Where the title of one claiming ownership of real estate in bad
faith is openly questioned and attacked in actions of ejectment,
neither he nor his mortgagee are entitled to an equitable lien on
the property for moneys expended thereon.
One loaning money on real estate the title to which has been, to
his knowledge, attacked in an equity suit which has been dismissed
without prejudice and not on the merits, takes the risk of the
title, and his knowledge extends
Page 204 U. S. 273
to all property described not only in the declaration, but also
in amended declarations, notwithstanding the failure of the clerk,
without any fault of the party filing them, to properly index the
amended declarations. Knowledge of the president of a local board
of directors and of the local attorney of a building and loan
association in regard to a matter coming within the sphere of their
duty and acquired while acting in regard to the same is knowledge
of the association, and the fact that they have committed a fraud
does not alter the legal effect of their knowledge as against third
parties who have no connection with, or knowledge of, the fraud
perpetrated.
While one claiming to own real property cannot stand by in
silence and see another expend money in improving it, he fulfils
his duty by notifying the person spending the money and claiming
ownership, and, in the absence of knowledge that such person is
insolvent, he is not bound to ascertain whether he is making the
improvements with money realized by mortgaging the premises and
notify the mortgagee also.
22 App.D.C. 368 affirmed.
This suit was brought in the Supreme Court of the District of
Columbia by the appellant, who is the ancillary receiver for the
New South Building & Loan Association of New Orleans,
Louisiana, hereinafter called "the company," against the owners of
the real property described in the bill, to establish an equitable
lien upon the property for the value of improvements placed thereon
with money which the company loaned to one Bradshaw for that
purpose, Bradshaw claiming to be the owner at the time. After
hearing, the bill was dismissed on its merits by the trial court,
and the decree of dismissal was affirmed by the Court of Appeals of
the District. The opinions of both courts are to be found in 22
App.D.C. 368. The receiver has appealed here.
The title to the property, which consisted of certain numbered
lots in Square Number 939 in Washington, had been in dispute some
time prior to 1891. During the year 1889, 1890, or 1891, one Aaron
Bradshaw, acting, as alleged, as agent of one John H. Walter, who
claimed to have acquired the title of George Walker, entered upon
and took forcible possession of the lots in question and proceeded
to erect a small brick structure on the corner lot, whereby to
continue to hold possession.
Page 204 U. S. 274
The respondents herein claim to be the owners of these lots, and
in the latter part of 1891 they or their grantors commenced four
actions of ejectment in the Supreme Court of the District to
recover possession of separate and undivided interests in the
designated "ink-lot" number 1, and subsequently, by proper
amendments, other lots in the same square, comprising the property
involved herein, were included in the declarations in those
actions. A statement of facts regarding the title to these various
lots may be found in
Bradshaw v. Ashley, 14 App.D.C. 485,
and in this Court, upon review of that decision, in
180 U. S. 180 U.S.
59,
180 U. S. 60,
where the expression "ink-lot" is explained as referring to certain
ink numbers on a map of the lots in square 939, on file in one of
the public offices of the city, and which also had pencil numbers
on it, which were different. In that litigation, the Ashleys, the
respondents herein, finally established their right to the
possession of the property and obtained judgment to that effect
against Bradshaw, defendant in the ejectment actions, in the
Supreme Court of the District sometime in 1897, and in this Court
in 1901. These respondents were thereupon placed in possession of
the property, including these lots.
While the litigation in these ejectment actions was pending, and
some years before judgment therein, Bradshaw, while defending them,
became a stockholder in the company in order to obtain a loan from
it, and succeeded, in October, 1893, in borrowing $20,000 from the
company, secured by a deed of trust upon the property in litigation
in the actions in ejectment other than ink-lot 1, above mentioned.
The deed was duly recorded, and the money was to be used for the
construction of buildings, which were subsequently placed on these
lots. The money was advanced to Bradshaw by the company in
installments, the last being in April, 1894.
