Pagenhardt v. Walsh

Singley, J., delivered the opinion of the Court. On 23 October 1964, McIntyre’s Bakery, Inc. (the Bakery) of Westernport, Maryland, borrowed $60,000 from The Garrett National Bank of Oakland, Oakland, Maryland (the Bank). The loan was secured by a mortgage on four parcels of land, located in Westernport and owned by the Bakery. On the day when the mortgage was executed, David G. McIntyre and William R. Burkett, who were, respectively, the president and secretary of the Bakery, went to the office of Wesley Schaible, the executive vice president and cashier of the Bank.

Prior to the signing of the mortgage, Schaible requested Howard Rex Teagarden, a notary public, to join the group in order to be present when the mortgage was executed. McIntyre signed the mortgage as president of the Bakery and Burkett signed as secretary and affixed the Bakery’s corporate seal. Schaible then dated the mortgage and entered the date in the form of affidavit of consideration, which was a part of the mortgage. Teagarden, who was a notary public, took McIntyre’s acknowledgment and asked Schaible whether the consideration of $60,000 was true and bona fide, and Schaible answered that it was.

Teagarden then completed the form of acknowledgment and the affidavit of consideration, which were combined in a single paragraph, by signing his name and affixing his notarial seal. Teagarden did not, however, insert Schaible’s name in the affidavit of consideration, “thinking that it would be typed in by the attorney” who would record the mortgage. The Bakery then received cashier’s checks totalling $60,000 which were used to pay creditors. Thereafter, the Bakery defaulted in its mortgage payments; the mortgage was assigned to the appellant, Pagenhardt, as ³³⁵ trustee for purposes of foreclosure; on 8 February 1966, Pagenhardt instituted foreclosure proceedings; on 24 February 1966, bankruptcy proceedings were instituted against the Bakery; and on 11 March 1966, the mortgaged property was sold to the Bank for $63,000.

On 14 March, the Bakery was adjudicated a bankrupt and on 7 April 1966, the appellee Walsh was appointed its trustee in bankruptcy. On 15 April, Walsh intervened in the foreclosure proceedings, and filed exceptions to the sale; and on 17 March 1967, the court below entered a decree holding the mortgage invalid, setting aside the foreclosure sale, and holding title to the mortgaged premises vested in the trustee in bankruptcy. It was from this decree that the present appeal was taken. The appellant bases his appeal on two contentions: i.

The mortgage constitutes an equitable lien on the mortgaged property superior to the liens of subsequent creditors; ii. The mortgage was valid. The trustee in bankruptcy, relying on the provisions of Maryland Code (1957) Art. 21, § 30 (the Act) : “No mortgage or deed of trust shall be valid except as between the parties thereto, unless there be endorsed thereon an oath or affirmation of the mortgagee or the party secured by a deed of trust that the consideration recited in said mortgage or deed of trust is true and bona fide as therein set forth.” urges that the omission from the affidavit of consideration of the name of the affiant, Schaible, makes the mortgage invalid as to subsequent creditors without actual notice, in whose shoes he stands. We shall first consider the validity of the mortgage.

Ginsburg, Mortgages and Other Liens in Maryland (1936) at 56, states the rule of the Maryland cases : “If the affidavit [of consideration] is lacking or if the affidavit is bad, the mortgage will, as a general rule, have no effect except as between the parties. The mortgage is not absolutely void, but will have the effect of an equitable mortgage. As such mortgage, it will yield to the specific lien created by an attachment, even though such attachment is based on a prior existing debt. But it will be good against a judgment creditor who acquires such judgment subsequent to the mortgage but on a prior debt.” ³³⁶ As Judge Soper, speaking for the Fourth Circuit, said in Sandler v. Freeny, 120 F. 2d 881 (1941) in a case where Maryland law was controlling: “It is clearly established that while the omission of the affidavit of consideration is fatal to the validity of the mortgage as to subsequent creditors without actual notice, the purpose of the statute is fulfilled if it is substantially rather than literally complied with.” 120 F. 2d 883 .

Our predecessors stated the proposition somewhat differently in Marlow v. McCubbin, 40 Md. 132 (1874) at 137: “This court has frequently declared it was the purpose of this statutory provision to prevent fraudulent transfers of property upon false or pretended considerations, and not only thus to protect creditors against frauds, but also to enable them to claim against such instruments when executed without the required affidavit as void in law, no matter how the question of actual fraud may stand. Cockey v. Milne, 16 Md. 200, 207 . But it has never been decided that there must be an exact and literal following or incorporation of the zvords of the statute in the affidavit or otherwise it will be insufficient. On the contrary a substantial compliance, a compliance which meets and subserves the purpose and design of the Act is all that the law requires.” The question which we must resolve is whether the omission of Schaible’s name in what would otherwise have been a valid affidavit is equivalent to the omission of the affidavit, which would invalidate the mortgage, or whether the affidavit with the name omitted can be characterized as substantial, if not literal, compliance with the statute.

