Court Opinion

ID: 8776707
Source: CourtListenerOpinion
Date Created: 2022-11-26 13:04:36.792638+00
Date Added: 2024-06-11T17:02:36.692166
License: Public Domain

REED, District Judge (dissenting).
I am unable to concur in the conclusion reached in the third or last division of the foregoing opinion. The facts as stipulated by the parties are: That prior to July 28, 1908, one Hollicke held a mortgage on real property, then and at the time- of the bankruptcy owned by the bankrupt, a Kansas corporation, and had brought suit upon the note secured thereby, and on that date recovered judgment against the bankrupt for the balance due thereon, without a foreclosure of the mortgage. On the same day, July 28th, the bankrupt negotiated with the petitioner for a loan to pay said judgment and as security agreed in writing to -procure an assignment to him of said mortgage from Hollicke, and that he “is subrogated to the rights of Hollicke the payee in said note.” The petitioner furnished the bankrupt with the money to pay said judgment, and it gave to him its note for the amount and the judgment was paid therewith. Hol-licke refused to assign his mortgage and the bankrupt gave to the petitioner a mortgage upon the property covered by the Hollicke mortgage to secure the loan, which mortgage the petitioner accepted, but never filed for record, and it -has never been recorded'.- The bankrupt at such times was insolvent, and the petitioner was one of its stockholders and a director of the corporation. The Hollicke mortgage was satisfied by an indorsement thereon signed by him January 3, 1908, and filed for record August 21st following. The adjudication in bankruptcy was December 18, 1908, but when the petition in bankruptcy was filed does not appear.
It thus appears that on July 28th, more than four months before the adjudication in bankruptcy, the bankrupt corporation negotiated *585with the petitioner, who was then one of its directors, for a loan sufficient to pay the judgment which Hollicke that day recovered against it and agreed to procure an assignment of the Hollicke mortgage to him as security therefor, and that he “is subrogated to the rights of Hollicke the payee' of the note.” When this loan was made, the security taken, and the transaction closed appear only from the date of the writing and the note and mortgage given by the bankrupt to the petitioner, all of which are dated July 28, 1908. Hollicke, not being a party to the agreement to assign his mortgage, was under no obligation to do so, and for some reason not shown refused to assign the same. The petitioner must be held to have known that Hollicke could not be required to assign his mortgage and to have accepted the mortgage of July 28th in lieu of such assignment. If that mortgage was made on the day it bears date or when the loan was made and the transaction closed, whenever that was, it would be for a present consideration and not to secure a prior indebtedness, and if it had then been deposited for record as required by the law of Kansas, where the property is situated, it would have been a valid lien upon the property covered by it. Security Warehousing Co. v. Hand, 206 U. S. 415, 27 Sup. Ct. 720, 51 L. Ed. 1117; Knapp v. Milwaukee Trust Co., 216 U. S. 545, 30 Sup. Ct 412, 54 L. Ed.-.
The law of Kansas relating to the recording of deeds and mortgages upon real property provides:
“No such instrument in writing shall be valid, except as between the parties thereto and such as have actual notice thereof, until the same shall be deposited with the register of deeds for record.” Section 1672, Glen. St. Kan. 1909.
