Catawba Fertilizer Co. v. Gibson

152 S.E. 729, 155 S.C. 462, 1930 S.C. LEXIS 82

• Court: Supreme Court of South Carolina
• Decided: March 22, 1930
• Docket: 12864
• Status: Published

Opinions

The opinion of the Court was delivered by

Mr. Justice Coti-iran.

. In the spring of 1925, the defendant E. W. Gibson effected a loan from the South Carolina Agricultural Loan Association (hereinafter referred to as the “Association”), of $14,500, for his farming operations during that year; the loan was secured by a réal estate mortgage upon 4,000 acres of land, a mortgage upon the crop of 1925, and a chattel mortgage upon 50 mules and 4 horses; it was due November 1, 1925; it appears that at the maturity of the obligation, Gibson had paid nothing upon the principal; I assume that the, interest was provided for.

In the spring of the following year, 1926, Gibson effected a second loan from the Association of $6,262, for' his operations during that year. It appears that the total indebtedness then was consolidated into a new paper for $20,762.50, made up of the original debt of $14,500, and the new loan, $6,262.50, which was secured by a mortgage upon the 4,000 acres, a mortgage upon the crop of 1926, and a chattel mortgage upon the same live stock. These obligations fell due on November 1, 1926, at which time Gibson had paid upon them a little less than $6,000, leaving a balance due and unpaid of $15,006.06.

It appears, strange to say, that the 4,000 acres of land which normally would be expected to constitute the main reliance of the Association for security was incumbered by prior mortgages which, being foreclosed, and the lands sold, realized nothing to the Association.

With a hopefulness upon the part of Gibson and of the Association which is remarkable, in the spring of the following year, 1927, Gibson effected a third loan from the Association of $6,500, for his operations during that year. Accordingly,' he gave two notes to the Association on April 9, 1927; one for the balance then due upon his previous obligations, $15,006.06, and the other for the new loan, $6,500; each of these notes was secured by a mortgage upon the crop of 1927 and a chattel mortgage upon 44 mules and a horse, a part of the live stock already included in the other mortgages referred to above. They were recorded on April 12, 1927.

On April 29, 1927, Gibson effected a loan from the plaintiff, Catawba Fertilizer Company (hereinafter referred to as the Fertilizer Company), of $5,000 for which a note was given payable November 1, 1927, secured by a mortgage of the crop of 1927, nothing else, no mention being made of the live stock.

A matter which has not been explained needs notice: The mortgage to the Fertilizer Company was dated April 29, 1927; it covers, as stated, only the crop of 1927; no reference in that mortgage is made to the mortgages of April 9, 1927, to the Association, covering the same crop and securing the two notes of $6,500 and $15,006.06; and yet in the mortgage of $15,006.06, occurs this statement: “It is understood that this is a third mortgage over the crops, first being held by S. C. A. T. Association for $6,500 (the Association), and second by Catawba Fertiliser Company for $5,000.00.”

It must have been inserted in the $15,006.06 mortgage after its execution and record, probably as an inducement to the loan by the Fertilizer Company, as the former is dated April 9, and the latter April 29. There does not, however, appear to be any controversy over the fact thát, as to the crop of 1927, the Association had the first lien for $6,500, the Fertilizer Company the second for $5,000, and the Association the third for $15,006.06, or that the Association had the first lien upon the live stock to the extent of $6,500 plus $15,006.06, $21,506.06.

In August, 1927, Gibson needed about $900 for the purpose of purchasing arsenate and a dusting machine with which to combat the boll weevil, and applied to the Fertilizer Company for it. In order to justify it in making the advance, and for their own protection, the Association and the Intermediate Credit Bank of Columbia (to which the mortgage had been assigned), executed an agreement in the form of a release, dated August 23, 1927, by which it was stipulated that the $15,006.06 mortgage should be subordinated to the advance to be rtrade by the Fertilizer Company, “it being the intent and purport of this instrument to make the $900 a second mortgage, equal in rank to the one now held by the Catawba Fertilizer Company” for $5,000, on April 29, 1927, as above stated. It was also stipulated that the release agreement “shall in no manner affect the first mortgage covering said crops heretofore executed by the said E. W. Gibson,” dated April 9, 1927, to the Association, for $6,500.

Accordingly, the Fertilizer Company made the required advance amounting to $884.32 on August 25, 1927, and took a mortgage from Gibson upon the crop of 1927, and the dusting machine, making no mention of the live stock.

In the fall of 1927, the Association collected out of the crop upon which it had to that extent the first lien, the $6,500 mortgage in full; the Fertilizer Company, as the holder of the second lien upon the crop, collected $2,084.99, and as the holder of a mortgage upon the dusting machine $200. They applied the $200 last mentioned to the $884.32 mortgage for arsenate and machine, leaving $684.32 due thereon; of the $2,084.99 collected from the crop they paid off this balance of $684.32, leaving applicable to their $5,000 mortgage $1,-400.67 which left unpaid upon it $3,599.33 (making no allowance for interest).

