find no evidence in the amendments of 1903 and 1910 of any purpose to make any change in this difference so as to make it less radical. The amendments of 1903 to sections 60a and 60b. indicate a purpose to prolong the time in which a recordable transfer in payment of or as security for an existing indebtedness may be attacked, and none other. And the amendment of 1910 to section 60b indicates a purpose to render such a transfer, which has been recorded, so that it can be judged as of the date when recorded, as well as when made, in determining whether it effects a preference and the transferee has reasonable cause to believe that it does so and none other.
“No deed or deed of trust or mortgage conveying a legal or equitable title to real or personal estate shall be valid as against a purchaser for a valuable . consideration without notice • thereof or against creditors until such deeds shall be acknowledged or proved according to law and lodged for record.”
Most of the general creditors of the bankrupt became such subsequent to the making of the mortgage, and before it was recorded. I assume that they so became without notice of its existence, though it is arguable that they did not. Their debts exceed the surplus proceeds of the mortgaged property after satisfying the first mortgage. After the mortgage was recorded and before the proceeding was instituted ,. — i. e., within the 10 days intervening between these two events— these creditors brought suit in the proper state court, and obtained attachments which were levied on the mortgaged property. These attachments were in full force at the time this proceeding was instituted. The trustee contends that by virtue of that statute, had this proceeding not been instituted, the mortgage would have been void as against these creditors because not recorded when the debts were created and they had no notice of its existence, and therefore that it is invalid as against the trustee, presumably, though he has not . so expressed himself, for the benefit of all the general creditors. He has not made clear the exact basis upon which he is entitled to avail himself of this right of these creditors. He cannot do so through their attachments, because no order was made under section 67f of the
It follows then that the correctness of this ground of attack depends entirely on the soundness of the trustee’s contention that, had not bankruptcy intervened, the mortgage would have been invalid as to those creditors, and the property covered thereby would have been subject to their attachments free therefrom by virtue of that statute. To this contention I now direct my attention.
The soundness thereof depends on who are creditors within the meaning of the statute. As heretofore noted, it does not include all the general creditors of the'maker of the instrument of writing whose validity is involved. It is well settled by decisions of the Court of Appeals of Kentucky that it does not include creditors who became such before its making, hereafter termed “antecedent” creditors. It is limited to creditors who became such subsequent to its making and before its recording, hereafter termed “subsequent” creditors. Nor does it include all subsequent creditors. It is further limited to such creditors who became creditors without notice of its existence. I will not now refer to the decisions by which these limitations upon the word “creditors” in the statute became established. That statute, substantially as it is now, has been in existence from an early period in the history of the state, and it is only until recent years that those limitations have become established. In the course of the discussion I will note when this came about. In so far, then, those creditors answer the description of the statute. They are subsequent creditors without notice. The question then comes to .this: Does the statute include all subsequent creditors without notice, or is it further limited to subsequent creditors without notice who by their own activity —i. e., through an execution, attachment, or suit in equity on a return of nulla bona — have acquired a hold or lien on the property covered by the instrument of writing, and that before it has been recorded? If there is such an additional limitation, then the contention under consideration is not sound, for,' though those creditors did by. their attachments acquire a hold or lien on the property covered by
Considerable confusion exists as to just what is to be taken as the position of the Court of Appeals on the first of these questions. It is so great, and the task of clearing it up is one that so needs to be done, that I feel called on to make an effort to do so, though it will greatly extend this opinion. It necessitates a consideration of all of the decisions of that court dealing with that part of the statute, and! an incisive criticism of each one of them.
At the outset I would note that before Wicks Bros. v. McConnell, 102 Ky. 434, 43 S. W. 205, the words “or against creditors” had been practically eliminated from the statute. This is how I make this out. The only possible way in which a general creditor can collect his debt is by subjecting his debtor’s property to the payment thereof; i. e., causing it to be sold and its proceeds to be so applied. This he can do by a sale under an execution issued on a personal judgment against the debtor, or under a judgment of the court in furtherance of an attachment levied thereon, or in equity upon a return of 'nulla bona. Before Wicks Bros. v. McConnell it had been settled that a purchaser at an execution sale, whether the creditor or a third party, acquired no title as against an instrument of writing of the character called for in section 496, though the same had not then been recorded, if, at the time of .his purchase, he had actual notice thereof. The hold or lien acquired by the levy of the execution was of no avail to protect him as against the instrument. And the fact that the execution creditor was a subsequent creditor without notice made no difference. It was sufficient to subordinate the rights of the purchaser to that of the holder of the instrument that he had actual notice thereof when he purchased. In such a case, therefore, the provision of the statute relating to creditors was of no force. And, where the purchase was made without notice of the instrument of writing, that portion of the statute was not needed to protect the purchaser. . The other portion relating to a purchaser for valuable consideration without notice was sufficient to that end. Though there were no decisions involving sales under judgment of court, in furtherance of an attachment, or in equity upon a return of nulla bona, there was no reason for differentiating them from sales under execution, and hence it must be taken that they were subject to the same rule. And one decision went so far as to hold that actual notice to the purchaser was not required to subordinate his rights to that of the holder of the instrument of writing. Constructive notice, caused by recording the instrument after the hold or lien had been acquired by the creditor, was sufficient. So. it is that I say that at the time of the decision of Wicks Bros. v. Me-? Connell the decisions of the Court of Appeals had practically eliminated the words “or against creditors” from the statute. That court:
The cases to be considered, in order to bring out what I have-said as to the decisions before Wicks Bros. v. McConnell, are as follows, to wit: Helm v. Logan’s Heirs, 4 Bibb, 78; Campbell v. Moseby, Litt. Sel. Cas. 359; Graham v. Samuel, 1 Dana, 166; Morton v. Robards, 4 Dana, 258; Halley v. Oldham, 5 B. Mon. 235,41 Am. Dec. 262; Righter v. Forrester, 1 Bush, 281; Low v. Blincoe, 10 Bush, 331; Baldwin v. Crow, 86 Ky. 679, 7 S. W. 146. In Helm v. Logan’s Heirs the subject of the controversy was negroes; in Baldwin v Crow, a piano; and in the other cases land. In Helm v. Logan’s Heirs, Graham v. Samuel, Righter v. Forrester, and Baldwin v. Crow the instrument in writing involved was a mortgage, though in Graham v. Samuel it was on its face an absolute deed. In Morton v. Robards and Low v. Blincoe the instrument was in reality, as on its face, an absolute deed, and in Campbell v. Moseby and Halley v. Oldham it was an executory contract or title bond. In' each of these eight cases one party to the controversy was the holder of the particular instrument of writing there involved. In all but Graham v. Samuel and Baldwin v. Crow the other party to the controversy was a purchaser at sale under execution of the property covered by the instrument of writing. In each instance the instrument of writing had not been recorded at the time of the levy of the execution. This was the case, also, at the time of the sale except in Righter v. Forrester, where the mortgage had then been recorded, and in Low v. Blincoe, where such was the case as to the deed. The mortgages and deeds were not recorded, not at all in all cases but Righter v. Forrester and Low v. Blincoe, and not until after the levy of the execution in those cases, either purposely or through neglect, which not appearing. The execution purchaser in each case except Halley v. Oldham and Righter v. Forrester had actual notice of the instrument of writing at the time of his purchase. In Halley v. Oldham he had such notice at the time he received the sheriff’s deed, but not at the time of his purchase, and in Righter v. Forrester it does not appear that he had notice as early as that. In Helm v. Logan’s Heirs and Graham v. Samuel the purchaser was a third party, but in Graham v. Samuel it is probable that he was acting as agent for the execution creditor. Such was probably the case in Righter v. Forrester. In the other cases he was the execution creditor. In Graham v. Samuel and Baldwin v. Crow the party to the controversy other than the holder of the instrument of writing was the creditor himself. In Graham v. Samuel he had brought suit in' equity upon a return of nulla bona to subject the land to the payment of his debt, and made the holder of the instrument a defendant, and sought to have it set aside. At the time he brought his suit, the mortgage, in form an absolute deed, had been recorded. The effect of this circumstance will be considered later, but until then it will be treated as if such had not been the case. In Baldwin v. Crow the holder of the mortgage brought suit against the sheriff who had levied on the' piano and the execution creditor defended the suit. In Graham v. Samuel the creditor was a subsequent creditor without notice.' In'
