Case Name: Smith v. Folsom et al., Receivers
Court: Supreme Court of Ohio
Jurisdiction: Ohio
Decision Date: 1909-04-27
Citations: 80 Ohio St. 218
Docket Number: No. 10762
Parties: Smith v. Folsom et al., Receivers.
Judges: Crew, C. J, Summers and Davis, JJ, concur.
Reporter: Ohio State Reports, New Service
Volume: 80
Pages: 218–231

Head Matter:
Smith v. Folsom et al., Receivers.
Action to enforce right under subrogation — Appealability—Determined by.Section ¡226, Revised Statutes — Participation in trust is sought — No right to jury — Section 5130, Revised Statutes— Doctrine of subrogation — Applies, although primary and secondary liabilities not incurred at same time — Not defeated by cancellation of mortgage.
1. Whether a civil action brought within the original jurisdiction of the court of common pleas for the enforcement of a right accruing under the doctrine of subrogation is appealable or not depends, under Section 5226, Revised Statutes, upon the right of either party to demand a jury for the trial of issues of fact under Section 5130, Revised Statutes. When the relief sought is participation in a trust estate in the hands of the defendants, neither party is entitled to demand*a jury, and the action is appealable.
2. One who in the discharge of a secondary liability pays an obligation is entitled by subrogation to the securities of him who is primarily liable, although the primary and secondary liabilities are not incurred at the same time.
3. When one in discharge of a secondary liability pays an obligation secured by mortgage upon real estate, his right to subrogation is not defeated by the cancellation and surrender of the mortgage without a stipulation that his right shall be preserved. Neilson & Churchill v. Fry, 16 Ohio St., 552, approved and followed.
(No. 10762
Decided April 27, 1909.)
Error to the Circuit Court of Pickaway county.
The plaintiff in error brought suit in the court of common pleas seeking subrogation with respect to a mortgage which had passed into the possession of Folsom and Waters as receivers of The New Citizens’ Building and Loan Company-. He alleged a payment by himself on account of a prior mortgage on the same premises, and prayed for á decree awarding to him an interest in a mortgage in the hands of the receivers to the extent of such payment. The answer contained no allegations changing the character of the issues tendered by the petition. A trial in the court of common pleas upon the merits, resulted in a judgment for the plaintiff in accordance with the prayer of his petition. From that judgment the receivers took an appeal to the circuit court. The plaintiff moved to dismiss the appeal upon the three grounds that: 1. They have not executed an appeal bond as required by the statute. 2. They were not authorized or directed by the court of common pleas which appointed them, and which made the order in this case appealed from, to appeal from said order and judgment of the court of common pleas. 3. The case is not appealable. That motion was overruled. The circuit court then proceeded to try the case upon the pleadings and the evidence and rendered judgment in favor of the defendants dismissing the plaintiff’s petition. The. material facts appearing from the pleadings and the circuit court’s special findings of fact upon the issues joined are:
On the 15th of April, 1902, one H. R. Clarke, borrowed from The People’s Building and Loan Company, of Circleville, $6,884.80, and to secure its payment executed to that company a mortgage on the premises described in the petition. Later he desired a further loan which The People’s Company declined to make, and on the 25th of July, 1902, he made an arrangement with The New Citizens’ Building and Loan Company for a loan of $7,500, to be secured by a mortgage to it upon the same premises, that company to- assume the payment of the prior mortgage which then amounted to $6,500, and to pay to Clarke one thousand dollars. In accordance with this arrangement, Clarke executed his mortgage to The Citizens’ Company and it paid to- Clarke $801.33; On the 27th of August, 1902, The Citizens’ Company, having paid to The People’s Company the interest and dues upon the prior loan from July 25th -to that date, paid to Clarke the balance of the one thousand dollars due him upon the arrangement of July 25th, and procured the cancellation and surrender of the prior mortgage by delivering to The People’s Company a certificate of credit executed by The Citizens’ Company to the plaintiff for $6,500, and by him endorsed waiving notice of non-payment. For this certificate and endorsement there was no consideration whatever, it being executed and endorsed upon the suggestion and request of The Citizens’ Company for the sole purpose of securing the endorsement of Smith to make the certificate acceptable to The People’s Company as an inducement to the cancellation and surrender of the prior-mortgage. Smith’s endorsement was sought and given for that definite purpose. During the time covered by these transactions, The Citizens’ Company was insolvent, but its insolvency was not known by the parties. At the maturity of the certificate, August 27, 1903, Smith paid to The People’s Company, $6,500 with interest in discharge of his liability as endorser, and The People’s Company then cancelled and surrendered its mortgage. There was, at the time, no express stipulation that the mortgage should continue in force for any purpose. In the solicitation of the endorsement by Smith of The Citizens’ Company’s certificate, the company was represented by its treasurer, who then represented to Smith that the company was solvent. The defendants were appointed receivers of The Citizens’ Company, February 19, 1903.
