Federal Land Bank v. Joynes

18 S.E.2d 917, 179 Va. 394, 1942 Va. LEXIS 234

• Court: Supreme Court of Virginia
• Decided: March 2, 1942
• Docket: Record No. 2449
• Status: Published

Opinions

Gregory, J.,

delivered the opinion of the court.

This is an appeal from a decree of the circuit court of Northampton county adjudicating priority of liens and denying a claim of the appellants to subrogation.

The suit was instituted by Mrs. Emma K. Joynes for the purpose of enforcing an equitable lien upon a certain 87.86 acre tract of land situate in Northampton county. The hen secured an annuity of $700 to her. The appellants filed their answer and cross-bill in the court below wherein they claimed subrogation to the superior hen of a prior creditor.

The record contains many facts that are not material in our consideration of the case. We will not advert to what we deem are nonessential facts. Those that are essential are not in dispute and are as follows: Prior to 1915, Emma Joynes and her two sons, Thomas and Garnett, held the 87.86 acre tract here involved as tenants in common. By deed dated February 15, 1915, Emma conveyed all her interest, which was one-third, to Thomas and Garnett, who owned a two-thirds interest, and promised to pay her an annuity of $700 each year. She retained a hen on her one-third interest in the tract of land, and Thomas and Garnett granted a Hen on their two-thirds to secure payment of said annuity. The liens were expressed as follows:

“As a part of the consideration for the aforesaid conveyance, the said Thomas E. Joynes and Garnet R. Joynes, covenant and agree for themselves, their heirs and assigns, to pay to the said Emma K. Joynes during her life the sum of Seven Hundred Dollars ($700.00) each and every year on the thirty-first day of December, the same being testified to by their becoming parties to and signing and sealing this deed, and to secure the said annuity to the said Emma K. Joynes during each year of her life a lien is hereby retained by the said Emma K. Joynes on the first above described real estate and a further lien is hereby given by the said Thomas E. Joynes and Garnet R. Joynes on their respective interest in the first above described tract of land, their interest in said tract being a two-thirds interest under the will of the late William W. Joynes. It is the intention of this agreement that the said Emma K. Joynes shall have a hen on the entire tract of land of eighty-seven and one-half acres to secure the payment of said annuity so long as she shall live.”

In 1925 Thomas and Garnett executed a deed of trust which conveyed the said tract (along with other land not material here), to secure the Virginian Joint Stock Land Bank payment of $22,500. Emma Joynes joined in this deed for the purpose of subordinating her liens which secured the $700 annuity payments.

In 1933 the payments on the joint stock bank loan were delinquent, and that bank was threatening foreclosure. Mrs. Emma Joynes had made her home since 1915 with Thomas on the said tract of land. Thomas and Garnett applied to the Federal Land Bank and the Land Bank Commissioner for loans which were finally closed with the bank in the amount of $12,000 and with the Commissioner in the amount of $5,000. The bank’s loan was secured by a mortgage, whereas the loan of the Federal Farm Mortgage Corporation (represented by the Land Bank Commissioner), was secured by a deed of trust. In their application Thomas and Garnett stated that one of the purposes of the said loan was to pay the amount due the Virginian Joint Stock Land Bank. They agreed, in the application, to give the appellant bank and corporation a first and second lien, respectively. They were required to list all lien debts against the property, but failed to include the claim of Emma Joynes.

In order to close the loans of the bank and corporation, it was required that all existing liens be released. This necessitated a scaling down of the debts of the Joyneses by means of creditor’s agreements. Through such an agreement the debt owing the Virginian Joint Stock Land Bank was reduced from a figure in excess of $16,000 to $13,000.

