Clement v. King

after stating tbe case: Tbe pleadings contain no suggestion affecting tbe bona fides of tbe deed of trust of tbe Trunk Company to Lindsay, nor tbe sufficiency of the power of sale therein conferred, nor tbat tbe power was not executed in strict conformity with its terms, nor tbat tbe deed to tbe purchasers was not properly executed and recorded. Tbe deed of trust having been executed in good faith and for a sufficient consideration and duly registered prior to tbe docketing of tbe *460judgments in favor of King and Kimball, J. T. Moretead, W. H. Ragan, J. H. and H. A. Millis, recovered upon causes' of action lying in contract, constituted a lien upon the property therein described and conveyed superior to the general lien of these judgments upon the mortgaged property of the judgment debtor. This is well settled in this State, and must logically and necessarily follow from the statutory provisions which give to judgments'a lien from their docketing, and mortgages and deeds of trust validity from their registration, as against creditors or purchasers for a valuable consideration. Rev., secs. 574, 982, and cases cited thereunder in Pell’s Revisal, 1908; James v. Markham, 128 N. C., 380; Gammon v. Johnson, 126 N. C., 66; Gambrill v. Wilcox, 111 N. C., 42; Gully v. Thurston, 112 N. C., 192.

Default having been made by the Trunk Company in the payment of the note to the bank, the deed by the trustee executed to the„ purchasers at the sale made by him in conformity with the power of sale divested the equitable title of the Trunk Company in the mortgaged property, and left no estate nor interest in the corporation to which the lien of the subsequent judgments, in favor of King & Kimball, Morehead, Ragan, J. II. and II. A. Millis, could attach; and this would be equally true as to the Jarrett judgment but for- the provisions of section 1131, Rev., which we will presently consider.

When these judgments (except the Jarrett judgment) were docketed, the Trunk Company'did not own the property previously sold by Lindsay; it had been divested of the entire legal and equitable estate. The deeds passing its entire legal and equitable estate had been properly executed, delivered and registered. There had been no reconveyance to it by the purchasers, and no act done sufficient in law to reinvest the title in the corporation. The sale and deed of the Sheriff of Guilford County, made pursuant to the execution issued on the King & Kimball and Morehead judgment, were, therefore, ineffectual to pass the title to the purchaser at that sale, and the deed conveyed no title nor interest in the property to the purchaser, King. The deed is a nullity.

The same conclusion would be reached as to the Jarrett judgL ment but for the provisions of section 1131, Rev., and the construction of that section by the decisions of this Court. Section 1131 is as follows: “Mortgages of corporations upon their property or earnings, whether in bonds or otherwise, shall not have power to exempt the property or earnings of such corporations from execution for the satisfaction of any judgment obtained in courts of the State against such corporations for *461labor performed nor torts committed by sucb corporation whereby any person is killed or any person or property injured, any clause or clauses in sucb mortgage to the contrary notwithstanding.” In Williams v. R. R., 126 N. C., 918, the Falls of Neuse Manufacturing Company petitioned the court to' direct its receiver to pay out of the proceeds derived from a foreclosure sale of defendant’s property the amount of a judgment recovered by it for damages occasioned by ponding back water on its lands, its judgment having been recovered after the foreclosure sale had been had and confirmed, and in disallowing the motion the present Chief Justice, then Associate Justice, said: “This case is governed by R. R. v. Burnett, 123 N. C., 210. There Burnett brought an action against a corporation for personal injuries, recovered judgment and sued out execution. In the meantime a mortgage had been foreclosed against the corporation, the property had been sold and a new company was in possession as purchaser. This Court said: ‘The fact that the plaintiff claims under a decree of foreclosure by order of court does not affect the rights of the defendant Burnett. The decree was based on the mortgage and conveyed no more than was conveyed by the mortgage. It conveyed no more than would have been conveyed by a foreclosure of the mortgage under power of sale contained in the mortgage.’ And says further: ‘The principle underlying this decision, and upon which it is decided, is that under section 1255 of The Code (now section 1131, Rev. 1905), ths mortgage conveyed nothing as against this claim, and as it conveyed nothing as against this claim, the purchaser got nothing as against this claim by the mortgage sale.’ ” The Court further proceeds: “The purchaser stands in the shoes of the original debtor, bought only such interest as he could mortgage as against the Falls of Neuse Manufacturing Company, and subject to any judgment it might, obtain, and the Falls of Neuse Manufacturing Company has no right to share in the proceeds of such sale. It must proceed against its debtor and assert its rights by execution against the property, notwithstanding the foreclosure sale, just as was held in R. R. v. Burnett, supra. The same doctrine was reiterated in Belvin v. Paper Co., 123 N. C., 138 * * *. But here, as in R. R. v. Burnett, the judgment was obtained after the sale under foreclosure, and after the property was turned over to the purchaser, and there was no obstruction of the petitioner’s execution by any action of the court. As to it, the mortgage and any rights obtained under it, either by bondholders or purchasers, are nonexistent.” In Howe v. Harper, 121 N. C., 356, the same conclusion was reached and the same construction affirmed *462in an opinion delivered by tbe same learned judge. Tbe proper construction and effect of tbis statute bas become settled by these decisions, and applying tbis construction to tbe admitted facts of tbis ease, we beld tbat tbe title obtained by Ragan and Millis under tbe deed from tbe trustee, Lindsay, was subject to tbe satisfaction of tbe judgment recovered by Jarrett for tbe tort of tbe corporation resulting in personal injuries to bim; it was, however, valid and effectual against all subsequently recovered judgments except “for labor performed or torts committed by such corporation whereby, etc.”