Mr. Clarence Curtain and Mr. Milt Morris, for plaintiff in error.
■ Our claim in support of the motion to dismiss the appeal is, that where a receiver is appointed and is placed in possession of property by the court, and the court subsequently finds and determines that a certain portion of the property placed in the hands of its receiver is the property of a certain claimant, and directs its receiver to pay the same to said claimant, that the said receiver can not appeal from the order of the court directing him so to do, unless he is specially authorized by the court to prosecute said appeal. Section 5590, Revised Statutes; Porter v. Sabin, 149 U. S., 479; McKinnon v. Wolfenden, 47 N. W. Rep., 436 ; 2 Cyc., 641; Polk v. Johnson, 76 N. E. Rep., 634; Herrick v. Miller, 24 N. E. Rep., 112; Crawford v. Schriver, 21 Atl. Rep., 518; Haskie v. James, 23 Atl. Rep., 1030; Lurman v. Hubner, 23 Atl. Rep., 646; McColgan v. McLaughlin, 58 Md., 499.
It is admitted that Smith’s endorsement of the certificate of deposit was without consideration, and that he was therefore in legal contemplation, a surety only for The New Citizens’ Company, and that is held to be his leg'al status. 2 Randolph on Commercial Paper, Section 474; Greenough v. Smead, 3 Ohio St, 420.
As to The New Citizens’ Company and all persons standing in its shoes, the payment by Smith of the certificate of deposit was “in the nature of a purchase by” him from The People’s Company and operated as an assignment of the debt and securities of The People’s Company to him. In other words, Smith by making this payment placed himself, legally, in the same position that The People’s Company occupied toward The New Citizens’ Company. In that position he is entitled to assert any right or remedy which The People’s Company might or could have asserted against The New Citizens’ Company. Hill v. King, Exr., 48 Ohio St., 80; Railroad Co. v. Falk, 62 Ohio St., 305; Dempsey v. Bush et al, 18 Ohio St., 381; Zuellig v. Hemerlie, 60 Ohio St., 33.
We call attention to the holding of this court that the surety’s action is upon “the implied contract of indemnity” and not. upon the note or other security of the creditor which he has paid, for the reason that an erroneous impression seems -to have prevailed in this case that to entitle Smith to the right of subrogation it was necessary that some contract, express or implied, should have been made by him at the time he made said payment in order to give him such right. Zuellig v. Hemerlie, 60 Ohio St., 27; Railroad Co. v. Falk, 62 Ohio St., 305.
It is true that there is no reported case in Ohio precisely like the one at bar, but we believe that the general principles which have been announced in various decisions substantiate the right of the plaintiff in error to subrogation. Baker v. Ward, 7 Bush, 240.
The conclusion of law arrived at by the circuit court was that a surety who paj^s the debt of his principal is “purely a stranger and volunteer” and is not entitled to the right of subrogation, in the absence of a contract, express or implied; that he is to have such right in consideration of making such payment.