Helm v. Logan’s Heirs, the first case to arise under the statute, as stated, involved a controversy between an execution purchaser, not the creditor, and the holder of a mortgage, outstanding at the time of the levy, not then or thereafter recorded, but of which .the execution purchaser had notice at the time of the sale as to which had the better right to certain negroes. (It did not appear whether the creditor in the execution was an antecedent or subsequent creditor. It was just as likely that he was an antecedent creditor, or, if subsequent, that he was such with notice as that he was a subsequent creditor without notice. It was-held that the execution purchaser had the better right. Judge Owsley said:
“As against Caldwell (the execution creditor), therefore, who is proven to have been the creditor of Ballinger (the execution debtor), that mortgage could have no probable effect. But it is contended that, although the mortgage may be void with respect to creditors, yet it cannot be so considered as to purchasers with notice; and, as Logan made his purchase from the sheriff with notice of the mortgage as respects him and his representatives, it is urged the mortgage must prevail. This doctrine cannot be admitted to be correct. Nothing could be more absurd than the recognition of such a principle. What would be the consequence? As to creditors the mortgage is void, but as to purchasers under the execution of the creditor with notice the mortgage it is contended is valid. The creditor cannot enforce the collection of his demand without execution. There must a purchaser intervene. If no other person becomes the purchaser, the creditor will be left to the alternative either to purchase himself or lose his demand; and, if he purchases, he thereby loses his character of creditor, and, according to the doctrine contended for, as a purchaser with notice cannot be protected. A 'doctrine fraught with such consequences we are not-prepared to recognize. And we think the mortgage o‘f Helm not only invalid as respects creditors, but must be so held with respect to purchasers under the execution of creditors.”
It must be conceded that this reasoning is unanswerable, at least, in a case where the creditor is a subsequent creditor without notice. In such a case notice to the purchaser at the time of sale would be to no purpose. But in the light of the present position of the Court of Appeals Judge Owsley went too far, if the creditor in that case was an antecedent creditor or a subsequent one with notice. He decided the case as if this made ho difference; and in so doing gave the words “or against creditors” too wide a scope.
In Graham v. Samuel, as stated, the controversy was between a creditor who had brought suit in. equity upon a return of nulla bona to subject the land to payment of his debt and the holder of a mortgage, in form an absolute deed outstanding at the time the suit was brought, which for the time being is treated'as not then recorded. The holder
“But in this case the Bradleys must he admitted to have had notice of Moseby’s equity when, they purchased, and, as all other purchasers with notice, must hold the laid subject to that equity.”
“And it may possibly be thought by some that as the writing under which Moseby asserts his equity was hot proved and lodged with the clerk to be recorded, according to the provisions of the act to which we have referred, his equity was not good against the creditors of Campbell, and ought not to prevail against the Bradleys, who are purchasers under an execution which issued in favor of a creditor of Campbell.”
To this he answered most aptly:
“But it should not be forgotten that the statute has no application to ex-ecutory contracts for land. * * * According to the statute, the legal title as respects' the interest of creditors will remain as though no conveyance had been made, unless the conveyance be made, proved, and lodged with the clerk to be recorded as directed by the provisions of the statute.”
Had he stopped here, all would have been well. But this he did not do. He gave expression to this dictum, to wit:
“The mere failure to prove and record the deed of conveyance as required by the statute is not per se fraudulent, and if made on a valuable consideration, although not regularly proved and recorded, vests in the grantee a specific equity to have the title perfected, so as to be operative against all the world; and the holder of such an equity is always preferred in any contest with the general creditors of the vendor or subsequent purchasers with notice.”
He was led to give expression to this dictum by a consideration of the English statute concerning the registration of certain deeds and adjudications of the English courts thereunder That statute provided that deeds of a certain character should be adjudged fraudulent and void against any subsequent purchaser or mortgagee for a valuable consideration unless registered. Concerning it and the adjudications thereunder he said:
“It will be perceived that by this act nothing is saidi about the subsequent purchaser having notice of the prior conveyance; but the prior deed is expressly declared to be void, unless registered within the time prescribed by the statute. Under that statute, however, a question occurred whether a person buying an estate with notice of a prior incumbrance not registered should be bound by such incumbrance, although he had obtained priority at law by registering his deed. It was held that by force of the statute the subsequent, purchaser was vested with the legal title, but, having notice of the prior incumbrance, he was not bound by it and in equity compellable to surrender his title.”
But that statute had no provision as to the validity of such deeds as against creditors like the statute here. It concerned solely purchasers and mortgagees for a valuable consideration. It said nothing on the subject of notice as to them. The English courts .held that, though the statute provided that an unregistered deed should be void as against any subsequent purchaser or mortgagee for a valuable consideration, it was not void as against such purchaser or mortgagee with notice, of its existence. In effect, they construe the statute to mean this, though they did not put it that way. Thus construed, tne statute was exactly the same as that part of the statute not involved here, which protects a purchaser for a valuable consideration without notice. In enacting that part of the statute the Legislature of Ken
“A deed of conveyance, acknowledged or witnessed, and not deposited to be recorded or improperly placed on record, has I conceive in the contemporaneous construction of the act not been deemed valid against a fieri facias. How, then, can an instrument of less validity, of less force, either in law or equity, an executory contract only, be effected? It may be said that the first passes the legal estate, and is executed while the latter passes an equity only. To this it may be replied that the first described instrument passes the equity also and more; and the major will include the minor. If an instrument passing the equity only can be enforced, I see no reason why an unrecorded deed may not be. valid against a sale under a fieri facias, not only in equity, but also at law.”
He concluded with this argument ab inconvenienti, to wit:
“I cannot conceive of a more facile mode of placing land beyond the reach of creditors than that of placing the legal estate in the hands of one and the equity in another. The equity holder is safe for his estate cannot be touched, nor .will a court of chancery according to the decision of this court in the ease of Buford v. Bxxford, 1 Bibb, 305, compel him to bring his title into reach; and he runs no risk from the debts of his vendor, for, if his estate is sold, it is only to give notice to the purchaser in time, and make him surrender it. Thus both are safe, while one of them enjoys the estate and the creditors of both remain unpaid.”
In the case of Graham v. Samuel, Judge Nicholas, who delivered the opinion therein, referred to the dictum in Campbell v. Moseby heretofore quoted. He responded to it thus:
“No authority is cited in support of this dictum, and it will be found on examination not to have been called for by the case then before the court. It would be difficult to reconcile the opinion thus intimated, or the reasoning adduced in its support with the case of Helm v. Logan’s Heirs, 4 Bibb, 78, where the point was directly presented for adjudication, and it was expressly decided that neither the creditor‘himself nor a purchaser under his execution were affected by notice of an unrecorded deed. ' It is also there said that nothing could be more absurd than the recognition of a contrary principle.”
