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settlement, but in any event he took no part therein. Held, that there was nothing in such facts or in complainant's conduct which created an equi. table estoppel to prevent him from enforcing his mortgage against the property for the balance due him.
[Ed. Note. For cases in point, see Cent. Dig. vol. 19, Estoppel, $8 165– 187.] Appeal from the Circuit Court of the United States for the District of Kansas.
This was a bill in equity to foreclose a mortgage given April 27, 1901, by Herbert H. Clark and his wife to Harvey S. Clark, his father, conveying an undivided one-half interest in certain real estate situated in Wilson county, Kan., to secure the payment of certain notes amounting to $35,000 described in the mortgage, upon which $19,500 remained unpaid when the suit was brought. This mortgage was duly recorded in the office of the register of deeds of Wilson county on April 29, 1901. The mortgagors and also one Frederick E. Lyster, who held the title to the mortgaged premises at the time the suit was brought, were originally made defendants. Subsequently the suit was dismissed as to the Clarks and prosecuted only against defendant Lyster. His answer admits the execution of the mortgage as charged, but avers that at the time it was given Clark, the mortgagor, had no mortgageable interest in the land conveyed, that the notes claimed to have been secured by the mortgage had all been paid and satisfied, and that the mortgagee by reason of certain facts was estopped in equity from enforcing his security. The main facts, as disclosed by the pleadings, proof, and proceedings below, are as follows: Defendant Lyster and Herbert Clark, the mortgagor, had prior to April 27, 1895, been copartners in the manufacture of linseed oil, and were then the owners in fee simple, as tenants in common, each of an undivided one-half interest in the real estate which had been used by them in connection with their manufacturing business, the one-half of which belonging to Clark constituted the land which he subsequently mortgaged to his father. Their partnership was on that day dissolved, and a new agreement entered into by which Clark was to retire from active participation in the business, but to retain as a silent partner for a term of five years thereafter his interest in it. He agreed to leave his portion of the partnership capital, except $5,000, in the business, to loan Lyster $25,000 for five years, to pay annually to Lyster $2,500 in lieu of rendering personal services in carrying on the business, and in order to afford Lyster a basis of credit and commercial standing he agreed to convey and did convey to Lyster by a quitclaim deed his one-half undivided interest in the mill property, taking from Lyster a bond for a deed to reconvey the same to him on September 1, 1900. They proceeded with the business under the new agreement until about the expiration of the term, when Clark brought his action against Lyster to wind up their partnership business and for an accounting of all moneys due to him from Lyster under the agreement of April 27, 1895. On March 1, 1902, while that action was pending, Clark and Lyster settled and compromised all their differences involved in the suit. Lyster paid Clark $40,000 in full of all his dues, whether for money loaned or profits made. Clark dismissed his suit, and agreed to and did convey by a quitclaim deed his one-half equitable interest in the mill property which he had on April 27, 1901, mortgaged to his father and for which he then held Lyster's bond for a deed. At the time of that settlement Lyster had no actual as distinguished from constructive knowledge of the existence of the mortgage sued on, or of the fact that Clark's father had any right or interest in the property, and believed he was acquiring from Clark an unincumbered title to the same. After Clark received the $40,000 from Lyster pursuant to the terms of the settlement, he paid more than $16,000 of it over to his father in partial satisfaction of the mortgage debt, and the latter, being then 79 yearg old, made a present to his son of $10,000 to be invested for the support of his family. Lyster, after making his settlement with Clark on March 2, 1902, under the belief that he was the owner of an unincumbered title to the land in question, erected thereon permanent improvements of the value of $20,000. and was not actually informed of complainant's claim until this suit was begun, July 10, 1902. The court below by consent of parties appointed a special master to take testimony and return the same, with his findings of fact based thereon, to the court. The master heard the proof, made a finding of the foregoing main facts, and also found (using his language) that: "Close confidential relations existed at all times between Harvey S. Clark and Herbert H. Clark; the father was generous to the son, and to a considerable extent was dominated by the son. The settlement was brought to a close after Harvey S. Clark had come to Kansas City in order to be present when the settlement was made, and at a time when Harvey S. Clark was dwelling with his son Herbert H. Clark. Of the proceeds of said settlement Harvey S. Clark presented Herbert H. Clark with about $10,000 to invest for the latter's family, although Herbert H. Clark was then still indebted to Harvey S. Clark in the sum of nearly $20,000. From these facts, as well as from the contradictory evidence which Harvey S. Clark gave and the lack of interest which he manifested while testifying, I find that Harvey S. Clark authorized the settlement which was made by Herbert H. Clark with Lyster, and that the attempt to foreclose the written instrument described in the bill of complaint is an afterthought conceived by Herbert H. Clark, who overpersuaded his father to undertake it.” He also specially found that "neither during the negotiations for settlement nor at the time of the settlement and payment of the $40,000 was anything said one way or the other by any of the parties engaged therein concerning the said mortgage,” and that Clark, in consideration of the receipt of $40,000 from Lyster, agreed to and did accept the same in full settlement and satisfaction of the indebtedness due him from Lyster, which he found to be $38,279.45, and agreed "to make, execute and deliver to said Lyster at the time said $40,000 is paid a good and sufficient quitclaim deed of conveyance of all of his right, title and interest in and to” the property which was mortgaged. He also specially found that the issue involved in the accounting suit between Clark and Lyster “did not embrace or involve or include any questions pertaining to the real estate or the reconveyance there of or other matters provided for in the bond of date April 27, 1895, but only as to the moneys loaned and left in the business by the said Herbert H. Clark and the earnings of the business.” The master reported in favor of a dismissal of the bill on the ground that it would be unjust and inequitable to defendant Lyster to have the mortgage enforced. The Circuit Court overruled exceptions duly filed to the master's report, confirmed the same, and entered a decree dismissing the bill. From that decree an appeal is prosecuted to this court.
