United States: "What additional power do they ac quire from the fact that the undertaking may in some way benefit their line? Whatever be the object or prospect of success, they are still but a corporation for the purpose of making and maintaining the Eastern Counties Railway; and, if they cannot embark in new trades because they have only a limited authority, for the same reason they can do nothing not authorized by their act and not within the scope of their authority." Thomas v. Railroad Co., 101 U. S. 82. We conclude that the partnership formed between appellant and appellees was unauthorized by the statute, and contrary to public policy, and, while those parts of the contract which have been executed should be enforced between the parties, no enforcement of the unexecuted part of it can be properly demanded. Parish v. Wheeler, 22 N. Y. 494; Thomas v. Railroad Co., above cited. The suit, in this case, does not relate to any matters that arose between the parties before the dissolution of the illegal partnership, but the cause of action is the probable profits that would have accrued to appellant had the partnership been continued. The suit is to recover damages for non-performance of a contract unauthorized by law and obnoxious to public policy. The damages claimed arose from a failure to further prosecute an illegal enterprise. The law does not wield its power to prevent persons or corporations from withdrawing from illegal combinations, but rather encourages iepentance and reform, even though at a late hour. When the illegal contract has ended by the acts of either party to it, future consequences resulting from the infraction will not subject the party to a suit for damages, but the parties will only be held responsible for those parts of the contract already executed. "The test whether a demand connected with an illegal transaction is capable of being enforced at law is whether the plaintiff requires the aid of the illegal transaction to establish his case." Swan v. Scott, 11 Serg. & R. 155, cited by Thomp. Corp. § 6024. Apply. ing this test to appellant's case, it must necessarily fall through, because it is based entirely upon the illegal contract of partnership.

EFFECT UPON GENERAL CREDITORS OF DEEDS OR MORTGAGES WITHHELD FROM RECORD.

What right has a general and subsequent creditor to attack mortgages or deeds of his debtor withheld from record, and which was executed before the debt was created? The writer proposes to examine the cases upon this question, but limits the inquiry to those instances where no statute defines the right of such a creditor. So, too, does he limit the examination to those cases where no statute was involved, declaring that the deed or mortgage should not take effect until recorded. Such cases have no place in this inquiry. And he further limits the inquiry to general creditors of the debtor, by which is meant those at least who have no specific liens on the lands or chattels mortgaged or

executed, placed thereon or given therefor subsequent to the date of the mortgage or conveyance withheld. The inquiry will, however, embrace subsequent judgment creditors who have acquired a lien on the land. It must be borne in mind that, as between the mortgagor and mortgagee, or a grantor and grantee, a mortgage or deed is valid, though never recorded; and we are aware of no statute which declares an unrecorded deed or mortgage invalid as between the parties to it. How does such a mortgage or deed affect subsequent general creditors of the mortgagor or grantor, where no statute declares it shall be void as to them unless recorded? That is the question for examination. It is quite evident that this question may be materially affected by several factors entering into it. One of these is, was there an understanding or agreement be tween the mortgagee and mortgagor, or grantor and grantee, that the mortgage or deed should be withheld from record; and what was the object of withholding it, a lawful or an unlawful one? Another is, did the general creditor extend to the mortgagor or grantor credit before he knew of the execution of the mortgage or deed? A still further question, did the creditor, after he had secured his judgment, change his position? For instance, by purchasing the property under an execu tion issued thereon? Whether or not the debts were bona fide is not a question for inquiry in this article; for it is assumed that all claims have a valuable consideration for their creation, and that no part of them is fictitious. In Indiana, a statute provided that "every conveyance or mortgage of lands, or any interest thereon, shall be recorded in the recorder's office of the county where such lands shall be situated; and every conveyance or mortgage not so recorded in forty-five days from the execution thereof, shall be fraudulent and void as against any subsequent purchaser, lessee or mortgagee in good faith and for a valuable consideration." Suit was brought to foreclose a mortgage against the plant of a lumber company, and its assignee resisted the foreclosure. He set up as a defense that the mortgage was given for a pre-existing debt st the time when the company was greatly indebted to creditors others than the mortgagee; that at that time it had a good credit; that its indebtedness would soon mature, and it