This is directly contrary to the holding of this court in several cases. Dempsey v. Bush, 18 Ohio St., 376; Railroad Co. v. Falk, 62 Ohio St., 305; Miller v. Stark, Admr., 61 Ohio St., 421; Poe v. Dixon, 60 Ohio St., 131; Hill v. King, 48 Ohio St., 80; Neilson & Churchill v. Fry, 16 Ohio St., 552; Insurance Co. v. Middleport, Í24 U. S., 534; Sanford v. McLean, 3 Paige, 122; Railroad Co. v. Dow, 120 U. S., 287.
Messrs. Abernethy & Folsom and Mr. Barton Walters, for defendants in error.
The receivers in this case had the right to appeal without getting special leave: Beach on Receivers, 258, 296; People v. Steel & Iron Co., 82 Hun, 303; 2 Cyc., 641; Fagan v. Machine Co., 65 Tex., 324; Melendy v. Barbour, 78 Va., 544; High on Receivers, Section 264; Alderson on Receivers, 712, 714, 715, 797, 798.
Leave to plaintiff to bring an independent suit against the receivers, impliedly directs them to defend the suit in all proper ways. Alderson on Receivers, Sections 520, 585; Wason v. Frank, 7 Colo. App., 541, 44 Pac. Rep., 378; Beach on Receivers, 257, 492, 500, 776; Davis v. Duncan, 19 Fed. Rep., 477; Fluck & Becker on Receivers, 447; Runyon v. Bank, 4 N. J. Eq., 480; Bosworth v. Railroad Assn., 174 U. S., 182.
Subrogation defined. Bouviers’ Law Dictionary; Bispham’s Principles of Equity, Section 335; Sanford v. McLean, 23 Am. Dec., 773; Uzzell v. Mack, 40 Am. Dec., 648; Insurance Co. v. Middleport, 124 U. S., 534; 3 Pomeroy’s Eq. Jur., 200.
The doctrine is sometimes extended to one who having no previous interest and being under no obligations pays oft" the mortgage, or advances money for its payment at the instance of the debtor party and for his benefit; but there must be some agreement or understanding or expectation that the lien was being preserved for his benefit in order that he may be subrogated. There is no case reported that holds under the above facts. that the mere payment at the instance of the debtor party gives the person advancing’ the money the right to be subrogated. Pomeroy’s Eq. Jur., 202.
It is the universal custom of persons making loans to take up prior mortgages, to hold in their hands sufficient money out of the new loan, to pay off said mortgages and in so doing they act as the agent of the debtor. They do not assume and agree to. pay the prior mortgage. Sheldon on Subrogation, Section 240; Gadsden v. Brown, Speer’s Eq. (S. Car.), 37; Nolte v. Creditors, 7 Mart., N. ,S., 602; Curtis v. Kitchen, 8 Mart., O. S., 706; Cox v. Baldwin, 1 La., 401; Shinn v. Biidd, 14 N. J. Eq., 234; Insurance Co. v. Middleport, 124 U. S., 542; Van Winkle v. Williams, 38 N. J. Eq., 105; 24 Am. & Eng. Ency. Law, 283; Leydon v. M'alloy, 10 C. C, 442; Wentworth v. Tubbs, 55 N. W. Rep., 543.
Where there is no thought, expectation of, or agreement for subrogation, there can be none. Gashe, Assignee, v. Lumber Co., 31 W. L. B., 189; Collins on v. Owens, 6 Gill & J., 4; Miller v. Price, 20 Wis., 117; Wentworth v. Tubbs, 53 Minn., 388; Commonwealth v. Canal Co., 32 Md., 501; Wormer v. Agricultural Works, 62 la., 699; Sheldon on Subrogation, Section 43.

Opinion:
Shauck, J.