It was obtained from the company by means, as alleged, of a
fraudulent combination between Bradshaw and one Walter, the
president of the local board of directors of the
Page 204 U. S. 275
company at Washington (who claimed to have been the owner at one
time of the property, but whose title, whatever it was, had been
acquired by Bradshaw), together with the local attorney of the
company in this District. The local attorney, in carrying out the
alleged fraud, sent a defective so-called "chain of title," which,
nevertheless, had been accepted by the local board of the company
in Washington. It omitted certain tax and other deeds under which
the respondents claimed title in themselves. This defective paper
was continued by other examiners of the title, but was not revised
by them. The certificate regarding the title was sent, with the
defective chain of title, to the company in New Orleans by the
local attorney about May 26, 1893. The certificate approved the
application for the loan, but such loan was not acted upon
favorably at that time. Subsequently, in October, 1893, the loan
was made, the company, as is stated, relying upon the certificate
of the local attorney for the period which it covered, and the
certificate of the other examiner for the time thereafter passing
until the making of the loan. The company has insisted that it
acted at all times in good faith and made its advances upon the
security of the trust deed, which it supposed was perfectly good.
The trial court found that, before the money was paid to Bradshaw,
upon the security of this trust deed, the company was aware,
through its general attorney in New Orleans, of the fact that a
suit in equity had (theretofore, in 1890, and before the ejectment
actions) been brought by the Ashleys against Bradshaw, Walter, and
others, in which the plaintiffs therein claimed ownership of these
lots, and wherein they asked for an injunction to restrain the
defendants from setting up any title to them. The bill on file in
the equity suit showed a common source of title to all the lots
mentioned therein, which included the lots here in question. The
attorney also knew that, although the suit had been dismissed, yet
it was only for want of prosecution, and was "without prejudice."
The New Orleans attorney wrote to the Washington attorney, who
Page 204 U. S. 276
then had charge of the matter, calling his attention to these
facts. No notice seems to have been taken of the letter, but the
certificate of title by the examiner was given after its receipt.
The company insists that, during all the time it made advances to
Bradshaw under the deed of trust, it was ignorant of the existence
of these ejectment actions, and at any rate did not know that they
covered other than the corner lot, as described in the declarations
before they were amended, and the amendments they were ignorant of,
because, as is alleged, the clerk of the court in which the actions
were pending had not properly kept the books so as to show the
amendments and their nature, although they had been filed. The
corner lot was not one of the lots upon which the buildings were
erected.
The trial court, in the opinion delivered, said that the
complainant charged the defendants with knowledge of the advances
made by the company to Bradshaw towards the erection of the
buildings, but to this allegation the defendants interposed, in
their answer (which was under oath) a positive denial. They
admitted that, although wholly ignorant of the source from which
the money came to construct the houses, yet, soon after learning
that one Childs, a contractor, was engaged in their construction,
they notified him in writing, January 4, 1894, that he had been
represented to them as a contractor and builder of the houses for
which the ground had been broken, and which houses were then in
course of erection, and he was thereby notified that, if he, his
agents, or employees entered upon the grounds, they would be held
liable for trespassing thereon, as they (defendants herein) were
the owners of the lots, and had not given him or anyone else, the
right or permission to enter thereon for the erection of houses or
any purpose whatever, and that, as the improvements were not made
with their authority, they would not be responsible for any
liability contracted by Mr. Bradshaw.
The defendants, in their answer, also allege that it was not
until in or about February, 1895, that defendants, or any of
Page 204 U. S. 277
them, learned of the advances made by the company or of the
existence of the deed of trust. The trial court, in its opinion,
stated that, although
"there is no evidence contradicting either of these denials, nor
of actual knowledge possessed by the defendants of the matters thus
denied, still it seems to me there is evidence in the record that
facts might readily have been ascertained by them from which they
might well have learned at an earlier time of the building and of
the source from which the money employed was derived."
While not finding that the defendants had actual knowledge of
the advances made by the company, the court did impute knowledge of
certain conveyances made to Bradshaw, and of the existence of the
deed of trust to the company at earlier dates than those assigned
in the answer, February, 1895. And, in relation to an offer of
compromise, the joint answer alleged that, after that time,
viz., about May 31, 1895, during negotiations for the
compromise of the differences between the parties, Mr. H. F.
