CO129-451 - Public Offices - 1918 — Page 146

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In this state of affairs the uncle, having very good reason to suspect misconduct on the part of the nephew, left Chicago and came to Hong Kong, desiring to protect his interest in the property. He found as a fact that the nephew had defrauded him by creating the legal mortgage for 10,000 dollars, which undoubtedly had priority to his own equitable interest, and had defrauded the appellants by creating in their favour the equitable mortgage for 12,000 dollars which, apart from any question as to the uncle's conduct, was undoubtedly postponed to the uncle's equitable estate. The uncle and the nephew thereupon, after consulting solicitora in Hong Kong, entered on the 20th June, 1914, into the following transaction: First, the nephew paid off the legal mortgage and took a reconveyance of the legal estate. It does not appear whether the uncle or the nephew found the money for this purpose. Secondly, the nephew assigned the legal estate to the uncle subject to the indenture, creating the equitable mortgage, and the principal and interest thereby secured, the nephew covenanting with the uncle to pay him on demand the principal sum of 12,000 dollars and all interest or other monies due by virtue of the indenture of mortgage, and the costs, charges, and expenses of paying off such mortgage and obtaining a reconveyance thereof. The second point their Lordships have to decide is the effect of these transactions on the position of the appellants. The uncle contends that they do not preclude bira from setting up as against the appellants the equitable estate which he undoubtedly theretofore possessed. The appellants, on the other hand, contend that such equitable interest as the uncle had prior to the transactions in question is now gone, and that his sole interest is the legal interest which he expressly takes subject to the appellants' equitable mortgage.

In considering these rival contentions, there are two points which must be borne in mind. In the first place, whatever the nephew does in carrying out the transactions in question must be taken as done by the direction of the uncle, the party beneficially interested. In the second place, the position of an equitable mortgagee may be improved by transactions to which he is not a party. Where a prior mortgage is paid off by the owners of the property, the position of a puisne equitable mortgagee is improved, although the circumstances were such that the party taking the reconveyance might, had he so chosen, have kept the mortgage alive in his own favour, so as not to benefit the puisue mortgagee. Even in the case of the creation of an equitable charge, it is not necessary that the person in whose favour the charge is created should be a party to the transaction. A conveyance by A to B, subject to a

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that the effect of the transaction was, and was intended to be that for which the appellants contend. This indenture contains? a recital of the appellants' mortgage, and no recital as to its

It also . being postponed to the uncle's equitable estate. recites a request by the uncle to the nephew to assign the property to him, subject to the appellants' mortgage, and to enter into the covenant thereinafter contained, namely, the covenant to pay the uncle on demand the principal and interest due on such mortgage. What conceivable consideration could there be for such a covenant, unless the uncle intended to give the appellants priority in respect of their mortgage over his own equitable estate, and how cau the uncle now assert such equitable estate against the appellants without destroying this consideration? Again, the conveyance is expressed to be subject to the appellants indenture of mortgage and to payment of the principal and interest thereby secured, and not subject to any charge created by this indenture which might take effect in priority to the uncle's equitable estate, as would have been the case had the uncle intended to set up such estate against the appellants. Lastly, the nephew covenants to pay the uncle. on demand, what is secured by the appellants' mortgage, and not, as would have been the case if the uncle's contention be correct, pay these monies to the appellants and indemnify the uncle's property for any claim to a charge in respect thereof.

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In their Lordships opinion, the effect of these transactions was that the uncle, instead of his equitable ostate ranking in priority of appellants' mortgage, took the legal estate subject to the appellants' mortgage, in consideration of the nephew cove- nanting as above mentioned. The uncle's prior equitable estate, being co-extensive with the legal estate which he was acquiring would, prima facie, merge in such legal estate. (Selby v. Ashton, 3 Ves. Junr. 339; Re Douglas, 28 C. D. 327, and Re Selous, 1901, 1 Ch. 921.) He might have kept it alive as against the appel- lants but he deliberately elected not to do so, and the result is that the appellants can claim the benefit of the transaction, although they were not parties to it.

Under these circumstances it is unnecessary to deal with the question whether the uncle had or had not been guilty of conduct disentitling him in a Court of Equity to set up his prior equitable estate as against the appellants' equitable mortgage.

Their Lordships will humbly advise His Majesty that this appeal should be allowed with costs here and in the Court below, and that the order of the Trial Judge should be discharged, and the action in which the appeal arises be dismissed with

coats.