Thomas J. White and W. Littlefield (A. N. Gossett, on the brief), for appellant.
Charles W. Webster (John P. Gilmer and J. W. Crowley, on the brief), for appellee.
Before SANBORN and ADAMS, Circuit Judges.
ADAMS, Circuit Judge, after stating the case as above, delivered the opinion of the court.
Notwithstanding the fact that Harvey S. Clark, the mortgagee, has died since the institution of this suit and his
his personal representative has been substituted in his place, we shall frequently refer to the parties as they originally appeared. The substantial facts of the case are, as observed by the learned trial judge, practically undisputed, and we are to determine and adjudicate the rights of the parties thereunder. There is no doubt about the bona fides of the transactions between Harvey S. Clark, the mortgagee, and his son Herbert, which resulted in an indebtedness of the latter to the former in the amount of $35,000, the giving of the notes to represent the indebtedness, the execution of the mortgage to secure their payment, or the actual purpose of the parties to pledge whatever interest the son had in the real estate mortgaged to secure the payment of his indebtedness to his father. It is conceded that the son had paid the entire indebtedness excepting $19,500, and that the latter amount constituted a bona fide debt due on one of the notes described in the mortgage from the son to the father at the time this suit was brought. Notwithstanding the fact that numerous assignments of error are made, it is clear, as treated by the trial court, that two controlling questions are decisive of the case: First. Was the son's interest in the land which was conveyed by the mortgage subject to alienation as land, so as to entitle the mortgage deed to be recorded in the land records of the county and render its record constructive notice to subsequent purchasers? Second. Was the mortgagee's conduct in receiving from his son, the mortgage debtor, a part of the proceeds of the settlement between him and Lyster and otherwise, such as estops him in equity from foreclosing his mortgage for the balance due him? These questions will be considered in their order.
To properly apply the law, an accurate understanding of the relation of the parties as between themselves and as to creditors should be first stated. As between the mortgagor, Herbert Clark, and Lyster, the former undoubtedly owned the land in question and had a recognized vendible interest in it in 1895. The contract and bond for a deed executed by Lyster to Herbert on April 27, 1895, recited that Clark was then "the owner in fee simple of an undivided one-half interest” in the premises, and he then conveyed the same to Lyster for the purpose, as stated in the contract, of giving him credit and commercial standing as the managing partner of the partnership then formed between them. The contract and bond clearly disclose that as between the parties, so far as their rights against each other were concerned, the undivided interest conveyed by Clark to Lyster was not to be treated as partnership property, or as such made subject to any demands of Lyster against Clark on any possible accounting which might accrue to him. The contract and bond carefully discriminated between the loan of $25,000 made by Clark to Lyster and the conveyance of Clark's undivided interest in the land to Lyster. It subjected the loan to all the chances and hazards of the business. It provided that “on the first day of September, 1900, he” (Lyster) “will pay to said second party” (Clark) "the sum of $25,000 so loaned to him, conditioned, however, that in case of loss of any part of said loan by the first party in the legitimate transaction of the business herein provided for, then one-half of said amounts so lost beyond the control of said first party” (Lyster) “shall be deducted from said loan and the remainder of said amount” ($25,000) “shall be considered the amount due from the party of the first part to the party of the second part," etc. On the other hand, the contract and bond subjected the undivided interest transferred by Clark to Lyster to none of the chances and hazards of the business. It contemplated and in terms provided that it should be conveyed to Lyster and employed by him "as a basis of credit and commercial standing for the advantage and upbuilding of the business”; it contained an express covenant in the form of a bond that the interest should be reconveyed by Lyster to Clark on September 1, 1900, and, in the same clause which subjected the money to the chances and hazards of the business, it provided, concerning the land conveyed by Claik, as follows:
"That at the expiration of the five years for which this contract runs he" (Lyster) “will reconvey the premises herein described as hereinbefore provided” (referring to the absolute and unconditional terms of the bond) "to the said second party, his heirs or assigns, inevitable wear, decay, loss by fire or otherwise excepted.”.
