Russell v. Southard

THIS was an appeal from the Circuit Court of the United States for the District of Kentucky, sitting as a court of equity.

It was a bill filed by Russell, the appellant, to redeem what he called a mortgage, and the question in the case was whether it was a mortgage or conditional sale. The facts are set forth in the opinion of the court. Upon the trial, the Circuit Court dismissed the bill, and Russell appealed to this court.

It was argued by Mr. Underwood and Mr. Morehead, with whom was Mr. Clay, for the appellant, and by Mr. Nicholas for the appellee.

The counsel for the appellant made the following points:

1. That the execution of a defeasance simultaneously with the absolute conveyance, constitutes them, in legal contemplation, one instrument; and that in this case the execution of the defeasance was so. 3 J. J. Marsh. (Ky.), 354; Pow. on Mort., 67.

2. That in all doubtful cases the law will construe the contract to be a mortgage, and that courts are less inclined to consider a contract for land a conditional sale than the same kind of contract for personalty; because land is not so liable to the casualties incident to personal, and especially living property. The general and governing principle in this entire class of cases is, that whatever clauses or covenants there are in a conveyance, though they seem to import an absolute disposition or conditional purchase, yet if, upon the whole, it appears to have been the intention of the parties that such conveyance should only be a mortgage, or pass an estate redeemable, a court of equity will construe it so. 5 Bac. Ab., 5. In the case of Edrington v. Harper, decided by the Court of Appeals of Kentucky, 3 J. J. Marsh. (Ky.), 354, the general rule is laid down, that if there be no other fact to illustrate the intention of the parties, but an absolute sale on one side and a defeasance on the other, the court will incline to the construction that the contract was a mortgage.

In the case of Flagg v. Mann, 2 Sumn., 535, the same doctrine is ably enforced; the presiding judge, in the course of his decision, remarking that 'it is well known that courts of equity lean against construing contracts of this kind to be conditional sales; and, therefore, unless the transaction be clearly made out to be of that nature, it is always construed to be a mortgage,' and concluding that 'the onus probandi is on the defendant to establish it to be a conditional sale. If it be doubtful, it must be construed to be a mortgage.'

3. That a sale in form, but which in fact and substance may be avoided by the payment of money within a given time, is, and will be held to be, a mortgage; if a mortgage until that period elapses, it must continue a mortgage until lapse of time or some other matter changes it. Wheeland v. Swartz, 1 Yeates (Pa.), 579; Stoever v. Stoever, 9 Serg. & R. (Pa.), 434; Wharf v. Howell, 5 Binn. (Pa.), 499; Dimond v. Enoch, Add. (Pa.), 356; Coldwell v. Woods, 3 Watts, (Pa.), 487; Friedly v. Hamilton, 17 Serg. & R. (Pa.), 70; 7 Watts & S. (Pa.), 339; Kunkle v. Wolfersberger, 6 Watts (Pa.), 126; Kerr v. Gilmore, Id., 405; Rankin v. Mortimere, 7 Id., 372; Brown v. Nickle, Pa. St., 390; Hamet v. Dundass, 4 Id., 178; Flagg v. Mann, 2 Sumn., 532; Skinner v. Miller, 5 Litt. (Ky.), 85; Hard. (Ky.), 6; 2 J. J. Marsh. (Ky.), 471; 3 Id., 354; 1 Dev. Eq. (N. C.), 373; 2 Call (Va.), 421; 2 Mon. (Ky.), 40; 1 Wash. (Va.), 125; 4 Hen. & M. (Va.), 161; 3 Yerg. (Tenn.), 525; 2 Hayw. (N. C.), 26; 2 Edw. (N. Y.), 138; 7 Johns. (N. Y.) Ch., 40; 2 Id. 34, &c.; 6 Watts (Pa.), 406, where the cases are reviewed.

4. That the simultaneous execution of the deed and an instrument giving four months to repay the money, with interest, no matter what may be the clasuses or covenants intended to restrict the redemption to this precise period, necessarily import the loan of money on one side and security on the other, and, if so, a court of equity will always construe it a mortgage.

5. That calling it a conditional sale does not make it so; and that the extraordinary language used in this case, so far from making it such, tends strongly to show that the spirit and real substance of the contract were understood, but attempted to be avoided by the artful dress thrown around the transaction.

The counsel then examined the extrinsic evidence bearing upon these points, of which it is impossible to give an abstract.

