Case Name: LANDMARK BANK, Plaintiff/Appellant, v. J.V. CIARAVINO, Trustee and Royal Bank Mid-County, Defendants/Respondents
Court: Missouri Court of Appeals
Jurisdiction: Missouri
Decision Date: 1988-05-24
Citations: 752 S.W.2d 923
Docket Number: No. 53268
Parties: LANDMARK BANK, Plaintiff/Appellant, v. J.V. CIARAVINO, Trustee and Royal Bank Mid-County, Defendants/Respondents.
Judges: SATZ, C.J., concurs.
Reporter: South Western Reporter Second Series
Volume: 752
Pages: 923–933

Head Matter:
LANDMARK BANK, Plaintiff/Appellant, v. J.V. CIARAVINO, Trustee and Royal Bank Mid-County, Defendants/Respondents.
No. 53268.
Missouri Court of Appeals, Eastern District, Division Three.
May 24, 1988.
Motion for Rehearing and/or Transfer to Supreme Court Denied June 22, 1988.
Application to Transfer Denied July 26, 1988.
Robert C. Jones, Clayton, for plaintiff/appellant.
Terrence F. Moffitt, St. Louis, for defendants/respondents.

Opinion:
SMITH, Judge.
This case reaches the writer on reassignment. We have utilized, without quotation marks, portions of the original opinion which failed of adoption.
Landmark Bank appeals a judgment which granted some, but not all relief requested in its suit for equitable subrogation and to determine priorities among holders on notes secured by deeds of trust on a residence. Landmark also asked the court to set aside a foreclosure sale or, in the alternative, to require an accounting of the proceeds of the sale. The contest is between lienholders. It does not involve the borrower.
Solely for the purpose of clarity the names used in this opinion are those currently being used by the banking companies involved. Some name changes have occurred but the names are insignificant to the legal issues presented.
The appeal does not raise or depend upon any disputed matters of fact. Nor is it claimed that any of the findings of fact of the trial court are unsupported by the evidence which consisted of a stipulation of facts and testimony of witnesses offered by both sides.
Under the circumstances we borrow the operative facts from the stipulation of parties and the findings of fact made by the trial court. Howard J. Danzig and Myma Danzig (Danzigs), until March 12, 1986, were the owners of a parcel of residential real estate located in St. Louis County, Missouri. On November 10, 1976, Roosevelt Federal Savings and Loan Association recorded a deed of trust from the Danzigs to secure a loan of $43,800 as a first deed of trust. On January 20, 1979, Nationwide Financial Corporation of Missouri recorded a deed of trust to secure a loan of $28,294.06. This was a second deed of trust. On October 10, 1980, defendant Royal Bank Mid-County recorded a deed of trust to secure a loan of $25,000. This was a third deed of trust. On April 28, 1981, plaintiff Landmark Bank recorded a deed of trust to secure a loan of $27,585.68. This was a fourth deed of trust. On April 28,1981, plaintiff Landmark Bank recorded a deed of trust to secure a loan of $20,000. This was a fifth deed of trust. On April 28, 1981, the Danzigs used money borrowed from Landmark Bank to pay off and obtain a release of the indebtedness to Nationwide Financial Corporation of Missouri. Hence, the second was paid off by money loaned by plaintiff Landmark Bank which was secured by the fourth and fifth deeds of trust.
Prior to making loans to the Danzigs, plaintiff Landmark Bank employed a title company to search the title. The title company did not find and did not report the existence of the recorded third deed of trust which secured an indebtedness of the Danzigs to Royal Bank. The error of the title company is the source of the dispute between plaintiff Landmark Bank and defendant Royal Bank.
The trial court found that Landmark Bank had no actual knowledge of the existing loan of Royal Bank to the Danzigs, nor of the lien of Royal Bank on the subject property although it was of record providing Landmark with constructive knowledge. Sec. 442.390, RSMo 1986. The Dan-zigs were not called as witnesses and there is no evidence whether they informed plaintiff Landmark Bank of defendant Royal Bank's note or the third deed of trust. After Nationwide was paid and its lien released, Landmark Bank believed that it held a second deed of trust on the real estate. The Danzig-Landmark Bank deed of trust securing $27,585.68 expressly recited "subject to a first deed of trust." The Danzig-Landmark Bank deed of trust securing $20,000 expressly recited that it was "subject to a first and second deed of trust."
Plaintiff Landmark Bank petitioned the court to find that a portion of the proceeds of its loans to the Danzigs were intended to pay off and obtain a release of the note and second deed of trust from Danzig to Nationwide Financial and to find, as a matter of equity, that Landmark Bank was entitled to a priority over defendant Royal in the amount of money which it had advanced to pay the Nationwide note and deed of trust, $27,619.91. In the alternative, plaintiff requested the court to find the $25,000 indebtedness of Danzig to Royal Bank had been paid by subsequent transactions between Danzig and Royal. Plaintiff alleged payment as a sufficient legal ground to set aside foreclosure of the Royal Bank deed of trust and to order the lien of that deed of trust released of record. Finally, in the alternative to the above findings and judgments the petition alleged that defendant J.V. Ciaravino as a trustee in the Royal Bank deed of trust should be ordered to account for all proceeds from the foreclosure sale and pay any excess to plaintiff on its liens.