Beardsley, one of the defendants, wrote to the attorneys
representing the company, in behalf of himself and his associates,
offering to sell to the company the lots upon which the houses then
were
"at their present market value or price, said value not to
exceed the price at which similar lots (unimproved) in the same or
contiguous squares are offered for sale. Upon the payment of said
price or sum, we will convey our title to them by deed or
quitclaim, or make a building agreement to so convey upon the
determination of the pending suits, or a deed in escrow, as counsel
shall advise. We will hold this offer open until the 1st of July
next."
This offer was not accepted, but there is nothing stating what,
if any, objections were made to it.
Bradshaw had, in 1894, defaulted in his payments of amounts due
for his stock in the company, which he had taken in order to
procure his loan. Thereafter, some arrangements were attempted
between him and the company in regard to making his payments, but
they fell through, and nothing could be done in the way of
collecting anything on the mortgage or
Page 204 U. S. 278
deed of trust for the reason that the ejectment actions resulted
unfavorably. The company, in 1899, became embarrassed and went into
the hands of a receiver in New Orleans, and the same person was
appointed ancillary receiver in this District, and brought this
with leave of the court.
The Court of Appeals held that Bradshaw was an occupant of the
premises in bad faith, with the fullest possible knowledge of the
rights and claims of the appellees, and that it could not be
supposed that the grantee of an occupant in bad faith could have
any better right than his grantor had.
Some other facts are stated in the course of the opinion.
Page 204 U. S. 279
MR. JUSTICE PECKHAM, after making the foregoing statement,
delivered the opinion of the Court.
The foregoing facts show that Bradshaw, if he were plaintiff,
would have no cause of action against the defendants, based upon
any allegation that he was permitted by them to build on what he
thought was his own land, while the defendants stood by and did not
interfere to prevent it, although knowing that the land was not
his, and claiming title themselves. At all times, Bradshaw had
knowledge that not only was his title denied, but that these
defendants were asserting, to the best of their ability, in actions
of ejectment against him, the right to the possession of, and title
to, the property in question. Under such circumstances, it would
simply be at his own risk that he expended money on what might turn
out to be other people's property, and which he knew was so
claimed. His attitude in the matter would seem to have been that,
if he
Page 204 U. S. 280
could successfully defend the ejectment actions, he could then
pay the loan he had obtained from the company, while, if he should
prove unsuccessful in the defense, it would be the company's
misfortune.
The company now insists that the money was obtained from it
through the fraud of Bradshaw and others, as stated. But before
coming to the question of what duty the defendants owed to the
company, it may be well to examine for a moment the position of the
company in the transaction leading up to its loan to Bradshaw. It
is true, the company asserts that it has acted in good faith
throughout the whole matter. Upon examining its position, one fact
is apparent and uncontradicted: before the execution of the deed of
trust, and, of course, before the advance of any of the moneys by
the company to Bradshaw, the company was aware, through its general
attorney in New Orleans, that a suit in equity had been commenced
about March 1, 1890, by the Ashleys against Bradshaw and others,
wherein they alleged their claim of ownership of the property,
which included the lots in question in this case, and in which the
plaintiffs sought to enjoin the defendants from setting up any
title thereto. It appeared that there was a common source of title
to all the lots mentioned in the bill. The bill charged fraudulent
and illegal acts on the part of Bradshaw, Walter, and other
confederates, in undertaking to seize possession of the lots there
claimed to belong to the plaintiffs therein (the defendants in this
suit), and specifically described the status of the parties then
existing, and denied to Walter and Bradshaw any ownership or right
to the possession of the lots. The facts regarding this equity suit
were presented by the general attorney for the company, in New
Orleans, to the local attorney of the company in this District, and
the fact that the bill had been dismissed only for want of
prosecution, and without prejudice, was specially called to the
attention of the local attorney. No action seems to have been taken
regarding the contents of that letter by the local attorney after
its receipt other than
Page 204 U. S. 281
to certify to the title, nor does the general attorney seem to
have inquired further about the facts. The bill was, of course, on
file in the clerk's office, and it showed the contention as to the
title between these defendants and Bradshaw and his associates.
