Summary
In Deitsch, the court considered the effect of allowing equitable subrogation and concluded that there, equitable subrogation would not worsen the status of the holder of the second mortgage, in part because the holder of the secondary mortgage would have a cause of action against the borrower.
Summary of this case from ABN AMRO Mortgage Group, Inc. v. KangahOpinion
No. 24221
Decided February 14, 1934.
Mortgages — Subrogation — Third person satisfying first mortgage subrogated to first mortgagee's rights, when — Subrogation unaffected by preference given over prior intervening mortgagee, when — Recording acts create no barrier to subrogation.
1. A third person who, with his own funds, satisfies and discharges a prior first mortgage on real estate, upon the express agreement with the owner of the real estate that he will be secured by a first mortgage on the real estate in question, is subrogated to all the rights of the first mortgagee in such real estate.
2. The fact that such subrogation gives the third party a preference over a prior intervening mortgagee, who had no knowledge of such agreement, in no wise affects the application of the doctrine of subrogation, when the burdens of such prior intervening mortgagee are in no wise increased. ( Straman, Admr., v. Rechtine et al., 58 Ohio St. 443, approved and followed.)
3. Under such facts and circumstances, our recording acts create no barrier against the application of subrogation.
ERROR to the Court of Appeals of Hamilton county.
William Deitsch, having a judgment lien against the real estate of Mary Cornell in Hamilton county, Ohio, brought an action against her to marshal liens and subject her real estate to the payment of his judgment. The Federal Union Life Insurance Company and Maggie Kerbel, being the holders of mortgages on the real estate in question, were made parties defendant and set up their respective mortgages; each claiming the first and best lien.
The cause was heard in the Court of Appeals of Hamilton county, which court made findings of fact and conclusions of law, rendered money judgments, marshaled the liens, decreed a sale of the real estate, and directed that upon sale being made the proceeds be distributed in accordance with its findings and conclusions. To that judgment and decree, the Federal Union Life Insurance Company prosecutes error to this court.
The facts are that on and prior to January 25, 1926, Mary Cornell, who was the owner of real estate fronting on Stanton avenue in the city of Cincinnati, which for brevity will be referred to as the "Stanton Avenue property," contracted to purchase from Nettie Lingafelter the premises known as No. 646 Lincoln avenue, Cincinnati, Ohio, which will be referred to as the "Lincoln Avenue property," for the sum of $25,000 cash, the deal to be closed on or about March 1, 1926.
In order to consummate the purchase, Mary Cornell applied to the Federal Union Life Insurance Company to borrow $27,000, and agreed to give as security for the loan a first mortgage on both the Stanton and Lincoln avenue properties. At that time the Western Bank Trust Company held a first mortgage on the Stanton avenue property, in the sum of $8,490, and the Title Guarantee Trust Company had a first mortgage on the Lincoln avenue property in the sum of $11,000.
During the afternoon of March 2, 1926, Mary Cornell executed a mortgage to the Federal Union Life Insurance Company in the sum of $27,000, covering the two parcels of property. At the same time, Nettie K. Lingafelter and her husband executed and delivered to Mary Cornell a general warranty deed for the Lincoln avenue property. Out of the $27,000 obtained from the Federal Union Life Insurance Company, the mortgages on both properties were satisfied; the insurance company paying them by checks, the amount thereof being deducted from the $27,000 — the balance of which, less some minor expenses, was paid to Nettie K. Lingafelter on account of the purchase price of the Lincoln avenue property.
After contracting for the Lincoln avenue property, Mary Cornell found she did not have enough money to complete the deal, so she applied to her aunt, Maggie Kerbel, who was likewise her housekeeper, for a loan in the sum of $8,000. Mary Cornell already owed this aunt $2,000, and it was agreed that if Mary Cornell would give her a mortgage on both properties in question in the sum of $10,000 she would loan her the $8,000. The loan was made accordingly, and to secure the same Mary Cornell on March 1, 1926, gave Maggie Kerbel one mortgage for $5,000 on the Stanton avenue property and one mortgage for $5,000 on the Lincoln avenue property.
It will be borne in mind that Mary Cornell had not as yet acquired title to the Lincoln avenue property. On March 2, 1926, at 10:25 and 10:26, respectively, the two mortgages were filed for record.
The Federal Union Life Insurance Company claimed it made an examination of the title of the two properties and looked at the general indexes in the office of the county recorder "around noon" on March 2, 1926, and that such examination failed to disclose any notation of Maggie Kerbel's mortgages.