1 R. S. 1881, Sec. 2931.

expected to renew it; that it represented to the mortgagee if the mortgage was recorded the effect would be to destroy its credit, prevent it obtaining an extension of the time for the payment of its then existing indebtedness, and also prevent it from making further purchase of material; that it was then insolvent; that it was necessary to secure such extension and to make such purchase in order to carry on its business; that it did secure such extensions and purchase other goods upon the belief that its plant was unincumbered, and that the mortgagee expressly entered into an agreement to withhold the mortgage for the purpose of enabling it to obtain an extension of its indebtedness and making further purchases. There was no charge that the mortgagee knew at the time he took the mortgage and entered into the agreement to withhold it from the record that the lumber company was insolvent; nor was there any charge that the mortgage was withheld for the purpose of defrauding the then existing creditors or those contracting with the company thereafter. It was also charged that the mortgagee knew that the several mercantile companies of the country would report the condition of the lumber company as it appeared of record, and that if the mortgage was placed of record, that fact would be so reported, and prevent the lumber company securing an extension of its debt or making further purchases. The mortgage was recorded two days after the company made an assignment for the benefit of its creditors. In passing upon the questions involved in the case, the court held that as the creditors represented by the assignee were neither "subsequent purchasers or mortgagees" they did not come "within the classes against whom the instrument is, by statute, declared to be fraudulent and void," and that it could not "extend the terms of the statute so as to include general creditors in the classes of persons against whom unrecorded mortgages are to be deemed, as an inference of law, fraudulent and void, for that would be legislation." The court declared "that in the absence of express fraud, the mere failure to record the mortgage within the time fixed in the recording act will not, as against the creditors of the mortgagee, either prior or subsequent, render it invalid." The court then proceeds to determine whether the failure to record the mortgage will, when

taken in connection with the agreement to withhold the same from record, and the other facts stated in the answer, make such a showing of fraud as to either invalidate the mortgage or postpone its lien to the claims of some of the creditors represented by the assignee," and, after stating that the question of fraud in that State is made "a question of fact," reaches the conclusion that the answer was insufficient, for the reason that it did not aver that the mortgage was executed or kept of record "with intent to defraud existing or subsequent creditors," and for the further reason that it was not shown that when the mortgage was executed the lumber company was insolvent, or that the mortgagee knew of its insolvency. The court considered that the facts narrated above were only badges of fraud. "We are satisfied," said the court, "that the arrangement for the withholding of a mortgage from record is not of itself sufficient to justify a court in hol·ling, as a matter of law, such mortgage fraudulent and void as to creditors, either existing or subsequent; but that it is a badge of fraud to be considered with all the other facts and circumstances surrounding the transaction in determining whether or not there was, in fact, a fraudulent intent. "'2

4

3

renewing it periodically, and then receive the benefit of it by placing the last renewal upon record, to the prejudice of others, whom the possession and ostensible ownership of that very property by the mortgagor have induced to confide in him. The mortgage was declared void. A case has been decided in the Supreme Court of the United States which is a step further than the first case cited in this article. There the mortgagee not only concealed the fact that he had taken the mortgage, but he actively represented that the debtor was worthy of credit; and parties relying thereon loaned him large sums of money. The court was careful to say that the law favored the vigilant creditor, and "that the mere failure to record a mortgage is not a ground for setting it aside for the benefit of subsequent creditors who have acquired no specific lien on the property described in the mortgage. But where a mortgagee, knowing that his mortgagor is insolvent, for the purpose of giving him a fictitious credit, actively conceals the mortgage which covers the mortgagor's entire estate, and withholds it from the record, and while so concealing it represents the mortgagor as having a large estate and unlimited credit, and by these means others are induced to give credit to the mortgagor, who fails and is unable to pay the debts thus contracted, the mortgage will be declared fraudulent and void at common law, whether the motive of the mortgagee be gain to himself or advantage to his mortgagor." Another case we call attention to presents still another question. A husband made a deed of land directly to his wife. The deed bore date March 23, 1857, but was not filed for record until December 2, of the same year. On the 21st of the following January, he, professing to act for his wife, sold the land to a third person. The creditors of the husband, who contracted debts with him before the deed was recorded, attached the unpaid part of the purchase money in the hands of the vendee, and between him and the wife a contest arose on the question which had the better right to the proceeds of the sale. The court, in delivering its opinion, said: "There is another aspect to the case not at all favorable to the wife. It is that she withheld the deed of her husband from

5 Gill v. Griffith, 2 Md. Ch. 270.

• Bennerhassett v. Sherman, 105 U. S. 100.

