#### Zimpher et al., Appellants, *v.*Schwartz et al., Appellees.

(Decided January 18, 1940.)

ilfr. *A. W. DeWeese*and *Mr. J. H. DeWeese,*for appellants.

*Messrs. Berry é McCulloch,*for appellees.

Geiger, J.

This ease comes before us on appeal on questions of law and fact from an order of tbe Common Pleas Court of Miami county, Ohio. Tbe action there began upon tbe filing of a petition by John J. Zimpher in which he alleges that there is due to him from the defendant, Fred Schwartz, the sum of $241 on an account attached, for which he asks judgment, and the foreclosure of a mechanic’s lien.

Charles Helmer, an appellant, for his cross-petition, sets up a labor claim which he asserts has been perfected as a mechanic’s lien.

The Third Savings Bank & Loan Company, appellee, for a first cause of action in its cross-petition states *8that there is due from Schwartz and his wife $3,922.15 upon a promissory note for which a mortgage was given under date of July 9, 1937, upon the property in question, and it is alleged that such mortgage, by its filing on July 12, 1937, became a first lien upon the property.

John J. Thompson, an appellant, sets up a perfected mechanic’s lien for $247 for material furnished. .

The J. A. Shade Lumber Company, an appellant, sets up a perfected mechanic’s lien for material furnished, the lien being filed on the 12th of November, 1937.

An agreed statement of facts was filed by the parties which stipulated, in substance, that on the 24th day of April, 1937, The Third Savings Bank & Loan Company loaned $2,500 to Schwartz and wife and took their note and mortgage, which mortgage was recorded on the 26th day of April, 1937; that Schwartz began to improve the real estate and the' defendant lienholders began to furnish material and perform labor on the premises on the 13th day of May from which date work was continually and visibly in progress to the 3rd day of November, 1937, of which work the loan company had knowledge. It is further stipulated that the loan company loaned Schwartz the additional sum of $1,167.90 and took a new note and mortgage in the sum of $3,700 on the 8th day of July, 1937; that the $2,500 note and mortgage were paid from the proceeds of the $3,700 mortgage and the $2,500 mortgage was can-celled and discharged of record as fully paid on the 12th of July, 1937.

It is further stipulated that the lienholders have perfected their liens all according to statute, which liens were filed of record within the statutory period, but subsequent to the $3,700 mortgage to the defendant loan company. The stipulation states that the question is whether the defendant loan company is entitled to be subrogated to the amount of its first mortgage in *9preference to the lienholders. It is further agreed that the mortgage of April *24,*1937, in the principal sum of $2,500 was a purchase-money mortgage, without recital to that effect in either the deed or mortgage.

In an entry relating to the claim of The Third Savings Bank *&*Loan Company, it was found that there was due on the note and mortgage the amount claimed, for which judgment was awarded, the question of priority being reserved.

On August 29,1939, an entry was filed in which it was found that the defendant, The Third Savings Bank & Loan Company, was entitled to be subrogated to its original mortgage and that it had the first and best lien on the premises in the amount due on its original mortgage. An order of distribution was made to The Third Savings Bank *&*Loan Company in the sum of $2,962, being the amount due on the original mortgage note together with the value of inchoate right of dower of Lottie Schwartz; to the plaintiff,'John Zimpher, the sum of $118.29 to apply on his judgment and lien, the same being 14 per cent of the remainder of the proceeds of the sale; to the defendant, The J. A. Shade Lumber Company, $464.to apply on its judgment, being 55 per cent of the remainder of the proceeds of the sale; to the defendant, Helmer, the sum of $143.62 to apply on his judgment, being 17 per cent of the remainder of the proceeds of the sale; and to the defendant, Thompson, the sum of $118.29, being 14 per cent of the remainder of the proceeds of the sale.

Of all the original lienholders, the case is before this court to determine only the respective rights of The J. A. Shade Lumber Company, Charles C. Helmer and John J. Thompson on their respective mechanic liens, and of The Third Savings Bank *&*Loan Company on its mortgage lien.

The question is whether the mechanic lien holders, The J. A. Shade Lumber Company, Helmer and Thompson, are entitled to have applied to their liens *10the proceeds of the sale of the real estate in preference to the payment to The Third Savings Bank & Loan Company of $2,500, the amount of the original mortgage dated April *24,*1937, to which amount the loan company claims to have been subrogated when the second mortgage for $3,700, dated July 8,1937, was given.

The court below in its opinion referred to *Straman, Admr.,*v. *Rechtine,*58 Ohio St., 443, 51 N. E., 44, and quotes at large from that case and found that the interest of the mechanic lienholders will not be jeopardized by the allowance of the subrogation inasmuch as the $2,500 mortgage was in existence at the time they began the construction of the building upon which their mechanic liens are based.