The court of common pleas having rendered judgment in favor of the plaintiff Smith, and the circuit court against him, it is of práctica! importance to inquire whether the latter court erred in overruling the motion to dismiss the appeal. The only authorizing action required of the court of common pleas was taken when it granted to th: plaintiff leave to bring the suit. The appeal taken by the receivers was in the exercise of their general powers. By the provisions of Section 5658, Re vised Statutes, upon their appointment they became trustees of the estate of the corporation for the benefit of its creditors and stockholders having "all the power and authority conferred by law upon trustees to whom assignments are made for the benefit of creditors."
Since the receivers had given bond for the performance of their duties, and since the appeal was in the interest of their trust, they were exempt from the obligation to give an appeal bond, being parties in a trust capacity within the meaning of Section 5228, Revised Statutes.
Is the case in its nature appealable? That an action brought to assert a right arising under the equitable doctrine of subrogation is not necessarily appealable, is entirely clear. If, for example, one' secondarily liable as surety should pay the entire amount of the indebtedness in ignorance of the fact that the creditor had realized a part of it from securities deposited with him by the principal debtor, he might, upon discovery of that fact, recover the amount so realized by the creditor. But his action would be for the recovery of money only. Section 5130, Revised Statutes, provides, without regard to the principles upon which a recovery may be sought, that for the trial of issues of fact in actions for the recovery of money only, either party may demand a jury. That action would, therefore, not be appealable because it results from the provisions of Section 5226 that an appeal may not be taken in actions in which a trial by jury may be demanded. But the action of the plaintiff in the present case was not for the recovery of money only. It is true that his demand might have been satisfied by the payment of money, but the right which he asserted was to resort to a particular security as a resource for his reimbursement, with the concession that his right could in no event exceed the amount to be realized from that security. It is said that the proceeds of the mortgage are now in the hands of the receivers; but that fact is not found by the circuit court. Nor would it be material since the question must be determined upon the state of the record when the issues were joined. It was a suit for the determination of the extent to which the plaintiff was entitled to participate in a trust estate. It results from the statutory provisions referred to, that being a civil action not triable to a jury, it was appealable.
Did the circuit court err in rendering judgment against the plaintiff on the merits of the case presented? Upon the execution of the second mortgage, the mortgagee, The Citizens' Company, became charged by its agreement which constituted the consideration for its mortgage with the duty of paying the indebtedness of Clarke to The People's Company which was secured by the prior mortgage. In its capacity as purchaser it also became entitled, upon a familiar application of the doctrines of equity to be subrogated, upon its payment, to the rights of the- mortgagee of the prior mortgage, if that should be necessary to the copiplete enforcement of its rights. If The Citizens' Company had complied with its obligation, which, as between it and Smith, was primary, by discharging the prior lien with its own funds, unquestionably the proceeds of the second mortgage would have fallen into the general assets of The Citizens' Company and, its insolvency having occurred, they would on distribution pass to its general creditors. But the judg ment under review necessarily implies the proposition that the general creditors of the company are entitled to a fund which does not arise from its discharge of its primary obligation by payment of its own moneys, but from payment by Smith in the discharge of his secondary liability, and this without his reimbursement. If that proposition is unsound, the judgment of the circuit court is erroneous. The reimbursement of the plaintiff for the payment made by him in discharge of his obligation as surety, incurred by the endorsement of the certificate of credit, would place both of the companies and- the creditors of The Citizens' Company in the precise position they would have occupied if that accomodation endorsement had not been made. It would not be considerately denied that a judgment for the plaintiff would meet the ends of natural justice since it would enforce all rights which rest upon consideration.
