
    Kernohan v. Durham et al.
    
      Innocent purchaser — Priority of right.
    
    1. Where there is an equity directly attaching to the bill or note itself, in the nature of a claim of right or title to the instrument, such equity may be asserted by a third party, not a party to the instrument, against an indorsee after maturity.
    2. The payee of a note secured by mortgage, being indebted to K., as collateral security, assigned and transferred to him before the maturity of the note, the mortgage and what purported to be the note, but which proved to be a forgery of the note. The note was indorsed by the payee in blank, and the assignment on the mortgage was as follows: “ For value received, I assign and transfer the within mortgage and the note secured thereby to K., his representatives and assigns.” Afterwards, the payee, being indebted to C. also, as collateral security, indorsed and delivered to him the genuine note, after maturity, promising to deliver to him the mortgage. C. received the note, relying upon such promise, without any knowledge or information, at the time, as to the previous assignment of the mortgage to K.
    
      Held: 1. That, C. as a transferee of the genuine note after maturity, took no better right or title to it, than the payee had, from whom he received it.
    2. That in a proceeding to foreclose the mortgage, the lien of K. was paramount to that of C.; and that K. was entitled to be paid before C., out of the proceeds of the sale of the mortgaged premises.
    
      3. That K. was entitled to the genuine note, and to hold it free from the deduction of any payments thereon made by the maker, who neglected to have the amounts so paid by him, noted or indorsed on the instrument.
    (Decided January 13, 1891.)
    Error to the Circuit Court of Hamilton county.
    The original action was brought in the Court of Common Pleas of Hamilton county, by Joseph N. Kinney against Warren Durham, defendant in error, and his wife, and Robert Kernohan, the plaintiff in error, to foreclose a mortgage on 27f acres of land in Anderson township, Hamilton county, executed November 9, 1868, by Durham and his wife to William R. McGill, to secure the payment of two certain promissory notes of that date, for $1,000 each, signed by Durham, and made payable respectively to McGill or order, in one and two years after date, Kinney claiming to hold and own the notes and mortgage, through indorsement and assignment by McGill the payee and mortgagee.
    Stephen Coddington, defendant in error, who was made a party defendant, and Robert Kernohan, each filed an answer and cross-petition, setting up his interest in the real estate described in the petition, and denying that the plaintiff had any lien on said real estate by mortgage or otherwise. Answers of Durham and his wife, and other pleadings were filed, and the action was tried to the court upon the following agreed statement of facts:
    “ The parties to this action agree that the following are all the facts of this case, and all the evidence of the parties to the action, viz.
    “ Warren Durham was indebted to W. R. McGill on notes and mortgage executed November 9, 1868, for $2,000, payable one and two years after date respectively. In November, 1879, Durham had a settlement with McGill of said mortgage debt, then amounting to $8,250, and on the 26th day of November, 1879, Durham gave to McGill a new note for that amount payable one year after date, and to secure the payment of said last note of $3,250, Durham at the same time executed and delivered his mortgage deed of the real estate, described in the petition, to said McGill. The old notes and mortgage paid by the execution of the new were not present at the place of settlement, but were to be returned by McGill to Durham as soon as he, McGill, returned to his home in Newton, the new note and mortgage being made in Cincinnati.
    “ In 1884 McGill gave to the plaintiff, Kinney, the paid notes and mortgage (never having returned them to Durham) as collateral security for a loan then made from Kinney, and were so received by said Kinney who was ignorant of the transactions between Durham and McGill.
    “ The said McGill being also indebted to the defendant, Kernohan, as a collateral, he, McGill, assigned and transferred to Kernohan, before the maturity of the $3,250 note, the mortgage given to secure said note, and also a note for $3,250, or what purported to be Durham’s note. The assignment on the mortgage is ‘ For value received I assign and transfer the within mortgage and the note secured thereby to Robert Kernohan, his representatives and assigns. July 21,1880.’ ‘ Wm. R. McGill.’ ‘ Entered April 5,1884, George W. Rabenstein, Recorder.’ Afterwards, on the 22d of February, 1881, McGill being also indebted to the defendant, Coddington, in the sum of $1,250 and interest, as a collateral indorsed and delivered to Coddington the genuine note for $3,250, aforesaid, secured by the mortgage aforesaid for that amount. Coddington received said note and relied upon McGill’s promise to deliver the mortgage in good faith and for value, and without any knowledge or information as to the previous assignment of the mortgage until proved on the trial. It is agreed the note given to Kernohan of $3,250 is a forgery, and that the mortgage given to him was the genuine mortgage, and that the note held by Coddington is the genuine note for $3,250, secured by the mortgage. Me- ' Gill promised Coddington to deliver him the mortgage also, which he never did do, but that Kernohan received said note and mortgage and contract of assignment thereof in good faith and for value and without any knowledge or information as to said forgery until proven on said trial.
    