Before the closing of the loans the attorney who prepared the abstract of title discovered the existence of Mrs. Joynes* liens. He testified that Thomas advised him that Emma Joynes would join in the mortgage and deed of trust. The abstract containing the information concerning Mrs. Joynes* liens was then sent to the bank’s Baltimore office, where the documents were prepared. Through inadvertence and oversight the Baltimore office failed to require Mrs. Joynes to subordinate her liens, and the loans were thus consummated. The proceeds of the loans were then used to pay off, among other indebtedness, the debts owing the Virginian Joint Stock Land Bank and the taxing authorities.

In 1939 Thomas and Garnett Joynes were adjudged bankrupt and granted discharges. Subsequently, in 1940, Emma K. Joynes filed a bill in chancery for the purpose of establishing the amount due her on the annuity and to declare in her favor a first lien against the 87.86 acre tract of land, subordinate only to taxes then due. She also made the appellants, parties defendant. Thomas was appointed committee for his mother, who was too feeble and aged to testify.

The bank and corporation answered and filed a cross-bill. They asked for affirmative relief, namely, that they be subrogated to the rights of the taxing authorities to the extent of taxes paid from the proceeds of said loans, and to the rights of the Virginian Joint Stock Land Bank and be given a prior lien on the 87.86 acre tract for the $13,000 actually furnished to satisfy the first lien.

A decree of reference was made whereby the cause was referred to a special commissioner who heard evidence thereon. During the taking of the evidence, Emma K. Joynes' died testate, naming Thomas and Garnett Joynes executors of her will, and the original suit proceeded in their names as executors of the estate of Emma Joynes. The commissioner made his report and the court, acting thereon, entered a decree which denied the subrogation of appellants to a first hen on said tract, and declared a lien on the property after taxes in favor of the estate of Emma Joynes in the amount of the unpaid annuities of approximately $12,000. From this decree the appellants have appealed.

The sole question for determination is whether the appellant bank and corporation should be subrogated to the hen of the Virginian Joint Stock Land Bank and the taxing authorities.

There can be no doubt but that the bank and corporation intended to obtain a first and second hen respectively. In fact, under the statute (12 U. S. C. 771), the bank could take only a first hen as security.

Subrogation is the substitution of another person in the place of the creditor to whose rights he succeeds in relation to the debt. This doctrine is not dependent upon contract, nor upon privity between the parties; it is the creature of equity, and is founded upon principles of natural justice. See Hudson v. Dismukes, 77 Va. 242, 246. It was first applied only in the case of sureties, but through a process of liberalization its scope of application has been enlarged.

Subrogation has been generally classified as being either legal or conventional. Legal subrogation arises by operation of law where one having a habihty, or right, or a fiduciary relation in the premises pays a debt due by another under such circumstances that he is in equity entitled to the security or obhgation held by the creditor whom he has paid. Conventional subrogation, on the other hand, arises where by express or implied agreement with the debtor, a person advancing money to discharge a prior hen might be substituted to the security of the prior lienee. The progressive extension of both types of subrogation has somewhat obliterated this line of division. See 70 A. L. R. 1396, 1397.

The rationale of legal subrogation is bottomed on a sensitivity to the comparative equities involved. Where one is more fundamentally hable for a debt which another is obligated to pay, such person shall not enrich himself by escaping his obligation. In the case of conventional subrogation where the lender of money lent it with the intention and understanding that he be substituted to the position of the creditor whose debt he paid, but without taking an assignment, where there are no intervening equities to be prejudiced, the matter will be treated as if an assignment has been executed. See Martin v. Hickenlooper, 90 Utah 150, 59 P. (2d) 1139, 107 A. L. R. 762.