■ As to the supposed analogy with the English decisions under the English statute, lie argued that all that it required was that the creditor should have become such subsequent to the execution of the deed*
“The principle upon which the English decisions on this subject are based, is that the statute was made for the protection of innocent bona lide purchasers without notice, and that as a subsequent purchaser with notice of an unrecorded deed is not an innocent, but a mala fide, purchaser, he is not entitled to the protection of the statute. The principle is just in itself, and of undoubted equitable parentage. But it is far from warranting the taking from creditors indiscriminately the protection afforded them by the statute against unrecorded deeds, because they may have notice of such deeds at the time they come to enforce their demands, without reference to the time when the debt was contracted. On the contrary, if the principle be of pure equitable origin am} indubitable justness that we admit it to be, it must refluiré that the creditor should have had notice at the time the debt was contracted, when according to the intendment dedueible from the whole scoixi and policy of the statute he was liable to be prejudiced by the nonrecording of the deed. Notice at any subsequent period could with no show of equity or propriety be considered so far to affect his conscience as to deprive him of the protection against a secret and unrecorded conveyance which is extended to him by the very letter of the act. We should make the law ‘palter’ with him and cheat him with the mere ‘word of promise’ were we to determine that, after having declared all unrecorded deeds should be void as against him, when he came to demand the benefit of this declaration, its whole fruition should be snatched from him by the production of notice of the unrecorded instrument. It would be mere mockery to hold out the idea of protection to creditors against secret conveyances, and yet, when they came to enforce their demands, to permit the secret purchaser to deprive them of protection by the exhibition of an unrecorded deed.”
Though in response to the argument from analogy it is said that all that it required was that the statute should be limited to subsequent creditors without notice, and in that case the contesting creditor was such a creditor, it was not held that the statute should be so limited. Helm v. Logan’s Heirs, where, as we have seen, it was nqt so limited, was approved without qualification. And it may be that the wide scope which these two cases gave the statute was not without some influence in causing the court in the cases subsequent thereto to go to the opposite extreme. A hint, however, of this limitation of the statute, was thus given in Graham v. Samuel, but it was never taken. As we shall see, it was not because thereof that the court finally made such limitation.
In Morton v. Robards the controversy was between an execution purchaser and the holder of a deed outstanding at the time of the levy of the execution, though not recorded. The purchaser was a third party, but possibly acted as agent for the execution creditor in the purchase. It does not appear when the execution debt was created, but it is most likely that it was created before the execution of the deed. The deed was made in execution of a title bond executed over 36 years before. It was held that the holder of the unrecorded title deed had the prior right. This holding was not based on the fact that the creditor in the execution was an antecedent creditor. As stated, it does not clearly appear that he was. It is clear, however, from a consideration of the reasoning upon -which the decision was based that the fact that the creditor was a subsequent creditor, though without notice, would have made no difference in the decision. In
“A bond for a conveyance is not good as a-legal title, yet valid as an equity. If it were tbe object of the Legislature to forfeit the equity, as well /as tbe legal title for the benefit of purchasers and creditors, it could not well have escaped their observation that it was necessary to provide for tbe recording of secret bonds for a title and for tbe forfeiture of tbe equity of the bolder in case of a failure, yet no provision is made with respect to bonds. We cannot conceive — whether we look at the language of tbe act or tbe evil existing and intended to be remedied — 'that it was tbe object of tbe Legislature to affect tbe equity of tbe bolder in tbe one case or tbe other. It would be strange to contend that tbe equity of tbe bolder. of a bond is good, yet if be attempted to consummate bis legal title, but failed, that be forfeits that equity, which be unquestionably would have held under Ms bond, in case no attempt bad been made. We therefore conclude- that tbe statute only takes from the'bolder of an unrecorded deed bis legal priority or annuls bis legal advantage over tbe general creditor, but leaves him to contest with him bis prior equity.”
Possibly the argument was not sound because by the execution of the deed the title bond became functus officio. Thereafter the rights of the hQlder of the deed were measured by his deed. He had such rights as it.conveyed and none other, the avoidance of it by the statute not reviving the title bond. I am not concerned, however, to determine whether the argument is sound. I simply note that Judge Ewing seemed to think that it was, and -was affected thereby. But had there been no previous title bond Judge Ewing would have held exactly as he did. The decision was not placed on this ground. It was held that the decisions in Helm v. Logan’s Heirs and Graham v. Samuel were erroneous, not in giving too wide a scope to the statute, but in recognizing that in any contingency the purchaser in those cases would have had the better right, and that the dictum in Campbell v. Moseby, heretofore quoted, stated the true doctrine.
Judge Ewing said:
“There has been some oscillation in tbe decisions of tMs court on tbe question involved in tbe record.”
He thereby indicated that he thought the question involved therein had been involved in the previous decisions. He then noted what had been decided in Helm v. Logan’s Heirs and Graham v. Samuel on the one hand, and that, on the other hand, in Campbell v. Moseby, the court “had broadly asserted the opinion that the equity of the pur
“Upon a full review of these decisions and comparison of them with the English decisions upon their registration acts, we are inclined to the opinion expressed in Campbell v. Moseby.”
The way in which he made out that the dictum in Campbell v. Moseby was sound was substantially the way in which it had been upheld therein. The holder of the unrecorded deed had a specific equity. The avoidance of the deed did not affect this equity, as this equity was not within the statute. If, then, the purchaser at execution sale had notice of it at the time he purchased, the right thereby acquired was subordinate thereto-, just as the purchasers’ right in Campbell v. Moseby was subordinate to thé outstanding equity of the holder of the title bond in existence at the time of the levy of the execution, of which he had notice when he purchased. He said that it seemed tov have been the intention of the Legislature, not only, to limit the statute to legal conveyances only, but “to leave untouched the equity of the parties.” He said further:
“The conveyance or legal title may not be good, and yet the equity of the holder he unimpeachable.”
And still further:
“And as a bond is evidence of a specific equity so a deed, though it is made to lose its legal priority by hot 'being placed on the record .in time, yet is evidence of a purchase for a valuable consideration, therefore evidence of an equity of as high a grade as a bond.”
And still further:
“If the prior incumbrancer is merely deprived of his legal advantage, and' thrown back upon his equity, the prior equity must prevail, unless the junior-equity be united with the legal title acquired without notice of the prior equity. By well-established principles in a contest between mere equities the senior equity must prevail over the junior. But the junior equity coupled with the legal title fairly acquired without notice will prevail over the senior equity. And this is the only advantage which the general creditor may acquire under the recording statutes; namely, the privilege of arming himself with' the legal title and with all the legal as well as the equitable advantages, which - it may afford him in a contest with the prior equity. The general creditor has no right to the land sold or any specific lien upon it at the time when his debt is contracted. He has neither jus in re, nor ad rein, nor any claim in law or equity to the land attempted to be sold under execution. He has no claim' to the thing until he has placed his execution in the hands of an officer, and perhaps not until he has levied it And this lien is generally only a lion operating against the vendor and execution creditor, and not an outstanding senior equity in the hands of a stranger. So, if an attachment in chancery be levied on the property of a debtor, it will not overreach an outstanding equity in the hands of a stranger. Besides, the levy of an execution creates a mere lien, which may never be enforced; and the legal title to the property is never completed until a sale and conveyance. And in this case as all others the legal title being acquired with notice of a pre-existent equity will’ be made to yield to the prior equity in a court of chancery.” ■
And finally he said:
“Though our. statute postpones, or annuls the legal title acquired by an un-, recorded deed in favor of creditors, it gives to the creditors’ demands no high*983 er dignity or greater efficacy than they had before. It neither gives, nor was intended to give, to the creditor any lien or equity upon the property of the debtor which he had not by the terms of his contract. The statute could not, therefore, in the language of the court in the case of Graham v. Samuel, be said ‘to palter’ with him, and to ‘cheat him with mere word of promise.’ No promise is made to him that he shall have a lien, equitable or legal, on the specific property embraced in an unrecorded deed. Or that he shall have the privilege of making his debt out of the land thus conditional. This would be to promise him, what he had not secured by his own contract, and what the Legislature would, perhaps, have no constitutional power to afford. But that the statute has promised him to sweep away the legal obstruction which the holder of an unrecorded deed has placed in his way, and to enable him to gain the vantage ground which the legal title would afford him in a contest with the prior incumbrancer. And this, promise is redeemed by the construction which we have given to the act.”