      “Durham, the maker of the note, had no knowledge of these transactions by McGill, and afterwards as McGill called upon him from time to time for payments on his note stating to Durham he would credit the payments upon his note when he went to the Safe Deposit where the note was kept for safety. These payments made in good faith were as follows: March 1, 1880, $200; October 2, 1880, $200; December 27, 1881, $165; October 10, 1882, $150; December 25, 1882, $50; in all $765.”
    Upon this state of facts, the court found for the defendants as to the plaintiff, and ordered that the plaintiffs’ petition be dismissed, and as to him, that the defendants go hence without day, and that the mortgage sued on by the plaintiff be canceled; and as to Coddington, the court found for the defendants as to his cross-petition, and ordered that his cross-petition be dismissed, and that the defendants thereto go hence without day; and as to Kernohan, the court found for him, that the allegations in his cross-petition were true, that the equity of the case was with him, that by assignment he became entitled to and the owner before maturity, and in good faith, and for value, of the promissory note for $3,250, described in his cross-petition and the mortgage given November 26, 1879, to secure payment of the same; that said mortgage was duly recorded, and was the first and best lien on the real estate described in the plaintiffs’ petition, and in the cross-petition of Kernohan; that Durham was not, as against Kernohan, entitled to credits for the sums paid by him to McGill; and that there was due to Kernohan from Warren Durham on the note for $3,250, and the mortgage to secure payment of the same, with eight per cent, interest from November 26, 1879, the sum of $4,741.75.
    Judgment was entered for Kernohan in accordance with the above findings, to which Warren Durham and Stephen Coddington duly excepted.
    On petition in error by Durham and Coddington, the circuit court held, that the court of common pleas erred in finding that Durham was not entitled to credits for the payments made by him upon the mortgage note; that said court erred in finding that the lien of Coddington was a junior lien to that of Robert Kernohan; and that said court erred in finding that Kernohan was entitled to be first paid his claim out of the proceeds of the mortgaged premises. It was therefore ordered and adjudged, that the findings, judgment and decree, and orders of the court of common pleas be set aside, reversed and held for naught; that the cause be remanded to the'court of common pleas for a new trial, with instructions to said court to allow to Durham, upon such new trial, a credit for all the payments upon the note and mortgage made to McGill, and that the liens as between Coddington and Kernohan upon the mortgaged premises be found as follows, viz.: Coddington’s debt to be a valid lien, and the first lien thereon, and Kernohan’s debt to be a valid lien, and the second lien thereon. To which judgment of the circuit court Kernohan excepted, and asks this court to reverse the same.
    