Certainly it should always be admitted that in particular cases natural justice may fail, because It cannot be administered without violating rules and principles which have been considerately established as a part of our system of jurisprudence. The doctrine of subrogation is a creature of equity. Very frequently the rights which it secures are beyond the contemplation of parties to transactions, except in the view that parties are always presumed to contract with reference to the law by which their rights and liabilities will be determined, and it is only in this view that those rights depend upon even implied contract. Always 'the end of subrogation is to place the burdens of obligation upon those to whom they primarily belong, though in recognition of the rights of others they may have been, for a time, borne by those who are only secondarily liable. However diverse may be the facts to which in the reported cases the doctrine has been applied, and the remedies which those facts have made appropriate, that end is always in view. That the plaintiff in the present case has discharged an obligation with respect to which his liability was only secondary, and that the object of his suit is to charge the burden upon the party primarily liable, will admit of no doubt.
But it is said that he should not prevail because it is a recognized limitation upon the doctrine of subrogation that it may not be invoked by one who voluntarily discharges the obligation. That limitation is recognized in the statement that the doctrine is for the relief of one who, in the discharge of a secondary liability, pays an obligation upon which another is primarily liable; and it has been expressly held that the doctrine may not be invoked by a volunteer, or intermeddler, 'to use a term indicating the light in which he is regarded. But how can the plaintiff be regarded as a volunteer?- He asserts a right arising upon actual payment by him, and when he paid, it was in discharge of his obligation as accommodation endorser of the certificate of credit which had matured, leaving him no alternative. It is quite true that he might have refused to become such accommodation endorser, but the same observation may be made generally of those who incur the liability of sureties. Nor is it of the essence of the doctrine of subrogation that the primary arid secondary liabilities be incurred by the same instrument or at the same time. It gives conclusive effect to the relation of the parties at the time of the discharge of the obligation, having no regard whatever to the immaterial circumstance as to the contemporaneous incurring of the obligation. The relation of the primary and secondary liabilities involved in considerations respecting this doctrine do not, in any sense, differ from the same considerations with respect to the kindred doctrine' of contribution which was devised by the chancellors to secure equality among persons secondarily liable. Upon very conclusive reasons it was decided in Robinson v. Boyd, 60 Ohio St., 57, that, "to give rise to the application of the doctrine of contribution between sureties, it is not necessary that there should be privity of contract between the parties, nor that the liability of each should have been incurred at the same time; all that is required is, that the debt or burthen should be common to the parties, and primarily that of the same person."
Consideration seems to be thought due to the fact that when Smith discharged his secondary liability to The People's Company its mortgage from Clarke was cancelled and surrendered without any stipulation that it should be kept alive for the purpose of substituting him to its rights. If it should be assumed that technical considerations require a strict application of the doctrines of subrogation to that mortgage instead of to the mortgage of Clarke to The Citizens' Company, which is more than doubtful in *view of the direct methods by which equity reaches the results which its principles require, there was no necessity for such stipulation. The earlier cases recognized such stipulation as necessary, but the manifest inconsistency of that requirement with the principles involved in the doctrine of subrogation received early recognition. The object of the cancellation and surrender is completely accomplished by the discharge of the mortgagor and his property from further liability. To him it is a matter of no moment whether there is or not such a stipulation to affect the rights of others. It is fundamental that the right to be subrogated arises out of the relation of the parties and not out of contract. It is now settled in this state that although the surrender of the security is effective' as to the obligor, its continued existence for the benefit of the surety who pays it is presumed. Neilson & Churchill v. Fry, 16 Ohio St., 552; Dempsey v. Bush, 18 Ohio St., 376.
The plaintiff's case seems to be clearly within the doctrine which he invokes and he is entitled to be paid out of the proceeds of the Clarke mortgage, the amount which he paid to The People's Company with interest thereon, if the proceeds of the Clarke mortgage are sufficient. To hold otherwise would be to ignore the reason of the doctrine involved as it has been declared as the basis of decision, not only in the cases cited, but in many others, including Hill v. King, Exr., 48 Ohio St., 75; and L. E. & W. Rd. Co. v. Falk et al., 62 Ohio St., 297.
The judgment of the circuit court will be reversed, and the cause will be remanded to that court to render judgment for the plaintiff in accordance with this opinion.
Reversed.
Crew, C. J, Summers and Davis, JJ, concur.