I have quoted thus fully from Judge Ewing’s opinion in order that the exact basis of his position may be grasped. To repeat, it is that the holder of an unrecorded instrument of writing of the character called for by the statute has a specific equity apart from the writing, which is unaffected by the statute because it is limited to the writing. This equity is just as much unaffected by the statute as the outstanding equity of the holder of a title bond not covered by the statute who has nothing that is affected by the statute. If, then, the purchaser at execution sale has notice of this specific equity at the time of his purchase, he takes subject thereto, just as much as he does to the outstanding equity of the holder of the title bond.
The fallacy of this argument lies in the position that the holder of an unrecorded instrument of writing of the character called for by the statute has “a specific equity” apart from the instrument. As before, I submit that he had nothing apart from the writing. The writing represents all the right he has. This is so, even if it has been executed in performance of a previous executory contract, which by its execution comes to a final end. This specific equity arose out of the ashes of the unrecorded instrument of writing. It was a figment of Judge Owsley’s brain, accepted by Judge Ewing. It had no objective existence like that of the holder of a title bond which has been unexecuted. The statement of Judge Ewing as to what the statute had not and had promised the creditor is correct, save in so far as he stated that it promised to “enable him to gain the vantage ground which the legal title would afford him in a contest with a prior incumbrancer.”' If .a subsequent creditor without notice, he needed no such vantagei ground. And, if an antecedent creditor, he had such vantage ground under the other part of the statute relating to a purchaser for a' valuable consideration without notice. In thus creating such an equity and giving such effect to it he made the part relating to creditors of no effect. If his position was correct, in no event would the instrument of writing be void against creditors as such. It would be void against purchasers at sales to subject the property to their debts only, and against them only in case they purchased without notice, and this it would be under the branch of the statute relating to purchasers, without notice.
In Righter v. Forrester the controversy was between an execution purchaser and the holder of a mortgage unrecorded at the time of the levy of the execution, but recorded before the sale. It does not appear whether the creditor in the execution was an antecedent or subsequent creditor. It was just as likely that he was one as the other. Nor does it clearly appear whether the purchaser was the creditor or a stranger, but he probably was the latter. It was held that the mortgagee had the prior right, though the execution purchaser had no actual notice of the mortgage at the time of his purchase. Constructive notice from its then being of record was held sufficient to charge him. Judge Hardin said that the sale and conveyance under the execution operated to transfer to the purchaser “such equitable rights as the creditors acquired by virtue of the issual and levy of their execution.” “But,” he continued, “whether the rights so acquired were superior or subordinate to that of the mortgagee would seem to depend on the legal effect of the mortgage before it was recorded. * * * If, although it was inoperative as á legal conveyance of the title, it was effective to invest the mortgagees with an equity in the land, though liable to be defeated by a prior equity, or even a junior equity when united with the legal title, acquired without notice, as its creation was prior in date to the delivery to the sheriff of the execution under
We find at work here again the idea of a “specific equity,” first broached in Campbell v. Moseby, and emphasized in Morton v. Robards, which had no objective existence as in case of that of the holders of the title bonds in Campbell v. Moseby and Halley v. Oldham, but had a subjective existence only; i. e., in the minds of the judges who gave expression to it. Judge Williams dissented. He drew a distinction between an unrecorded deed and an unrecorded mortgage, in that the latter only created a lien, and did not pass the legal title, and thought the case was governed by Helm v. Logan’s Heirs. He considered the decisions in all the deed cases sound, but claimed that they rested on “different principles.” There is nothing in this difference between a mortgage and a deed to 'lead to different decisions in such cases. But he was on the right track in putting the question:
“Is this statute requiring mortgages to be recorded before they shall affect creditors to have any effect?”
And in expressing himself thus:
“The execution creditor by his fi. fa. and levy, before the recording of the mortgage, gets a prior lien which the law secures to him, and, of course, must give him the means to effectuate and make it available, else it still amounts to nothing, but becomes a ‘mere thing of delusion.’ How is his lien to be effectuated but by carrying out the mandates of the execution by sale? If the creditor has the right to sell, some one must-have the right to purchase, for there is no such anomaly and absurdity in the law as giving the right of sale to the creditor and at the same time prohibiting the world from purchasing. The right of sale to the execution creditor carries to the world the right of purchasing. If the conscience of the execution creditor remains untainted by the subsequent recording of the mortgage and he still has the right of sale, the purchaser under his execution remains untouched and has .the right to purchase, else, as said in 4 Bibb, there would be the absurdity of sale in the execution creditor, but the right of purchase in no one, not even himself; for the world would not purchase, and, if he did, he loses his right as a prior lien execution creditor and ’becomes a purchaser with notice. His execution is satisfied and he gets nothing.”
After this case all attempt to reason the matter out and determine where the truth lay ceased. In the remaining two cases of’ Low v. Blincoe and Baldwin v. Crow the sole effort was to extract from the earlier cases what should be accepted as presenting the then law on the subject. The controversy in Low v. Blincoe was between an execution purchaser and the holder of a deed unrecorded at the time of the levy of the execution, but recorded at the time of the sale. The execution purchaser had actual notice of the deed at the time of the sale, and was the creditor in the execution. It does not appear whether he was an antecedent or subsequent creditor, but it is not likely that he was the former. It was held that the holder of the deed had the better right. Judge Lindsay said:
“The question thus raised has frequently been before this court for consideration, and the decisions thereon are singularly inconsistent with each other.”
He referred to Helm v. Logan’s Heirs and Graham v. Samuel as “the earlier cases,” and stated that they had held “that a deed not
“Reconciling as far as practicable the various reported cases, we deduce from them the following views:
“(1) A purchaser at an execution sale who has no notice of a title bond or deed that has not been recorded within the prescribed time will be protected in his title even in a court of equity.
“(2) A purchaser with notice will also be protected in case the execution creditor acts in good faith and without notice. Under such circumstances, the creditor has the right to sell, and the purchaser necessarily tafees all the title that the creditor can require the sheriff to sell.
“(3) That notice to the purchaser after his purchase does not affect him. He is by his purchase invested with the inchoate legal title which he has the absolute legal right to perfect by procuring a conveyance from the sheriff, and this right does not depend upon his being a stranger to the execution. In such, cases the execution creditor is as much entitled to protection as a stranger.
“(4) That notice to the creditor at any time before he may purchase affects his conscience and he may be compelled in obedience to the equity evidenced by the bond or unrecorded deed to transfer the legal title to the party against whom he ought not in'good conscience to hold it”
—citing in support of the last proposition Halley v. Oldham and Righter v. Forrester.