      Wulsin Perkins, and Frank O. Suire, for plaintiff in error.
    1. What are the rights as between Coddington and Kernohan, under the mortgage ?
    The reasoning on which the decision of the circuit court must be based is that, although under Bailey v. Smith, 14 Ohio St. 396, the mortgagor may, in foreclosure, plead any equity against the purchaser from the mortgagee which he might have pleaded against the mortgagee, still, since the mortgage is but a security for the debt, he who owns the debt in equity is the owner of the mortgage; and since the original note is the evidence of the debt, therefore by the transfer to him of that note, Coddington became the owner of the debt so far as necessary to secure him, and therefore became the owner of the mortgage, and his rights are superior to Kernohan’s. That where a mortgagee, being the owner of a note and mortgage, sells the note, the purchaser in equity gets the security of the mortgage, is now settled law in this state, since in such case the purchaser becomes the owner of the debt secured by the mortgage; and we need not, in the case at bar, even consider what would be the rights of one who took a deed from the mortgagee so as to become the legal owner of the mortgagee’s interest, since here the assignment to Kernohan is only an assignment in equity, passing to him no legal estate in the land. But although this be law, does it follow that Coddington’s rights are superior to Kernohan’s ? We think not. As we view the matter, Coddington never became the owner of the debt secured by the mortgage, nor of the note evidencing such debt. That it is the debt as such, and not the note as such, wfiich is secured by the mortgage, is settled by the decisions that a recovery may be had on the mortgage although the note is barred by limitation. Fisher's Exr. v. Mossman, 11 Ohio St. 42; Nesbit v. Worts, 37 Ohio St. 378; Kuhns v. McGeah, 38 Ohio St. 468. As to the note, see Daniels on Negotiable instruments, sections 748,748a; Jones on Mortgages, sections 805, 834.
    There is no case, as between Coddington and Kernohan, for any application of the rule that where one of two innocent parties must suffer, he must suffer who has put it in the power of the third person to commit the fraud, since to apply that doctrine we must have laches, and there is no claim or pretense of laches on Kernohan’s part.
    Nor need we consider what rights a party could have acquired who, before maturity, had bought this note from the one having the apparent legal title. Here we have the case of Kernohan, the actual owner of the debt, and of both of its evidences, and McGill wrongfully, and without knowledge on Kernohan’s part, in possession of one of such evidences. This note before maturity, had a certain value as mercantile paper apart from all merits; but after maturity it had value, because, and only because, it was evidence of debt; if there were no debt the note had no value; if the debt had been paid the note had no value, and if the debt were due another the note was of no value. This is what is meant by the saying that the holder of overdue paper can pass no better title than he had; the note being of value only as an evidence of indebtedness to the holder; if nothing be due to him nothing will be due to the purchaser from him. And even if there be an indebtedness to the one transferring after due, but against which the maker might plead a set-off, he may plead this set-off against the purchaser. Baker v. Kinsey, 41 Ohio St. 404.
    At the time of the transfer to Coddington, the note was Kernohan’s property, withheld from him by fraud, of which he had no knowledge. McGill owned nothing, and all he had was an apparent legal title; this was all he could transfer, and all he did transfer to Coddington, so that Codding-ton took the note for Kernohan, and Kernohan is entitled to it from him. There is no estoppel, no equity in Codding-ton’s favor. In re, European Bank, L. R., 5 Ch. App. 359; Osborn v. McClelland, 43 Ohio St. 284; 78 Ky., cited in 43 Ohio St., 304. As applying both to the note and mortgage, see Timberman v. Hawley, 2 Cir. Ct. R. 37; Bush v. Lathrop, 22 N. Y. 535; Trustees Union College v. Wheeler, 61 N. Y. 121; Green v. Warnick, 64 N. Y. 220; Schaffer v. Reilly, 50 N. Y. 67.
    II. Is Durham entitled to payments made to McGill, and if yes, then to what payments ? The payments divide themselves into three classes : One made before the sale to Kernohan; one after the sale to Kernohan, but before the maturity of the note; and those made after the sale to Coddington and also after the maturity of the note. All these payments were made to McGill under the circumstances stated in the agreed statement of facts. As to all these payments, especially as to those made before maturity, it cannot be claimed that had Kernohan received, instead of the forged notes, the real notes, actually indorsed, under the circumstances in which he did receive them, that Durham would be entitled to any credits whatsoever. Daniels on Negotiable Instruments, sec. 1233. And it would make no difference whether the payment was made befoie or after the actual indorsement. The note being negotiable paper, and transferred before maturity, would pass to Kernohan free from all defenses other than such as appeared upon the paper itself. Had the note been transferred to Kernohan, after maturity, but by actual indorsement, he would then have taken only the title of the person who sold, and would have taken it subject to any defenses that might be made at that time; from this, it would follow that he would have taken the note subject to all payments that had been made before the actual transfer to him, but freed from any payments that might have been made to McGill afterwards. Daniels on Negotiable Instruments, sec. 1233a and sec. 725; Id. sec. 748 and sec. 748a.
    The solution of the question depends upon what constitutes a bond fide holder for value, before maturity and without notice. Is it the bona fides, the payment of full value before maturity, and the absence of any circumstances tending to impute knowledge to such purchaser, which imparts to his ownership that absolute protection from defenses to the instrument ? Or is it the actual, physical, manual indorsement that is necessary? Our claim is that Kernohan is the possessor of the substance, and that the actual indorsement of the note is simply a matter of form, which a court of equity can either compel or disregard. We find the following principle laid down with great clearness, namely, that if a party has delivered a bill without indorsement, when it was the intention of the parties at the time, that it should be indorsed, a bill in equity may be filed to compel the transferer to do so. 1 Chitty on Bills, 10th ed., 167; Smith v. Armstrong, Peake’s N. P. C. 50; Arden v. Watkins, 3 East 317; Ex parte Greening, 13 Vesey 206 ; Ex parte Mowbray, 1 Jacob & Walker, 428; Ex parte Hall, 1 Rose 14; see note “a” especially. Smith v. Armstrong, ante; Anon., 11 Campb. 492; Watkins v. Maule, 2 Jacob & Walker, p. 237; Baggerly v. Gaither et al., 2 Jones (N. C.) Equity 80.
    It must be borne in mind, in considering our contention, that this is not an action at law upon the note. It is an action in equity; not only for the foreclosure of the mortgage, but also asking the court to declare that, in equity, Kernohan is the owner of the note, to declare that Ooddington holds the legal title to the note in trust for him, and to compel it to be conveyed to him, and to enforce payment of the same out of the proceeds of sale of the land. In view of this we cannot see how it can make any difference whether Kernohan had obtained the actual manual indorsement of the note or not. He is, in equity, the possessor of the substance of all that entitles him to the protection of an innocent holder for value before maturity and without notice; and, in equity, he is just as much entitled to that protection as he would be at law, had he received the manual indorsement of the paper. The principle we are contending for would entitle Kernohan to the proceeds of sale, without deductions for any payments.
    There is another and a very good reason why, as to the payments made after maturity and subsequent to the transfer to Coddington, Durham, as against Kernohan, should not be entitled to credits. If we are right, Coddington taking the note after maturity, took it subject to all equities and all defenses thereto. One of those equities is the right of Durham to set up the payments made before maturity; another equity is, that the note did not belong, at the time of the transfer, to McGill at all; that it was Kernohan’s property, and that Kernohan had a right to call for the note from McGill and from Coddington. The fact that Coddington took it after maturity is sufficient to put him upon notice of any latent equities therein, not only on behalf of the parties thereto but of third parties. Osborn v. McClellend, 43 Ohio St. 284; Timberman v. Hawley, 2 Circuit Court Reports 37; Bush v. Lathrope, 22 N. Y. 535; Trustees Union College v. Wheeler, 61 N. Y. 121; Shaffer v. Reilly, 50 N. Y. 67; Greene v. Warnick, 64 N. Y. 220.
    Payment can only be made before maturity by consent of a payor and drawer; that it can only be made with perfect safety at or after maturity, when the payor receives the instrument in his hands and cancels it. For a payment before muturity is not in the usual course of business. 2 Parsons on Notes and Bills, 214 and notes; Da Silva v. Fuller, 1 Chitty, Jr., 776; Story on Notes, sec. 483, Koffman v. Bank of Kentucky, 31 Miss. 212; Brayley v. Ellis, 71 Iowa 155; Jones on Mortgages, sec. 956; Wheeler v. Guild et al., 20 Pick. 545; Clark v. Iglestrom, 51 Howard’s Practice Rep. 407; See also, Brown v. Blydenberg, 7 N. Y. (Selden) 142.
    Our claim then is that- Durham was guilty of laches in not requiring the actual production of the papers themselves. If it be replied to this that even if he had required the production of the note it would not have prevented the fraud that was practised upon Kernohan and Coddington, we will reply: First, while McGill might have produced the note, yet he could not have produced the mortgage, and Durham was chargeable with knowledge of the fact that the note and mortgage were capable of assignment; and Secondly, that this argument would not apply at all to the payments that were made after the sale to Coddington, because at that time McGill would have been unable to produce either the notes or mortgage. But we wish to place our argument as to Durham’s negligence not upon what would have happened had he done what the law required of him, but rather upon that which is the usual legal test of negligence, namely, whether under the circumstances existing at the time the act was performed, so far as they appeared to the party charged, did he act in accordance with the ordinary dictates of prudence.
    There is another ground also upon which Durham’s claim for credits can be met and overturned. We claim, under the decision of the supreme court, in Holliger v. Bates, 43 Ohio St. 437, that Durham was bound at the time he made his payment, to make it not only to the holder of the title of record, but also to inquire, find out and be certain, who the real holder of the mortgage was, and to make his payments to him. Jones on Mortgages, sec. 953.
    