The appellants have filed an assignment of errors to the effect that the court erred in its finding that the loan company was not charged with knowledge that the mechanics might perfect their liens; in finding that the loan company could not have taken advantage of Section 8321-1, General Code, to protect itself; in finding that the rights of the lienholders were not jeopardized by the giving of the second mortgage ,• in finding that it was the intention of the mortgagor and mortgagee that the lien on the original mortgage should continue; and finally, that the court erred in its finding that the mortgage was a first and best lien upon the premises.

Counsel for both sides have furnished interesting briefs supporting their respective positions, which we have read carefully and have examined all cases cited together with many others.

Counsel for the appellants state their position briefly as follows: All persons who seek subrogation must allege facts which would entitle them thereto, either by way of fraud, mistake, or an agreement that the lien of the second mortgage should be a first lien upon the premises. Counsel assert that there must be an agreement that the second mortgage should continue as a first lien, acquiesced in by all concerned and that sub*11rogation can not be invoked to work a hardship upon the intervening lienors. It is also asserted that if the loan company wanted to protect itself in this case, it had available the provisions of Section 8321-1, General Code, designed for the protection of one who loans money to be used in the improvement of property, but that it did not avail itself of this provision.

In support of the second error complained of, it is claimed that the loan company does not allege that the transaction was a result of a mistake of facts, or fraud, or agreement among the parties, and having failed to take advantage of the section above cited, it is not entitled to subrogation.

As to the third assignment of error, it is claimed that the mechanics had performed work on the house, when the second mortgage was taken, to such an extent that the property was enhanced in value and the equities in the property were greater than when the original mortgage was given, and that, therefore, their rights were jeopardized by the second mortgage.

As to the fourth assignment, counsel assert that there is no foundation for the judgment of the court below in finding that there was an intention between the parties to continue the lien of the first mortgage, and in conclusion'counsel assert that there was no agreement that the second mortgage should be a first lien; no lack of knowledge as to the intervening lien-holders; no mistake of fact but only of law, and that, therefore, equity will not intervene, and that there is nothing alleged that would warrant a finding of subrogation and that the agreed statement of facts warrants the refusal to apply the doctrine.

Counsel for appellees point out the general principles of subrogation as found in 38 Ohio Jurisprudence, 245, Section 1 *et seq.,*and also cite certain cases and quote at large from the case of *Harter Bank*v. *Cooper,*11 Ohio Law Abs., 300, and discuss at length cases which we will briefly examine. They as*12sert the lienholders began to furnish material and perform labor on the property almost three weeks after the first mortgage had been recorded, and that they could not have been prejudiced by the execution of the new mortgage if subrogation be granted only to the extent of the amount due on the first mortgage. They assert that the cancellation of the first mortgage did not prevent the loan company from claiming rights thereunder, and that the holder of the first mortgage, which was paid off from the proceeds of the new mortgage, given subsequent to the commencement of the repairs on the property, is entitled to priority over the mechanics’ and materialmen’s liens, by way of subrogation, in an amount equal to the money advanced to pay off the first mortgage and that if such subrogation is not allowed, an injustice and hardship will result.

We examine the law briefly and first point to Section 8321-1, G-eneral Code, which provides for the protection of one who loans money for building purposes.

This section affords protection for those seeking to loan money on property which is under improvement by the erection of buildings, but this appellee did not avail itself of it and consequently can not claim its benefits. This does not mean that it may not secure the rights claimed by it by other provisions of the law

Ohio Jurisprudence is cited by both parties and we may allude to certain sections under the heading ‘ ‘ Subrogation,” 38 Ohio Jurisprudence, 245, Section 1 *et seq.*It is there stated that subrogation is an equitable and not a legal right and is a substitution of one person for another with reference to a lawful claim or right. Subrogation is nothing more than an assignment by operation of law. It is then pertinently stated that the word “subrogation” sometimes is doubtfully employed to describe the equity which protects the priority of a lienholder who takes a new lien, and intending to retain his property, cancels the old lien in *13real or supposed ignorance or mistake respecting the existence of an intervening lien.

The doctrine is founded in equity and natural justice and will be invoked only when necessary to secure some equitable right, without which an injustice will be done, and will not be enforced where it will work injustice to the rights .of those having equal equities or prefer one creditor over another where an inequitable result will be accomplished thereby. It will not be decreed in favor of a volunteer, who, without any duty, pays the debt of another.

