## Facts

- McBride borrowed money from Moseley and gave Moseley a promissory note.
- To secure the note, McBride executed a mortgage on McBride’s real property in favor of Moseley.
- Moseley owed substantial debts to the Bank of Lodi (the bank).
- As collateral for Moseley’s debts, Moseley delivered McBride’s original promissory note to the bank and also signed a document that purported to assign the mortgage to the bank.
- Moseley did not deliver the original mortgage instrument to the bank, and the bank did not record the mortgage assignment.
- Later, Moseley created a fake copy of the promissory note by forging McBride’s signature.
- Moseley then transferred the original mortgage instrument to Newell and delivered the forged note to Newell, along with an assignment of the mortgage and note.
- Newell paid Moseley the full balance claimed to be due and had no notice of the bank’s earlier collateral arrangement.
- Adler later acquired the mortgaged property and wanted to remove the mortgage lien but was uncertain whether the bank or Newell was the proper party to receive payment and release the lien.
- Adler filed an action to determine who held the enforceable mortgage lien. The trial court ruled that Adler should pay the bank. Newell appealed.

## Issues

1. As between (a) a bank that held the original promissory note and an unrecorded, undelivered assignment of the mortgage as collateral and (b) a later purchaser who, in good faith and for value, received the original mortgage and an assignment but was given a forged substitute note, who has the better right to the mortgage lien?

## Decision

- The California Supreme Court reversed the judgment for the bank.
- The court held Newell’s claim to the mortgage lien was superior to the bank’s claim under these circumstances.
- The bank’s possession of the genuine note did not give it priority over Newell where the bank failed to take delivery of the mortgage and failed to record its assignment, leaving Moseley with the means to mislead an innocent purchaser.
- Because Newell paid value without notice and received the original mortgage instrument with an assignment from the mortgagee of record, equity favored Newell over the bank.

## Legal Principles

- A mortgage is generally an incident of the debt it secures, but priority disputes may turn on recording, delivery, and equitable considerations when the parties’ interests are not properly protected against third parties.
- A creditor who takes a note as collateral and relies on a secret or unrecorded mortgage assignment, while leaving the mortgage instrument and record title with the assignor, may be subordinated to a later good-faith purchaser who takes an assignment of the mortgage and gives value without notice.
- Between two innocent parties harmed by the fraud of a third party, the loss is placed on the party whose conduct or omissions made the fraud possible—such as by failing to take possession of the mortgage instrument or to record the assignment.

## Conclusion

The Supreme Court of California ruled that Newell, as a bona fide purchaser for value who received the original mortgage and an assignment without notice of the bank’s unrecorded claim, had the better right to the mortgage lien, and it reversed the trial court’s ruling that would have required Adler to pay the bank to discharge the mortgage.


Adler v. Newell, 109 Cal. 42 (1895)