      Motion, Coffey Motion, and S. B. Beal, for defendants in error.
    I. The debt is not separate and distinct from the note. The note and the mortgage are not two securities and evidences of the debt. The note is the representation of the debt, it is the “ body ” of the debt, the materialization of the debt into tangible form. Is it possible to separate a promise from the words in which it is framed, whether other words be spoken and lost, given into a phonograph and reproduced in sound or written in characters and rendered permanent on paper? The promise is framed in the words.
    Thus is counsel’s first premise erroneous. The note is in no wise a security or evidence of the debt. It is the debt or to be exactly exact it is the expression of the debt; there is no debt until the promise to pay is made. The note is the promise to pay. The note is the debt; the mortgage is the security of the debt. Sixteen years go by, the debt is not extinguished, the promise given in the shape of the note is still in existence; but the courts say, that, owing to considerations of public policy, a promise clothed in the form of a note shall be enforceable for fifteen years and longer. Had the promise been mere oral and evidenced by an account, the promise and not the account would have been the debt, yet the promise clothed in that form would have been good for only six years. But if the promise, i. e. the note, i. e. the debt, is evidenced by a mortgage, the courts hold that the debtor has, by giving a security good for twenty-one years, waived, in advance, his right to take advantage of a legal bar to a remedy, not an extinction of a right, a waiver which he may at any time make.
    II. We have seen that his first premise is founded on an attempted but false distinction between the debt and the promise to pay, and secondly, on failing to bear in mind the now well established view of the statute of limitation, namely, that it imposes a bar to a remedy but does not extinguish a right. Turner v. Chrisman, 20 Ohio, 336. We shall now see that his second premise is also untenable. He reasons, when Kernohan loaned him money a debt was created, due from McGill to Kernohan; subsequently McGill, being unable to pay this debt, as there is a debt from Durham to me, I transfer his debt to you and here is one of the securities of the debt, the other (the note) I hereby promise to give you. Now, when Kernohan handed the money to McGill, no debt was by that act created. The debt was created by McGill’s promise to repay Kernohan. The promise, however expressed, created and was the debt. If the debt and the note were distinct, then by his own reasoning nothing but the mortgage passed to Kernohan, because the transfer reads, “ assign and transfer the within mortgage and the note secured thereby.” The note not the debt, therefore the debt of Durham to McGill was not transferred or promised to be transferred and still remained the property of McGill. And should we concede the illogical position that a debt was created by the mere giving of the money by Kernohan to McGill; still, if there was a debt, how did Durham’s debt to McGill pass over to take the place of McGill’s debt to Kernohan ? There was no transfer, there was no promise of a transfer, because, if the words on the mortgage can be construed into a promise, it can only be a promise to transfer the note, which he claims is not the debt; and if there was no transfer, surely the mere fact that Durham owes McGill and McGill owes Kernohan does not transfer the debt.
    The simple, plain and true view of what passed to Kernohan leads to the same conclusion, as indeed every view must. Nothing passed to Kernohan. McGill owed Kernohan. Kernohan wished securitjr for the debt. McGill said, whether in writing or verbally, upon the mortgage or elsewhere can make no difference: “ I transfer the Durham note to you,” and handed to Kernohan a worthless piece of paper— not the note. A statement contrary to fact, or even a promise to transfer the note, (should these words upon any broad equitable ground be so loosely construed,) does not transfer the debt. McGill could not transfer the note without indorsement, and he could not transfer the debt without transferring the note, no more than I could go from one room to another without taking my body with me; or to be more exact, than I could send myself into the next room without going there. Kernohan got the mortgage, which was merely security for the debt as represented by the note, and must follow the note wherever it goes. Cooper v. Newland, 17 Abbt. Prac. 342; Jackson v. Blodgett, 5 Cow. 206; Merritt v. Bartholick, 47 Barb. 253.
    The argument that Coddington cannot recover because he took the note after maturity, is founded upon an error of law, and upon the erroneous assumption that Kernohan had equitable rights in the note. That Kernohan had no equities in the premises is, we think, established by an argument above; but granting that Kernohan had equities, all that the most fanciful imagination might conceive, they would of necessity be equities between parties, i. e., between McGill and Kernohan, and not equities existing against the note. That the indorsee of an overdue note takes it subject only to the equities attaching to the bill itself, and in no instance subject to the equities arising from dealings with a third party outside of the claim of title, is established by the following authorities. Oriental Com. Bank, Ames’ Bills and Notes, vol. 1, p. 891; Ex parte Swan, 6 Law R. Eq. cases, 367, Sturtevant v. Ford, 4 M. G. 101; Young v. Shriner, 80 Pa. St. 463.
