Newark Trust Co. v. Lackawanna Investment Co.

The opinion of the court was delivered by

Garrison, J.

The learned vice-chancellor dealt with this case as if it'had its inception in a debt due to Crocker by the investment company and secured by its mortgage, which, having been assigned to the trust company, was subject to the equities of the mortgagor against the assignor. In fine, he treated the mortgage as a security between the parties to it. The real transaction was far otherwise. There was no debt, and the mortgage purporting to secure one was a contrivance devised to deceive the trust company for the purpose and in the manner disclosed by the testimony. It was of the essence of the scheme thus disclosed that the trust company should be made to believe that the mortgage was genuine, and that the full amount was due thereon., The scheme, therefore, necessarily involved the making of a false representation. This false representation was made by both mortgagor and mortgagee, for this court, sitting as a court of equity, has said: “In order to establish a case of false representation, it is not necessary that-something that is false should have been stated as if it were tine. If the presentation of that which is true creates an impression which is false, it is, as to him, who, seeing the misapprehension, seeks to profit by it, a case of false representation.” Lomerson v. Johnston, 47 N. J. Eq. 312.

If this be true under the passive conditions stated in the text, how much more so must it be true when the misapprehension was actively contrived.

lYith the real nature of the transaction thus laid bare, we are in a position to see in their true light the equitable relations of the parties to this transaction when the mortgage is regarded as a security, which is the only light in which it is regarded by a court of equity. The mortgage was created for the sole purpose of serving as a security to the Newark Trust Company, to which it was to be assigned by Crocker. Hence, until it was so assigned, i. ewhile it was in the hands of Crocker, it was not, in the eye of equity, a mortgage, since it secured nothing. Crocker, while ostensibly mortgagee, was in fact a mere conduit through whom the mortgage was to reach the trust company and have vitality infused in it by securing the loan made upon the strength of it and any other indebtedness of the assignor to the bank.

Out of this situation two highly pertinent considerations arise —first, that the relation of mortgagor and mortgagee never having existed between the respondent and Crocker, no equity based upon that relation came into existence, and second, that as the mortgage became such for the first time in the hands of the trust company, the primary obligation secured b} it was a negotiable promissory note given to the trust company before maturity, and there is excellent authority for the proposition that the assignee of a mortgage under such circumstances holds it free from equities between the parties, although, as we have seen, in the present ease, no such equities existed.

These considerations are mentioned chiefly for the purpose of pointing out the diametrical difference that exists between the normal cases in which the equity of a genuine mortgagor arises and the present case; from which it follows that it is totally inadmissible to assume, by way of analogy, that because an equity arises in those cases it also arises in this case.

Equally inadmissible is it to construct an original equity for this mortgagor out of its conduct in this transaction. An equity has been variously defined, but always in terms of good faith and conscionable conduct. Chicanery, deceit and misrepresentation are not such stuff as equities are made of. To determine this is to decide that the respondent has no equity.

The court below decided that the appellant had no equity, and we now decide that the respondent has none. In this state of equilibrium, the legal rights of the appellant will be enforced by a court of equity under its maxim that where equities are equal the law will prevail, for there can surely be no greater equality between equities, within the meaning of the maxim, than their mutual non-existence. The trust company is entitled to enforce its mortgage as collateral to the Ackor note.

The decree of the court below is reversed and the record remitted for further proceedings in accordance with the views herein expressed.