The answer, if it is to be found, must be found in the prior decisions of this Court. Mortgages to which no affidavit of consideration was attached were held invalid in Cockey v. Milne, 16 Md. 200 (1860); and in Pleasanton v. Johnson, 91 Md. 673 , 47 A. 1025 (1900). See also Johnston v. Canby, 29 Md. 211 (1868). In Dyson v. Simmons, 48 Md. 207 (1878) the borrowers mortgaged land in Montgomery County, hut their acknowledgments, and the affidavit of consideration, were taken by a justice of the peace in Frederick County.

The mortgage was recorded without first obtaining a clerk’s certificate as then required by law, and our predecessors held the mortgage invalid as to subsequent creditors. See also, Reiff v. Eshleman, 52 Md. 582, 588 (1879) ³³⁷ where the same result would have been reached on almost identical facts had the subsequent mortgagees not had actual notice of the defective mortgage. For a case in which the affidavit was attached, but where the morgage was held invalid because the consideration was not truthfully stated, see Denton v. Griffith, 17 Md. 301 (1861), where a bill of sale purported to transfer chattels for a consideration of $1,500 while an affidavit attached to the bill oí sale said that the grantor was indebted to the grantees in the amount of $1,500. In Ressmeyer v. Norwood, 117 Md. 320 , 83 A. 347 (1912) a mortgage was given by a man to his wife.

The consideration stated both in the mortgage and the affidavit was an obligation alleged to be owed by the husband to the wife. In fact, no such obligation existed, and the mortgage was held invalid. In Groh v. Cohen, 158 Md. 638 , 149 A. 459 (1930) where the consideration stated in the affidavit was entirely fictitious, the mortgages were held invalid; and the same result was reached on similar facts in Kline v. Inland Rubber Corp., 194 Md. 122 , 69 A. 2d 774 (1949). In Jackson v. County Trust Co., 176 Md. 505 , 6 A. 2d 380 (1939) an affidavit made by “George E. Rullman, Attorney named in the foregoing mortgage” was held not to comply with the Code requirement (now Art. 21, § 31) that an agent of the mortgagee make a further affidavit respecting his agency.

Milholland v. Tiffany, 64 Md. 455 , 2 A. 831 (1886) reached the same result when the agency was recited by the officer who took the affidavit but not sworn to by the agent. On the other hand, substantial compliance with the provisions of the Act has been regarded as sufficient where the transaction was entered into in good faith, but where there was an inadvertent or careless disregard of fact. Examples of this can be found in Marlow v. McCubbin, supra, where the affidavit stated that the consideration was “bona fide” and not “true and bona fide” as required by statute; in Comegys v. Clarke, 44 Md. 108 (1876) where the affidavit stated that the consideration was an advance of $2,000 by the mortgagee to the wife who executed the mortgage, when the advance had actually been made to her husband by the mortgagee; in Smith v. Myers, 41 Md. 425 (1875), where the mortgage was given to secure a note of $5,000, and the affidavit so stated, when in fact the amount loaned was $4,400, the difference of $600 being regarded as a bonus by the mortgagee; in Buck v. Gladfelter, 122 Md. 34 , 89 A. 317 (1913), where the affidavit was made by Charles D. Fenhagen, not further identified, who was later permitted to testify that he “was the secretary and treasurer of the mortgagee and made the affidavit as such officer and not in his individual capacity” thus bringing the affidavit within the Code provision ³³⁸ (now Art. 21, § 31) permitting the affidavit to be made by an officer of a corporation; in Govane Bldg. Co. v. Sun Mortgage Co., 156 Md. 401 , 144 A. 486 (1929) where the mortgage and the affidavit recited a loan of $5,000, which the mortgagor expected to repay, although the amount he received was less; and in Sandler v. Freeny, supra, where the mortgage recited that it was a purchase money mortgage, and this representation was adopted by the affidavit, when in actuality only a portion of the loan was used to purchase the property.

Smith v. Myers, supra, and Govane Bldg. Co. v. Sun Mortgage Co., supra, should be compared with Plitt v. Stevan, 223 Md. 178 , 162 A. 2d 762 (1960) where a contrary result was reached on a similar, but a more extreme variance between the recited consideration and the true consideration. From our review of the Maryland cases, we come to the reluctant but inevitable conclusion that the result reached by the lower court was correct on this point: reluctant, because there is not in this case any suggestion of a fraudulent transfer for a pretended consideration which