McGahan v. National Bank of Rondout/Opinion of the Court

It is argued that the circuit court should have held that the withholding of the mortgage from record invalidated it as against the creditors of the firm, but no such defense to the mortgage was set up in the answer, and, there having been no issue thereon below, it cannot be made in the first instance on appeal. The decree of the circuit court refers to no such defense, and it is now too late to raise it. Nor do we find anything from which to conclude that the firm was given a fictitious credit by the conduct of Crane in this particular, or that the withholding of the mortgage from record amounted to a fraud upon creditors of which these defendants could complain. McGahan was not a creditor, but claimed to have been a purchaser after the mortgage had been recorded. D. R. Smith was not a creditor, and was not misled; and there is no evidence in the record that any creditor dealt with D. R. Smith & Co. on the faith that the three-fourths interest in the lands standing in Crane's name was partnership real estate. The error assigned in this regard is untenable.

The circuit judge was of opinion that Crane held the undivided three-fourths of the lands in question in individual ownership in fee, unaffected by any trust, and that it was competent for him to make an absolute conveyance thereof in virtue of such ownership. But, although the deeds were made to North, Crane, Tompkins, and Smith as individuals, and the purchases were made in severalty, and they held, and Crane and Smith subsequently held, as tenants in common, yet if an equity resulted to firm creditors because the purchases were made in furtherance of the joint enterprise, and the lands were devoted to its use, it seems to us nevertheless quite clear that the mortgage by Crane of the three-fourths standing in his name to secure a partnership debt was valid, and could be enforced against these defendants.

The settled rule in this country is that, where a deed is executed on behalf of a firm by one partner, the other partner will be bound if there be either a previous parol authority or a subsequent parol adoption of the act; and that ratification may be inferred from the presence of the other partner at the execution and delivery, or from his acting under it or taking the benefits of it with knowledge. 3 Kent, Comm. 48; Cady v. Shepherd, 11 Pick. 405, 406; Peine v. Weber, 47 Ill. 41; Frost v. Wolf, 77 Tex. 455, 14 S. W. 440; Schmertz v. Shreeve, 62 Pa. St. 457; Wilson v. Hunter, 14 Wis. 683; Rumery v. McCulloch, 54 Wis. 565, 12 N. W. 65; Pike v. Bacon, 21 Me. 280; Russell v. Annable, 109 Mass. 72; Gunter v. Williams, 40 Ala. 561; Sullivan v. Smith, 15 Neb. 476, 19 N. W. 620.

This is the accepted doctrine in New York (Smith v. Kerr, 3 N. Y. 144; Graser v. Stellwager, 25 N. Y. 315; Van Brunt v. Applegate, 44 N. Y. 544); and in South Carolina (Stroman v. Varn, 19 S.C.. 307; Salinas v. Bennett, 33 S.C.. 285, 11 S. E. 968).

In Stroman v. Varn the supreme court of South Carolina laid down the general rule that one partner might bind his copartners by deed if the others were present and authorized it, or if authority to do so was fairly inferable from the evidence of their conduct and the course of business; and it was held, where there were four partners in a sawmill, two of whom owned the land, and one of the others mortgaged it in the name of the four, and signed the firm name, that the mortgage was a valid lien on the land, the two owners having received the consideration, and in many ways acknowledged and ratified the mortgage, and that a purchaser of the interest of one of the owners in both land and partnership after record of the mortgage was bound by its lien.

In Van Brunt v. Applegate it was held that a conveyance by one partner having the legal title to one-half of certain real estate (the other half being in the other partner), the whole of which was in equity partnership property, to a creditor of the firm in payment of a partnership debt, vested good title to such undivided half in his grantee, notwithstanding it was executed without the knowledge or consent of the other partner, the firm was insolvent, and its effect was to give a preference to the grantee. The argument that a partner holding the legal title of one-half held a moiety of it for himself and a moiety for his copartner was rejected, and it was decided that a partner holding the legal title for the firm has the same power over it as over firm personalty, and that his conveyance for firm purposes passes the title free of the firm's equities; that, if he were a trustee as to his copartner, the separate deeds of both partners would leave one-half the tract unconveyed, but that a joint deed was not necessary to convey the firm title.

In this case the title to three-fourths of the lands stood in Crane. It is said that the legal title to Tompkins' three-eights (one-eighth having been conveyed by North to Tompkins and one-eighth to Crane) was never conveyed to Crane, but we regard the case made as sufficient in this respect. The bill alleged that Crane was 'seised and possessed in fee of all the undivided three-fourths of all those tracts and parcels of land,' and this averment was not denied in the answer, while appellants admit that Crane 'had the right to compel Tompkins to make a conveyance of the legal title.' No question arises as to a conveyance in the name of the firm; as, in order to apply this three-fourths in security or payment of partnership liabilities, a conveyance by Crane in his own name was required, and the mortgage was given by Crane accordingly to secure partnership notes and their renewals, as appeared on the face of the mortgage. The character of the transaction was not changed because Crane may have desired to protect his own indorsements made for the benefit of the firm, nor by the fact that the mortgage, pursuing the legal title, happened to provide that any surplus after sale should be paid to Crane, 'his heirs or assigns.' Moreover, Smith was not called as a witness, and. although the testimony of the president of the bank tended to show that Smith objected to the giving of a mortgage in the name of D. R. Smith & Co., we concur with the finding of the circuit judge that Smith knew of the execution by Crane of the mortgage of the three-fourths, which as between them belonged to Crane, and accepted the benefits of the renewals secured thereby without objection. The necessary conclusion is that the partnership indebtedness to the bank was properly secured by the mortgage as against other firm creditors, even if Crane's title could under some circumstances have been subjected to an equity in favor of the firm.

