WESTERN MORTG. & INV. CO., Limited, v. GANZER et al., 63 F. 647

PARDEE, Circuit Judge (after stating the facts as above).

The assignments of error relied upon by the appellant present in different forms practically the same question; i. e. whether the court below erred in not allowing the plaintiff in error (appellant here) a lien on the lands in controversy for the amount of $2,200, represented by the vendor’s lien notes, with interest thereon from April 17, 1891, for the reason that the complainant, at the express instance and request of the defendant Ganzer, and while innocent of any fraudulent taint affecting the notes, advanced the value thereof to pay the same before maturity, and became by contract expressly subrogated to the lieu securing the same.

It is conceded that, notwithstanding the representations and declarations of the defendant Ganzer and his wife made in the apidieation for a loan and in the recorded declaration of a homestead, the lots in controversy formed no part of Ganzer’s homestead; yet the fact being established that said lots, at the time and up to the institution of this suit, were actually used as a homestead, renders the mortgage sought to be foreclosed in this case, so far as it grants a mortgage lien on the lots in controversy, not enforceable.

The evidence establishes tha t on the Kith day of November. 1888, the defendant Ferdinand Ganzer, having applied to J. B. Simpson, who was agent for the Scottish-American Mortgage Company, for a loan of money, offered as security the lots involved in this suit, which were then, and continued to be, a part of the homestead of said Ganzer and his wife, until the loan on which this suit was brought was made.

Said Simpson suggested that, as the security formed part of the homestead of the Ganzers, the form of the security offered should be changed; that the Ganzers could convey the property to some trusted friend, who would give vendor’s lien notes, and, after the loan was made, the property could be conveyed back. He further suggested that a. plat of the homestead as an addition to the city of Dallas be made, evidently that a proper showing would appear of record. Ganzer and his wife, being fully informed of the purposes thereof, executed a conveyance of said lands to one John H.

Eberhart, reciting a consideration of $5,20(h—$3,000 cash, and two notes for deferred payments, one for $1,200, due at three years, and the other for $1,000, due at five years, with interest; at 10 per cent, per annum, with vendor’s lien retained. Said Eberhart made said notes, and at the same time made a trust deed to Simpson to secure the payment of the same. Simpson recorded both of said instruments, and. taking Ganzer’s indorsement upon the alleged notes, discounted them for the Scottish-American Mortgage Company, and said company advanced the money therefor.

Ganzer aud his wife and Eberhart all knew, as well as Simpson, that the colorable sale to Eberhart was for the purpose of perpetrating a fraud upon the company discounting the notes, as well as upon the homestead law of the state of Texas; and in making said conveyance, and executing the deed of trust and the vendor’s lien notes and the plat of Ganzer’s addition to the city of Dallas, the said Ganzer and wife knowingly colluded with the agent of the Scottish-American Mortgage Company for the fraudulent purposes aforesaid. In the case of Heidenheimer v.

Stewart, 65 Tex. 323, it is said: “The equities between the original parties to a mortgage cannot avail the mortgagor in a suit on the secured negotiable note to foreclose tlie mortgage (Jones Mortg. § 834; Hil. Mortg. 572), even if it results in the incumbrance of the homestead, if tiloso entitled to the exemption have caused the result by their own deliberate fraud (Hurt v. Cooper, 63 Tex. 362).

If the owners of the homestead simulate a, transaction in which a negotiable note would be secured by a valid and meritorious lien on the exempt estate, and their artiiieo succeeds in imposing upon an innocent party, they are stopped from denying the truth of their solemn statements, and cannot be permitted. to prove that a lien their acts declared to be valid is void because their acts were false. The constitution prohibits liens on the homestead, except for purchase money or improvements.

The lien asserted by appellant was for purchase money, if the transaction was genuine, and appellees are estopped, as against appellant, from proving that it was otherwise.” In the case of Cunningham v. Holcomb (Tex. Civ. App.) 21 S.