In February, 1928, the Association foreclosed its chattel mortgage upon the live stock and realized from the sale $2,-025 which, with $600 from the co-operative Association on account of cotton in its hands belonging to Gibson, upon which the Fertilizer Company had no claim, the Association applied to the mortgage of $15,006.06, leaving a balance of over $12,000 unpaid.

Although the Fertilizer Company had a second lien upon the crop and a first lien upon the dusting machine, with no lien upon the live stock, and has received every dollar that it was entitled to, it attempts to maintain the extraordinary position that, under the two-fund doctrine, because the Association had a first lien to the extent of $6,500 upon the crop, and a first lien upon the live stock, it has the right to take from the Association the $2,025 proceeds of the sale of the live stock and apply it to the $3,500 balance unpaid upon its $5,000 note. In other words, although it had no lien upon the live stock at all, and the Association has not been paid by a large balance the amount of its mortgage, it may appropriate money that belongs to the Association, for the purpose of paying a debt of Gibson for which it was in nowise responsible.

A simple illustration of the two-fund doctrine, as I understand it, is this: Jones has a mortgage upon two tracts of land, black-acre and white-acre, to secure a debt of $5,000; Brown has a mortgage upon black-acre alone to secure a debt of $3,000; it would be manifestly unfair to allow Jones to foreclose' his mortgage upon black-acre and wipe out Brown’s mortgage; so Brown has the right, without the slightest prejudice to Jones’ rights to compel him to foreclose upon white-acre and leave black-acre for him. If it should be- necessary in order to protect the full amount of Jones’ mortgage that both tracts be sold, the Court will so order. In fact, the relief which Brown would be entitled to would be an order that Jones foreclose white-acre first, and if that sale did not satisfy his debt recourse could be had to the other tract.

Suppose the question had arisen before either the mortgage upon the crop or that upon the live stock had been realized upon; I do not think that there could be a doubt as to the right of the Fertilizer Company to force the Association in the first intance to exhaust the live stock upon which the Fertilizer Company had no lien, before resorting to the crops upon which it had a second lien. The position of the Fertilizer Company now, if sustained, would justify an order requiring the Association to proceed against the mules and be content with the result of that chase. *

In Bank v. Harbin, 18 S. C., 425, the Court said:

“There is no dispute as to the general rule, that where there are two creditors of a common debtor, one of whom has a claim or lien upon two funds, and the other upon only one of'these funds, that the latter has an equity to require the former, first to exhaust the fund upon which he has no claim or lien. The only qualification of this rule, laid down in the elementary writers, is that it will not apply where the creditor having the lien upon the two funds will be injured or delayed by its application. * * *

“There is no 'suggestion that its application would tend to injure or delay the creditors having liens on the two funds.”

In Bank v. Holliday, 108 S. C., 116, 93 S. E., 333, 335, the Court said: “That two-fund doctrine rests upon equitable principles, and therefore it will not be allowed to defeat the equities of third persons over whom the parties invoking it have no superior equities. * * * In applying the rule, the maxim, ‘Qui prior est in tempore potior est in jure,’ has peculiar force.”

In Davis v. Butler, 107 S. C., 548, 93 S. E., 193: “And while Davis & Son might have had the right to go into equity and require the Gin Company to exhaust the other property covered by the mortgage before coming upon the cotton sold them by Brown, yet, as this equity in their favor might have been doubtful, since the two-fund doctrine may not be applied by the Court where its application would result in too great prejudice to the rights of the senior lienee, or drive him to litigation, or a doubtful security. * * * ”

In Wardlaw v. Troy Mill, 74 S. C., 368, 54 S. E., 658, 660, 114 Am. St. Rep., 1004: “The doctrine of marshaling being a rule of equity and having its foundation in principles of natural justice, its application will not be enforced when it would so operate as to work substantial injustice or injury to any party in interest. Thus marshaling will not be applied to the detriment of a third person having an equity equal or superior to that of the person seeking to invoke the rule.”

In Clark v. Wright, 24 S. C., 526: “It is, indeed, beset with difficulties, and we agree with the Circuit Judge, that it would not be just to Mrs. Wright, in enforcing a mere equity of others, to require her, against her protest, to embark in an expensive litigation, and to be ‘delayed and inconvenienced in the collection of her debt.’ In this respect, the case is somewhat like that of Walker v. Covar (2 S. C., 20), in which the Court says: ‘Such relief as is here asked is never granted, if the prior creditor is thereby endangered or his right to raise the money out of both funds the least impaired (citing several cases). Or where the fund to be resorted to is dubious, or one which may involve him in litigation, notwithstanding the claims of a junior creditor may be defeated thereby.’ ”

In Witte v. Clarke, 17 S. C., 313 : “The rule requiring a creditor holding two liens to first exhaust that property on which a subsequent creditor has no lien, is inapplicable where its enforcement.would operate to the prejudice of the prior creditor.”

In Walker v. Covar, 2 S. C., 16 : “The rule that a creditor having a lien on two funds may be compelled to resort, in the first instance, to the one on which the subsequent claim of another does not attach, is never applied where injustice may be done to the prior creditor. * * * ”

I think it is clear, therefore, that the position of the Fertilizer Company cannot be sustained under the two-fund doctrine.