The Supreme Court of Kansas has construed this section to mean that, until the instrument is deposited for record, it is not valid, and, in effect, has no legal existence as to any person, or class of persons, except those named therein. Smith v. Worster, 59 Kan. 640, 54 Pac. 676, 68 Am. St. Rep. 385. The petitioner through his own neglect failed to deposit his mortgage for record, and solely because of such neglect has lost the security which the bankrupt gave him, which, if so deposited, would have been equal to the lien of the Hol-licke mortgage for there are no intervening liens between them. He now asks that he be subrogated to the rights of Hollicke whose debt has been paid and mortgage discharged. The doctrine of subrogation comes to us from the civil law, and is said to be a legal fiction by force of which an obligation extinguished by a payment made by a third person is treated as still subsisting for the benefit of the person so paying the same. Originally it was allowed only in favor of those standing in the relation of sureties who paid the debt of their principal, being under legal obligation to do so, or junior in-cumbrancers who paid a prior incumbrance to save their own, or others standing in similar situations. It was never allowed in favor of strangers to the title, or of those who voluntarily paid the debt of another being under no obligation to do so. Ætna Life Insurance Co. v. Middleport, 124 U. S. 534-548, 550, 8 Sup. Ct. 625, 31 L. Ed. 537. But, under a more liberal application of the principles of *586equity, it is now generally held that when one loans money f&r the purpose of paying an existing- valid incumbrance upon property and takes as security therefor a defectively executed or void mortgage upon such property, but supposed to be valid, and the money loaned is actually applied to the payment of the prior incumbrance, the lender is not regarded as a stranger to the title or a mere volunteer, and may be subrogated to the rights in the property of the prior lienholder whose debt he has thus paid when to do so will not displace legal or equitable rights accrued since the extinguishment of the prior in-cumbrance. It was upon this principle that this court acted in Cumberland Building & Loan Association v. Sparks, 49 C. C. A. 510 111 Fed. 647; and the Supreme Court of Kansas in E version v. Central Bank, 33 Kan. 353, 6 Pac. 605, and Zinkeison v. Lewis, 63 Kan. 590, 66 Pac. 644 and the cases there cited. In the first of these cases the trust deed or mortgage of the Cumberland Building & Loan Association was so defectively executed, apparently without its knowledge or" fault, that it was not legally admissible to record. It was, however, placed of record, but, under the statutes of Arkansas where the property is situated, the record imparted no legal notice to subsequent purchasers or lienholders. The property was subsequently purchased from tire mortgagor by one who, as the court found, had actual knowledge of the association’s trust deed, and of the fact that the prior incumbrance was paid from the proceeds of the loan made by it, and whose purchase was with the deliberate purpose of taking advantage of a known defect in the execution of such trust deed.
In Eversión v. Central Bank one Prescott made a loan which was secured by a forged mortgage upon property hold by the mortgagor under a' forged deed of the real owner, and from the proceeds of such loan a prior valid incumbrance upon the property was paid. It was found as a fact that Prescott had no knowledge of the forgeries and that he was not guilty of any negligence in failing to discover them. Everston, the plaintiff, purchased the property with knowledge of the forgeries, taking a quitclaim deed from the real owner, and neither he nor the owner of the property had ever paid or offered to pay the prior incumbrance, or reimbursed Prescott for the amount paid by him-to discharge thq same. There were no other intervening liens or conveyances. Held, that the defendant bank as assignee in good faith of the Prescott mortgage was entitled to be subrogated to the rights of the prior incumbrancer whose debt was thus paid from the proceeds of the Prescott loan.
In Zinkeison v. Lewis the defendant O. H. Lewis made a mortgage to the plaintiff upon real property which was the homestead of himself and wife to secure a loan made for the purpose of paying a prior valid incumbrance upon the property, and from the proceeds of such loan the prior incumbrance was paid. Lewis signed the name of his wife to the mortgage without her authority, and without her authorized signature a mortgage or other conveyance of the homestead was under the law of-Kansas void. Shortly after making the mortgage, Lewis informed his wife that he had signed her name *587thereto, and she knew that the greater part of the loan secured by it was to pay, and in fact was used to pay, the prior incumbrance. Interest was paid upon the loan by Rewis with the wife’s knowledge for nearly three years, and she with full knowledge that her name had been signed to the mortgage by her husband concealed from the mortgagee the fact that she had not authorized her name to be signed thereto. After the mortgage became due, Zinkeison brought suit to foreclose the same when he was confronted with the defense, pleaded by the wife and her husband, that her signature to the mortgage was unauthorized by her, and this was the first knowledge that he had that her signature thereto was a forgery. There were no intervening liens upon or conveyances of the property. Upon these facts the Supreme Court of Kansas said:
“The facts bring the case within the authority of Everston v. Bank, 33 Kan. 352, 6 Pac. 605, where it is held that if the money is loaned upon a forged mortgage, supposed to be valid, to be used, and which was used, to pay off a valid mortgage, the mortgagee or his assignee may be subrogated to the rights of the prior mortgage, if there are no intervening liens or incumbrances. * * * It is highly equitable that the plaintiff, who was without knowledge of the fraud in the execution of the mortgage, should be substituted to the rights of the prior mortgagees; and it would be very unjust to hold that Mrs. Lewis, who knew that her name had been signed to the mortgage, and that it was to be used to obtain money for the payment of existing incumbrances on her land, and remaining quiet and allowing the mortgagee to pay off valid mortgages existing against the property, might come into court, and ask, not only (hat the mortgage should be declared invalid, but also that prior valid liens which the mortgagee was induced to discharge should also be declared unavailing.”
