When a mortgagor and mortgagee are citizens of the same state,
and the mortgagee assigns the mortgage to a citizen of another
state for the purpose of throwing the case into the circuit court,
it is necessary, in order to divest the court of jurisdiction, to
bring home to the assignee a knowledge of this motive and purpose.
Till then, he must be considered an innocent purchaser without
notice.
If the assignment was only fictitious, then the suit would in
fact be between two citizens of the same state, over which the
court would have no jurisdiction.
The question of jurisdiction, in such a case, should have been
raised by a plea in abatement. Upon the trial of the merits, it was
too late.
A former suit in chancery between the original parties to the
mortgage involving directly the validity of that instrument, in
which suit a bill to foreclose was dismissed, upon the ground that
the mortgage was void, was good evidence in an ejectment brought by
the assignee claiming to recover by virtue of the same mortgage.
The instrument had been declared void by a court of competent
jurisdiction, and neither the parties nor their privies could
recover upon it.
There is no difference upon this point between a decree in
chancery and a verdict at law. Either constitutes a bar to a future
action upon the instrument declared to be void. The authorities
upon this point examined.
The highest court of the State of Alabama having decided that
the original mortgagee (an incorporated company) violated its
charter in the transaction which led to the mortgage, this Court
adopts its construction of a statute of that state.
Page 48 U. S. 199
The plaintiff below, Kernochen, a citizen of New York, brought
an action of ejectment against the defendants to recover the
possession of eleven hundred and sixty acres of land, situate in
that state, and to which he claimed title.
On the trial it appeared that Archibald K. Smith, being the
owner in fee of the premises, executed a mortgage of the same, on 9
April, 1839, to the Alabama Life Insurance and Trust Company, a
corporation duly incorporated by the Legislature of the State of
Alabama, to secure the sum of seven thousand five hundred dollars,
payable in five equal annual payments, with interest. And, further,
that the mortgage had been duly assigned and transferred by that
company to Kernochen, the plaintiff, in consideration of the sum of
one thousand dollars, on 26 August, 1844. Possession being admitted
by the defendants, the plaintiff rested.
It appeared, on the part of the defense, that the mortgage and
bond accompanying it, with other securities belonging to the Life
and Trust Company, were placed in the hands of Hunt, an agent of
the company, to procure a loan of money in New York, and that one
thousand dollars was loaned, at his instance and request, by the
plaintiff to the company, for the security of which the assignment
of the above mortgage was made. That the motive of the company in
making the assignment was to obtain a decision of the federal
courts upon the questions decided in the court below, but that
Kernochen was not advised of the motive at the time of the advance
of the money, nor was he in any way privy to it.
It further appeared, that a bill of foreclosure of the mortgage
had been filed in the court of chancery of Wilcox County, State of
Alabama, by the company, against Smith, the mortgagor, which was
defended by him. In the answer he admitted the execution of the
bond and mortgage, but denied their validity, setting out the
consideration, which consisted of bonds and obligations of the
company made and delivered to him for the like sum of seven
thousand five hundred dollars, payable at a future day, with six
percent interest. The mortgage in question bore eight percent.
The proofs taken in the case sustained the answer, and showed
that the transaction between the company and the mortgagor
consisted simply in an exchange of securities with each other, with
an advantage to the former of two percent profit.
The chancellor decreed that the contract was valid, and the bond
and mortgage binding upon the defendant, and that unless
Page 48 U. S. 200
the principal and interest were paid within thirty days, the
mortgage be foreclosed.
Upon an appeal to the supreme court of the state, this decree
was reversed, and a decree entered dismissing the bill. That court
held that the charter of the Life and Trust Company conferred no
authority upon it to lend its credit, or issue the bonds for which
the mortgage in question was given, and that the bond and mortgage
taken therefor were inoperative and void.
The charter of the company, together with several amendments of
the same, were given in evidence.