In the present discussion, counsel have considered the question as being one of “subrogation,” although we have some doubts whether it properly comes within such principle.

In the case at bar the company made a mortgage loan for $2,500, and after the lienors had begun their work it made a second loan for $3,700. It now abandons its first claim that by virtue of such second mortgage it had a prior right over the materialmen, and bottoms its claim upon the single fact that $2,500 of the second mortgage was used in the payment of the first mortgage which was in existence at the time the mechanics began their work, and that, therefore, these mechanics are in no worse position than they would have been had the second mortgage not been given. It is asserted that they were in a better position inasmuch as the last $1,200 furnished funds that were used in the completion of the building.

The agreed statement of facts becomes of importance. It is first agreed that the $2,500 mortgage was recorded on the 26th of April, 1937, and that from the 13th day of May work was continually and visibly in progress to the third day of November, “and of the improvement work the defendant, loan company, had knowledge. ’ ’

It is further agreed that the $2,500 note and mortgage was *paid*from the proceeds of the $3,700 mort*14gage and that the $2,500 mortgage was cancelled and discharged of record ‘ ‘ as fully paid on the 12th day of July, 1937.”

It is further agreed that the principal sum of $2,500 was a purchase-money mortgage, but without recital to that effect in either deed or mortgage.

We may briefly refer to cases which have been under discussion, which we believe are of interest, not endeavoring to discuss them in detail. *Straman, Admr.,*v. *Rechtine, supra,*is much quoted by counsel. As we comment upon it, we will emphasize those facts-appearing in the record of that case which seem to us to be of importance.

The first paragraph of the syllabus is to the effect that where money is loaned *under an agreement*that it shall be used in payment of a lien *“and it is so used,”*and the agreement is that one who so loans the money shall have a first lien to secure his money, but through some *defect*in the new mortgage or *oversight*as to other liens, the money can not be made on the last mortgage, the mortgagee has a right to be subrogated to the lien which was paid by the money so by him loaned when it can be done without placing greater burden upon the intervening lienholders than if the old mortgage had not been released, but not as against a lienholder who acquired his lien after the release of the old mortgage without notice of the new mortgage.

In the case at bar, the two mortgages being made by the same company, there would be no occasion for an *agreement*between the mortgage, lienholders. There was no defect or oversight. The mortgages were both good and the company had, by the agreed statement of facts, knowledge of the work being done upon the premises. There could be no oversight by the company based upon a claim that it did not know that the mechanics’ lien men would perfect their liens. It certainly knew, or should have known, that that was a right *15given by law to the lienors and that they would no doubt assert it.

The case of *Union Trust Co.*v. *Lessovitz,*51 Ohio App., 69, 199 N. E., 614, decided by the Court of Appeals of Cuyahoga county in 1931, holds that where a person, through *misrepresentation or oversight*is *induced*to pay off an existing mortgage lien on the *assurance*that he shall have a first mortgage, and the money can not be made on the second mortgage, he is entitled to be subrogated to the mortgages cancelled by the money advanced, where it places no greater burden on the intervening judgment lienholder than would have existed had the old mortgage not been cancelled.

This is an interesting case, but involves the question of the right of subrogation based upon the fact that through *misrepresentation*or *oversight*a person is *induced*to loan money and where there is an *assurance*that he would have a first mortgage lien on the property. We discover neither *misrepresentation*nor *oversight*and there was no *assurance,*inasmuch as the mechanic lienors did not enter into any such contract, and the only assurance that could have been given would have been that the mortgagee of the first mortgage assured the mortgagee of the second mortgage that it was to have a lien, but being the same party, of course, no such assurance would be of any consequence.

The case of *Harter Bank*v. *Cooper,*11 Ohio Law Abs., 300, decided October 23, 1931, states in the syllabus that the holder of a first mortgage, proceeds of which were used to pay off an existing first mortgage, is given priority by subrogation over the second mortgage previously recorded. This case reviews a number of cases to which we shall hereafter allude. In that case the Savings *&*Loan Company of Massillon having had a loan of record prior to the. mortgage of the Harter Bank, and this prior mortgage having been paid off by taking a new mortgage recorded subsequent to the Harter Bank mortgage, the loan company claimed to *16be subrogated to the extent that the proceeds from the second mortgage were taken to pay off the mortgage first recorded, and the court held, in substance, that the equity under all the facts and circumstances are such as entitle the loan company to priority by subrogation to the extent that the money was advanced for the cancellation of the first mortgage.

It will be observed that this decision was rendered by the Court of Appeals of the Fifth Appellate District in which Judge Lemert delivered the opinion, concurred in by Judges Sherick and Montgomery.

