Factors' & Traders' Ins. Co. v. Murphy, 111 U.S. 738 (1884)

U.S. Supreme Court

Factors' & Traders' Ins. Co. v. Murphy, 111 U.S. 738 (1884) Factors' & Traders' Insurance Company v. Murphy

Submitted April 18, 1884

Decided May 5, 1884

111 U.S. 738

I N ERROR TO THE SUPREME COURT

OF THE STATE OF LOUISIANA

Syllabus

This Court has jurisdiction in error over a judgment of the Supreme Court of Louisiana in a suit by one citizen of that state against another for the foreclosure of a mortgage on real estate therein when the only controversy in the case is as to the effect to be given to a sale of the property under an order of the district court of the United States in bankruptcy to sell the bankrupt's mortgaged property free from encumbrances.

When a mortgagee of real estate becomes owner of the equity of redemption, a court of equity will not regard the mortgage as merged by unity of possession if it was the evident intent that the two titles should be kept distinct

Page 111 U. S. 739

or if the purchaser has such an interest in keeping them distinct that this intent can be inferred.

A sale of real estate of a bankrupt by order of court free from the lien of a mortgage creditor is invalid as to the creditor and as to the purpose of discharging his lien unless he is made a party to the proceedings. Ray v. Norseworthy, 23 Wall. 128, affirmed.

In such case, it is not sufficient to notify the person who holds the evidences of his debt and claims to be his agent if the record represents that person as acting for another party and makes no mention of the mortgage creditor.

The real estate of a bankrupt was sold by order of court free of encumbrances and purchased by A. One of the mortgages on the estate was given to secure four notes of which at the time of the sale A held two, and B held two. A and other mortgage creditors were made parties to the proceedings, but B was not made party. C held B's notes and claimed to represent him in the proceedings, but the record only showed C as acting for D. B brought suit to foreclose the mortgage as to his two notes, claiming that as to A's notes the lien was cut off by the purchase of the equity, and as to the rest of mortgage liens as well as to A's they were discharged by the sale. Held (1) that B had the right to a decree of foreclosure. (2) That this decree should be made for the benefit of all the mortgage creditors in the order of their priority, including A. (3) That the expenses of A for taxes, prior liens, improvements &c., growing out of the former sale should be first paid out of the proceeds of the new sale. (4) That A should account for rents and profits if there were any.

This suit was originally brought by the widow Mary Murphy, in the Fifth District Court of the Parish of Orleans, to foreclose a mortgage upon real estate in Louisiana, which had been the property of a bankrupt, and had been sold by order of the district court of the District of Louisiana free from encumbrances, and purchased by a holder of notes secured by the same mortgage. The facts which raise the federal question are stated in the opinion of the court. The supreme court of the state, to which the case came on appeal, decreed a sale of the mortgaged property to satisfy Mrs. Murphy's debt and interest. This writ of error was sued out to review that judgment.

MR. JUSTICE MILLER delivered the opinion of the Court.

This is a writ of error to the Supreme Court of Louisiana.

Page 111 U. S. 740

The defendant in error sued in the proper court of the state to foreclose a mortgage given by Paul Cook and Justus Vairin, Jr., to secure the payment of four notes of $10,000 each, given by them in their partnership name of Paul Cook & Co., of which she was then the holder and owner of two, all the notes being of the same date. She alleged that Cook and Vairin had been declared bankrupts, and that by certain proceeding in the bankruptcy court, and under its order, the mortgaged property had been sold free from encumbrance, and bought in by several persons who had liens on it, by whose order it was conveyed to the Factors' and Traders' Insurance Company, which held the other two notes secured by the mortgage. She further alleged that the effect of this sale was to extinguish the mortgage as to the notes held by that company, and all other liens but hers, and to make that company liable to her for the amount of these notes, with a first lien on the property mortgaged. That the sale under the order in bankruptcy was not binding on her, because she was not made a party to the proceeding and had no notice of it, while it was binding on all the other lienholders whose liens were thereby discharged, leaving hers a paramount lien on the property.

The insurance company and the other parties interested answered and insisted that Mrs. Murphy was bound by the bankruptcy sale because she was represented by T. A. Archer, who, as her agent, and having possession of her notes, took part in all the proceedings, and in that character was one of the purchasers, and joined in directing the conveyance to be made to the insurance company. They admit her interest in the property in proportion to the extent of her notes, but set up certain expenses and charges on it paid by them for taxes, necessary improvements, and prior liens, to the amount of $11,454.83, as a superior claim to her notes.