In 25 R. C. L. 1322, 1323, appears this cogent statement:

“Since the doctrine of subrogation was ingrafted on English equity jurisprudence, it has been steadily expanding and growing in importance and extent in its application to various subjects and classes of persons. The original limitation of the right to transactions between principals and sureties no longer exists, and the doctrine as now applied is broad enough to include every instance in which one person, not acting voluntarily, pays a debt for which another is primarily hable, and which in equity and good conscience should have been discharged by the latter. Subrogation not being a matter of strict right, but purely equitable in its nature, dependent upon the facts and circumstances of each particular case, no general rule can be laid down which will afford a test in all cases for its application. # # #”

Virginia has long been committed to a liberal application of the principle of subrogation. See Sands’ Adm’r v. Durham, 99 Va. 263, 38 S. E. 145, 86 Am. St. Rep. 884, 54 L. R. A. 622, where Judge Whittle says at p. 267:

“In no other jurisdiction has the doctrine been more firmly adhered to or more liberally expounded and applied, to meet the exigencies of particular cases, than in Virginia.”

The weight of authority and the modern cases support the view that subrogation is generally allowed where the loan was made by one who took a security from the borrower which turned out to be invalid. See Morgan v. Gollehon, 153 Va. 246, 250, 149 S. E. 485.

An examination of the specific holdings in particular cases is illuminative of the breadth of the application of subrogation.

In Cooper v. Home Owners’ Loan Corp., 197 Ark. 839, 126 S. W. (2d) 112, the loan corporation in good faith liquidated an existing valid vendor’s lien on realty owned by husband and wife by entirety at the instance of the husband and at a time when the wife was insane. It was held that the loan corporation was not a mere “volunteer” and was subrogated to the rights of the vendor, and, subject to the wife’s right to redeem, could foreclose the lien against the wife who was subsequently declared to be sane.

In Bankers’ Loan, etc., Co. v. Hornish, 94 Va. 608, 27 S. E. 459, the loan company advanced money to pay off notes given for the purchase price of real estate secured by a first deed of trust thereon and stipulated that it was to have a first lien. The notes were taken in uncancelled. The court held that the lender was entitled to be subrogated to the rights of the holder of said notes and had priority over intervening judgment creditors of the grantor.

However, contractual subrogation does not depend upon a formal transfer of the instruments evidencing the original indebtedness. Glasscock v. Travelers Ins. Co. (Tex. Civ. App.), 113 S. W. (2d) 1005.

And in Kaminskas v. Cepauskis, 369 Ill. 566, 17 N. E. (2d) 558, conventional subrogation as against a debtor’s widow’s dower claim was held to have resulted from an equitable right springing from an express agreement with the debtor by which one advanced money to pay a claim for the security of which there existed a lien, and by such agreement he was to have an equal lien to that paid so as to receive the benefit of the security which he had satisfied with the expectation of receiving an equal hen.

Counsel for the appellees argue that in the instant case the appellants have forfeited any rights they might have had to subrogation by their negligence in not availing themselves of the information contained in the abstract of title relative to Mrs. Joynes’ equitable lien. It is true that some cases qualify the granting of subrogation by requiring that the subrogee be not chargeable with culpable or inexcusable neglect. See McCollum v. Lark, 187 Ga. 292, 200 S. E. 276. But the negligence of the subrogee must be more than ordinary negligence to bar the application of subrogation. Furthermore, the negligence should be chiefly of significance when there are subsequently intervening rights involved which would be prejudiced if subrogation were allowed.

Thus, a party advancing money to discharge a prior lien who does not search the records to discover other liens, but who relies, for example, on the borrower’s assurances that there are no other hens is not barred from his right of subrogation as against a junior encumbrancer who is not prejudiced. Morgan v. Gollehon, supra; Huggins v. Fitzpatrick, 102 W. Va. 224, 135 S. E. 19; Jackson Trust Co. v. Gilkinson, 105 N. J. Eq. 116, 147 A. 113.

In Hoagland & Co. v. Decker, 118 Neb. 194, 224 N. W. 14, the lender advanced money to pay off a first mortgage, upon an agreement that he would have a first lien on the property to secure his loan. He was on notice that some construction was taking place on the premises and demanded that the liens of materialmen be released so as not to jeopardize his first lien. The owner failed to procure the release of these liens, and through mischance the loan was consummated without procuring them. The proceeds of the loan were in fact utilized to pay off the prior first mortgage. The court held that it was the intention of the lender to obtain a first mortgage and that, accordingly, he would be subrogated to the security of the prior mortgagee.