Tbe defendants, however, plead as a defense tbat tbe trunk company was duly adjudicated á bankrupt within four months after tbe judgment in favor of Jarrett was recovered, to wit, 11 March, 1908, and under tbe provisions of section 67f, Bankruptcy Act of 1898, “all> levies, judgments, attachments, or other liens, obtained through legal proceedings against a person who is insolvent, at any time within four months prior to tbe filing of a petition in bankruptcy against bim, shall be deemed null and void in case be is adjudged a bankrupt, and tbe property affected by tbe levy, judgment, attachment or other lien shall be deemed wholly discharged and released from tbe same, and shall pass to tbe trustee as a part of tbe estate of tbe bankrupt, unless tbe court shall, on due notice, order tbat tbe right under such levy, judgment, attachment, or other lien shall be preserved for tbe benefit of tbe estate, and thereupon tbe same may pass to, and shall be preserved by, tbe trustee for tbe benefit of tbe estate, as aforesaid.”

Before considering tbe construction placed upon tbis section by tbe Supreme Court of tbe United States and other courts, we must bear in mind tbat tbe property included in tbe mortgage and sold by tbe trustee was sold 13 October, 1905, and tbe adjudication, in bankruptcy was made 11 March, 1908 — two and a half years intervening; tbe deed of trust under which tbe sale was made was executed 22 October, 1902 — six and one-half years -before tbe adjudication. Tbe property included in tbe deed could not have passed to tbe trustee in bankruptcy; as against bim, tbe deed, made when it was, was an insuperable barrier. No other creditor except Jarrett, as appears from tbis record, could have reached tbat property, ’ either through tbe trustee or otherwise. While the defendants plead tbat tbe Trunk Company was adjudicated a bankrupt, they do not plead its discharge in bankruptcy, nor does it appear tbat any discharge bas been granted.

In Coal Co. v. Electric Light Co., 118 N. C., 232, in considering whether tbe effect .of section 1131, Rev., was to create a *463lien, this Court said: “This section differs entirely from section-1781 (Code, now sec. 2016, Rev.), which creates, or provides for creating, a lien as a security for certain debts. It (section 1255, Code, now sec. 1131, Rev.) creates no lien, but undertakes to afford the creditor protection by disabling corporations from conveying their property, by mortgage, freed from liability upon _ a judgment obtained against such corporations ‘for labor performed, for materials furnished [now omitted from section 1131], or torts committed by such corporations, their agents or employees.’ This statute must mean such labor performed, such materials furnished and such torts committed after making the mortgage, as the act was passed in 1879 * * * [p. 235]. As we have said; this section neither creates nor provides for the creation of a lien. It does not seem to provide against prior judgment liens, whether taken upon a prior or subsequent debt; nor does it provide against an absolute bona fide sale, but only provides that the property mortgaged shall stand, so far as their debts and liabilities are concerned, just as if there had been no such mortgage made.” <