The only other point that I think needs discussion is that under the release agreement the Association agreed that the mortgage of the Fertilizer Company .for $884.32 should be paid prior to the payment of the $15,-006.06 mortgage of the Association. In sustaining that contention, his Honor Judge Johnson in his order said: “It is probable that irrespective of the application of the two-fund doctrine, that this instrument alone would be sufficient to allow the plaintiff to recover the amount of its second mortgage of $884.32 before any sum could be paid upon the defendants’ mortgage of $15,006.06. But when the'instrument is considered, together with the conditions prevailing at the time of its execution, and in the light of the accepted doctrine of marshaling, the Court is clearly of the opinion that the plaintiff should recover its second mortgage from the defendant Association and Bank. There were no other funds available with which this second mortgage of the plaintiff could be paid, except from the proceeds of the crop - and stock. The Association’s first mortgage has been paid in full from the crop sale. The plaintiff had received about $1,-500.00 from the crop upon its $5,000.00 mortgage. The defendant Bank has in hands the proceeds of the stock sale, which it has attempted to apply on the paper of $15,006.06. But by reason of the law of marshaling and by the terms of the instrument dated August 23rd, 1927, the Association and Bank both agreed that the plaintiff’s second mortgage of $884.32 should be paid in full before payment of its $15,-006.06 mortgage. It is inevitable that the defendant Bank and Association must pay over to the plaintiff the amount of its second mortgage, $884.32, with interest, as therein provided. This is especially true in light of all the facts and circumstances of this case, considering that the plaintiff furnished emergency money with which to fight boll weevils in August, and considering the terms and effect of the instrument then executed as qualifying the two-fund doctrine as applied by the Court to the claim of this plaintiff for full amount sued for.”

As indicated above, it appears that out of the crop of 1927, after the Association’s $6,500 mortgage upon it had been paid therefrom, the Fertilizer Company collected $200 from the sale of the dusting machine, and $2,084.99 from the crop. The $200 was applied as the Fertilizer Company had to do, to the $884.32 mortgage which reduced it to $684.32; the $2,084.99 received from the crop was applied to this balance, paying the $884.32 mortgage in full. The Association had therefore fully complied with its agreement- that the $884.32 mortgage should be paid prior to payment upon the $15,006.06 mortgage.

Besides, what I think is absolutely conclusive of the matter, the release agreement referred solely, as its terms plainly show, to the crop of 1927 and not to the live stock; that-is to say that no part of the crop should be applied to the $15,006.06 mortgage until the Fertilizer Company’s mortgage for $884.32 should be paid. It did not purport to limit the efficacy of the $6,500 mortgage of the Association, and specifically so declared: "and the same (that is, the release agreement) shall in no manner affect the first mortgage covering said crops heretofore executed by the said B. W. Gibson,” that is, the $6,500 mortgage which all through the case is conceded to have been the first lien upon the crop. The Fertilizer Company was in no position to object to the application of the proceeds of the crop received by the Association sufficient to pay off the $6,500 mortgage. What remained after this payment was turned over to the Fertilizer Company, $2,084.99, as stated. Not a dollar of the crop proceeds was applied to the $15,006.06 mortgage, and hence it is evident that the Fertilizer Company has no ground of complaint. What the Fertilizer Company is contending for is that the Association applied the proceeds of the sale of the live stock, $2,025.00, to the large mortgage, proceeds to which it had no earthly claim.

That the release agreement referred only to the crop of 1927 and not to the live stock is apparent, not only for the reason that the Fertilizer Company had no claim upon the live stock, but from the very terms of the paper. It opens with the “whereas” that Gibson had executed a mortgage to the Association to secure the $15,006.06 debt, which by agreement had become the third mortgage “covering certain crops” — no mention of live stock. (Note.) There is liable to arise some confusion from the description of the Association’s mortgage as a third mortgage. The reference is to the large mortgage as being the third mortgage. The fact is that the Association held the first mortgage of $6,500 on the crop which was not affected by the release agreement, as it specifically states. By agreement evidenced by the memorandum in the mortgage of April 9, 1927, above referred to, the priorities were fixed with reference to the mortgages upon the crop: 1. The Association’s $6,500 mortgage; 2. the- fertilizer’s $5,000 mortgage; and 3. the Association’s $15,006.06 mortgage. (That is why the Association’s mortgage is referred to as the third mortgage.)

The release agreement goes on to release the lien of the Association’s mortgage on the crop for $15,006.06, in awarding priority to the $884.32 mortgage of the Fertilizer Company; and it provides: “ * * * it being the purport of this instrument to make the $900 ($884.32 in fact), a second mortgage, equal in rank to the one now held by the Catawba Fertiliser Company ” that is, the $5,000 mortgage which was specifically made second to the $6,500 mortgage of the Association as has been seen, showing that it was never the intention of the parties to create any convention affecting the mortgage upon the live stock.

For these reasons I think that the decree should be reversed, and the complaint dismissed. It is so ordered.

Msssrs. Justices Stabler and Carter concur. Mr. Chiee Justice Watts and Mr. Justice BlEase dissent.