We call attention to.the court and judges rendering the opinion last above referred to for the reason that we find the case of *Canton Morris Plan Bank*v. *Most,*44 Ohio App., 180, 184 N. E., 765, was decided by the same court on November 16, 1932, and it seems, in some particulars, to contradict the position taken by the court in the *Harter Bank case, supra.*The fifth, sixth and eighth paragraphs of the syllabus are of authority in the instant case.

The court on page 184 comments pertinently and holds that a cancellation of a mortgage on record is not conclusive as to the discharge or payment of the indebtedness. We again call attention to the agreed statement of facts where it is stated that the “$2,500 note and mortgage were paid from the proceeds of the $3,700 mortgage, and said $2,500 mortgage was can-celled and discharged of record as fully paid. ’ ’

See, also, page 186 where the court points out various conditions that surrounded the mortgage in question, which are similar to those in the case at bar, and concludes on page 188 that:

“We see no clear right established in the applicant to subrogation in this action, and it is therefore ordered that a decree be entered in this court such as that entered in the court below.”

Whatever may have been the authority of the *Harter**17*Bank case, supra,*we think that the *Canton Morris Plan Bank case,*just alluded to, is more pertinent.

We now examine certain other authorities.

See 33 A. L. R., 151.

On page 157, under the heading “Mistake of Mortgagee,” we find a general statement that, “Where an existing lien has been discharged by the holder and a renewal lien taken *in ignorance of intervening lien against the property,*the mortgagee will be regarded as acting under such a mistake of fact as to entitle him to relief by a restoration of his priority, if the rights of innocent parties are not involved.” (Italics ours.)

We again are met by the agreed statement of facts that the loan company had knowledge of the intervening liens.

The matter is stated in another way in 98 A. L. R., 845.

It will again be noted that the agreed statement of facts in the matters we have pointed out differentiates the case at bar from the general principle announced.

The first case cited in support thereof is that of *Riegel*v. *Belt, Admr.,*119 Ohio St., 369, 164 N. E., 347. In the fourth paragraph of the syllabus, it is stated:

“Whether a new note and mortgage operates as a renewal or payment depends upon the agreement of the parties. Where no receipt is given for the amount of the debt, and no release or satisfaction of the mortgage is executed, the presumption is that the later note and mortgage were not intended to pay and discharge the earlier.”

Here again we are confronted with the agreement of the parties to the effect that the first mortgage and note were paid by the second.

In 41 Corpus Juris, 807, Section 945, it is stated:

“Where a note secured by mortgage is taken up, at or before its maturity, and a new or renewal note substituted for it, the mortgage continues as security for *18the debt in its new form and there is no change in the rights or remedies of the mortgagee, *unless there is an actual agreement or mutual intention of the parties that the mortgage shall be discharged, or the debt regarded as paid, by the new note *** *.” (Italics ours.)

We think the case at bar falls within this exception by virtue of the provisions of the agreed statement of facts. The matter resolves itself into this. A mortgage was given, which by virtue of its filing, is a prior lien upon the real estate. At a subsequent date mechanic lienors began their labor and, at a subsequent date, the original mortgage was cancelled and a new one given for a greater amount, there being no allusion within the mortgage to the statutory provisions saving the lien as against materialmén and laborers. The agreed statement of facts advises us that at the time of the giving of the new mortgage the work was continually and visibly in progress and that the defendant loan company had knowledge of this and that the $2,500 note and mortgage were paid from the proceeds of the $3,700 mortgage and “said $2,500 mortgage was cancelled and discharged of record as fully paid.”

We think that these facts and circumstances clearly remove this cause from that class of cases that recognize and assert a right of subrogation. The fact is that the loan company was simply careless in failing to get the consent of the lienors and in not putting in the saving provision of the statute. It gave up its old mortgage security which was, by the agreed statement of facts, cancelled and paid and was out of existence for all purposes inasmuch as there has been failure to show any mistake or fraud by virtue of which it might have continued to be in existence.

This case is reminiscent of the questions decided by one of the present judges of this court 20 years ago in *Geer*v. *Tuggle,*22 N. P. (N. S.), 129, 29 O. D. (N. P.), 552.

*19Judgment of this court will he that the money derivéd from the sale of the real estate must first be applied to the payment of the mechanics’ liens and that if anything remains, after such payments are made, it would go to the loan company as holding the first lien junior to that of the mechanics’ liens.

The rights of the widow, of course, are to he reserved in view of this holding of the court.

*Judgment reversed and cause remanded.*

Barnes, J., concurs.

Hornbeck, P. J., dissents.