Neither the learned counsel, in their briefs or oral arguments, nor our own researches have found a similar statute in other States; but in Georgia they have an analogous provision which permits the maker of a note to waive as to its payment the benefit of the homestead provision of the Georgia Constitution. In the case of McKenny v. Cheney, 45 S. E. Rep., 433, in determining the effect of section 67f, Bankruptcy Act, upon a note with a waiver clause in it, the Court held, quoting from Frazee v. Nelson, 179 Mass., 456: “The effect of section 67f of the, United States Bankruptcy Act of 1898 is not to avoid the; levies and liens therein referred to against all the world, but only as against the trustee in bankruptcy and those claiming under him, so that the property may pass to and be distributed among the creditors of the bankrupt.” The Federal Court, as ruled in the Lockwood case (190 U. S., 294), having no jurisdiction to administer the property set apart as exempt, subsection f of the Bankruptcy Act does not affect a judgment obtained in a State court on a note waiving such exemption, when such judgment is proceeding only against property set apart as exempt.” The Court further proceeds: “Aside from the authorities cited, however; we think that the language of the statute affords ample warrant for the ruling here made. The section in question provides simply that the effect of the discharge of such liens as are obtained in four months prior to the filing of the petition in bankruptcy shall be to pass the property against which the lien is held ‘to the trustee as a part of the estate of the bankrupt.’ ”

*464In Lockwood v. Exchange Bank, 190 U. S., 292, the Supreme Court said: “The difference, however, between the two is, that in the latter case — -that is, causing the exempt property to form a part of the bankruptcy assets — the inconvenience would be irremediable, since it would compel the administration of the exempt property as part of the estate in bankruptcy, whilst in the other, the rights of creditors having no lien, as in the case at bar, but having a remedy under the State law against the exempt property, may be protected by the court of bankruptcy, since, certainly, there would exist in favor of a creditor holding a waiver note, like that possessed by the petitioning creditor in the case at bar, an equity entitling him to a reasonable postponement of the discharge of the bankrupt, in order to allow the institution in the State court of such proceedings as might be necessary to make effective the rights possessed by the creditors.” So in the present case, while section 1131, Rev., does not create a lien, it gives to the tort-claimant, whu has reduced his claim to judgment, a right (remedy) to follow and subject to the payment of his claim such property as the corporation has disposed of by mortgage, even where the sale under mortgage has taken place before judgment has been rendered. In concluding the opinion in Lockwood v. Bank, supra, Mr. Justice White says: “As in the case at bar the entire property which the bankrupt owned is within the exemption of the State law, ,it becomes unnecessary to consider what, if any, remedy might be available in the court of bankruptcy for the benefit of general creditors, in order to prevent the creditor holding the waiver as to exempt property from taking a dividend on his whole claim from the general assets, and thereafter availing himself of the right resulting from the waiver to proceed against exempt property.”

What property, if any, the Trunk Company had at the time of the petition and adjudication in bankruptcy does not appear; the only property involved in this litigation is the property conveyed by it in the deed of trust or mortgage to Lindsay, which, by the prior registration of the deed, its tona fides being unquestioned, was placed beyond the reach of its general creditors, "and which, by the provisions of section 1131, Rev., was not exempt from the satisfaction of the judgment recovered by the tort-claimant, Jarrett.