In Martin v. Hickenlooper, supra, a trust company owned some property subject to outstanding first and second mortgages. The trust company borrowed money from Mrs. Zorn, representing that she was to obtain a first lien. An abstract of title was furnished Mrs. Zorn, but she never examined it. The money loaned by her was used to pay off the first mortgage, which was released. In a dispute over priority of claims between the second mortgagee and Mrs. Zorn, wherein the court made an exhaustive review of the authorities, it was held that Mrs. Zorn was entitled to be subrogated to the lien of the first mortgagee.

Although appellants were guilty of negligence in the instant case, they are not barred from subrogation on that ground alone. An examination of the facts of this particular case shows that the equities strongly favor them.

The equities referred to grow out of facts that existed at the time the suit was instituted as well as those that have developed during the progress of the litigation. Thomas and Garnett Joynes gave the land bank a mortgage and the bank commissioner a deed of trust securing the respective amounts loaned by them. In those instruments they conveyed the 87.86 acre tract with general warranty of title and with the Virginia statutory covenants. The legal effect of these is expressly set forth in Michie’s Code, sections 5171 to 5177, inclusive. The covenantors, by their covenants, agreed to warrant and defend the title against all the world, and they also covenanted that they had done no act to encumber the title to the tract. At the very time the covenants were made they had already placed a prior lien on the tract to secure their mother an annuity of $700 per annum. Thus, their covenant that they had done no act to encumber the tract was untrue and violated.

Thomas and Garnett Joynes later filed their petitions in bankruptcy, listing their mother, the beneficiary of the annuity, as a creditor, having defaulted in their payments to her for many years and in a large sum. Still later they obtained their discharges. Afterwards, their mother, Mrs. Emma Joynes, died testate leaving one-half of her estate to Thomas Joynes for life with remainder to his wife, and the other half to Garnett for life with remainder to his children, providing in the will that the life estates of her two sons should not be available for any of their debts. As conceded by counsel, practically all of her estate at her death consisted of the annuity, which at that time amounted to approximately $12,000. Thomas and Garnett were named executors, and this suit from that time has been conducted in their names as executors against themselves as individual defendants along with the land bank and others. They are in fact the real plaintiffs because, if they, as executors, prevail in the assertion of their present claim, a large portion, to wit, at least one-half of the total annuity payments, will be distributed to them as life tenants under the will from proceeds of the property, the title to which they warranted to defend against all claims and demands, and which they covenanted was free of encumbrances.

Thomas and Garnett are in reality both plaintiffs and defendants. This is conceded by Thomas. The decree in its result permits them to acquire their own lien obligation by devise and to enforce it against land they had warranted generally.

Generally the acquisition of a mortgage by the mortgagor extinguishes the mortgage. This is especially true when its enforcement would prejudice the rights of other creditors as is the case here. Allen v. Patrick, 97 Va. 521, 34 S. E. 451. Here, in final analysis, “the hand that is to receive is the hand to pay” to the extent of the life estate which according to the ages of Thomas and Garnett and Code, section 5131, amounts to more than $6,000.

Even if we were to deny subrogation in this case, in no event would the court countenance the injustice of allowing Thomas and Garnett to enjoy a life estate, under their mother’s will, in a fund, coming from the proceeds of the 87.86 acres, which they themselves had previously agreed to pay to her during her lifetime but had failed to pay. This would in effect be to require the appellants to pay Thomas and Garnett the annuities. They would be estopped by their covenants and the conscience of a court of equity to assert such a claim to the prejudice of the appellants.

We must look to the realities of the situation as they existed at the time of the decree. 19 Am. Jur., Equity, section 411.