The bank's rights could not be divested by sale under judgments against D. R. Smith or D. R. Smith & Co., whether the property was held in individual ownership or affected by an equity which passed to the bank in security of firm indebtedness.

Such being the situation, McGahan and his lessee could not claim to occupy under McGahan's purchase the position of a mortgagor in possession, and, indeed, that is not appellants' contention, which, on the contrary, denied the validity of the mortgage altogether. And since they proceeded to cut and sell the timber from the mortgaged premises from September 7, 1885, to the date of the decree, in derogation of the rights of both the bank and of Crane, the circuit court correctly held them to an accountability for three-fourths of the proceeds thus realized.

As between mortgagor and mortgagee, whether the mortgage be regarded as passing the legal estate or as giving merely a lien for the debt, the right of the mortgagee to be protected from the impairment of his security is alike recognized (Jones, Mortg. § 684; Brady v. Waldron, 2 Johns. Ch. 148; Nelson v. Pinegar, 30 Ill. 473); but the mortgagee cannot recover for waste in the cutting of timber from the mortgaged land by the mortgagor, unless the severance be wrongful (Searle v. Sawyer, 127 Mass. 491). So it may be conceded that the mortgagee is not entitled to rents and profits unless a lien thereon is reserved in the mortgage (Hardin v. Hardin, 34 S.C.. 80, 81, 12 S. E. 936); and that although the mortgagee may have the right to take possession upon condition broken, if he does not exercise the right he cannot claim the rents (Teal v. Walker, 111 U.S. 242, 4 Sup. Ct. 420). But the accounting was not awarded by the circuit court as resulting from the application of the doctrine of waste or the right to rents and profits as between mortgagor and mortgagee, but rested on the ground that McGahan acquired nothing more under the sale and conveyance to him than Smith's one-fourth of the property, and that his taking possession of the entire lands and converting the timber thereon entitled the bank to an account for three-fourths of the property so converted.

If McGahan was accorded the rights of a tenant in common, he could not complain at being subjected to the obligations of that relation. If one exclude his cotenant under a claim of exclusive right, or otherwise, the cotenant is entitled to compensation to the extent of the use of which he has been improperly deprived; and it is settled law in South Carolina that the occupying tenant is chargeable with what he has received in excess of his just proportion, and is liable to account to his cotenant for the rents and profits of so much of the common property as he has occupied and used in excess of his share. Thompson v. Bostick, 1 McMul. Eq. 78; Hancock v. Day, Id. 72; Holt v. Robertson, Id. 475; Jones v. Massey, 14 S.C.. 292; Scaife v. Thomson, 15 S.C.. 337; Pearson v. Carlton, 18 S.C.. 47. The character of McGahan's possession was hostile, and in any view, on general principles of equity, the accounting was properly decreed.

But it is objected that the decree was erroneous in this particular, because the heirs of Crane were not parties to the suit. By the forty-seventh rule in equity, in all cases where it appears to the court that persons who might otherwise be deemed necessary or proper parties to the suit cannot be made parties by reason of their being out of the jurisdiction of the court, or because their joinder would oust the jurisdiction of the court as to the parties before the court, the court may, in its discretion, proceed in the cause without making such persons parties; but in such cases the decree is without prejudice to the rights of the absent party. In this case the heirs of Walter B. Crane were not made parties to the bill, presumably because jurisdiction would thereby be ousted; but no objection was made to proceeding in their absence, and, so far as these defendants are concerned, complainant, if otherwise entitled, was properly allowed to go to a decree of sale and foreclosure as to them, as claiming the equity of redemption or title to that part of the real estate which stood in the name of Crane. And, as the decree was operative to this extent, we think it may be sustained in respect of the accounting for the conversion of that which rendered the security valuable. It is admitted that Crane and his wife, who alone survives him, executed the mortgage, and that the indebtedness is unpaid, while it is evident upon this record that the firm is insolvent.

Under these circumstances, we are unable to conclude that appellants are entitled to insist upon an objection in this court, to sustain which would curtail the relief to which appellee was entitled as against them, or overthrow the jurisdiction of the circuit court. Keller v. Ashford, 133 U.S. 610, 626, 10 Sup. Ct. 494, and cases cited.

Decree affirmed.