W. 125, the court of civil appeals of Texas said: “It seems to be held that where a third person conspires with an agent to perpetrate a fraud upon the principal, and the rights of innocent third par-' ties have not intervened, the principal is entitled to have a rescission of the contract made between his agent and such third party; or, if he elects not to have it rescinded, to have such other adequate relief as a court of equity may deem proper under the circumstances,”—citing Jleeham, Ag. § 797. In the case of Hurt v. Cooper, 63 Tex. 362, referred to in Heidenheimer v.

Stewart, supra, which was a case where it was claimed that the sale and conveyance of a homestead was not real, but colorable, being resorted to as an expedient to raise money by negotiating the notes for the deferred payment, it was held that if the purchaser of the vendor’s notes had notice that the conveyance was made to the apparent vendee by the owners of the homestead, not on a real consideration, but was accepted by him for their accommodation, and as a means of enabling the owners to procure money, then the deed to the apparent purchaser vested as to him no homestead rights of the original owners; but, if the purchaser had no such notice, he could rely upon the deed from those claiming the homestead as having been sufficient to divest them of all interest to the property; and this, even though the vendors had remained in possession of the property after executing the deed.

From these authorities, it is clear that the validity of the notes purporting to be for the purchase money in the sale from Ganzer to Eberhart, in the hands of the Scottish-American Mortgage Company, who discounted them for Ganzer, depends upon whether such company had notice of the colorable character of the transaction.

The agent Simpson had full notice, in fact seems to have concocted the arrangement, and probably for the reason assigned by Ganzer, to wit, ‘‘on account of the large commissions allowed him by the company and other considerations of value to him;” but there is no pretense or suggestion that the Scottish-American Mortgage Company had actual notice. In this matter of notice the appellant contends, and the circuit court so held, that the general rule that a principal is bound by the knowledge of his agent is applicable to and controls this case.

The supreme court of the United States says: “The general rule that a principal is bound by the knowledge of his agent is based upon the principle of law that it is the agent’s duty to communicate ■to his principal the knowledge which he has respecting the subject-matter of negotiation, and the presumption that he will perform that duty.

When ■ it is not the agent’s duty to communicate such knowledge, when it would be unlawful for him to do so, as, for example, when it has been acquired confidentially as attorney for another client in a prior transaction, the reason of the rule ceases; and in such a case an agent would not be expected to do that which would involve the betrayal of professional confidence, and his principal ought not to be bound by his agent’s secret and confidential ■information.” Distilled Spirits Case, 11 Wall. 3(>7. In 1 Am. & Eng. Enc.

Law, p. 423, we find: “SI an agent should collude with a third party to defraud the principal, the latter will not ho responsible for knowledge of lho agent in relation to such fraud.

While the knowledge of nn agent is ordinarily to be imputed to Hie 'principal, it would appear now to be well established that there is an exception to tile construction or imputation of notice from the agent to the principal in case of such conduct by the agent as raises a clear presumption 'hat he would not communicate the i'act in controversy, as where tho communication of such a fact would necessarily prevent the consummation of & fraudulent scheme which the agent was engaged in perpetrating.” Prom some of the cases cited in the Encyclopedia, supra, we quote as follows: “The doctrine of cons trun ive notice depends upon two considerations; I'drst. that certain tilings existing in the relation or the conduct of parties, or in the case between them, beget a presumid ion so strong of actual knowledge that, the law holds tho knowledge to exist, because it is highly improbable it should not. * * * Bostoek was acting as Air.

Kirby’s solicitor in the transaction; and although, generally speaking, the knowledge obtained by a man’s attorney or agent fixes himself, if obtained while so employed, and on the same business,—for I do not at all differ from Mountford v. Scott (a), Hiern v. Mill (b), and the other cases,—yet it cannot here be said that Mr. Kirby is fixed wit’ll all which Bosiock knew; for tho fraud practiced by Bostoek upon Air. Kirby himself was. of course, concealed from nirn; and so we may say would certainly be that, other fraud which he had practiced on Airs. Kennedy.