It happens that no one will be prejudiced by the application of the doctrine of subrogation here. Even if Mrs. Joynes were still living her interests would not be prejudiced. In fact, they would be promoted because her annuity would be inferior only to a hen for $13,000, while originally it was inferior to one much larger, to wit, $16,000. Thomas and Garnett Joynes will not be hurt because whatever benefit would accrue to them from the proceeds of the 87.86 acre tract in satisfaction of the claim to the annuities should, in good conscience and justice, inure to the benefit of their covenantees, the appellants. In addition they are conclusively estopped by their covenants to resist the appellants’ claim to subrogation or to make any claims, as against the appellants, to any participation in the annuities that may be paid from the 87.86 acres or its proceeds.

The remaindermen in the will of Mrs. Joynes could take only such estate as Mrs. Joynes had to dispose of and inasmuch as subrogation in favor of the appellants became effective at the time they paid off the first lien, and during the life of Mrs. Emma Joynes, the estate she had to devise was subject to the subrogation. Furthermore, in consideration of the comparative equities as between the remaindermen and the land bank, the devisees are gratuitous donees, while the land bank is a bona fide creditor for value with rights fixed prior to those of the remaindermen.

The ultimate onus of discharging the debt should equitably rest upon the two principal debtors, namely, Thomas and Garnett Joynes. Since the underlying purpose of subrogation is to accomplish this just end by lending the benevolent aid of equity in curing technical defects caused by mistakes or inadvertence, we conclude that the case at bar rightly demands the application of that doctrine.

It is argued that to apply the doctrine of subrogation here would result in making a new contract for Mrs. Joynes; that the time of payment of the obligation to which she agreed to subordinate her lien would be greatly extended, and thus prejudice her rights.

When the Federal Land Bank and the Land Bank Commissioner are subrogated to the hen of the deed of trust which secured the Virginian Joint Stock Land Bank they step into the shoes of the latter bank in so far as the latter bank’s lien is concerned. They succeed to all the rights of their predecessor in that lien. Now when Mrs. Joynes signed the deed waiving the priority of her lien to that of the deed of trust, she knew that the Virginian Joint Stock Land Bank might exercise one or all of the incidents of ownership over its obhgation; she knew that the obhgation might be assigned, in which event the hen of the deed of trust would follow the evidence of the obhgation and that it would be a first hen securing that obhgation in the hands of an assignee. Likewise she must have also known that a situation might develop whereby the apphcation of the doctrine of subrogation might arise which would operate just as an assignment of the deed of trust obhgation and which would give the subrogee like priority over her hen.

The waiver apphed not only to the deed of trust hen in favor of the Virginian Joint Stock Land Bank but also in favor of any one that might succeed to its rights, whether it be by assignment or by the operation of the doctrine of subrogation. The waiver was not personal to the Virginian Joint Stock Land Bank. This is clear from the express language of the waiver: “Subject only to this deed of trust, which is hereby given priority, the annuity reserved shall remain intact.” Thus it is obvious that it apphed to the deed of trust and not to any particular person. It apphed to any person or corporation succeeding to the rights of the Virginian Joint Stock Land Bank.

Reduced to simple terms, in effect we have a case where there are senior and junior mortgages. At the request of the holder of the senior mortgage the appellants advanced the money to satisfy the obhgation secured under that mortgage with the intent of both parties that the appellants would have a first mortgage. Through their own negligence, which has prejudiced no one’s rights, they failed to procure a first mortgage. A court of equity under such circumstances and in view of the prevailing equities in their favor will keep ahve the senior mortgage and allow the appehants to be subrogated thereto.

The cause is therefore reversed and remanded with directions to subrogate the appehants to the valid hens on the said 87.86 acre tract which had existed in favor of the Virginian Joint Stock Land Bank and the taxing authorities, to the extent of the amount actually used to pay off those claims, and to decree the lien of appellees to be subordinate thereto.

Reversed and remanded.