record until December 2, 1857. In asking that a deed void at law should be sustained in equity, she is met with the fact that she asserted no right under it, in fact concealed its existence until after her husband had con. tracted the debts against which she now seeks to set it up. There appears to have been no abandonment of possession by the husband. Even if the deed was delivered on the day of its date, the suppineness of the wife gave to the husband a false credit, and equity will not aid her at the expense of those who have been misled by her laches."7

In a New Jersey decision, the court stated the case as follows, and laid down the rule it considered the proper one in such instances: "The defendant's case must stand or fall upon the bare fact that complainant's cashier, having a mortgage given to himself to secure himself for endorsing the maker's note to be discounted by the complainant, and so, in effect, given to secure the complainant directly, refrained, at the request of the maker, to place it on record until after the maker had become indebted to another person, such other indebtedness not being in the mind of either at the making of the mortgage, and the cashier having no knowledge or sus picion of the maker's solvency. In order to postpone such a mortgage to one executed and recorded subsequent to its record, it is necessary to hold the mortgage itself void as against such subsequent mortgage creditor. In order to do that, it is necessary to find that the mortgagee was guilty of what is known as actual fraud as distinguished from constructive fraud; for it is well-settled that a conveyance or mortgage made or given for full and valuable consideration, can only be impeached by another creditor on the ground of actual fraud, in which the grantee or mort gagee has himself participated." In this case one Jones, president of a bank, borrowed money from his bank, and one Dunham, his brother-in-law and cashier of the bank, took a mortgage from him to secure the payment of the note for the money borrowed. This mortgage was left off the record and con cealed for eleven years. In the meantime the complainant, Dunham and three others

7 Coates v. Gerlach, 44 Pa. St. 43. The three follow ing cases may be regarded as taking an extreme view of the subject: Smith v. Craft, 17 Fed. Rep. 705; Stockgrowers' Bank v. Newton, 13 Colo. 245, 22 Pac Rep. 444; Root v. Harl, 62 Mich. 420, 29 N. W. Rep. 29.

be entitled to indemnity for suretyship and advances under the deed as mortgagee.16 But if the grantee take possession of the premises, then it is a matter of indifference whether he record his deed or not, or even if he conceal it, for every one is charged with notice of the title by which he holds possession, and must make inquiry before relying upon the alleged ownership of the grantor." The same rule prevails where the mortgagee takes possession. 18 Another thing to be observed is, that there must be, according to the later and better reasoned cases, an intention to perpetrate an actual fraud, either upon the person injured or upon the public generally, and that the withholding or concealment is a mere badge of fraud. The larger number of cases hold to this view of the subject.19 An agreement, however, to withhold a deed or mortgage from record, so as to enable the grantor or mortgagor to secure credit, is of itself, as a rule, sufficient to avoid the conveyance or mortgage, if anyone relying upon the appearances is thereby misled and becomes a creditor of such grantor or mortgagor. The mere agreement to withhold the instrument from record is not sufficient; it must be done with an intent to aid or maintain the debtor in his financial credit.20