Indeed, that was only another part of the same fraud.—another act of the same plot; and therefore I think we cannot, on this account alone, fix his client, Mr. Kirby, any more than his employer, Mrs. Kennedy, with the knowledge of his criminal proceedings. We must lay out of our view all the knowledge, the actual and full knowledge, he had of his own fraud, and are not to hold Air. Kirby as cognizant (I mean, of course, cognizant in law and constructively) of that, merely because his solicitor himself—the contriver, the actor, and llie gainer of the transaction—knew it all well.” Kennedy v. Green, 10 Eng.

Ch. 697, 718-724. (a) 3 Madd. 31. (b) 13 Ves. 114. “A., to whom B. was indebted, advised G. to lend money to B., on the security of a mortgage of personal property, and acted as O.’s agent in completing tiie transaction. "With the money thus obtained, B. paid A. the debt which he owed him. Both A. and B. acted in fraud of Gen. St. c. 118, §§ 89, 91; but C. had no knowledge, of the fraud. Held, that the knowledge of A. was not in law imputable to 0.” Dillaway v. Butler, 135 Alass. 479.

"Where the same person is an officer of two corporations, and lie transfers securities issued by one to the oilier, with knowledge that the securities are subject to an infirmity which renders them invalid in any hands but those of a bona fide holder for value, his knowledge is not the* knowledge of the transferee.” De Kay v. Water Co., 38 N. J. Eq. 158.

In the light of these authorities, and considering the fact, well established by the evidence, that ¡Simpson and Canzer and wife and Eberhart colluded in the execution of the alleged vendor’s lien notes;, we are constrained to hold that the knowledge of the agent Simpson as to the colorable character of the transaction cannot be imputed to the principal, the Scottish-Anieriean Mortgage Company, tmd the case is thus brought directly within the rule declared In Heidenheimer v. Stewart, supra, and Hurt v.

Cooper, supra; and that the vendor’s lien notes in the hands of the Scottish-American Mortgage Company should be treated as against Ganzer and wife as representing a valid, subsisting vendor’s lien upon the property in controversy. This being- the state of the case, the right of the complainant, the Western Mortgage & investment Company, which advanced the money to pay off and extinguish such vendor’s lien under express subrogation thereto, must be recognized.

If it be conceded that notice would affect the Western Mortgage & Investment Company, which is doubtful if the Scottish-American Mortgage Company was a holder of the vendor’s lien notes without notice of their taint, then it is to be said that there is no more reason for charging the Western Mortgage & Investment Company with knowledge of the simulated sale by G-anzer to Eberhart, by reason of the knowledge of agent Simpson, than there is to charge the Scottish-American Mortgage Company.

We understand it is settled in Texas that, generally, where one advances money to pay off and discharge a vendor’s lien upon a homestead, and the money is so applied, the creditor becomes subrogated to the vendor’s lien so paid off and discharged. Hicks v. Morris, 57 Tex. 658; Pridgen v. Warn, 79 Tex. 588, 15 S. W. 559. In this case there was express subrogation by deed.

For these reasons, we are compelled to disagree with the conclusions of the circuit court, and hold that it erred in refusing to recognize the complainant’s lien for the amount of the alleged vendor’s lien notes executed by Eberhart, acquired by the Scottish-American Mortgage Company, and paid off with the moneys obtained from the complainant. The decree appealed from is reversed, and the cause is remanded, with instructions to enter a decree in favor of the Western Mortgage & Investment Company, Limited, for the amount of the vendor’s lien notes, principal and interest, executed by J. H.

Eberhart, and recognizing the same as a vendor’s lien upon the property described in the complainant’s bill, directing the foreclosure of such lien, and the sale of the property to pay the same. (October 2, 1894.)