As to these views I would say the law as thus presented is purely artificial. Four distinct rules are presented with no principle at the back of them necessitating their existence. Title bonds and deeds are classed together when the principles applicable to them are distinct. Title bonds are not included in the statute, and hence are not affected by it. The law as to them, therefore, is determined by general principles applicable to such cases. Deeds are included in it. Hence the law as to them is to be found in the true meaning of the statute. Then, on principle, there is no room for any difference between the case where the execution creditor is the purchaser and the one where a stranger or third party is.
In Baldwin v. Crow the controversy was between the execution creditor and the holder of an unrecorded mortgage. The sheriff in whose hands the execution had been placed had levied on the mortgaged
“If the inquiry whether, hy that section, creditors generally were intended, to be affected by notice of such conveyances and transfers of property to debtors in the same way and to the same extent as purchasers was an original one, there would, looking alone to the language used, be some difficulty in reaching a satisfactory conclusion. But there is no reason whatever that a creditor whose debt has been created prior to the conveyance, as was that of appellee, Crow, and who has not been defrauded or injured, should occupy a better attitude than a purchaser with notice.”
But he did not rest his decision on that ground. He surveyed the earlier decision, and then said:
“The radical and irreconcilable difference between the two eases of„• Helm v. Bogan’s Heirs and Morton v. Robards is that in the former it was decided that the unrecorded conveyance was as to a creditor of the grantor or mortgagor to be held fraudulent and void, whereas in the latter the principle was announced that, though such an instrument did not operate to pass the legal title, it was evidence of an equity paramount to that acquired by a levy or sale with notice to the creditor and purchaser. In every case decided by this court since the opinion was rendered in Morton v. Robards where the question arose * * * the distinction taken in that case between the legal character and effect of an unrecorded conveyance and the equity of the holder thereof has been recognized and applied.” '
As to the statute itself he thus expressed himself:
“The clear and necessary implication from the language * * * is that deeds of trust and mortgages of real and personal estate, though unrecorded, are not void, but valid against purchasers at sale under execution as well as private sale when notice has been given. And, that being the case, it would seem to be the intention that creditors should be likewise though indirectly affected by notice; for their attempt to collect debt by execution would be generally abortive, if notice to those about to purchase could prevent a sale: But, be that as it may, by the uniform ruling of this court for many years, creditors and purchasers have in that respect been placed on the same footing.”
So it was and in the way that I have indicated that the Court of Appeals practically eliminated the words “or against creditors” from the statute. The elimination began with the dictum of Campbell v. Moseby, and was established by the four cases of Morton v. Robards, Righter v. Forrester, Low v. Blincoe, and Baldwin v. Crow. The conflict which resulted in this elimination was between these cases and that dictum on the one hand and the earlier cases of Helm v. Logan’s Heirs and Graham v. Samuel on the other. In it there was no question as to whether the statute included all creditors — i. e., antecedent and subsequent creditors with notice — as well as subsequent creditors without notice or was limited to the latter. The sole question was whether it included all creditors or none. Helm v. Logan’s Heirs and Graham v. Samuel presupposed that it included all. The dictum in
Such then was the situation when the case of Wicks Bros. v. McConnell arose. It cannot be said that there was then any confusion as to what the law on the subject was or any basis therefor. The court had simply been diverted from the path of truth, and seemingly was hot conscious of the fact that it was not in that path. And it is clear that under the law as then declared it would have to be held that the mortgage in question herein would not have been invalid as against the attachments of the creditors on whose behalf the ground of attack now under consideration is urged. The confusion that now exists to which reference Has been made has grown out of the decisions since Wicks Bros. v. McConnell. In that case the controversy related to certain machinery. It was between a creditor who had brought suit and obtained an attachment and the holder of an unrecorded mortgage in existence at the time of the creation of the debt in suit and the issuance and levy of the attachment. The creditor, therefore, was a subsequent creditor. He became so without notice. And he had through his attachment a hold or lien on the machinery. The holder of the mortgage brought suit to enforce his mortgage, and the two suits were consolidated and disposed of together. It was held that the attaching creditor had the better right. This decision was in direct conflict with the cases of Morton v. Robards, Righter v. Forrester, Low v. Blincoe, and Baldwin v. Crow; for, according to them, had no controversy arisen between the attaching creditor and the holder of the unrecorded mortgage, and the property been adjudged sold in furtherance of the attachment, the purchaser at the sale, at least if he were the creditor, would have acquired no title as against the mortgage if he purchased with notice of its existence. This could have been the case only on the ground that by the levy of the attachment the creditor acquired no absolute right as against the holder of the mortgage. Judge Durelle, who delivered the opinion, recognized the conflict that existed between the previous decisions. He said that the statute had “been frequently construed by this court, and as said by Judge Lindsay in Low v. Blincoe, 10 Bush (Ky.) 334, the decisions therein are singularly inconsistent.” He did not so express himself, but it is clear that he thought that Morton v. Robards, Righter v. Forrester, Low v. Blincoe, and Baldwin v. Crow were wrong, in so ffir as they subordinated a subsequent creditor without notice who had acquired a hold or lien on the property or a purchaser at a sale in furtherance of -such hold or lien to the holder of an instrument in writing of the kind covered by the statute not lodged for record in any contingency. It would seem that he accounted for those decisions, at least for Baldwin v. Crow, by the fact that the creditors therein were antecedent creditors. He said:
“Without reviewing those cases, which has been done in the case last referred to (i. e., Low v. Blincoe) and in Baldwin v. Crow, 80 Ky. 680 [7 S. W.*989 146], it may be said that in the ease last named, which is the latest authoritative utterance of this court upon the subject, a distinction was clearly-recognized between the position of an execution or attachment creditor without notice of an unrecorded mortgage lien whose debt was created antecedent to the creation of the lien and the position of one whose debt was created subsequently.”
And again:
“It may be said that in that opinion is to be found the first intimation of such a distinction; but, on the other hand, the distinction is there clearly-indicated, and is in our judgment right and equitable. The holder of an antecedent debt is in no wise defrauded by not being permitted to subject to the payment of his debt property subsequently acquired by his debtor which is subject to a lien.”
It is not true that the first intimation of the distinction to which reference is made is to be found in Baldwin v. Crow. The first hint of it is to be found in Graham v. Samuel. It is found there in that Judge Nicholas noted the fact that the creditor there was a subsequent creditor without notice; the intimation in Baldwin v. Crow arising from Judge Lewis noting the fact that the creditor there was an antecedent one. But in neither case was the fact noted made the basis of the decision. In the one case the reference was made in answer to the argument from analogy and in the other as a portion of a reason why the creditor in that case should not be favored.. As to the other decisions he said:
“Moreover, in none of the cases to which we have been referred in which the holder of a pocket lien has been held to have a claim superior to an execution or attachment creditor does it appear that the latter’s debt was created subsequent to the creation of the lien.”
That is true. But there is no reason to believe that, had it appeared, th fact would have made any difference in the result. The doctrine of specific equity which was at the bottom of those cases would have subordinated the right of the subsequent creditor without notice to that of the holder of the pocket lien as much so as the right of an antecedent one.
None of the cases giving such holder superiority therefore were really distinguishable from the case in hand on the basis on which the attempt to distinguish them was made. The thing to do was not to distinguish them, but to overrule them as a departure from the path of truth. But it was not appreciated wherein the departure had been made, and hence the attempt to distinguish them.