From these provisions of the contract it appears that according to the intent, purpose, and agreement of the parties the land was not to become partnership assets, but was to remain the individual property of Clark and be reconveyed to him absolutely and unconditionally on a day fixed, without regard to any liability which might then exist in favor of Lyster against Clark arising out of the partnership business. Whether and how far real property is partnership assets depends upon the intention or agreement of the parties. 1 Jones on Mortgages, § 119; Brown v. Morrill, 45 Minn. 483, 48 N. W. 328; Collumb v. Read, 24 N. Y. 505.
American and English cases very generally hold that real estate not purchased with partnership funds does not become partnership property, though used for partnership purposes, unless there is some agreement that it shall be so considered. Story on Partnership (7th Ed.) $$ 94 and 95, note B, and cases cited. A mere agreement to use real property for partnership purposes is not sufficient to convert it into partnership stock. There must be some evidence of further agreement to make it partnership property. 1 Lindley on Partnership (2d Am. Ed.) p. 332 et seq., and cases cited; Shafer's Appeal, 106 Pa. 49; Alexander v. Kimbro, 49 Miss. 529; Ware v. Owens, 42 Ala. 212, 94 Am. Dec. 672.
In Frink v. Branch, 16 Conn. 260, 269, facts were considered very similar to those in this case, and it was there held that the property was not partnership assets; the court saying:
“This property was not purchased with common funds, nor was any common capital withdrawn from the power of creditors to make the purchase, nor was there any agreement that the property thus owned in common should become partnership stock or constitute any part of the capital of the company. It was agreed, by parol only, that this property should be improved by the company in the prosecution of its business; but this agreement extended only to its temporary use. It did not, nor could it, affect the title to the land, even as between the parties, much less as the rights of others might be involved."
In Reynolds v. Ruckman, 35 Mich. 80, which was a suit for the foreclosure of a mortgage given by one of two partners who held an undivided one-half interest as tenant in common with his copartner in property made use of for partnership purposes, the defense set up was that it was partnership assets. Chief Justice Cooley, in delivering the opinion of the court, said that cases "in which the lands have been purchased with partnership funds can have no application here. * * * Real estate held by partners may or may not be partnership property; but usually it is not so unless partnership assets have been used to purchase it, or unless it was put in originally as a part of the joint estate. But generally the fact that two or more persons make use of property in which their interests are apparently several, for partnership purposes, is very far from indicating an understanding that it is partnership estate.'
Before the time arrived for the execution of the deed from Lyster to Clark, pursuant to the terms of the contract and bond, they became estranged; litigation ensued, and Clark brought his action against Lyster for an accounting concerning the partnership business. According to the proof and to the finding of the special master, that suit involved no question concerning the real estate or the reconveyance thereof by Lyster, but related exclusively to an accounting for the money loaned and left in the business by Clark and the earnings of the business. No creditors of the firm appeared or intervened in that suit, and, so far as this record discloses, there were no creditors of the firm at the time that suit was settled in March, 1902. There were none in April, 1901, when Clark executed his mortgage to his father, and no questions are now involved in this suit which in any manner concern creditors. So that for the purpose of this case we are dealing with no assets in which creditors or any other persons except Clark and Lyster and the mortgagee of Clark have any rights. In this condition of things the learned trial judge held that on April 27, 1901, when the mortgage was given by Clark, he had no interest in the land which he could mortgage, but had only an equitable right to an accounting; that the mortgage in question amounted only to an assignment of Clark's right as a partner to enforce an accounting; and cited as sustaining his conclusion the following cases: Bank v. Carrollton R. R., 11 Wall. 624, 20 L. Ed. 82; Shanks v. Klein, 104 U. S. 18, 26 L. Ed. 635; Rommerdahl v. Jackson, 102 Wis. 444, 78 N. W. 742; Collumb v. Read, supra; Goldthwaite v. Janney & Cheney, 102 Ala. 431, 15 South. 560, 28 L. R. A. 161, 48 Am. St. Rep. 56; Page v. Thomas, 43 Ohio St. 38, 1 N. E. 79, 54 Am. Rep. 788; Seeley v. Mitchell's Assignee, 85 Ky. 508, 4 S. W. 190; Beecher v. Stevens, 43 Conn. 588; Hewitt v. Rankin, 41 Iowa, 35; Lindley on Partnership (2d Am. Ed.) * 341 and note B. Those were cases in which one partner assigned his entire interest in the partnership property to an outsider, or in which title to real estate purchased with partnership funds or originally contributed to the partnership capital was involved. In the first class of cases it was held that the outsider did not, by the assignment, become a partner, but acquired the right to an accounting only. In the second class of cases it was held that the real estate, in whosesoever name it stood, was held in trust for creditors and other copartners till their interests were satisfied or waived.
By reason of the peculiar facts involved in those cases and the legal principles applicable to them they afford no authority for the disposition of this case, which involves totally different facts and is governed by different principles. The case of Hewitt v. Rankin, supra, was a suit to foreclose a mortgage upon partnership property in which priority of liens was involved. The Supreme Court, in delivering its opinion, said:
"Real estate held by a partnership is to be regarded as the property of the firm, as to the creditors and all persons dealing with it, where necessary to