When the evidence closed, the defendants prayed the court to
charge the jury, that, if they believed that the transfer of the
mortgage to the plaintiff was made for the purpose of giving
jurisdiction to the federal courts, and to enable the company to
prosecute its claim therein, and that the plaintiff was privy to
the same, the deed was void, and did not pass any title to the
plaintiff which the court would enforce.
The defendants further prayed the court to charge, that the
judgment and decree of the Supreme Court of Alabama between the
company and Smith, the mortgagor, was conclusive upon the parties
in this suit, and that neither the mortgagees, nor those claiming
under them, since the rendition of the decree, could recover the
lands embraced in the mortgage at law or in equity.
The court refused to charge according to the above prayers, and
charged as follows:
1. That any matters which might abate the suit should have been
pleaded in abatement, and that, after the plea of the general
issue, the facts proved by the defendants, as set forth in the bill
of exceptions, could be of no avail, and were insufficient to abate
the suit. And,
2. That the defendants, claiming title under Smith, the
mortgagor, were estopped from denying the consideration of the
mortgage as set forth in that instrument, and that the
consideration as there stated was good, and valid, according to the
charter of the company, and sufficient to sustain the validity of
the mortgage and title of the plaintiff.
The jury found a verdict for the plaintiff.
A writ of error brought the case up to this Court.
Page 48 U. S. 215
MR. JUSTICE NELSON, after reading the statement of the case
prefixed to this report, proceeded to deliver the opinion of the
Court.
We are of opinion, that the charge of the court below upon the
question of jurisdiction was substantially correct.
It might have been placed upon ground less open to objection.
The case admits that Kernochen, the plaintiff, was not chargeable
with notice of the motive of the company in assigning the mortgage
to a citizen of another state; he was not chargeable, therefore,
with the legal consequences that might result from the existence of
such knowledge. He advanced his money, and took the security in
good faith, and became thereby possessed of all the title that
belonged to the mortgagees, and had a right to enforce it in any
court having cognizance of the same.
The most that can be claimed is that the company intended a
fraud upon the eleventh section of the Judiciary Act, in seeking to
obtain a decision of the federal courts upon the validity of the
mortgage between themselves and the defendants, both parties
residents and citizens of the same state, using the name of the
plaintiff as a cover for that purpose. But admitting this to be so
still, upon general principles, the rights of the plaintiff under
the assignment could not be affected by the
Page 48 U. S. 216
fraud, unless notice was brought home to him. Till then, he
stands on the footing of a
bona fide purchaser without
notice.
But the charge, we think, may also be sustained upon the ground
on which it was placed by the court below. For even assuming that
both parties concurred in the motive alleged, the assignment of the
mortgage, having been properly executed and founded upon a valuable
consideration, passed the title and interest of the company to the
plaintiff. The motive imputed could not affect the validity of the
conveyance. This was so held in
McDonald
v. Smalley, 1 Pet. 620.
The suit would be free from objection in the state courts. And
the only ground upon which it can be made effectual here is that
the transaction between the company and the plaintiff was
fictitious and not real, and the suit still, in contemplation of
law, between the original parties to the mortgage.
The question, therefore, is one of proper parties to give
jurisdiction to the federal courts, not of title in the plaintiff.
That would be a question on the merits, to decide which the
jurisdiction must first be admitted.
The true and only ground of objection in all these cases is that
the assignor, or grantor, as the case may be, is the real party in
the suit, and the plaintiff on the record but nominal and
colorable, his name being used merely for the purpose of
jurisdiction. The suit is then in fact a controversy between the
former and the defendants, notwithstanding the conveyance, and if
both parties are citizens of the same state, jurisdiction of course
cannot be upheld.
26 U. S. 1 Pet.
625;
2 U.S. 2 Dall. 381; 1
Wash.C.C. 70, 80; 2 Sumner 251.
Assuming, therefore, everything imputed to the assignment of the
mortgage from the company to the plaintiff, the charge of the court
was correct. The objection came too late, after the general issue.
