Heyder v. Excelsior Building Loan Ass'n, No. 2

The opinion of the court was delivered by Knapp, J.

The learned master who decided this cause reached the conclusion on the evidence that the purchaser of the premises, and not the mortgagee, should bear the loss incident to the fraudulent cancellation of the mortgage made upon the record prior to the purchase, on the faith of which cancellation the buyer parted with the whole purchase-money, believing ⅛⅜- property to be unencumbered. After a careful review of the case, I am led to an opposite result. I am fully impressed with the importance of securing due protection to the holders of mortgage securities, where, in pursuit of the provisions of the registry laws, the lien has been made apparent on the record. The security afforded by registry should remain undisturbed by a cancellation effected through mistake, accident or fraud of third persons; even if, by such cancellation, subsequent mortgagees or purchasers are made to suffer loss. Such after-acquired rights ought not to prevail against the just claims of an innocent, non-negligent encum-brancer, because the record has been wrongly effaced.

Cancellation of a mortgage on the record is only prima facie evidence of its discharge, and it is left to the owner making the allegation to prove the canceling to have been done by fraud, accident or mistake. Such proof being made, the mortgage will be established, even against subsequent purchasers or mortgagees without notice. Trenton Banking Co. v. Woodruff, 1 Gr. Ch. 117; Harrison v. N. J. R. R. Co., 4 C. E. Gr. 488.

Between a mortgagee, whose mortgage has been discharged of record, solely through the unauthorized act of another party, *408 and a purchaser who buys the title in the belief, induced by such cancellation, that the mortgage is satisfied and discharged, the equities are balanced, and the rights, in the order of time, must prevail. The lien of the mortgage must remain, despite the apparent discharge.

But this is apart from any default attributable to the holder of the lien. If, through his negligence, the record is permitted to give notice to the world that his claim is satisfied, he cannot, in the face’of his own carelessness, have his mortgage enforced against a bona fide purchaser, taking his title on the faith that the registry is discharged.

. Where one gives to another the power to practice a fraud upon innocent parties, the court will not interfere in his protection at the expense of those who have been deceived and misled by such fraud. What circumstances shall be sufficient to establish negligence, such as shall preclude a mortgagee from a decree establishing his canceled paper, must be determined as a question of fact in each particular case, tested by those rules of conduct which men of common prudence usually observe in the care and management of such securities.

That it is negligence in the owner of a mortgage to permit it to be in the custody and control of the mortgagor or owner,of the mortgaged premises, in view of the provisions of our statute of registry, will not admit of denial. Such an occurrence is so unusual, so imperils the owner, and is therefore so unlikely to happen in business dealing, that it was regarded, in Harrison v. New Jersey R. R. Co., as ground for the gravest suspicion of the truthfulness of a witness who had testified to such custody by the assent of the owner of the security.

The minute of discharge of this mortgage, made upon the record by the register, expressed in general form the fact of cancellation. The entry was made upon evidence presented to the register, such as the statute has declared to be his sufficient authority for so doing. The mortgage was produced by the mortgagor, canceled, and there is no doubt that upon the faith of this cancellation, the purchaser took title to the property and paid the consideration. But it clearly appears that the mort *409 gage was unpaid, and that the act of the mortgagor in procuring the entry of its discharge was fraudulent and without the knowledge or assent of the mortgagee. If this were all of the case, and no default appeared on the part of the mortgagee, notwithstanding the forcible language of the act which declares such minute to be a full and absolute bar to and discharge of the said entry, registry and mortgage, the right of the respondent to the lien of its security should be maintained, and it is solely upon the grounds that the respondent is chargeable with negligence which tended to and actually did produce the injury, that I think the decree should be reversed. The mortgage was in the possession and under the control of the mortgagor at the time when it was produced for cancellation on the record. How long he had such custody does not positively appear, but the strong inference from the testimony is that it was during the whole time between the registry of the mortgage and its cancellation. Neither the president of the association nor its treasurer, who had charge of its securities, were able to say that they ever had the actual custody of this mortgage; and they further declare that the mortgagor, although an officer of the company, had no access whatever to the securities in the possession of the treasurer. It is, therefore, impossible that he should have obtained its possession by means resembling theft. His possession must, I think, be attributed either to the assent or to the negligence of the officers of the association responsible for its securities. If we regard the theory that the mortgagor, at the conclusion of his transaction for the loan, fraudulently substituted a copy of the mortgage for the original paper, and delivered that to the association, I am still forced to the conclusion that the officers were culpably negligent in permitting themselves to be thus imposed upon. The fact that he was the law officer of this body would not justify so implicit a trust in him in the matter of a loan to himself. We must assume that these officers were men of business capacity and skill. The transaction was in the line of their ordinary duties. Indeed, they did not trust to him, but employed other counsel to make searches against his property. In their ordinary transactions their habit was to submit to counsel the securities received *410 for loans for inspection and approval. The slightest examination of the paper received by them would have shown it to be but a copy. They submitted it to no legal adviser, they gave it no examination. If it were not intended to be, as was its purport, a mere copy, leaving the original in other hands, any degree of care exceeding the blindest confidence must have revealed the deception. The theory fails to lead us out of the difficulty. I do not think that any circumstance presented in this case made it the appellant’s duty, in order to avail himself of the rights of a bona fide purchaser, to institute personal inquiry of the mortgagee. Any rule placing him under this exaction would embrace every case of a purchase of lands that had ever been subject to mortgage, which the record showed to be canceled. Such a rule, it is needless to say, would .render this provision of the registry act entirely nugatory. A purchaser could then only buy with safety when the registry had been discharged, and an admission of payment obtained from the mortgagee. Doubtless, circumstances may, and frequently do, arise to put the purchaser upon inquiry and charge him with notice. It seems to me that nothing appears in this transaction which should have put this purchaser upon further inquiry. He was permitted to-rely upon the record. ' He did so, purchasing upon the belief that it spoke the fact truly. It was false, but the deception was directly traceable to the culpable negligence of the mortgage owner, and the loss should fall upon the party chargeable with the fault.

The decree below '.should be reversed, and the bill of complainants be dismissed.

Decree unanimously reversed.