With this knowledge, therefore, it is impossible to say that the
company was ignorant of the fact of the existence of a question as
to the title of Bradshaw to the premises on which he was seeking to
obtain this loan. The dismissal of the bill without prejudice, for
want of prosecution, would not be evidence that the title of
Bradshaw was good or that the controversy had been settled. It
certainly was a warning of the existence of a question as to the
title, and it was at any rate, notice enough to start the company
upon some investigation of the facts as to the actual condition of
the controversy respecting it. And at this time the ejectment
actions had been brought and were pending. The declarations in
those actions were then on file in the clerk's office of the
Supreme Court of the District, and showed the actions were
originally brought to recover possession of "ink-lot" 1. It is true
that, while that particular lot did not include the premises upon
which the buildings were subsequently erected, yet the source of
title to all the lots was the same. Some months before the deed of
trust was executed, amendments to these declarations, which did
include those lots, had been made and were on file in the clerk's
office among the papers in those actions.
Actual knowledge of the fact of the existence of the ejectment
actions in regard to ink-lot 1 is, however, denied by the company,
and a like denial is made in regard to the amendments to the
declarations. The local attorney had knowledge of them, or ought to
have had. But, so long as the company had knowledge of the equity
suit and the contents of the bill therein, there was enough to put
the company on inquiry as to the state of the title. If, under such
facts, the company loaned the money, it showed its willingness to
take the risk of the validity and sufficiency of the title of
Bradshaw.
Page 204 U. S. 282
The company denied knowledge of the amended declarations because
of the alleged defect in the manner of keeping the books in the
clerk's office, wherein the ejectment actions were entered, but no
statement was made on the page of the docket devoted to those
actions of the existence of amendments to the declarations. The
amendments were, however, duly filed in the clerk's office, and the
alleged failure of the clerk to properly index the amendments was
no answer to the failure on the part of the searcher to examine the
files for the purpose of seeing the papers in existence in the
actions. In this matter we agree with the opinion of the Court of
Appeals in holding that the respondents here were in nowise
responsible for the alleged failure of the clerk to make additions
to the docket or index book. Nor is there any evidence that the
persons acting for the company were in any way misled by such
failure, to the company's detriment.
The company also insists that it ought not to be charged with
any knowledge of any fact which was known only by Walter and the
local attorney. The company asserts first that Walter and the local
attorney were not its agents, and, in any event, by reason of their
fraud, knowledge by the company should not be imputed to it because
of the knowledge of its agents. The company asserts that Walter was
simply the president of its local board, composed of the
stockholders in the company residing or to be found in Washington,
and that his action was not the action of an agent under such
circumstances. It also asserts the same thing in regard to the
local attorney, and denies liability for their acts. We think the
position cannot be maintained. The president and attorney were
directors of the local board and had to be directors before they
could hold either office, and the local directors had to be
approved by the board of the main office. It was to this local
board that the application was first to be made for a loan, and it
was to be approved by it and transmitted at once to the main
office, signed by the president, secretary, and attorney of the
local board on a form furnished by the
Page 204 U. S. 283
association to applicants for a loan. Transactions of a local
nature were put in charge of the local attorney, who represented
the company at his locality, and loans were consummated by him and
papers sent to him by the company for such action as was necessary
for the completion of a loan. The knowledge of the attorney and of
the president of the board in regard to a matter coming within the
sphere of their duty, and acquired while acting in regard to the
same, and sending to the company in New Orleans their report which
it was their duty to make, must be imputed to the company. The fact
that those agents committed a fraud cannot alter the legal effect
of their acts or of their knowledge with respect to the company in
regard to third parties who had no connection whatever with them in
relation to the perpetration of the fraud, and no knowledge that
any such fraud had been perpetrated. There is no pretense of any
evidence that the defendants had any connection with these alleged
frauds, and no pretense that they had any knowledge of their
existence, if they did exist. In such case, the rule imputing
knowledge to the company by reason of the knowledge of its agent
remains.
But even if it be assumed that the company had no more than a
knowledge of the equity suit and its dismissal without prejudice,
it simply shows that the company was willing to take the risk of
the title, although confessedly questionable
Upon these facts, we cannot see that the defendants can be held
liable to the plaintiff on account of any failure of duty on
defendants' part. If the buildings were being erected by Bradshaw,
there was certainly no duty on the part of defendants to notify him
of their title to the property, and we cannot see that there was
any such duty resting upon the defendants to endeavor to find out
through what sources Bradshaw obtained the money to erect the
buildings, and to inform the person who was loaning the money that
the defendants claimed the property as theirs.