For when taken to the jurisdiction on the ground of citizenship, it
must be taken by a plea in abatement, and cannot be raised in the
trial on the merits.
D'Wolf v.
Rabaud, 1 Pet. 476;
Evans v.
Gee, 11 Pet. 80;
Sims v.
Hundley, 6 How. 1.
But we are of opinion the court erred in giving the second
instruction, which denied the conclusiveness of the decree in the
bill of foreclosure against the right of the plaintiff to recover
in this action.
The suit in chancery was between the original parties to the
mortgage, and involved directly the validity of that instrument; it
was the only question put in issue by the bill and answer, and the
only one decided by the court. The mortgage was held to be void, on
the ground that the bonds of the company which were given in
exchange for it were illegal,
Page 48 U. S. 217
and created no debt or liability for which a mortgage security
could be taken or upheld; that every part of the transaction was
beyond any of the powers conferred upon the company by its charter,
and therefore wholly unauthorized and void. On these grounds, the
court decreed that the bill be dismissed. The present is an action
of ejectment, brought by the assignee of the complainants in that
suit against defendants representing the interest of the mortgagor,
and in which the right to recover depends upon the force and
validity of the same instrument.
A mortgagee, or anyone holding under him, may recover possession
of the mortgaged premises, after default, on this action, unless it
appears that the debt has been paid, or is extinguished, or the
mortgage security for good cause held ineffectual to pass the
title. Here it has been shown to have been declared null and void
by a court of competent jurisdiction, in a suit between parties
under whom the present derive title, and in which, as we have seen,
the question of its validity was put directly in issue. The case
therefore falls within the general rule, that the judgment of a
court of concurrent jurisdiction directly upon the point is as a
plea, a bar, or as evidence conclusive between the same parties or
privies upon the same matters, when directly in question in another
court.
It is suggested on the brief submitted on the part of the
plaintiff below, that a decree in equity between the same parties
is not a bar to an action at law; and hence, that the decree in the
bill of foreclosure in this case is no bar to the action of
ejectment; and the case of the
Lessee of Wright v.
Deklyne, 1 Pet.C.C. 199, is referred to as sustaining that
position. On looking into the case, it will be seen that the decree
dismissing the bill, which was set up as a bar to the action of
ejectment, was placed upon the ground that the complainant had a
complete remedy at law, and did not, therefore, involve the legal
title to the property in question. The court said that if a
complainant seeks in a court of equity to enforce a strictly legal
title, when his remedy at law is plain and adequate, the dismissal
of his bill amounts to a declaration that he has no equity, and the
court no jurisdiction; but it casts no reflection whatever upon his
legal title; it decides nothing in relation to it, and consequently
can conclude nothing against it. It was admitted that the decision
of a court of competent jurisdiction directly upon the point was
conclusive where it came again in controversy.
The case of
Hopkins v.
Lee, 6 Wheat. 109, illustrates and applies the
principle which governs this case. There, Hopkins purchased of Lee
an estate, for which he agreed to pay
Page 48 U. S. 218
$18,000; $10,000 in military lands at fixed prices, and to give
his bond for the residue. The estate was mortgaged for a large sum,
which encumbrance Lee agreed to raise. The whole agreement rested
in contract. Hopkins filed a bill against Lee, charging that he had
been obliged to remove the encumbrance, and claiming the repayment
of the money, or, in default thereof, that he be permitted to sell
the military lands which he considered as a pledge remaining in his
hands for the money. Lee put in an answer denying the allegations
in the bill, whereupon the cause was referred to a master, who
reported that the funds with which Hopkins had lifted the mortgage
belonged to Lee, upon which report a decree was entered
accordingly. The suit in 6 Wheaton was an action of covenant
brought by Lee against Hopkins, to recover damages for not
conveying the military lands which he had agreed to convey upon the
aforesaid encumbrance being removed. The defense was that the
encumbrance had not been removed. And upon the trial, Lee relied
upon the suit and the decree in chancery as conclusive evidence of
the fact that he had complied with the condition, which was
admitted by the court below, and the decision sustained here on
error.