These cases and others to the same effect that might be cited are clearly distinguishable upon their facts, as well as in principle, from the case before us, and it is clear that they are not authority for subrogating the petitioner to the rights of the Hollicke mortgage; for here there is no defect in the execution of the mortgage of July 28th, nor lack of authority upon the part of the bankrupt corporation to make the same, and when made that mortgage was a valid and legally recordable instrument; but the petitioner neglected to deposit the same for record, and thus lost the lien thereof solely because of such neglect. The case falls within the firmly settled rule that equity will not afford relief to one by way of subrogation, or otherwise, to save him from the consequences of his own neglect when to do so will displace legal or equitable rights in the property accruing since, and because of, the extinguishment of the prior incumbrance. In short, subrogation to the rights of another is uniformly denied to those who have sustained a loss which they could have avoided by the exercise of reasonable diligence upon their part. 1 Story’s Eq. (12th Ed.) §§ 138-146, and note; Garwood v. Eldridge, 2 N. J. Eq. 145, 34 Am. Dec. 195-199; Conner v. Welch, 51 Wis. 431, 8 N. W. bottom page 260; Kitchell v. Mudgett, 37 Mich. 81-85; Rice v. Winters, 45 Neb. 517, 63 N. W. 830; Ft. Dodge Bldg. Ass’n v. Scott, 86 Iowa, 431-434, 53 N. W. 283; Hargis v. Robinson, 63 Kan. 686, 66 Pac. 988; Coonrod v. Kelly, 56 C. C. A. 353-360, 119 Fed. 841; Bunn v. Lindsay, 95 Mo. 250, 7 S. W. 473, 6 Am. St. Rep. *58848; Capen v. Garrison, 193 Mo. 335, 92 S. W. 368, 5 L. R. A. (N. S.) 838.
In Ft. Dodge Bldg. & Loan Ass’n v. Scott, above, the plaintiff had loaned money to the owner of real property to pay existing incum-brances thereon under an agreement with him- that he should have a first lien upon the premises. The loan was made and the proceeds applied to the payment of the prior incumbrances as agreed, which were then satisfied of record and a new mortgage made to the plaintiff to secure its loan. A few days prior to the payment of the prior incum-brances and the making of the plaintiff’s mortgage, a judgment was recovered against the mortgagor which became a lien prior to the plaintiff’s mortgage. Upon discovering this, the plaintiff sought to enjoin the sale of the premises under the judgment, and to be subro-gated to the rights of the holders of the prior liens whose debts were thus paid from the proceeds of its loan. The Supreme Court in denying the relief prayed said:
“The right to subrogation rests upon equitable grounds, and is never granted as a reward for negligence. While it may be true, as claimed, that no equities inhere in the defendant’s lien, that it is simply a lien given by law, it is certainly as true that the plaintiff’s claim is equally void of equities. The position of the plaintiff is the result of its own negligence. * * * An examination of the court records of the county on the day the loan was made would have informed the plaintiff of the existence of this judgment, and that it was a lien upon these lots, whether owned by both or either of the Baehrings. Without making this examination, which the most ordinary care required, the plaintiff made the loan, and accepted its mortgage. Surely equity will not reward such negligence by applying the doctrine of subrogation in favor of the negligent.’’
The other citations are to the same effect, and see especially, Conner v. Welch, Rice v. Winters, Coonrod v. Kelly, and Capen v. Garrison, and their citations.
The agreement of the bankrupt to procure an assignment to the petitioner of the Hollicke mortgage, or that he is subrogated to the rights of Hollicke, gave to him no right in or lien upon the property, and until such assignment was procured, or other lien given and recorded, the property remained unaffected by any such agreements, and if transferred in the meantime by its owner, or by operation of law, the title passes unaffected by such agreements. In re Great Western Mfg. Co., 152 Fed. 123-127, 81 C. C. A. 341.