    There is a peculiar kind of assignment remaining yet to be noticed. It is an assignment which arises not from the direct act of the persons from whom the beneficial interest in the thing assigned passes, but is effected by operation of law and is called equitable assignment. Daniel on Negotiable Instruments, sec. 748. What was there for the law to operate on in this case ? McGill did not assign the note, and surety the law will not do for him what he did not intend to do.
    Assignments by a separate paper carry only the equitable, not the legal title. Franklin v. Twogood, 18 Iowa, 517; French v. Turner, 15 Ind. 62; 12 Smed. & M. 87. It separates the evidence of ownership from the instrument itself, which is not favored in the books. See 89 Ill., 395; Wilson v. Carpenter, 17 Wis. 512; Eversole v. Maull, 50 Md. 104; Hayward v. Stearns, 39 Cal. 58.
    All rights are determined by the ownership of the note.
    Without the note the mortgage would have no existence— it is born and fed upon it. The note can live without the mortgage, not so the mortgage without the note. The language of the mortgage is that if the note be paid and the promise therein contained be performed, it is null and void. The mortgage contains in itself no promise to pay money— simply secures the promise in the note. Section 3171, Revised Statutes, provides that all notes, etc., and payable to order shall be negotiable by “ indorsement.” If indorsed, the indorsee may in his own name bring suit. Section 317 3 provides the punishment for taking negotiable paper after due, simply all defenses which the original payee might have made, that’s all. The legal title can pass only by indorsement. Avery v. Latimer, 14 Ohio, 542; Cushman v. Welsh, 19 Ohio St. 536.
    In conclusion, we insist that as between Kernohan and Coddington, the latter is the owner of the note — and the mortgage as an incident or security follows the note. The contract between Durham and McGill is contained in the note, and the indorsement of the note by McGill is the contract with us, is the source of our title, gives us the legal title which is clearly superior to the equitable one set up by Kernohan. The ownership of the note includes that of the mortgage. They are inseparable ;• the legal owner of the note is the owner of the mortgage security. Swartz v. Leist, 13 Ohio St. 423; Smith v. Bailey, 14 Ohio St. 413; 2 Jones on Mortgages, 1376-1377; Merrett v. Barthlick, 47 Barb. 253; Gower v. Hood, 20 Ind. 396; Garrett v. Pucktet, 15 Ind. 485; Briggs v. Hunnevold, 35 Mich. 474; Moore v. Ware, 38 Me. 496.
    We submit, upon the foregoing authorities, that Codding-ton is the legal owner of the note, and being the legal owner of the note, the mortgage securing it belongs to him. That the rights of the legal owner are superior to the alleged equitable rights of Kernohan. That the assignment of the mortgage, it being a mere chose in action, did not affect the note or the rights afterwards acquired therein by Coddington. That the alleged assignment of the note on a separate piece of paper was a nullity.
    Brief for plaintiff in error, in reply.
    I. A mortgage, though on its face reciting that it secures a note, or other evidence of indebtedness, in contemplation of law and equity both, really secures the debt, of which the note, etc., is only one evidence ; it secures the substance, not the proof of that substance; it secures the promise to repay itself, and not the evidence of that promise. Fisher’s Ex’r’s v. Mossman, 11 Ohio St. 42; Nesbit v. Worts, 37 Ohio St. 378; Kuhns v. McGeagh, 38 Ohio St. 468; Kimberly’s Appeal, 5 Central Rep. 460; Richardson v. Wright’s Estate, 2 New England Rep. 603; Bank v. M’f’g Co., 96 N. C. 298; Hoffman v. Wilhelm, 68 Iowa, 510; Owen v. Miller, 10 Ohio St. 136; Bigelow v. Capen, 5 New England Rep. 257; Buckley v. Chapman, 9 Conn. 5, at p. 9; Phillips v. Bank of Lewistown, 18 Penn. St. 403: Selfridge v. Northampton Bank, 8 W. & S. 320; Burrowes v. Keays, 37 Mich. 431; Franklin v. Twogood, 18 Iowa, 15; Cooper v. Newland, 17 Abb. Prac. 342; Jackson v. Blodgett, 5 Cow. 206; Merritt v. Bartholick, 47 Barb. 253; Hewell v. Colbourne, 54 Md. 60; Pratt v. Schofield, 45 Me. 386; Anderson v. Sharp, 44 Ohio St. 260; Pomeroy’s Equity Jurisprudence, sec. 1201, last paragraph; Walker v. Dement, 42 Ills. 272; Noyes v. White, 9 Kansas, 640; Grattan v. Wiggins, 23 Cal. 16; Bank v. Tarleton, 23 Miss. 173; Chew v. Buchanan, 40 Md. 367.
    II. Our se'copd point is equally clear. Kernohan before maturity and for value, got an equitable title to the note. Coddington purchased after maturity; he consequently bought subject to all equities; received only the right and title McGill had, and no more; therefore, he bought subject to our rights in the note. If this reasoning be correct, we may admit all our opponents say in reference to the inseparability of the note, debt, and mortgage security, and still our claim is superior. If the transferrer had no right to make the transfer, the purchaser gets no title. Osborne v. McClelland, 43 Ohio St. 284; Foley v. Smith, 6 Wallace, 492; Towner v. Me Clelland, 110 Ill. 542; Greenwell v. Haydon, 78 Ky. 332; Byles on Bills, (Sharswood’s ed.,) star p. 161, 162, 284; Texas v. White, 7 Wallace, 700; Texas v. Hardenburg, 10 Wallace, 68; Vermilye v. Adams’ Exp. Co., 21 Wallace, 138; Fairbanks v. Sargent, 5 Central Rep. 919; Williams v. Ingersoll, 89 N. Y. 508; In re European Bank, 
      5 L. R. Ch. App. 358; Timberman v. Hawley, 2 Circuit Court Rep. 37; Bush v. Lathrope, 22 N. Y. 535; Trustees of Union College v. Wheeler, 61 N. Y. 121; Green v. Warnick, 64 N. Y. 220; Shaffer v. Reilly, 50 N. Y. 67; Ex parte Swan, 6 L. R. Eq. 367; Baker v. Kinsey, 41 Ohio St. 404, 3d syllabus.
   Dickman, J.