The deed to the Lincoln avenue property was made by Nettie K. Lingafelter and husband on March 2, 1926, and the mortgage of the Federal Union Life Insurance Company for $27,000 covering both properties was placed of record at the same time.
It is admitted that the $27,000 loaned by the Federal Union Life Insurance Company was applied to the satisfaction of the Western Bank and Trust Company's first mortgage on the Stanton avenue property, in the sum of $8,490, and the Title Guarantee Trust Company's first mortgage on the Lincoln avenue property in the sum of $11,000; and it is further admitted that while Maggie Kerbel's $8,000 was a contribution to the purchase fund, none of it was, as a matter of fact, applied toward the satisfaction of either of the first mortgages in question.
The Court of Appeals held that the judgment lien of William Deitsch was junior to both mortgage liens in question; that the mortgage lien of the Federal Union Life Insurance Company was prior to that of Maggie Kerbel on the Lincoln avenue property; and that the lien of Maggie Kerbel was prior to that of the Federal Union Life Insurance Company on the Stanton avenue property.
While there were numerous other lienholders, parties to the action in the court of common pleas, all except those herein referred to, went out of the picture before the cause reached the Court of Appeals.
Mr. O.K. Jones, Messrs. Lorbach Garver, and Messrs. Kunkel Kunkel, for plaintiff in error.
Mr. Arthur E. Georgi and Mr. Albert E. Savoy, for defendants in error.
The issue presented here is between the Federal Union Life Insurance Company and Maggie Kerbel, neither of whom appears to be satisfied with the judgment and decree of the Court of Appeals. While Maggie Kerbel's dissatisfaction is expressed in her brief, she has filed no cross-petition in error, and we can offer her no condolence.
The Federal Union Life Insurance Company claims priority in the Stanton avenue property to the extent of $8,978.99, the amount it paid to the Western Bank Trust Company to satisfy its first mortgage on the Stanton avenue property, by right of subrogation.
This issue was made by the pleadings, and evidence was introduced to support it.
In one of its findings of fact, the Court of Appeals found "that said Mary A. Cornell made an application in writing to borrow $27,000 from the defendant, The Federal Union Life Insurance Company, and agreed in said application to give as security for said loan a first mortgage" on the Stanton avenue and Lincoln avenue properties.
It is self-evident that the Federal Union Life Insurance Company could get a first mortgage in one way only, to wit, to satisfy existing mortgages out of the loan. It did this only to awaken to the fact that under our recording acts it had been "nosed out" on the Stanton avenue property. Maggie Kerbel had beaten it to the record with her $10,000 mortgage. Of course, her mortgage on the Lincoln avenue property was nil, as the mortgagor, Mary Cornell, had no title to this property when she executed the mortgage.
We have no knowledge of Mary Cornell, other than that she was the niece of Maggie Kerbel, and a "rolling stone." The record does not indicate that she "gathered any moss," but it divulges indubitably that she became quite smooth. When the "smoke cleared away," Mary was gone; and counsel inform us in open court that she is now a fugitive from justice.
Whatever Mary Cornell's disposition may have been, it could not deprive her of the right to contract — if it did impair her contractual obligations. The fact that this niece fleeced her aunt out of $10,000, probably all she had, is most lamentable. We assume that this is all she had, on the ground that had she been possessed of more Mary would have gotten it. This court is human and appreciates that a grievous wrong has been done Maggie Kerbel; but can it help her, even under the beneficent principles of equity?
The right of subrogation herein involved has its foundation in contract.
There is much logic and apparent fairness in the reasoning of the Court of Appeals, to the effect that in this transaction a purchasing fund was created; that Maggie Kerbel was a contributor to this fund and as such contributor her rights rose just as high as those of the Federal Union Life Insurance Company, which was nothing more than a contributor.
Along this line of reasoning that court found the equities between the Federal Union Life Insurance Company and Maggie Kerbel equal, and established the priorities in accordance with the law established by our recording acts. Our recording acts were enacted for the purpose of giving notice to the world of the condition of title to real estate, and under such acts it is the law that, everything else being equal, he who first gets to the record with his lien has the first and best lien. Under the facts and circumstances of this case, our recording acts create no barrier to the application of the doctrine of subrogation.
There is no question that the Federal Union Life Insurance Company granted the loan to Mary Cornell upon consideration that it be given a first mortgage on both her properties. There is no question that its money satisfied the first mortgages.