It is said in the brief for the trustee that the petitioner’s mortgage was made within the four months immediately preceding the bankruptcy, and is therefore a voidable preference. The fact, if it be a fact, that it was made within such four months, would not necessarily make it a preference. But, if it was so made, and accepted by the petitioner with reasonable cause to believe that a preference was thereby intended, that would be fatal under the bankruptcy act to the validity of the mortgage, and to the petitioner’s claim to be subrogated to the rights of the Hollicke mortgage. German Bank v. United States, 148 U. S. 573-581, 13 Sup; Ct. 702, 37 L. Ed. 564; Dong v. Farmers’ State Bank, 147 Fed. 360, 77 C. C. A. 538, 9 D. R. A. (N. S.) 585; In re Great Western Mfg. Co., 152 Fed. 123-127, 81 C. C. A. 341. It dpes not appear from the facts as stipulated save by the merest in*589ference, and the trustee does not allege, that the mortgage was made within such four months, or that it was in fact a preference; but, however this may be, it is entirely plain that the petitioner has no lien under his mortgage, solely because of his own neglect in failing to deposit it for record and not because of any defect in the instrument, or wrong on the part of the bankrupt, or that it was in fact void, or a voidable preference. The petitioner’s claim to be subrogated to the rights of the Hollicke mortgage is not in my opinion well founded.
But it is urged upon us that the trustee stands only in the shoes of the bankrupt and takes its property subject to all equities impressed upon it in its hands, and Hewitt v. Berlin Machine Works, 194 U. S. 296, 24 Sup. Ct. 690, 48 L. Ed. 986, and York Mfg. Co. v. Cassell, 201 U. S. 344, 26 Sup. Ct. 481, 50 L. Ed. 782, are cited in support of this contention. But the facts do not bring the case within the rule of those cases. In both of them the property involved was not the property of the bankrupt, but was held by him only under a conditional contract for its purchase; and it was held that the validity of such contracts as against purchasers of the property from or creditors of the bankrupt is to be determined by the local law. These cases and others are reviewed in the recent case of the Security Warehousing, Co. v. Hand, 206 U. S. 415, 27 Sup. Ct. 720, 51 L. Ed. 1117; and again in Knapp v. Milwaukee Trust Co., 216 U. S. 545, 30 Sup. Ct. 412, 54 L. Ed. —-, and it is there held that the trustee takes the property of the bankrupt in cases unaffected by fraud, subject to all equities impressed upon it in the hands of the bankrupt, except in cases where there has been a conveyance or incumbrance of the property which is void as against the trustee by some positive provisions of the bankruptcy act. The facts in the case before us bring it within the rule of these later decisions and its determination is controlled by them. The positive provisions of the bankruptcy act applicable to the case before us are:
“Sec. 67a. Claims which for want of record or for other reasons would not have been valid liens as against the claims of the creditors of the bankrupt shall not be liens against his estate.”
“Sec. 1 (9). ‘Creditor’ shall include any one who owns a demand or claim provable in bankruptcy. * * * ”
“Sec. 67d. Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to daw, if record thereof was necessary in order to impart notice, shall not be affected by this act.”
“Sec. 70a. The trustee of the estate of a bankrupt, upon his appointment and qualification, ⅜ * * shall * * * be vested by operation of law
with the title of the bankrupt, as of the date he was adjudged a bankrupt, except in so far as it is to property which is exempt, to all * * * (5) property which prior to the filing of the petition he could by any means have transferred or which might have been levied upon and sold under judicial process against him.”
The property covered by the petitioner’s mortgage was at the date thereof and at the time the petition in bankruptcy was filed the property of the bankrupt, and could then have been sold or otherwise transferred by it, or levied upon and sold under judicial process against it. Under section 67a of the bankruptcy act that mortgage, because not recorded, was not a lien against the bankrupt estate; and under sec*590tion 70a the property covered by it passed to the trustee free from its lien and from any equities the petitioner may have had therein because of the prior agreement with the'bankrupt that it would procure an assignment to him of the Hollicke mortgage, or that he “is subro-gated to the rights of Hollicke the payee of the note” secured by that mortgage. To carry the petitioner’s claim to priority upon the property covered by his mortgage of July 28 th, back to the date of the Hollicke mortgage, under the facts as disclosed by this record, would in effect nullify the plain provisions of .section 67a of the bankruptcy act, and open the door to a method by which that section can be successfully evaded. Much that is said by Judge Sanborn in Re Great Western Mfg. Co., 152 Fed. 123-127, 81 C. C. A. 341, though said of an attempt to escape the consequences of .a voidable preference might well be said of the petitioner’s claim to priority in this case.
The burden is upon the petitioner to show by satisfactory proofs that he is entitled to priority of payment from the proceeds of the property covered by his mortgage of July 28th. In my judgment he has failed to do so, and his petition to revise should be denied.