The reasoning upon which the decision of the case was based was thus put:
“If this be not the construction, then the language of the statute ‘or against creditors’ is entirely nugatory. There must be some class of creditors to which this language applies. The law gives to the execution or attachment creditor a lien. The law also provides that a mortgage shall not affect him, except from its recording, and equity and good conscience do not require the court to disregard the will of the Legislature, and inflict upon creditors whose equity is superior to that of the mortgagee the evils which the statute was designed to restrain.”
“On the one hand, the unrecorded lien is upheld as against creditors who cannot be presumed to have given credit upon the faith of the property held in lien. On the other hand, creditors who may be presumed on such faith to have given credit are protected as-against the secret lien in the rights which they secure by their diligence in the levy of their execution or attachment.”
It was in this case, then, that it was clearly and definitely laid down for the first time that the creditors had in view by the statute were subsequent creditors without notice. In no. prior case had this l?een done. It so happened in this case that the creditor was not merely a subsequent creditor without notice, but one who had secured a hold or lien by his own activity by the issuance and levy of an attachment. Possibly in view of this it cannot be said that the case is an authority against the proposition that such a creditor who has not thus or in some way by his own activity acquired a hold or lien is not had in view by the statute, or, putting it affirmatively, in support of the proposition that the only creditor which the statute has in view is such a creditor who has by his own activity acquired a hold or lien. But the court thought of no other creditor than such creditor as being included by the statute. In stating the doctrine of such cases, it limited the protection of the statute to such creditors as have secured rights “by their diligence in the levy of their execution or attachment.” Of course, creditors who had secured rights by their diligence in bringing suit in equity on a return of nulla bona to subject the property to their debts would also be included. And such should be accepted as the position of the court until held otherwise in a case involving the question. In each of the cases thus far considered, where the creditor’s right has been upheld, to wit, Helm v. Logan’s Heirs, Graham v. Samuel, and Wicks Bros. v. McConnell, he had by his own activity acquired a hold or’ lien — in Helm v. Logan’s Heirs by the issuance and levy of an execution; in Graham v. Samuel by a suit in equity on a return of nulla bona; and in Wicks Bros. v. McConnell by issuance and levy of an attachment. In each of the cases where the creditor’s right has been denied, it was denied notwithstanding he had by hi's own activity acquired a hold or lien by the issuance and levy of ah attachment or execution. It would be going to an extreme, with this history behind it, for the court now to hold that the creditor’s right should be upheld, though he has obtained no hold or lien in any of these three ways. And the statute itself is not without an indication that such is its true construction. It includes two classes of persons —purchasers for a valuable consideration without notice and creditors. Though it is not so expressed, the purchasers included are subsequent purchasers. It is expressly required that they be without notice. A purchaser has a hold on the property purchased, and he has acquired it by his own activity. In connection with this class of persons then we find the four qualifications, subsequent, without notice, having a hold on the property, and that acquired by their own activity. Placed in -the same category with them is another class of persons, to wit, creditors. Applying the maxim, “Noscitur a sociis,” is it not to be
The confusion that exists as to just what is to be taken as the position of the Court of Appeals on the question under consideration heretofore referred to has arisen since the case of Wicks Bros. v. McConnell, and that mainly from a dictum of that court in the last case that has been before it involving the statute, to wit, the case of Swafford v. Asher (Ky.) 105 S. W. 164. Before dealing with it, reference should be made to certain cases intervening between it and Wicks Bros. v. McConnell, to wit: Clift v. Williams, 105 Ky. 559, 49 S. W. 328, 51 S. W. 821; Cin. Leaf Tob. Wh. Co. v. Combs, 109 Ky. 21, 58 S. W. 420; Bowles v. Jones, 123 Ky. 395, 96 S. W. 1121. In Clift v. Williams the creditors had not acquired a hold or lien on the property by their own activity, and it was held that their rights were subordinate to the rights of the holder of the instrument of writing, not lodged for record. But the basis of the decision was not that such hold had not been acquired. It was that the creditors were antecedent creditors. But no inference can be drawn therefrom that, had the creditors been subsequent creditors without notice, the decision would have been otherwise. The debtor hadl died, and in a suit to settle his estate the general creditors relied on the statute to defeat an unrecorded lien asserted by the holder thereof as against a portion of the property left by the decedent. In the decision the doctrine as laid down by Judge Durelle in Wicks (Bros. v. McConnell was quoted with approval. In Cincinnati Leaf Tobacco Warehouse Co. v. Combs the debtor had made an assignment for the benefit of creditors, and the controversy was between the holder of an unrecorded mortgage and the assignee. It did not apjiear whether the creditors or any of them were antecedent or subsequent creditors. It was held that the holder of the mortgage took the prior right. The basis of the decision was that, as the mortgage was enforceable against the assignor, it was enforceable against the assignee. Judge Hobson said:
“Under the rule laid down in these cases any equity which may be enforced against the assignor is equally available against the assignee.”
And again:
“Appellant, therefore, stands on the plane of a mortgagee holding an unrecorded mortgage, and as against the assignee for the benefit of creditors its older equity must prevail.”
“But as the assignee for tiie benefit of tlie creditors, being neither a purchaser for a valuable consideration, nor a creditor, is not protected by'the statute.”
• According to these expressions, therefore, an assignee for the benefit of creditors takes subject to an unrecorded instrument of writing of the character called for by the statute, and cannot in any case claim that it is invalid, because he is neither a purchaser for value nor a creditor, and hence is not included by the statute. He cannot do so, even though certain of the general creditors may be subsequent creditors without notice and on their behalf. It .cannot be that it was thought that in such a case such creditors on their own behalf could claim the benefit of the statute. .If so, they could only do so by repudiating any benefit under'the assignment which places them on an equality with the other creditors. There is not the slightest hint that they had any such right., It does not appear that there were any such creditors in the case. It is likely that they were all antecedent creditors. I gather this from this statement immediately following that last quoted:
“Even as to creditors, tbe rule is well settled in this state that the oldest equity prevails, and that an unrecorded mortgage will have preference over an attachment or an execution lien of at least antecedent creditors if notice is given before a sale of the property.”
• In support thereof he cited the cases of Baldwin v. Crow, Wicks Bros, v. McConnell, and Clift v. Williams. From the reference to antecedent creditors therein it is likely that the creditors were antecedent. The leaning, however, of the case is against the position that a subsequent creditor without notice who has acquired no hold or lien by his own activity has the better right as against an unrecorded instrument of writing. In Bowles v. Jones the controversy related to a crop of tobacco, and was between subsequent creditors without notice who had sued and obtained attachments which had been levied on the tobacco and the holder of an unrecorded mortgage. It was held that the credb’ itors had the better right. This makes the fourth and last case where the creditor has been given the better right; the other three being Helm v. Logan’s Heirs, Graham v. Samuel, and Wicks Bros. v. McConnell. In each one of the'four the creditor had acquired by his own activity a hold or lien,.and in all but Helm v. Logan’s Heirs he was certainly a subsequent creditor without notice. And in no case has it ever been held that a subsequent creditor without notice who lmd not by his own activity acquired a hold or lien had the better right.. But in the dictum in Swafford v. Asher, heretofore referred to, there is an intimation, at least, that such a creditor who had not by his own activity acquired a hold or lien might have a better right. The controversy related to certain teams, and was between the personal representative of the debtor and the holder of an unrecorded mortgage. It was like Clift v. Williams, in that with one exception the creditors of the decedent were antecedent creditors, and he, though a subsequent creditor, was such with notice, but differed therefrom,
“There is no doubt that, as between Swafford and Asher, the latter had a lien upon the teams for the advances made, and we perceive no reason why the creditors, none of whose debts are shown to have been subsequent to the mortgage, should stand in a better attitude than the principal, Swafford, would have done if he were alive.”