The petition of Kinney, the plaintiff in the original action, having been dismissed and judgment rendered against him, to which he took no exception, and instituted. no proceeding in error, the only questions which we need consider are, (1.) Whether Kernohan, as against Coddington, is entitled to be first paid his lien out of the proceeds of the sale of the mortgaged premises; and, (2.) Whether Durham is entitled to credit for his payments, or any portion thereof, upon the note of $3,250, executed by him to McGill or order, on November 26, 1879, made payable one year after date, and secured by mortgage on real estate.

I. As conceded in the agreed statement of facts, McGill, being indebted to Kernohan, assigned and transferred to him ap collateral security, before the maturity of Durham’s note for the above named amount, the mortgage executed to secure the payment of the same, and what purported to be the genuine note itself, but which proved to be a forgery of the note. The assignment on the mortgage reads as follows: ‘ For value received, I assign and transfer the within mortgage and the note secured thereby to Robert Kernohan, his representatives and assigns. July 21, 1880. Wm. R. McGill.” After the maturity of the note, to wit, on February 22,1881, McGill being also indebted to Coddington, indorsed and delivered to him, as collateral security, the genuine note. Coddington relying upon the promise of McGill, to deliver to him the mortgage — which he never did deliver — received the note in good faith, and for value, and without any knowledge or information as to the previous assignment of the mortgage to Kernohan, until proved on the trial. And Kernohan received the forged note and mortgage and contract of assignment thereof, in good faith, and for value, and without any knowledge or information as to the forgery, until the forgery was proven on the trial.

Prior to the adoption of the Code of Civil Procedure, in an action at law by the indorsee and holder of a promissory note payable to any person or order, against the maker, the maker could not, when- he did not deny the signature and indorsement, defend against the indorsee on the ground that he was not the owner of the paper; nor could a third party, except in equity, intervene and claim the note. Sections 1 and 2, act of February 25,1820, 1 S. & C. 862; sections 3171, 3172, Revised Statutes; Way v. Richardson, 5 Gray, 412.

Section 3172 of the Revised Statutes provides, that ap. indorsee, to whom such note is made payable by indorsement, may, in his own name, institute and maintain an action thereon, against the maker. But by section 4993 of the Revised Statutes, (formerly sections 25 and 26 of the Code,) all actions must be prosecuted in the name of the real party in interest, except as provided in sections 4994 and 4995. This provision of the Code applies to negotiable paper. If, therefore, the note is not transferred to the indorsee in good faith, and upon good consideration, before maturity, it is a good defense for the maker to show, that the indorsee is not the real party in interest, unless he is authorized to sue under sections 4994 or 4995; and the real owner may intervene, and by cross petition, obtain the relief to which he is entitled, as against the indorsee or holder who is the apparent owner. Kernohan, accordingly, in his cross-petition claims that the note for $3,250, was never lawfully assigned to or held by Coddington; that the mortgage security was never owned or held by Coddington, and that he has no lien on, or interest in the mortgaged premises; and that he, Kernohan, is the owner of the note and mortgage, and has the first and best lien on the real estate in the mortgage described.

An issue of ownership is thus presented, between the two claimants of the note and mortgage, both claiming to derive a good title from McGill the payee. As between Kernohan and McGill, the ownership, beyond dispute, passed from the payee to Kernohan. Before the maturity of the note, the payee, for value, assigned and transferred to Kernohan in writing, the mortgage and the note thereby secured. The mortgage was delivered at the time of the assignment, and by the simultaneous indorsement and delivery of the forged note, as evidence of the debt secured, Kernohan became the holder and owner of the equitable title to the genuine note. It was negotiable paper, to which he acquired title before it fell due, for a good consideration, and without notice of any defect in the instrument that was delivered. While McGill, by retaining the genuine note, may have been its apparent owner, he was, as to Kernohan, a fraudulent holder, and the latter, had he discovered the fraud, might have cmnpelled McGill to deliver to him the genuine paper. As to legal obligation, the position of McGill was not very different from what it would have been had he delivered the genuine note to Kernohan and afterwards stolen it from him. McGill, after the transfer, had no longer any interest in the note or mortgage, and, at most, was only a trustee for Kernohan.

What now are the rights of Coddington ? The genuine note, indorsed by the payee in blank, was indorsed and delivered to him when overdue. It came to him dishonored, for the faét that it was unpaid after maturity was a circumstance of suspicion. Such a note past due, no longer represented a distinct and definite credit, or money to be paid at a certain period. Coddington, in taking the paper, was thus put upon inquiry. He knew that the note was secured by mortgage, and was put upon his guard when the mortgage, his main security, was not produced at the time the note was indorsed and delivered. McGill, at the time, promised to deliver to him the mortgage, but he never did deliver it. Coddington relied upon the promise, and took the risk. Had he exercised the requisite care and diligence, he might have found that the mortgage was no longer in the possession of McGill, but had, seven months before, been assigned and transferred to Kernohan. Coddington, we think, should be held as having constructive notice of the rights of Kernohan in the note and mortgage. In Sterry v. Arden, 1 John. Ch. 261, Chancellor Kent uses the language: “ I hold him chargeable with constructive notice, or notice in law, because he had information sufficient to put him upon inquiry.” Whenever a party has information or knowledge of. certain extraneous facte, which of themselves do not amount to nor tend to show, an actual notice, but which are sufficient to put a reasonably prudent man upon inquiry respecting a conflicting interest, claim, or right; and the circumstances are such that the inquiry, if made and followed up with reasonable care and diligence, would lead to a discovery of the truth — to a knowledge of the interest, claim or right, which really exists; the party is absolutely charged with a constructive notice of such interest, claim or right. The presumption of knowledge is then conclusive. 2 Pom. Eq. Juris., § 608.