And

16 Scrivener v. Scrivener, 7 B. Mon. 374. 17 Tutwiler v. Montgomery, 73 Ala. 263; King v. Levy (Va.), 22 S. E. Rep. 492.

18 State v. Flynn, 56 Mo. App. 236.

19 Barker v. Smith, 12 N. Bank Reg. 474, 2 Woods, 87; First National Bank v. Jaffray, 41 Kan. 694, 19 S. C. Pa. Rep. 626; Hildreth v. Sands, 2 Johns. Ch. 35; Seals v. Robinson, 75 Ala. 363; Tutwiler v. Montgomery, 73 Ala. 263; Blackman v. Preston, 123 Ill. 381, 15 N. E. Rep. 42; Donner Land, etc. Co. v. Stonewall Ins. Co., 77 Ala. 184; Tryon v. Flournoy, 80 Ala. 321; Mobile Savings Bank v. McDonnell, 87 Ala. 736; Steurbach v. Leopold, 50 Ill. App. 476; Nadel v. Britton, 112 N. Car. 180, 16 S. E. Rep. 914; Lemert v. McKibben, 91 Iowa, 345, 59 N. W. Rep. 207; State v. Flynn, 56 Mo. App. 236; Curry v. McCauley, 20 Fed. Rep. 583; Dravo v. Fabel, 25 Fed. Rep. 116; Montgomery v. Phillips (N. J.), 31 Atl. Rep. 622; King v. Levy (Va.), 22 S. E. Rep. 492; Blanks v. Klein, 53 Fed. Rep. 436, 2 U. S. App. 363, 3 C. C. A. 585; Day v. Goddard, 69 Miss. 687, 12 South. Rep. 30; Thouron v. Pearson, 29 N. J. Eq. 487; Central National Bank v. Frame, 112 Mo. 502, 20 S. W. Rep. 620; State Bank v. Doran, 109 Mo. 40, 18 S. W. Rep. 836; Thomas v. Kelsey, 30 Barb. 268; Northwestern Forwarding Co. v. Mahaffey, 36 Kan. 152, 12 Pa. Rep. 705; Banner v. Robinson (Tex. Civ. App.), 34 S. W. Rep. 355; First Nat. Bank v. Rohrer (Mo.), 39 S. W. Rep. 1047; Collins v. Corwith (Wis.), 69 N. W. Rep. 349; Michigan Trust Co. v. Bennett (Mich.), 64 N. W. Rep. 330.

20 Central National Bank v. Frame, 112 Mo. 502, 20 S. W. Rep. 620; State Bank v. Doran, 109 Mo. 40, 18 S. W. Rep. 836; Jewett v. Sundbock, 5 S. Dak. 111, 58 N.

an agreement to withhold the instrument from record, with no intention of maintaining the debtor's credit, is not sufficient, unless it should be brought to the grantee's or mort gagee's notice that the debtor was obtaining credit upon the general appearance of his ownership of the property, or upon its apparent unincumbered condition, whereupon it would be his duty to at once put his deed or mortgage on record. 21 Secrecy is not of itself a fraud, but it gives force to other evidence tending to show a fraudulent agreement. As, for instance, that it was to be held off record until the debtor escaped, or until suit be threatened. In such an instance, secrecy is a part of the consideration, and it relates back to the inception of the transac tion. 22 But it is not all the cases that take this view of the subject, as some of the quotations already made show. Thus, absolute deeds given by one banking house to another as security for loans and discounts, and withheld from record for three years, so as to not injure the debtor's credit, was held to be fraudulent as to subsequent creditors as a matter of law, the proofs of these facts rais ing a presumption of fraud.28 But where an insolvent debtor made a conveyance of his real estate to his creditors, for the purpose securing an indebtedness, and they withheld the conveyance from record, with an honest belief that their indebtedness would be paid, and without any agreement or understanding with the debtors that the conveyance should be withheld, for the purpose of benefitting their grantors in some way, it was held that

W. Rep. 20; Montgomery v. Phillips (N. J.), 31 Atl. Rep. 622; Standard Paper Co. v. Guenther, 67 Wis. 101, 30 N. W. Rep. 298; Sanger v. Guenther, 73 Wis. 354, 41 N. W. Rep. 436; Evans v. Laughton, 69 Wis. 138, 33 N. W. Rep. 573; Klein v. Richardson, 64 Miss. 41, 8 South. Rep. 204; Ackerman v. Ackerman (Neb.), 69 N. W. Rep. 388; Dobson v. Snider, 70 Fed. Rep. 10; Snouffer v. Kinley (Iowa), 64 N. W. Rep. 770.

21 Sternbach v. Leopold, 50 Ill. App. 476; affirmed 156 Ill. 44, 41 N. E. Rep. 51.

22 Id. See Montgomery v. Phillips, 53 N. J. Eq. 203, 31 Atl. Rep. 622.

23 State Savings Bank v. Buck, 123 Mo. 141, 27 S. W. Rep. 341. See also Liddle v. Allen, 90 Iowa, 738, 57 N. W. Rep. 603; Falkner v. Lineham (Iowa), 55 N. W. Rep. 443; Muli v. Dooley, 89 Iowa, 312; Sanger v. Guenther, 73 Wis. 354, 41 N. W. Rep. 436. For cases upholding the validity of secret judgment notes and preferences obtained by means thereof, see Flemington National Bank v. Jones, 50 N. J. Eq. 224. 24 Atl. Rep. 928, affirmed 27 Atl. Rep. 636, and Illnois Steel Co. v. O'Donnell, 156 Ill. 624, 41 N. E. Rep. 185, affirming 53 Ill. App. 314.

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