The trial court found plaintiff Landmark Bank's failure to discover Royal Bank's superior lien precluded Landmark from asserting equitable subrogation and found no equitable basis to set aside Royal Bank's foreclosure sale. The trial court ordered defendant J.V. Ciaravino, as trustee, to account for the proceeds of the foreclosure sale. After an accounting was filed, plaintiff Landmark filed objections which were considered, sustained in part and overruled in part. Plaintiff appeals from these judgments.
Some additional facts add to an understanding of the appeal. It appears that Roosevelt Federal Savings and Loan held a purchase money note and deed of trust on November 10, 1976. Nationwide Financial accepted a second deed of trust in June of 1979. This may have been the source of funds by which the Danzigs acquired or financed a business they came to own, Flash Cube, Inc. The priority and sequence of these deeds is not at issue.
On October 10, 1980, defendant Royal Bank Mid-County loaned Flash Cube, Inc., $25,000 and obtained a note in that amount from the corporation. As part of the loan transaction Royal obtained a $25,000 note and deed of trust from the Danzigs on their residence as collateral for the corporation borrowing. Both notes were dated and signed on October 7, 1980. The "master loan" was to Flash Cube, Inc., in the sum of $25,000. The collateral note was in like amount but for the same consideration. The collateral note was payable on demand, and if no demand, then on April 7, 1981. Defendant Royal continued to loan money to the Danzigs. On May 19, 1982, it received a note signed only by Howard Dan-zig in the amount of $992.41. On May 19, 1982, it received a note in the amount of $15,000 from Flash Cube, Inc. On November 4, 1982, it received a note signed only by Howard Danzig for $5,702.90. On the same day, May 19, 1982, it received a note for $25,000 signed by Flash Cube, Inc. Finally, on September 12, 1984, it received a note for $36,850 signed by both Howard and Myma Danzig. According to the evidence the $36,850 note, a collateral note, "represented the balance outstanding under more than one note . it consists of the balance owing on the $25,000 note that started this and the balance due on some of these other notes." The September 12, 1984 note reflected the total sum due from Flash Cube, Inc., the Danzigs, or both, to Royal Bank. At that time the original $25,-000 master loan note and collateral note and deed of trust were still in existence and no principal payments had been made.
Royal Bank looked to the collateral note secured by what was originally a third deed of trust on the property for payment of the obligations of Flash Cube, Inc. and the Danzigs. On June 23, 1985, on the advice of counsel, defendant Ciaravino, as trustee, held an advertised sale of the collateral note and deed of trust. He did so at a public sale, after publication. Royal Bank bid $10,000 for the note and deed of trust. It is not clear why the sale was held in view of the fact that the collateral note and deed of trust were payable to Royal Bank. It appears it "bought" what it already owned. Defendant Ciaravino, as Vice President of Royal Bank of Mid-County, reported the collateral sale in an exhibit which recites: "(1) that the Danzigs on September 12, 1984 executed a promissory note for $36,850 payable on demand, and if no demand is made, then on September 12, 1985"; that the Danzigs pledged with Royal Bank Mid-County, as collateral, a $25,-000 promissory note dated October 7,1980; and that the $36,850 note, with interest, remains unpaid. It does not recite that the $25,000 note is due and remains unpaid. The exhibit then refers to the uniform commercial code — secured transactions and relevant statutes, reasonable notice of sale and describes a $1,000 payment by Royal Bank Mid-County "the receipt of which is hereby acknowledged." It reports a transfer of the $25,000 note to Royal Bank Mid-County as purchaser. In its answer Royal admitted a $10,000 consideration, not $1,000. None of these events created a credit due the Danzigs.
On December 9, 1985 plaintiff Landmark Bank filed a notice of lis pendens referring to the present law suit to "Determine an Equitable Lien and Enjoin Trustee's Sale."
On February 6, 1986, plaintiff Landmark Bank dismissed Howard J. Danzig and Myma Danzig, his wife, from the present law suit without prejudice. This apparently occurred because the Danzigs had filed a petition for protection under the Federal Bankruptcy Act. On March 12, 1986 defendant Royal Bank foreclosed on the Dan-zig $25,000 collateral note and deed of trust. Defendant Royal Bank was the successful bidder at the foreclosure sale. The bank bid $42,000. Defendant Ciaravino testified that he, as trustee, received no money from the bank. On March 17, 1976, Royal purchased the note and first deed of trust from Roosevelt Federal Savings and Loan Association. It paid Roosevelt $45,-487.31. On August 25,1986 Royal sold the real estate to the present owners for $94,-000.