Maggie Kerbel's loan, as appears from her testimony in the record, notwithstanding she was given a mortgage, was personal. In other words, she just turned the money over to Mary Cornell to do as she pleased with it. Quite true, Maggie Kerbel was informed that her money would be applied to the purchase of the Lincoln avenue property; but nowhere in the record do we find that she attached any particular significance to that fact. The fact that her money was to be applied toward the purchase of the Lincoln avenue property did not move her to part with it. Mary Cornell just naturally talked her out of it.
"Subrogation," in its broadest sense, is the substitution of one person in the place of another with reference to a lawful claim or right. Our modern law has divided subrogation into two classes: Legal subrogation and conventional subrogation.
"Legal subrogation" arises by operation of law when one having a liability or right or a fiduciary relation in the premises pays a debt due by another under such circumstances that he is in equity entitled to the security or obligation held by the creditor whom he has paid.
"Conventional subrogation" depends upon a lawful contract, and occurs where one having no interest in or relation to the matter pays the debt of another and by agreement is entitled to the securities and rights of the creditor so paid. 25 Ruling Case Law, Section 1, page 1312.
If the Federal Union Life Insurance Company has the right of subrogation herein, it is a conventional right. It has been held that a third person loaning money for the express purpose of paying the purchase price of land sold another is entitled to be subrogated to the right of the vendor to an equitable lien on the land for the purchase money. The application of this doctrine might be somewhat complicated in Ohio by reason of Section 8543-1, General Code, which provides as follows: "As between the vendor and vendee of land the vendor shall have a lien for so much of the purchase money as remains unpaid. But such lien shall not be effective as against a purchaser, mortgagee, judgment creditor, or other encumbrancer, unless there be a recital or a reservation of the lien in the deed, or in some instrument of record executed with the same formalities as are required for the execution of deeds and mortgages of land * * *."
The extension of this equity to a third person is, however, strictly confined to those who furnish or advance the purchase money to the purchaser in such a manner that they can be said either to have paid it to the vendor personally, or caused it to be paid on behalf of and for the benefit of the purchaser, and to this extent they become parties to the transaction. It must not be a general loan to be used by the purchaser to pay the consideration of the purchase, or to be used for any other purpose at his pleasure.
In such case, the simple fact that the money can be traced into the land as having been paid by the purchaser to the vendor as the whole or a part of the purchase money gives the person who loaned it no such right. 25 Ruling Case Law, Section 34, page 1351, citing Austin v. Underwood, 37 Ill. 438,
87 Am.Dec., 254; Dreese v. Myers, 52 Kan. 126, 34 P. 349, 39 Am. St. Rep., 336; and notes 99 Am. St. Rep., 527, and 37 L.R.A. (N.S.), 1206.
Maggie Kerbel's money did go into the Stanton avenue property, but when that is said, all is said. Her loan to Mary Cornell was a general loan. Maggie Kerbel is not hurt by reason of the fact that the Federal Union Life Insurance Company is subrogated to the rights of the Western Bank Trust Company in the Stanton avenue property. She could not have secured priority over the first mortgage held by the Western Bank Trust Company on the Stanton avenue property, and when the Federal Union Life Insurance Company satisfied this mortgage and stepped into its shoes, the same old lien remained on the property, from the viewpoint of the chancellor. Maggie Kerbel does not, as a matter of fact, lose one penny that she would not have lost had this latter transaction not taken place. Her rights against Mary Cornell, against whom she can proceed if she is ever able to locate her, are in no wise jeopardized. No greater burden was placed on Maggie Kerbel than she would have borne if the old mortgage on the Stanton avenue property had not been released. This case comes squarely within the purview of the case of Straman, Admr., v. Rechtine, 58 Ohio St. 443, 51 N.E. 44, which is approved and followed.
Our recording acts in no wise affect the equities in this case. While this court has not, so far as we are advised, passed squarely on this proposition, we regard it as fundamental so far as this case is concerned.
We find that the Federal Union Life Insurance Company should be and is as a matter of equity subrogated to all the original rights of the Western Bank Trust Company in the Stanton avenue property and to all the original rights of the Title Guarantee Trust Company in the Lincoln avenue property. The judgment of the Court of Appeals is hereby reversed.
Judgment reversed.
WEYGANDT, C.J., ALLEN, JONES, MATTHIAS, BEVIS and ZIMMERMAN, JJ., concur.