Coming into possession of the note as he did, Coddington should be in no better position than McGill, so far as Kernohan is concerned, and should stand in the relation of a trustee for Kernohan. Negotiable paper, not paid at maturity, being regarded as dishonored, that fact is equivalent to notice that there is something wrong with it; and he who purchases it when so overdue, obtains only such title and rights as were had by his vendor. 1 Edw. Bills, § 517, and cases cited.

In Crossby v. Ham, 13 East. 498, the rule is laid down, that one who acquires the bill or note after maturity, is chargeable with constructive notice of any flaw in the right or title of his transferrer. And in Angle v. Insurance Company, 92 U. S. 341, it is held, that a person who takes a bill which, upon the face of it, was dishonored, cannot be allowed to claim the privileges which belong to the lond fide holder. If he chooses to receive it under the circumstances, he takes it with all the infirmities belonging to it, and is in no better condition than the person from whom he received it. . The authorities are numerous to the effect, that the purchaser of an overdue or dishonored bill, who buys it from one who is not the owner, and who is not authorized to sell, acquires no title as against the true owner. Spencer, J., in Henderson v. Case, 31 La. Ann. 215, applying to negotiable instruments the general principle that governs the transfer of personal property, says, that after dishonor, the bill or note falls under the dominion of that fundamental rule of property, that, “ the sale of the thing of another is void.” “ Purchasers of notes or bonds past due take nothing but the actual right and title of the vendors.” Chase, C. J., in Texas v. White, 7 Wall. 735. This species of property, when purchased overdue from one who is not the real owner, and has no authority to sell, is thus placed in the same class with other goods, and made subject to the well recognized rule, that if the seller was not the owner, and had no authority from the owner to sell, the buyer will have no title whatever to the property he has bought, as against the true owner, although purchased in the ordinary course of trade. Roland v. Gundy, 5 Ohio 202. Buying the paper after it is dishonored, the purchaser, who, when put on his guard does not seek the knowledge which he might obtain by using reasonable diligence, cannot complain, if the law charges him with constructive notice of such infirmity of title, as attaches to the instrument in the hands of him from whom he acquired it, and permits him only to stand in the shoes of his vendor or indorser.

Nor is the indorsee or purchaser after maturity placed in such situation, only as regards equities that may exist between the maker'of the note and the payee who indorsed or transferred the instrument. It is held' in England, that if there be an equity attaching directly to the bill or note itself it may be asserted against an indorsee after maturity, by a third part}1' who claims the right to follow the bill. And Mr. Daniels, in his work on Negotiable Instruments, says: “ If the equity be a claim of some right to the instrument directly attached to it, we perceive no good reason why it may not be asserted against an indorsee after maturity, by any party whatsoever.” § 7265. In the case at bar, tine outstanding equitable title in Kernohan to the note in question, was an equity attaching to the instrument itself, which he might assert against Coddington, the indorsee, after maturity.

This doctrine is well illustrated in the case, In re European Bank, L. R. 5 Ch. App. 358, where bills transferred after maturity, were purchased with money stolen from one who claimed the bills as owner. Demetrio Papa, the manager of the Oriental Bank, abstracted moneys of that bank, and with them bought certain overdue bills of exchange. In April, 1867, the Eastern Bank, promoted by Papa, was registered, of which, until the following July, Papa was the sole director. These bills, Papa sold to the Eastern Bank, and paid himself for them out of its funds. The Eastern Bank, as the holder, having proved the bills against the company on which they were drawn and accepted, to wit, the European Bank, it was held, that the claim of the Oriental Bank to the bills, as having been purchased with its money, was an equity attaching to the bills; that the Eastern Bank having purchased them overdue, took subject' to this equity. “ The bills,” said Sir G. N. Giffard, L. J., “ were overdue when the Eastern Bank took them; there were equities affecting the bills, and the Eastern Bank has no better title, either legal or equitable, than Demetrio Papa.” In this case, the court followed the rights of third parties, although their connection with the bills, or title to the same, was only an equitable one founded upon the doctrine of resulting or presumptive trusts. '

That Coddington, as indorsee of the note after maturity, acquired no better title to it than McGill had, as against Kernohan, finds ample support in the case of Osborn v. McClelland, 43 Ohio St. 284. Mrs. Osborn, for value received, made and delivered to Mrs. Faxon hef negotiable note, payable to the order of Mrs. Faxon in five years, secured by mortgage. Two years before the same became due, Mrs. Faxon, without consideration, and solely for the accommodation of Bartlit & Smith, bankers, loaned the same temporarily to them, to enable them to use the same as collaterals for a loan to meet a present emergency, Bartlit & Smith promising to safely keep and return them. Bartlit & Smith did not use them, but they were suffered to remain in their custody until after the note became due, when Smith, the survivor of Bart-lit & Smith, without the knowledge of Mrs. Faxon, or without authority from her, hypothecated them to McClelland by delivery, merely saying the note would be paid. McClelland took the same in good faith, and for full value, but without inquiry, guaranty, or indorsement by Smith, relying solely on his possession and the blank indorsement of Mrs. Faxon that Smith was the owner. It was held, that McClelland having acquired the note after due and without inquiry, acquired no better title than Smith had, and as Smith had neither title nor interest which was good against Mrs. Faxon, he transferred none to McClelland that in equity gave him the right to foreclose the mortgage as against the real owner.