Assuming, even, that the company made the loan in the
bona
fide belief that Bradshaw had title, and that the claims
Page 204 U. S. 284
of the defendants to the ownership of the lots were not well
founded, and also that no knowledge of the agents of the company in
Washington could properly be imputed to it, and we still have the
fact that the company loaned its money with knowledge of the equity
suit and of the allegations of the bill therein regarding the title
of the defendants and the lack of any title in Bradshaw. Imputing
no knowledge to the company other than it actually possessed, the
same course should be taken with the defendants. In that case, we
have their sworn denial, unaffected with any proof to the contrary,
that they had any actual knowledge of the existence of the deed of
trust or of any connection of the company with Bradshaw, or of any
advances made by it to Bradshaw, until February, 1895 (long after
all the moneys had been advanced), and, even in regard to Bradshaw
himself, they notified the contractor early in January, 1894, that
they owned the property and they would not be responsible for any
expenditures made by Bradshaw, and that, if the contractor went on,
he would be regarded as a trespasser.
There is no finding that Bradshaw was insolvent, or that the
defendants had any knowledge of it if he were insolvent, and hence
there is nothing to lead to the assumption that the defendants knew
the buildings could only be erected by Bradshaw with borrowed
money, and nothing to show any duty on the part of defendants to
take active steps and make a search to endeavor to find out who was
loaning him money, and on what security. And this is the contention
on the part of the complainant. We think it must be regarded as an
extraordinary contention and an unreasonable application of the
doctrine of constructive notice. This is the language used by the
Court of Appeals, and it properly describes the situation.
Certainly constructive notice cannot be applied to the owner of
property in regard to the existence of a mortgage thereon, placed
there by someone who did not own such property. The owner of real
estate is under no obligation whatever to watch the records to see
whether someone who
Page 204 U. S. 285
does not own his property has assumed to place a mortgage upon
it or convey it by deed to some third person. The defendants knew
Bradshaw was in possession, and they saw buildings being erected on
the lots. Were they to assume that Bradshaw was borrowing the
money, and that they must therefore go to work to find out from
whom he was borrowing, and notify him of the facts? They in fact
knew nothing of the deed of trust, but, by imputing knowledge, the
claim is made that a duty founded upon such imputed, but not upon
any actual, knowledge rested upon defendants, for the failure to
discharge which the defendants ought to be held liable.
No case has been called to our attention which in any degree
resembles the claim made by the company herein. The man who
actually erected the buildings knew all about the state of the
title, and that it was contested by the defendants in the most
earnest and emphatic manner in their actions of ejectment to
recover the lots. The evidence fails to show that the company was,
before the money was advanced, entirely innocent of any knowledge
on its part which would lead to doubt as to the ownership of the
property by Bradshaw. But even its actual good faith, in the
popular sense, cannot charge the defendants with the duty of active
investigation to discover from what source Bradshaw obtained the
money to build. The simple facts are that the defendants were in
possession of the property when this suit was commenced, and they
ask no aid from a court of equity to place them in possession. They
had recovered it in their actions at law, and a court of equity
will not, even in the case of a
bona fide improver, grant
active relief in such a case. 2 Story, Eq.Juris. (12th ed.) ยงยง
1237, 1238;
Williams v.
Gibbes, 20 How. 535,
61 U. S. 538;
Anderson v. Reid, 14 D.C.App. 54;
Canal Bank v.
Hudson, 111 U. S. 66,
111 U. S. 79;
Searl v. School District &c., 133 U.
S. 553,
133 U. S. 561,
and other cases, cited by the trial judge in his opinion, and in
the opinion of the Court of Appeals. The case of the company is not
strengthened by its knowledge that the title of Bradshaw was
questionable.
Page 204 U. S. 286
Morgan v. Railroad, 96 U. S. 716,
96 U. S. 720,
cited, among other cases, by the appellant, has no application. The
facts are so wholly different in their nature as to present a case
which does not touch the principle decided herein. There was
conduct on the part of the appellant which was such as to amount to
fraud or misrepresentation, leading appellee to believe the
existence of a fact upon the existence of which appellee acted. We
find no cases in opposition to the result we have arrived at.
The decree of the court below is
Affirmed.