To hold that the Jarrett judgment, under section 1131, Rev., drew the mortgaged property into the bankruptcy court for the equal benefit of all the creditors of the Trunk Company, including the Jarrett judgment, would be to give an effect to the provisions of that section much broader than the construction *465of that section, as settled by the decisions of this Court, would warrant, and would, go far beyond its evident purpose. It would be to subject the mortgaged property of a corporation, though a foreclosure had been had more than two years before an adjudication in bankruptcy, to distribution among the general contract creditors, because there happened to exist a judgment for labor performed or a tort committed, resulting in' death or personal injuries. We cannot accept this enlargement or broadening of the provisions of the statute. Its language does not admit of such interpretation, nor are we constrained to so interpret it by the provisions of any section of the bankruptcy act.

Accepting all the facts alleged in the complaint and admitted in the answer as true, and accepting as true all the defenses pleaded in the answer, except their legal effect, we conclude that the plaintiff was entitled to judgment, upon the pleadings, that he is the owner and entitled to the possession of the land described, with the buildings thereon, and the deeds to the defendants casting a cloud upon his title should be canceled of record, by placing upon the margin a memorandum of the judgment to be entered in accordance with this opinion. In refusing the motion of the plaintiff there was error.

Reversed.

I agree with the Chief Justice that Causey Jarrett, haying proven his claim in bankruptcy, could • not pi’oceed at the same time in the State court, and that the sale under his judgment is a nullity.

To my mind, it is plain that if there was any estate or remnant of title left in the bankrupt corporation which its deed in trust to Lindsay could not pass by reason of our statute (Ke-visal 1905, sec. 1131), that interest passed to the trustee in bankruptcy under section 67f of the bankrupt law, for our statute does not prevent it. I think the decision of the Supreme Court of the United States in Bank v. Staake, 202 IJ. S., 141, is an authoritative adjudication upon the provisions of that section, that all judgments within the four-months period are nullified and annihilated, not only as against the trustee, but as against third parties and all the world as well. The language of Mr. Justice Brown, in delivering the opinion, seems to admit of no other construction. He says: “The argument that section 67f in question here refers only to liens upon property which, if such liens were annulled, would pass to the trustee of the bankrupt, we think is unsound, since that contingency is amply provided for by the prior clause of the section annulling all such liens, and providing that property affected thereby shall pass to the trusted as a part of the estate.”

But to my mind there are other reasons why plaintiff is not entitled to a judgment upon the pleadings.

1. This motion must be treated in the light of "a demurrer to the answer, and therefore as admitting its allegations to be true. The defendants in their answers expressly deny that plaintiff is the owner and entitled to possession, and they deny, in express terms the allegation of unlawful possession, thus raising the general issue as to title. Under these pleadings defendants are entitle®, to prove, if they can, an outstanding legal title' paramount to that of the Trunk and Bag Corporation, and to connect themselves with it. While they admit that the corporation executed the deed in trust to Lindsay, they nowhere admit that the corporation had a valid and indefeasible title to the property. It is true, the answer set up other defenses and facts, but it is settled in this State that a defendant may plead different as well as inconsistent defenses to the same action.

2. There appears to me to be another reason why, taking the facts as set out in the answers to be true, the plaintiff is not *467entitled to recover. Altbongb some of tbe defendants may claim title under tbe deed in trust to Lindsay, tbey all claim title under valid judgments against tbe Trunk and Bag Company wliicb antedated tbe Causey Jarrett judgment. Tbe defendant King, who filed a separate answer, does not claim under tbe deed in trust, but under a judgment likewise antedating tbe Causey Jarrett judgment.

Section 1131, Revisal,' applies only to mortgages and not to judgments. This is expressly recognized in Coal Co. v. Electric Light Co., 118 N. C., 235, where it is said: “It (meaning section 1131 of tbe Revisal) does not seem to provide against prior judgment liens, whether taken upon a prior or subsequent debt. Nor does it provide against an absolutely bona fide sale, but only provides,” etc. Assuming that a sale under tbe deed in trust could not in consequence of tbe statute pass an absolute and indefeasible title as against a judgment founded upon tort (such as tbe Causey Jarrett judgment), there is no such restriction in regard to judgments duly docketed. If after tbe mortgage was executed or foreclosed there was any right, interest or estate left in tbe Trunk and Bag Company that Causey Jarrett could sell and convey under bis judgment and execution, it follows that such interest must have passed out of tbe Bag Company under tbe sale in August, 1907, made under executions upon judgments antedating his. If Jarrett could sell such interest, tbe prior judgment creditors could do tbe same, for their judgments were not affected by tbe statute and were as valid and unrestricted as bis.