Smith was, in fact, a mere bailee or custodian, with no interest in the note. He was, however, lawfully in possession of it as legal holder, which, with the indorsement in blank by Mrs. Faxon, were badges of ownership. The mortgage was hypothecated and delivered with the note to McClelland, and its absence therefore could not, as in the case at bar, excite suspicion and prompt inquiry. But, the note being past due and discredited when transferred to McClelland, he was not permitted to divest Mrs. Faxon of the true ownership. If Smith, into whose custody the note had lawfully come, could confer upon his transferee ho better right or title than he himself had, still less could McGill, who held the genuine note through gross fraud practised upon Kernohan, give a better right or title to it than he himself had.

In the case of Greenwell v. Haydon, 78 Ky. 332, there was a contention between the appellant and appellee as to the ownership of a coupon bond. Coeer, J., in delivering the opinion of the court said : “ There is another class of cases in which the title to the obligation was involved. The case at bar belongs to that class. There is no question here between the holder and the maker. It is a question as to the right to receive whatever sum the maker may owe, and not as to whether ¿he maker shall pay. his obligation in whole or in part. This distinction seems not to have been always kept in view, and, as a natural result, the authorities are in some confusion, decisions in one class of cases being often quoted in the discussion of cases belonging to another class.” But, the conclusion reached in the opinion was, that whoever takes a bill or negotiable note after maturity, takes it, so far as the title to, and integrity of the paper is concerned, upon the credit of the person from whom he receives it. He gets whatever right and title that person had and no more.

II. Is Durham, the maker, entitled to credit, as against Kernohan, for the several sums paid by him to McGill on the note ? Those payments were made in part before the transfer of the note and mortgage to Kernohan, and before the maturity of the note; and partly, after the indorsement and delivery of the genuine note to Coddington, to wit: after its maturity. But, when Durham made payments on his note from time to time to McGill, the note was not produced, and no receipt or memorandum of payment was ever noted on the instrument, except one indorsement of interest on the day of maturity; McGill stating to Durham, that he would credit the payments upon his note, when he went to the Safe Deposit, where the note was kept for safety; and Durham relying upon the statement, without seeing that the credit was actually given.

The rule is well established, that part payment made on a negotiable instrument should be minuted or entered on the paper itself; and when the instrument comes into the hands of a bond fide holder for value, before maturity, with no memorandum or other notice of part payment thereon, it cannot be set up as a defense against him. 8 Randolph on Com. Paper, § 1414. In Brayley v. Ellis, 71 Iowa, 155, it is said that, ordinarily, the maker of a note, when he makes a partial payment thereon, sees that it is properly indorsed on the note. In that case, where the mortgagee of land sold and assigned the secured notes before maturity, and afterwards fraudulently, and without the knowledge of his assignee, received from the mortgagor, who was led to believe that he still owned the notes, a partial payment thereon, taking only a receipt therefor, and the mortgagor afterwards sold the land to another, it was held, in an action by the assignee to foreclose the mortgage, that he was entitled to recover, as against the mortgagor and the land, the whole amount of the notes, regardless of the partial payment so negligently made by the mortgagor. See also Clark v. Igelstrom, 51 How. Pr. 407; Chit. Bills, margl. 423; Cooper v. Davies, 1 Esp. R. 463; 2 Edw. Bills, § 783; Brown v. Blydenburgh, 7 N. Y. 141; 1 Jones on Mortgages, § 956.

Five several payments were made, in good faith, by Durham to the payee, of which there was no memorandum on the note. The non-production of the paper at the time, was sufficient to awaken inquiry, and did draw from the payee a promise that he would give the proper credits. Had the genuine instead of the spurious note been transferred to Kernohan, unquestionably, he would have held it free from anjr deduction of payments by Durham that were not apparent on the paper itself. He would not have been subject to other equities between the maker and payee. It is true, McGill did not transfer to Kernohan the genuine note, but a forged note in its stead. Yet, Durham permitted the genuine note, notwithstanding his payments, to continue in all respects as when it first left his hands, with no mark or acknowledgment upon it of the payment of the several sums he paid from time to time; and when McGill transferred the forged instrument to Kernohan, it was the counterfeit presentment of the note as Durham had negligently suffered it to remain, with nothing thereon to indicate a reduction of the amount called for on its face. If Durham had demanded that the note and mortgage be exhibited, in order that his payments might be indorsed on the note, he would have discovered that on July 21, 1880, the mortgage was transferred to Kernohan, and might also have discovered, by due investigation, the fraud of McGill, and the situation and true ownership of the note. Under the circumstances, we think that Durham failed to exercise the ordinary care in having the amounts paid by him properly credited on his note; and, as against Kernohan, no allowance should be made to him for any portion of those amounts, out of the proceeds of the sale of the mortgaged premises.

As to Coddington, an indorsee after maturity, he took the note subject to all payments that had been made by Durham at the time he received the instrument, but freed from apy of the payments made by Durham to McGill after he received the note.

From the aforegoing considerations our conclusion is, that the judgment of the circuit court should be reversed, and that of the court of common pleas affirmed.

Judgment accodingly.  