He continued in these words:
' “As the mortgage was not recorded., it would, of course, not be valid as to creditors whose debts were subsequently created; but as to those whose debts were created prior .to the purchase of the teams and the mortgage upon them the lien is valid, although not recorded as required by section 496 of the Kentucky Statutes of 1903, and, as said before, there is nothing to show that any debt of the estate was created after the purchase of the teams, except that of appellant who had actual notice.”
It is in the intimation that, if there had been any subsequent creditors of decedent without notice, they would have had the better right, 'that Judge Barker went beyond the requirements of the case, and pronounced a dictum, and), in view of the presentation I have made, I cannot accept that the Court of Appeals will ever hold in a case involving the question in accordance with this dictum.
The question here involved has frequently been before the appropriate federal courts. It first arose before me in the case of In re Sewell (D. C.) 111 Fed. 791. I there held that the holder of an unrecorded mortgage had the better right as against the trustee in bankruptcy because none of the creditors represented by him had by their own activity acquired a hold on the property covered by the mortgage. It then arose before Judge Evans in the case of In re Ducker (D. C.) 133 Fed. 771, and he took the opposite position. His judgment on appeal was affirmed, and it was held .that I was wrong. In re Ducker, 134 Fed. 43, 67 C. C. A. 117. Subsequently a case came before the appellate court from Ohio whose statute is substantially similar to the Kentucky statute. That court adhered to its opinion in the Ducker Case. Dolle v. Cassell, 135 Fed. 52, 67 C. C. A. 526. This case was carried to the Supreme Court, and that court reversed the appellate court. York v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782. Subsequently an-’ other case arose before Judge Evans. The York v. Cassell Case was urged upon him as overthrowing the Ducker Case. ■ He did not think so, on the ground that the Ohio statute differed from the Kentucky statute. In re Doran (D. C.) 148 Fed. 327. The appellate court on appeal reversed his judgment. In re Doran, 154 Fed. 467, 83 C. C. A. 265. Yet another case arose before Ju<%e Evans, and he adhered to his position in the Doran Case. The judgment in this case was reversed by the appellate court. Crucible Steel Co. v. Holt, 174 Fed. 127, 98 C. C. A. 101. The judgment of the appellate court was carried to the Supreme Court, and affirmed’ by. it. Holt v. Crucible Steel. Co. 224 U. S. 262, 32 Sup. Ct. 414, 56 L. Ed. 756. In this case that of Swafford v. Asher and an earlier case, not heretofore referred to and ’ not'.oí
“The court below seems .to have so held, and some of the language of the judges who delivered opinions in those cases seem to favor, that construction.”
And he stated the position of the court thus:
“We think we ought not to 'overrule our decision without a more positive demonstration that the law of Kentucky is to the contrary of what we there-(i. e., in -the Doran Case) held.”
In the Supreme Court Judge Van Deventer said:
“What was said in Wicks Bros. v. McConneil should be accepted as reflecting the- true construction of section 496, in the absence of some more x>ositive and direct ruling upon the subject by the Court of Appeals of the state. Such was -the view of the Circuit Court of Appeals, and we are át least unable to say that it was wrong.”
It is largely because of this uncertainty bn the part of these two courts as to just what the law of- this state in this particular is that I have devoted so -much time and space to the matter. The result is that I feel driven to the conclusion that the only creditors in- . eluded by the statute are such subsequent creditors without notice as have acquired by their own activity a hold or lien on the property. The decisions of the appellate court for this circuit and the Supreme Court are sufficient in themselves to require me to so decide. But I • would so decide if these decisions were out of the way. I cannot conceive that it is possible that the Court of Appeals of Kentucky in view of its previous decisions under the statute, an account of which has • been fully set forth herein, will ever hold otherwise.
This brings me to the other question, whether- the creditors included by the statute as already determined must acquire a hold or lien- before the instrument of writing involved is recorded. Is it sufficient that they acquire such hold or lien after it is recorded? I think that it follows from the fact that they must acquire such hold or lien that they must acquire it before the instrument of writing is recorded, The statute provides that the instrument of writing shall be “invalid” until it is recorded; i. e., up to its being recoi'ded, or as late as it is recorded. This implies that, as soon as it is recorded, it is valid. It is ■ invalid, therefore, only against those who become such creditors as the statute calls for before the instrument is recorded. As to those who so become after it is recorded it is valid. In this an additional-reason is -to be found for the position that the statute includes only such subsequent creditors without notice as have acquired a hold or lien. The statute seems to contemplate that the creditors must be in a position to question the validity of- the writing before it is recorded, and that they cannot do so unless .they have, acquired a hold or lien. ' It is contended by the trustee that the decision'in Graham v. Samuel' is an authority against this. In'giving the-facts of that case I noted''
“In that ease it was field that tbe statute declaring tbe mortgage absolutely void as against the creditors of the mortgagee and as against subsequent purchasers of the mortgagee in good faith, unless the mortgage or a true copy thereof shall be deposited forthwith as directed in the act, did not make the mortgage void as between the parties thereto, but only avoided the instrument as to those creditors who, between the time of the execution of the mortgage and the filing thereof, had taken steps to fasten upon the property for the payment of their debts. As against such as had in the interim secured liens by attachment, execution or otherwise, the mortgage would be void. When filed with the recorder, the instrument became valid as against all persons except those whose rights have attached upon the property before the recording of the instrument. Judge Spalding, delivering the opinion, gives weight to mere delay in the filing of the mortgage only as important in determining the rights of the parties where it has been so great as to taint the transaction with fraud.”
He said further
“Applying the law thus settled to the finding of facts in the present case, we find a mortgage which as against the contesting creditors had no force and effect until filed with the proper officer. It was as ineffectual to create a lien as against them as a mere agreement for a mortgage would have been, but, where properly executed and duly filed, it became operative as against creditors who had not, before its filing, fastened some valid lien or right upon the property. It could only be avoided after such filing by proof of fraud in the making or withholding it from record.”
The fact that by the construction placed by the Ohio Supreme Court on its statute its benefits are not limited to subsequent creditors without notice, but belong to creditors generally, in this particular, therefore, differing from the Kentucky statute, does not differentiate the Shirley Case and those which it follows from this case as to the matter now.in hand. Both statutes as construed are limited to creditors^-in the one case generally and in the other subsequent without notice — who have acquired a hold or lien; i. e. fastened on the property. These cases arising under the Ohio statute decide that this fastening must take place before the instrument is recorded. This is .persuasive that it must so take place under the Kentucky statute. I think, then, that the position of the Court of Appeals of Kentucky as to the meaning of this portion of the statute must now be taken to be that it applies only to subsequent creditors without notice who by their own activity have acquired a hold or lien on the property covered • by the instrument of writing before it is lodged for record, and that, where such a creditor has acquired such a hold or lien, notice to the purchaser at a sale in furtherance thereof, whoever he may be, of the existence of the writing before his purchase, will not affect his right thereby acquired.. This ground of attack on the mortgage, therefore, is not well taken.