It has been said foreclosure under a deed of trust is void in the absence of default according to the terms of the deed of trust. Petring v. Kuhs, 350 Mo. 1197, 171 S.W.2d 635 (1943) [7, 8]. Plaintiff invokes this rule of law as a foundation for a claim that the court erred in failing to find that the Danzig — Royal Bank third deed of trust was "satisfied" upon the subsequent execution of a $36,850 note which included the $25,000 note and for the further reason that the $25,000 note was never "funded" by Royal Bank. This claim fails as a matter of law and as a matter of fact. The $25,000 note secured by a third deed of trust on their residence was given by the Danzigs as collateral security for a $25,000 borrowing by their corporation. The loan from Royal Bank to Flash Cube, Inc., was the agreed consideration for the note executed by Flash Cube, Inc., and the note executed by the Danzigs secured by a third deed of trust on their residence. Further, the note imports a consideration. Section 431.020 RSMo 1986; Munday v. Austin, 358 Mo. 959, 218 S.W.2d 624 (banc 1949) [3, 4]. As a matter of fact the only evidence on the issue was that neither Flash Cube Inc., nor the Danzigs ever paid any principal payments on the note. Accordingly, both as a question of law and as a question of fact the court did not err in ruling that the foreclosure sale was not void for failure of consideration or for lack of default of a condition contained in the deed of trust.
Plaintiff Landmark Bank also claims the court erred in failing to apply the doctrine of equitable subrogation. It claims that it loaned the Danzigs $27,585.68 in exchange for a note and what it believed would be a third deed of trust on the property. This deed of trust was intended by Landmark Bank to become a second deed of trust because the proceeds of the loan were intended to be and were utilized to pay the note and second deed of trust held by Nationwide.
The doctrine of equitable subrogation has been applied on several occasions in this state. The basis for the doctrine was stated in State Sav. Trust Co. v. Spencer, 201 S.W. 967 (Mo.App.1918) [1] as follows:
"Subrogation is the substitution of another person in the place of the creditor, so that the person in whose favor it is exercised succeeds to the rights of the creditor in relation to the debt. The doctrine is one of equity and benevolence, and like contribution and similar equitable rights, was adopted from the civil law, and its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form, and its object is the prevention of injustice." (Quoting from 37 Cyc. 363).
The cases involving equitable subrogation have applied the doctrine only in very limited circumstances. In Bunn v. Lindsay, 95 Mo. 250, 7 S.W. 473 (1888) a lender provided money necessary to pay off a first deed of trust. The lender was unaware of an intervening judgment lien of record. The court refused to allow equitable subro-gation and stated its reasons as follows:
"Why did he not know it? That judgment was spread upon the public records in order that all who might deal with the property might know of its existence. He was not prevented from examining the record or lulled into security by any representation of Paramore, Lindsay, or anybody else. He did not know simply because neither he nor his agent looked that he might see and know. That plaintiff's security was less valuable than he expected it would be when he made the loan was the result of his own negligence, and not of the fault, wrong, or mistake of any other person. Against the consequences of that negligence, for which he has no one to blame but himself, a court of equity cannot relieve him by interfering with the legal rights of others who are without fault." (l.c. 476).
State Sav. Trust Co. v. Spencer, supra, involved a lender who advanced money to satisfy a first deed of trust upon which foreclosure was threatened. He was to receive a first deed of trust. The holder of the second deed of trust agreed to subordinate his security to that of the lender, which he did. A third deed of trust was noted in the county records as satisfied. In fact that record of satisfaction was obtained through the use of a forged instrument by the borrower. This was unknown to the lender. In that case, involving fraud which caused the public records to be erroneous, the court awarded an equitable sub-rogation. In determining that subrogation was appropriate the court noted: "But the fact that the relative status or value of defendant's lien will not be changed does not entitle plaintiff to be subrogated; but in determining plaintiff's claim to subrogation, the status or relative status of defendant's lien should be considered." (Emphasis supplied). Id. at [1]. We interpret this to mean that more is required to support an equitable subrogation than that the superior liens are no worse off than they were before the subsequent lender advanced his money to retire the senior lien. It would further appear to imply that if the other lienors would be damaged by the subrogation such should not be awarded even in the presence of equitable grounds otherwise sufficient.
Anison v. Rice, 282 S.W.2d 497 (Mo.1955) was a case in which no junior lienors were involved. The lender advanced money to pay off a first deed of trust under threat of foreclosure. He did so at the request of one joint owner of the property who represented that he was the agent for the other joint owner, his mother. In return for the loan the lender was to receive a first deed of trust on the property. The original deed of trust was satisfied but no new deed of trust was executed. The trial court found the son was the agent for his mother and ordered specific performance of the son's agreement. The Supreme Court found the evidence inadequate to establish the son's agency but ordered equitable subrogation to the original deed of trust. In so doing it noted that the mother benefited equally with the son from the lender's actions.