6. Whether, construing this transaction as a mere security for money advanced, any subsequent event has deprived the complainant of his right to redeem? The giving up the defeasance and execution of the receipt, it is insisted, amounted to a relinquishment or release of the equity of redemption. Russell called on Southard, after the period stipulated for redemption, to make good the advance mentioned in the deed. The receipt recites the several sums which, with the addition of this $100, make the amount stated in the deed, and concludes by saying it was in full of all demands. According to the face of the papers, Russell was allowed to redeem only by paying $4,929.81, whereas he had only received $4,829.81. He insisted on the $100 to make the sum he received equal to the obligation he had imposed on himself. This is so clearly shown by the receipt itself that it would be useless to enlarge upon it. The words at the end of the receipt, 'This is in full of all demands upon J. Southard,' can only be construed as having reference to monied claims. Russell, after the receipt of the $100, had no demand upon Southard, and it only increased by that sum the demand which Southard held on him. Increasing the sum which Russell was equitably bound to pay, if it be considered a mortgage, and releasing all further demands on the mortgagee, cannot be construed as destroying the liability which the advance only enlarged, and the right to redeem must consequently be considered as unaffected by the receipt. The giving up the defeasance at the same time was, therefore, without consideration.

Admitting, however, that it was an attempt on the part of Southard to extinguish the right to redeem, will a court of equity sanction it?

The civil law was, perhaps, more rigid on this point than ours, regarding, as it did, the mortgagor as a minor, and as having no will to do a valid act which would deprive him of the right to redeem. Our courts of equity have never gone to this extent, but they always look upon any act done under the influence resulting from the relation between mortgagor and mortgagee with great suspicion, and never fail to examine it with the severest scrutiny. It is not denied that the mortgagee may purchase the equity of redemption for a fair price and full consideration, under circumstances where the mortgagor could exercise a will unembarrassed by necessity. A court of equity will never sanction an arrangement by which the right of redemption is surrendered without adequate consideration. St. John v. Turner, 2 Vern., 418; 1 Ridgew., 295; Pow. on Mort., 122, note n.; Holdridge v. Gillespie, 2 Johns. (N. Y.), Ch., 30; Henry v. Davis, 7 Id., 41; 2 Cow. (N. Y.), 322; 2 Day (Conn.), 246; 1 Murph. (N. C.) 117; Hicks v. Hicks, 5 Gill & J. (Md.), 75.

7. With respect to lapse of time, the suit was commenced within twenty years of the date of the original transaction, and within less than seventeen years after the advance of the $100.

The points made by Mr. Nicholas were the following:

1. Does the written proof concerning the agreement show a conditional sale or a mortgage?

Over and above the unequivocal express language of the agreement itself, that it is, and was intended to be, a conditional sale from Southard, and not in the nature of a mortgage from Russell, there is the absence of any of those indicia, upon which courts rely in construing a quasi conditional sale to be a mortgage or security for a loan.

1st. There is no agreement, express or implied by Russell, to pay the $4,900.

2d. There is no acknowledgment, express or implied, which imports, or from which there could be inferred, an indebtedness from Russell to Southard. There is nothing creating any personal liability upon Russell, or by which Southard could have coerced the payment of the $4,900. There is nothing on the face of the writings importing a loan, or anything else than what they purport to be, the evidence of a conditional or defeasible sale.

There is, therefore, the want of that mutuality in the agreement, which, according to all the approved authorities, is indispensable to the construing of a conditional sale into a mortgage. Robinson v. Cropsey, 2 Edw. (N. Y.), Ch., 138; 19 Wend. (N. Y.), 518.

The legality of these sales is, at this day, beyond all doubt, even if there ever was room for a fair legal doubt on the subject. 'To deny it,' (says Ch. J. Marshall, delivering the opinion of the whole court, in Conway v. Alexander, 7 Cranch, 236,) 'would be to transfer to a court of chancery, in a considerable degree, the guardianship of adults as well as infants.' In Flagg v. Mann, 14 Pick. (Mass.), 480, the court says: 'Such a contract is known and recognized in law, and is as much to be enforced as is a mortgage, or any other contract or agreement. A decision to the contrary would essentially, unnecessarily, and unjustly fetter and impair the right to manage and dispose of property, according to the wants and interests of the owners.' In Glover v. Payne, 19 Wend. (N. Y.), 522, the Supreme Court of New York says: 'Until the courts are prepared to make contracts for parties, and to assume the guardianship of adults as well as infants, such a contract cannot be declared a mortgage.' 'Conditional sales, or defeasible purchases,' says Chancellor Kent, 'though narrowly watched, are valid, and to be taken strictly as independent dealings between strangers; and the time limited for the repurchase must be precisely observed, or the vendor's right to reclaim his property will be lost. The court never relieves the grantor who neglects to perform the condition on which the privilege of repurchase depends.'