If there was no interest left in tbe Bag Company, tbe subject of execution, then plaintiff acquired no title under tbe Causey Jarrett execution.

If there was an interest or estate of any kind left in tbe corporation after tbe execution of tbe mortgage, plaintiff likewise got no title, because it had been sold and passed under prior judgments and executions.

For this reason, tbe cases of R. R. v. Burnett and Williams v. R. R., cited in tbe opinion, have no application. In those cases there were no prior judgments against tbe mortgagor corporation under which tbe property bad been sold and conveyed to purchasers. This is not a contest between Causey Jarrett and tbe purchaser under tbe mortgage, as in tbe Burnett case, but it is a contest between a purchaser under Causey Jarrett’s judgment and a purchaser under prior judgments equally valid and binding on the corporate defendant as Causey Jarrett’s.

If this was an action in which Causey Jarrett was seeking to subject tbe property to tbe payment of bis judgment debt in tbe *468bauds of a purchaser under tbe mortgage, tbe ease would be different. But it is not that. It is an action of ejectment under wbicb plaintiff claims title under an execution sale. It must therefore appear tbat there was some interest left in tbe judgment debtor subject to sale under execution. There must have been something in tbe debtor for tbe execution to operate on.

If there was, then such interest bad been previously sold and conveyed to defendant King under prior judgments, for tbe statute applies only to mortgages and does not restrict or in any way limit tbe lien and operation of a judgment and execu-' tion.

Whatever residuum of estate was left in tbe corporate mortgagor was liable to be sold under any docketed judgment, whether founded on tort or contract, and therefore priority must govern.

Another obstacle, in my opinion, stands in plaintiff’s way. Tbe mortgage to Lindsay, trustee, was executed and recorded before Causey Jarrett was injured or bis action commenced. It seems to me subversive of elementary principles of law to bold tbe trustee and those claiming under him bound by tbe findings in a cause to wbicb neither of them were parties.

It is true, tbe mortgage is voi,d as to a tort, but tbe tort wbicb thus avoids it must be proved in an action to wbicb tbe trustee or bis assigns were parties. They are entitled to “a day in court” when tbe fact wbicb avoids their title is adjudicated; otherwise, an insolvent corporation might submit to judgment upon fictitious torts for tbe purpose of avoiding its mortgage, and those interested in tbe mortgage be without remedy.

To destroy tbe value of tbe existing mortgage by a trial and judgment when tbe mortgagee cannot be beard and of wbicb be may be in entire ignorance, is taking bis property without due process of law.

I think, therefore, tbe plaintiff is required to establish tbe tort again to tbe satisfaction of a jury in this action before be can recover.

Under our precedents, the mortgage. was nonexistent as to the Jarrett claim for a tort, but the Trunk Company having been adjudged a bankrupt 11 March, 1908, and Jarrett having proven his claim in bankruptcy, the property could not be sold thereafter under the judgment in favor of Jarrett wlfich was obtained by him in January, 1908. Jarrett had no lien save by virtue of that judgment, which having been obtained within four months prior to the adjudication in bankruptcy, execution could not issue for its enforcement.

If the Trunk Company had made a bona fide sale of its property prior to the lien of the Jarrett judgment, the purchaser would have obtained a good title. Coal Co. v. Electric Co., 118 N. C., 232. It follows that the trustee in bankruptcy acquired a good title, as against the Jarrett judgment, which was obtained within four months prior to the adjudication in bankruptcy.

It is true that it does not yet appear that the Trunk Company has obtained its final discharge, but its property by virtue of the adjudication passed to the trustee in bankruptcy and no execution could issue on the Jarrett judgment unless the property was restored to the bankrupt by decree of the court which *466•bad taken it into custody. The sale under tbe Jarrett judgment 4 August, 1909, was therefore a nullity, and the purchaser at such sale acquired no title.