The court, after referring to the general rule, observed that a
verdict and judgment of a court of record, or a decree in chancery,
although not binding upon strangers, puts an end to all further
controversy concerning the points thus decided between the parties
to such suit. In this there is, and ought to be, no difference
between a verdict and judgment in a court of common law and a
decree of a court of equity. They both stand on the same footing,
and may be offered in evidence under the same limitations, and it
would be difficult to assign a reason why it should be
otherwise.
If any further illustration of the principle were necessary, we
might refer to the case of
Adams v. Barnes, 17 Mass. 365,
where it appeared that a mortgagee had brought an action to recover
possession of the mortgaged premises, in which the mortgagor had
defended on the ground of usury, but, failing in the defense, the
mortgagee had judgment. The mortgagor afterwards conveyed his
interest to a third person, who brought a writ of entry against the
mortgagee to recover the possession, relying upon the usury in the
mortgage as invalidating that instrument, and rendering it null and
void. But the court held the parties concluded by the previous
judgment, the same point having been there raised and decided in
favor of the mortgagee.
The same principle will be found in
Betts v. Starr, 5
Conn. 550, where it was held that a judgment recovered upon a
Page 48 U. S. 219
note secured by the mortgage, notwithstanding the plea of usury,
precluded the mortgagor from setting up that defense again, in an
action of ejectment by the mortgagee to recover the possession of
the mortgaged premises.
Further illustrations of the principle will be found by
referring to Cowent & Hill's Notes to Phillips on Ev., 804,
note 558; and 2 Greenleaf on Ev., §§ 528-531.
The case of
Henry Raguet v. Peter Roll, 7 Ohio, 76, has
been referred to as maintaining a different doctrine. That was a
scire facias on a mortgage to charge the lands in
execution. The defense set up was that the mortgage had been given
to secure the payment of a note of five hundred dollars, which was
made to the mortgagee to compound a felony. There had been a suit
between the same parties on the note, in which the same defense was
set up and prevailed. The case is reported in 4 Ohio 400. But this
former suit was not interposed or relied on in the
scire
facias on the mortgage, and the question here, therefore, was
not involved in that case, and probably could not have been. For on
looking into the report of the suit upon the note, it appears to
have been brought originally in the common pleas, where the
plaintiff recovered. This judgment was afterwards reversed by the
supreme court on error, without any further order in the case. This
left the parties and the note as they stood before the judgment in
the common pleas. Cowen & Hill's Notes, 826, note 587.
There is another principle that would probably be decisive of
this case, over and above the ground here stated, upon a second
trial, arising out of the thirty-fourth section of the Judiciary
Act, which provides that the laws of the several states, with the
exceptions there stated, shall be regarded as rules of decision in
trials at common law in the courts of the United States in cases
where they apply.
The highest court of the State of Alabama has given a
construction to the act of the legislature chartering this company,
which we have seen is fatal to a recovery. It belongs to the state
courts to expound their own statutes, and when thus expounded the
decision is the rule of this Court in all cases depending upon the
local laws of the state.
20 U. S. 7
Wheat. 361;
31 U. S. 6 Pet.
291.
It is unnecessary, however, to pursue this inquiry, as the
grounds already mentioned are in our judgment conclusive upon the
rights of the parties.
In every view we have been able to take of the case, we think
the court erred in the second instruction given to the jury, and
that the judgment below must be
Reversed.
Page 48 U. S. 220
Order
This cause came on to be heard on the transcript of the record
from the Circuit Court of the United States for the Southern
District of Alabama, and was argued by counsel; on consideration
whereof, it is now here ordered and adjudged by this Court, that
the judgment of the said circuit court in this cause be and the
same is hereby reversed with costs, and that this cause be and the
same is hereby remanded to the said circuit court, with directions
to award a
venire facias de novo.