The obvious reason for this departure from the ordinary chancery rule, in requiring such strict performance of the condition is, because there would otherwise be no mutuality in the agreement. The conditional vendee would be allowed to speculate on the chances of a rise in the value of the property, by lying by an indefinite time before he made his election to redeem, whilst the vendor had no power to compel a redemption. For the same reason, the want of power to coerce the payment of the purchase-money, is held by all the authorities as a controlling circumstance against construing a conditional sale into a mortgage. Some of the earlier authorities say, that want of mutuality is not an unanswerable argument, and some dicta in more modern decisions seem to recognize that doctrine; but it is believed that no case of approved authority can be found within the last seventy years, construing a conditional sale into a mortgage, where such mutuality did not exist. 19 Wend. (N. Y.), 522; 1 A. K. Marsh. (Ky.), 160.

The written proof in this case shows 'no previous debt or dealing, no loan in contemplation, no stipulation for the repayment of the money advanced, or right to coerce it, and no proposition for a treaty about a mortgage,' but does most clearly negative each of those propositions. We may, therefore, safely conclude, that the agreement cannot be construed into a mortgage from the written evidence in the cause.

2. The next inquiry is,-can parol proof be let in, to contradict or vary the construction of the written agreement, for the purpose of converting it into a mortgage?

The familiar general rule is, that this cannot be done either at law or in chancery. The exception to the rule at law is, where the parol proof is offered to establish alleged fraud in obtaining the agreement, or some vice or illegality in its consideration. Chancery allows the further exception, where a party comes to obtain the correction of an alleged mistake in the construction of the agreement. These are the only exceptions allowed in either court. In every other instance the rule is inflexible and invariable in its rigid application.

It might be inferred, from the loose language of some respectable authorities, and the case of Conway v. Alexander, (7 Cranch,) is among the number, that the letting in of parol proof, to establish the loan of money in this class of cases, without any charge of usury, was an additional exception. But it is believed never to have been so decided, where that was the turning point in the case. The contrary has been expressly and repeatedly decided by the Appellate Court of Kentucky, and such has long been the settled law of that state. In 1824, that court, composed of those eminent jurists, Boyle, Owsley, and Mills, after acknowledging that there had been difference of decisions in that court, as elsewhere, on the question, determined that the parol proof could not be allowed. The rule, thus settled, has constantly been enforced ever since. It has become a law of property in Kentucky. Its direct, and indirect recognition, can be found in at least twenty printed cases. In 1829, when there was a change in the members of the court, the rule was solemnly affirmed in the strongest manner, in Fishback v. Woodford, 1 J. J. Marsh (Ky.), 87. Again, in 1839, when there was another change in the members of the court, and it was composed of judges Robertson, Ewing, and Marshall, and effort was made to convert an absolute deed into a mortgage, by parol proof, without charge of accident or mistake, and the rule was reaffirmed in the following language, in Thomas v. McCormack, 9 Dana (Ky.), 109.

'There being no written memorial of any condition or defeasance, neither the public interest, nor the established principles of jurisprudence, will allow a court of either equity or law to admit parol testimony, in opposition to the legal import of the deed, and the positive denial in the answer, unless of foundation for such evidence had been first laid by an allegation, and some proof of fraud or mistake in the execution of the conveyance, or of some vice in the consideration. This rule, though it may operate harshly in a particular case, is, nevertheless, so salutary and conservative, that an inflexible adherence to it is necessary for effectuating the policy of the statute of frauds, and of giving proper security to property, and full effect to solemn contracts in writing.' 'To admit such testimony, would operate a mischievous relaxation of wholesome rules of law, open a wide door to perjury, and greatly impair, if not altogether destroy, the efficacy and value of written memorials of contracts.'

3. If correct in this position, then the complainant must fail, as there is no foundation laid for letting in any parol proof, to show the original transaction to have been a mere loan and intended security for its repayment.

4. The next question is, whether Russell is not bound by his release under seal.

5. The next question is, does the parol proof establish, in contradiction to the writings, that the parties intended a mortgage, and not a conditional sale?

The claim to the relief sought here should be sustained by the fullest and most indisputable proof, because of its staleness; because it is in contradiction to the written agreement of the parties, fairly made; because it is asserted long after the death of James Southard, the principal party, and that of Warden Pope, the intelligent and respectable draftsman of the agreement; because, no sufficient excuse is even pretended, much less proved, for the long delay; because it is in opposition to Russell's voluntary release, made seventeen years before; and because all the material allegations are positively denied, on oath, by the defendant, Daniel Southard, who is charged to have been personally cognizant of the whole transaction.

Such is not at all the character of the proof. On the contrary, it very strongly corroborates the import of the writings, and tends to show that the parties really intended a conditional sale, and not a mortgage.

The counsel then examined the evidence upon this point.

Mr. Justice CURTIS delivered the opinion of the court.