The testimony of Mr. Archer shows that he understood himself as acting for Mrs. Murphy, having as her agent possession of the two notes now in suit. That in that character and no other he took part in all the proceedings for the sale and purchase of the mortgaged property, and that during that time he had frequent conversations with her and explained to her what

Page 111 U. S. 741

was going on, to which she made no dissent. But he does not say that she at any time, in express terms, authorized him to represent her in the sale or in the proceedings connected with it. The record of those proceedings, on the contrary, affirm that Mr. Archer acted for Marshall J. Smith & Co., of which company he was a member, and no mention of Mrs. Murphy is found in the record of that case, though both Archer and Smith have sworn they had no real interest in the matter, and only appeared as representing Mrs. Murphy's notes then in their possession, and with her assent.

The Supreme Court of Louisiana, on appeal, held that Mrs. Murphy was not a party to the proceeding in bankruptcy, and was in no sense bound by the sale of the mortgaged property, but that the sale had the effect of extinguishing and satisfying all the liens on the property but hers, and left her notes the only lien on it. While it held that the insurance company was not bound for the debt in personam, it decreed that unless the company paid her debt, with interest, costs, and five percent attorney's fees, the property should be sold to raise the money, and denied the company's claim for taxes and other necessary outlays for the benefit of the property.

Counsel for defendant in error deny the jurisdiction of this Court and move to dismiss the writ. But it is apparent that the only controversy in the case relates to the effect to be given to the sale under the order of the district court of the United States, to sell the mortgaged property free from encumbrance. Both parties assert rights under this order and sale. Plaintiffs in error assert that the sale as made was valid, and, being sold free from encumbrances, extinguished Mrs. Murphy's lien as well as others. Defendant asserts that it had the effect of discharging all other liens but hers, and thus gave her the exclusive, paramount lien on all the property so sold. Both the parties therefore rely upon rights under federal authority, and as the right of plaintiff in error was denied by the court the writ of error lies.

As regards the merits, it is impossible to shut one's eyes to the injustice of the decree. The plaintiffs in error, who were led to suppose that they were acting in concert with Mrs.

Page 111 U. S. 742

Murphy, or at least with the holders of her notes by her consent, join in purchasing the property for the benefit of all the lienholders and receive the title in trust for their common benefit. It is immediately necessary, to save it from loss, to pay taxes and other prior liens and to make improvements necessary to its preservation to the extent of over $11,000, for which they advance the money. Mrs. Murphy, who was aware of all these proceedings, and that the holder of her notes cooperated in them by virtue of those notes, now, when, by reason of depreciation in the value of the property, it is insufficient to pay her debt alone, asks that the others shall be sacrificed, that it shall all go to satisfy her debt, and even the money advanced to save the property from sale for taxes and from falling to decay, which is paid by others and inures now to her benefit, shall fall upon them as a dead loss. If this be the necessary legal result of that proceeding in bankruptcy, the decree of the state court must be affirmed, but it will certainly be a result at variance with the policy of a statute whose main purpose was to secure an equal distribution of an insolvent debtor's property among all his creditors.

The first question to be decided is whether Mrs. Murphy was a party to the bankruptcy proceeding, so as to bind her to the order that the sale was free from encumbrance, by which, while her lien with all others was discharged, she had a right to her proportion of the price bid for it.

We are of opinion, with the Supreme Court of Louisiana, that the record in this case does not show such service of process or other notice as makes Mrs. Murphy such a party to the bankruptcy proceeding as binds her to the sale and discharges her lien. The case of Ray v. Norseworthy, 23 Wall. 128, is conclusive on that subject, and is, we think, sound in principle. The effect of this proposition is that after the sale was made she was at liberty to accept such a part of the sum for which the property sold as her two notes would entitle her to in their relation to all other liens on it, by which she would have ratified the sale; or to proceed in her own way to subject the property to payment of her debt, which she has done by the foreclosure suit now on review.

Page 111 U. S. 743

But in this suit she has not elected to proceed in disregard of that sale, whereby, when the property would be sold under her decree of foreclosure, the proceeds of it must be brought into court and distributed among the lienholders according to their priorities, but she seeks to affirm that sale as free from all encumbrances except her own, thereby assuming the benefit of a decree to which she was not a party, while denying its obligation on herself, without which the decree would not have been made.