The deed was that day signed by the claimant, and sent to Memphis for the signature of her husband, who signed and acknowledged it on January 22, 1909, and returned at once. Things were held thus in abeyance.until shortly before February 16, 1909, because of the neglect of the Moerlein Brewing Company to comply with its agreement. Upon its still neglecting, if not actually refusing, to do' so, the bankrupt applied to Wm. Reidlin, hereinbefore mentioned, president ‘of the Bavarian Brewing Company, a rival concern, for a loan of the $4,500 on the same terms, the bankrupt thereafter to become its customer and drop the Moerlein Brewing Company. He agreed to make the loan. Thereupon on February 15, 1909, the claimant acknowledged the deed to the bankrupt before Glenn, and that day or the next morning delivered it to him. It was lodged for record on the morning of February 16, 1909, and at the same time the bankrupt and his wife executed the mortgage to Reidlin to indemnify him as surety of the bankrupt to the Farmers’. & Traders’ National Bank on the loan of $4,500, out of which he paid the claimant the cash payment of $4,000, which mortgage was also lodged for record at that time. That same day in the afternoon the bankrupt executed his five notes to the claimant for $6,800, the balance of the purchase price, and he and his wife executed and acknowledged the mortgage to secure same which had been prepared on January 20, 1909, at the same time the deed from claimant to the bankrupt was prepared. The notes were prepared by, and the mortgage was acknowledged before, Glenn, who had prepared the deed and mortgage and taken the claimant’s acknowledgment to the deed. Glenn had nothing to do with the preparation and acknowledgment of the Reidlin mortgage, and it is likely that he was not informed of the change from the Moerlein Brewing Company to the Bavarian Brewing Company. I infer this from the fact that the mortgage executed by the bankrupt and his wife to the claimant was, as it had been originally prepared, except that the date “-January, 1909,” was
One is that on August 13, 1910, the bankrupt caused to be prepared, executed, and acknowledged a mortgage from himself and wife to the claimant to secure the $6,800, and left it with his attorney to lodge for record after he was gone which he did on Monday, the 15th. He also left a- letter for her in which he informed her what he had done, which she probably received and read before lodging the mortgage of date February 16¡ 1909, for record. She knew nothing of his contemplated flight, and had nothing to do with the preparation and lodging for record of the mortgage of August 13, 1910. It was entirely his own conception. She knew something was wrong on Sunday, the 14th, but did not ascertain that he had fled until Tuesday, the 16th,'the day she lodged the mortgage of February 16, 1909, for record.
The other thing is testimony on the part of the bankrupt and of his wife that they had never executed any other mortgage to- the claimant than that of August 13, 1910. On October 26, 1910, the claimant filed before the referee her claim consisting of her notes and the mortgage ■of February 16, 1909. This disclosed to the trustee that she was claiming under this mortgage, if he had not already ascertained its existence from the records, which was probably the case. Thereupon the trustee, because of , the mortgage of August 13, 1910, conceived the idea that, if he could obtain the testimony of the bankrupt and his wife without his having any communication beforehand with the claimant, they might testify that they never executed the mortgage of February 16, 1909. They were then living in Detroit, Mich. Without notice to the claimant, the trustee appeared in Detroit on November 14, 1910, and obtained an order of reference from the United States District Court for that' district to the referee in bankruptcy, which required the bankrupt and his wife to appear before him forthwith for examination. They were served that evening with subpoena to
“And didn’t you say to her, in substance, if not in exact words, ‘Sirs. Watson, if you have confidence in your boy, it is not necessary to have your mortgage recorded,’ or ‘it is not necessary for you to taire a second mortgage’.? Didn’t you say that to her in substance, if not in those precise words?”
To this question he answered:
“That’was about the substance of the conversation.’
Then, again, it is to be noted that Mr. Reidlin testified after the Detroit testimony of the bankrupt, when he and his wife had testified ■that -no mortgage was given, and that what the claimant had said in the telephone talk was that she would not take -a mortgage. This testimony may, to some extent at least, have affected .his. But, however this may be, the testimony .requires that I should -hold that the sole reason why the mortgage was withheld from record was that the claimant might not have to. “pay double taxation”; that this idea of "saving taxes and withholding the mortgage from record to this end was put in her head, at least, by Glenn, if not Mr. Reidlin, backed up by Glenn; and that it would not have been withheld but would have been put to record as soon as executed and acknowledged if Mr. Reidlin. after he had been told by her that she wanted a mortgage, had not undertaken to advise her in regard to the matter. It is to be noted further in this connection that the mortgage was so withheld from record, not because of any agreement with the bankrupt. He was not consulted about it. Nor was it withheld to give him credit. Its withholding was solely on her own account, and not to favor him. The testimony leaves no room for doubt as to this. -The only moral obliquity of which she was guilty was in trying to evade the taxes due from her on account of the indebtedness. Andl this is somewhat lessened by the low moral tone that pervades the community in such matters, by the advice of a reputable business man and a reputable lawyer, and by the thought that, if she paid taxes on the unpaid purchase money and the bankrupt on the property, there would be a payment of double taxes.
“Where it is either found that all the acts of the parties-were done honestly and in good faith, or it is not found that they were dishonest or fraudulent, a deed or mortgage cannot be adjudged fraudulent or void solely on the ground, that it was not recorded, and that in ignorance of the existence of the in'strument assailed credit was given to the grantor upon the faith of his supposed ownership of the property. Where the deed is withheld from record merely to gratify the feelings of a proud debtor, the omission is not a fraudulent act.”
The essential thing as I understand it is that there should be fraud in the withholding. The withholding must have been fraudulent. It ■should have been withheld f.or the conscious purpose of giving the mortgagor or grantor credit, andl thereby enabling him to .deceive others. The matter was put succinctly by Mr. Justice Brown in the case of Davis v. Schwartz, 155 U. S. 631, 639, 15 Sup. Ct. 237, 39 L. Ed. 289, when he said that the mortgage should be “withheld .from record in order to give the mortgagor a fictitious credit.”
The statement heretofore given of the circumstances under which the mortgage here was withheld and of' the reason for withholding 'it-negatives the existence of any such fraudulent purpose on the part of the claimant. In her account of the talk with Reidlin over the telephone and of her subsequent talk with Glenn, she testified that 'Reidlin saidi to her that she need not put the mortgage-to record as ■ long as she had confidence in her son, and that Glenn, upon being told by her what Reidlin had said, confirmed it, and added: “But, if there should-come a change, I should put my deed (mortgage) to record.”
Point is made by the trustee of this advice of Glenn. It is taken to mean that, if a change should come in the financial condition of her son and he should become involved in debt, then she should put the mortgage to record. But it meant nó more than that if a change should come in her confidence in her son, which she had expressed, then she should act. And, were its meaning as claimed, it did not follow that the withholding of the mortgage pursuant thereto was in order to give ■her son fictitious credit. So doing, was entirely consistent with the purpose being solely to save double taxation. Undoubtedly, the withholding might give him fictitious credit, and she must have known that it might do so. But such knowledge did not necessarily involve that the withholding was in order to that end. The statute, as we have construed it, contemplates that credit may be given to the maker of an unrecorded recordable instrument of writing on the faith that he is the owner of the property covered by it and that it is. unincumbered, and yet, if the writing is recorded before the creditor acquired a hold br lien thereon, it will prevail over him. In view of this, it is. difficult to. see how an instrument of writing withheld, in presumed ■ reliance' .on this right but with the risk involved, can be held fraudulent and ■void when it is withheld not in order to give fictitious credit to the. maker' thereof but solely in order to save double taxation, as it is termed. , ’•
B The subsequent indebtedness incurred by the bankrupt was mainly for the purpose of making improvements on the property. The ne.
An order will be entered overruling the motion to reconsider.