Baker v. Farmers' Bank of Conway, 220 Mo.App. 85, 279 S.W. 428 (1926) involved a loan made to satisfy three deeds of trust with the understanding that the resultant deed of trust would be the first lien and a previously existing fourth deed of trust would become a second. After payment of the notes secured by the first three deeds of trust the holder of the fourth refused to subordinate its security. Equitable subro-gation was decreed. It is not clear whether the court based its decision upon its conclusion that in fact the first three deeds had been assigned to the new lender or because there was evidence that the holder of the fourth had agreed to subordination and then reneged. Possibly it was based on both. It was there noted that a lender is not entitled to equitable subrogation if he has been placed into the position in which he finds himself because of his "culpable and inexcusable neglect."
It is clear from a review of these cases that equitable subrogation is allowed only in extreme cases bordering on if not reaching the level of fraud. Sec. 442.390, RSMo 1986, provides that documents filed for record with the recorder shall "impart notice to all persons of the content thereof and all subsequent purchasers and mortgagees shall be deemed, in law and equity, to purchase with notice." (Emphasis supplied). For courts to allow equitable subro-gation where no extreme circumstances are present would be nothing less than a judicial repeal of Sec. 442.390 and would place the lending of money secured by real estate at great risk and insecurity. In none of the cases in which subrogation has been ordered has the lender been allowed to advance ahead of a recorded lien in the absence of complicity by the superior lien holder in obtaining the loan. In State Sav. Trust Co., supra, the county records reflected the satisfaction of the superior lien at the time the money was advanced albeit that satisfaction record was the result of criminal conduct by the borrower. In that situation the court found that the lender relied upon the county records in making his loan and that the holder of the "satisfied" lien had sustained no loss in value of his security by the subrogation. The only case involving a lender who failed to accurately determine the state of the public records was Bunn, supra, where equitable subrogation was denied despite the fact that the intervening lienor had sustained no diminution in the value of his lien.
In the case before us Royal is totally innocent of any complicity in Landmark's mistake. Whether Royal's actions to protect its security would have been the same as a third or fourth mortgagee rather than the second which the records at the time of foreclosure showed it to be, neither we nor the trial court can assess. Regardless of that, it is Landmark's failure to properly ascertain the state of the Danzig title of which it is presumed to have had knowledge which has caused its dilemma.
The statement in the Danzig-Land-mark deed of trust that it was subject to a first deed of trust but which omitted reference to the Royal deed of trust is of no aid to Landmark for at least two reasons. First, it had no right to rely on that statement in view of Sec. 442.390 and normal commercial practice. Secondly, it did not in fact so rely. It had the record searched on its behalf and the title company, Chicago Title Insurance Company, upon which it relied, failed to find that which was clearly revealed on the public records. The record does not establish whether the title company was the agent of Landmark or an independent contractor. This absence in the record arises largely from Landmark's repeated objections, which were sustained, to the relationship between it and the title company. It was Landmark's burden to establish it was entitled to equitable subro-gation. Part of that proof was its freedom from negligence. It is presumed to have constructive knowledge of the public records. We need not decide whether its freedom from negligence would under the circumstances here have entitled it to equitable subrogation; it is sufficient to say it has not established that it was in fact free from negligence. The only fact supporting equitable subrogation in this case is that possibly Royal may have sustained no diminution in the value of its security from the actions of Landmark. That fact, if true, is not alone sufficient to invoke the doctrine. State Sav. Trust Co., supra.
One other matter deserves comment. As an offer of proof Royal offered evidence that in fact Landmark had title insurance to cover its loans from Chicago Title. Counsel for Landmark, in objecting to evidence of the existence of such insurance, repeatedly stated that "the rights of the insurance company would be subrogat-ed to the plaintiff in this case." In this equitable proceeding the relief to Landmark is a matter of "equity and benevolence" and the basis for the relief sought is the "doing of complete, essential, and perfect justice between all the parties without regard to form, and its object is the prevention of injustice." The status of Chicago Title as the insurer of Landmark and its status as the ultimate beneficiary of a decree in favor of Landmark is relevant. It is strange equity indeed, which would protect Chicago Title from the results of its negligence at the expense of Royal, which is totally innocent in the matter.
The trial court, in the exercise of its equitable powers, denied equitable subro-gation and we find that determination fully supported by the record. We have reviewed Landmark's challenges to the accounting rendered by the trustee, modified by the trial court, and, as modified, approved by the trial court and find no error.
Judgment affirmed.
SATZ, C.J., concurs.
KAROHL, P.J., dissents in separate opinion.