The adoption of this view by the Supreme Court of Louisiana is based by that court upon the doctrine of confusion found in the Civil Code of that state.

Without examining into the decisions of the state courts on that subject, it is sufficient to say that, in construing the effect of this sale under the order of the district court of the United States, it must be decided by those general principles which govern bankruptcy proceedings under that statute, rather than the Code of the state in regard to voluntary sales of mortgaged property between individuals.

In this view of the subject, it is not possible, consistently with any equitable view of the case, to hold that this sale discharged part of the liens against the property, and increased thereby the value of other liens at the expense of the purchasers. That the parties who honestly bid off the property and consented to hold it discharged of the claim of the assignee, but for the benefit of all the lienholders, thereby cut themselves off from any benefit of these liens to make good a lien which had no priority over theirs. If this were done by mistake, in supposing that all the lienholders were represented or were consenting, the mistake should be rectified by restoring the parties to their rights as if no sale had been made. If Mrs. Murphy chooses to assert her lien and demand a new sale of the land, let her have it, but it must be subject to the rights of all parties as they stood before the other sale, which, by reason of her absence and her objection, is ineffectual to bar encumbrances, as it was intended to do.

So far as the doctrine of confusion of the Louisiana Code may be said to be the equivalent of the doctrine of merger, in

Page 111 U. S. 744

the common law and in equity, in the latter it has been uniformly held that where an encumbrancer, by mortgage or otherwise, becomes the owner of the legal title or of the equity of redemption, the merger will not be held to take place if it be apparent that it was not the intention of the owner, or if in the absence of any intention said merger was against his manifest interest.

Applying this just principle to the case before us, it is quite apparent that no merger can be sustained.

It is clearly proved that the property was purchased, as they supposed at the time by all the lienholders, Mr. Archer acting for Mrs. Murphy at a sum far below the amount due on the liens, and that no money was paid except the costs of sale, or intended to be paid, but that the property should be held, as it was before the sale, for the benefit of all these lienholders, in the proportion of their interest. This was carried into effect, not by a new sale to the insurance company, as is asserted, but by a conveyance under that sale at the request of these lienholders, to that company, as trustee, for them all.

It was not, therefore, intended to extinguish their liens by this proceeding, but to keep them alive until the property should finally be sold and the money divided. So it is equally clear that it was not for the interest of these lienholders, who were actually purchasing, to extinguish their liens and thereby make Mrs. Murphy's notes a first lien, and enable her to get all her money at their expense.

The rule on this subject is thus stated by Jones, Mortgages, sec. 848:

"It is a general rule that when the legal title becomes united with the equitable, so that the owner has the whole title, the mortgage is merged by the unity of possession. But if the owner has an interest in keeping these titles distinct, or if their be an intervening right between the mortgage and the equity, there is no merger."

And, in the case of Forbes v. Moffatt, 18 Ves. 384, Sir William Grant says: "The question is always upon the intentions, actual or presumed, of the person in whom the interests are united." Other authorities cited by Mr. Jones sustain the principle. Clark v. Clark, 56 N.H. 105, is directly in point. Loud v. Lane, 8 Met. (Mass.) 517;

Page 111 U. S. 745

Armstrong v. McAlpin, 18 Ohio St. 184.

It is to be observed, in the present case, that, as the mortgage which secured the two notes owned by the insurance company was the same which secured Mrs. Murphy's notes, as between which there was no priority, it would hardly be held, on the order of the court to sell the property free from all encumbrances, that the purchase by the insurance company merged part of the mortgage, while part was kept alive. This is expressly decided in Winker v. Flood, 103 Mass. 474.

The result of these views is, that while Mrs. Murphy is not precluded by the judicial sale, under the order of the bankruptcy court, from foreclosing the mortgage for her notes, neither are the parties who took part in that proceeding barred of the right to set up their liens, as they existed before that sale, and share in the proceeds of the new sale accordingly, and, so far as the expenditures of the insurance company, in payment of taxes and prior liens and in improvements necessary to the prevention of loss and deterioration in the property, were required for the benefit of all the lienholders, it is to be first paid out of the proceeds of the sale, and plaintiff in error should account for rents and profits, if there were any.

The decree of the Supreme Court of Louisiana is accordingly reversed, with directions to enter a decree in conformity to this opinion, and it is so ordered.