Randell v. Fellers

252 N.W. 787, 218 Iowa 1005

• Court: Supreme Court of Iowa
• Decided: February 7, 1934
• Docket: No. 42108.
• Status: Published

Opinions

Albert, J.

The right of appellants, as administrators, whose decedent was not a party to or the owner or holder of the mortgage involved, to prosecute this action to foreclose the same is predicated upon the equitable doctrine of subrogation. The essential facts are in no sense complicated and may be briefly stated.

On or about September 3, 1919, Arda Brubaker McNulty, guardian of her minor son Burl Brubaker, was, upon proper application and showing to the court, authorized to make sale of the southwest quarter of the northeast quarter of section 22, township 74, range 15, Mahaska county, the property of her ward. The land was sold, full report of sale made to, and approved by, the court. Before consummating said sale, the guardian executed a bond in the penal sum of $20,000 conditioned as by law required with C. W. Randell, appellant’s decedent and another as sureties thereon. The order approving the sale of the aforesaid real property authorized the guardian “ * * to loan any balance of the ward’s money in. her hands at the rate of six per cent interest per annum and only upon first mortgages upon Iowa farm land, the land securing same to be worth at least twice the amount of the loan. * * * ”

On or about March 2, 1920, the guardian loaned to her brother Eugene McEwen $5,000 of the money of her ward for a term of five years, receiving as security for the payment thereof a first mortgage upon an eighty-acre tract of land located in Keokuk county, Iowa. The mortgage was duly recorded in the office of the county recorder of that county.

On January 23, 1922, a purported release bearing date December 23, 1921, of said mortgage reciting that “ * * * it is redeemed, paid off, satisfied and discharged in full, * * ” was filed in the office of the county recorder of Keokuk county. No part of the loan was paid by the mortgagor at the time such purported release was executed and filed. The only payments at any time made by him thereon were of interest, the last of which was made five years after the date of the purported release and one payment of $500 on principal on August 29, 1927.

Burl Brubaker, the ward, attained his majority on November 22, 1929. The final report of the guardian showed that she was in default in the sum of $5,797.50, the balance due on the aforesaid loan to her brother Eugene McEwen. Thereupon, Burl Brubaker filed a claim for the amount due him with the administrators of the estate of C. W. Randell, deceased, surety on the bond of his guardian. The claim thus filed was allowed by the court and paid in full by appellants. Thereupon, and shortly thereafter, this action against C. W. Fellers, the present ownér of the eighty-acre tract covered by the McEwen mortgage, was commenced. Although other issues were joined in the court below, the relief sought in this court is the establishment of the said mortgage lien upon the real estate described therein as of the date of its execution; the right of appellants to be subrogated to all the rights and remedies of Burl Brubaker, the ward for whose benefit the loan was made, and his guardian, and for the foreclosure of the said mortgage. Appellee acquired title through several mesne conveyances from the mortgagor.

The foregoing statement of the facts at once suggests the probable defenses urged to appellants’ cause of action. Paramount above all others is the contention that appellee is an innocent purchaser of the land in controversy for value without notice or knowledge, actual or constructive, of any defect in the purported release exe■cuted and caused to be placed of record by the guardian. The release was executed without application to, or prior authorization of, the court. The mortgage named Ardá Brubaker McNulty, guardian of Burl Brubaker, a minor, of the county of Mahaska and state of Iowa, as mortgagee. The release was executed by her in her name as guardian.

It is obvious that the payment by the debtor of the indebtedness secured by a mortgage upon real estate operates immediately to discharge the lien. It is equally true that an unauthorized release without payment by a guardian would, as between the immediate parties, including the ward and the sureties on the guardian’s bond, have no such effect. It, therefore, does not require argument t'o demonstrate that the lien of the mortgage here involved continued to exist in spite of the purported release thereof by the guardian. It is provided by section 12581 of the Code of 1931 that:

“Guardians of the property of minors must prosecute and defend for their wards, may employ counsel therefor, lease lands, loan money, and in all other respects manage their affairs, under proper orders of the court, or a judge thereof.”

Loaning of the money of the ward by the guardian and the release of a mortgage given to secure the payment of such loan under the language of the foregoing statute certainly constitutes management of the affairs of the ward. Andrew v. Sac County State Bank, 205 Iowa 1248, 218 N. W. 24; Andrew v. Farmers Sav. Bank, 207 Iowa 394, 223 N. W. 249; Slusher v. Hammond, 94 Iowa 512, 63 N. W. 185; Bates, Guardian v. Dunham, 58 Iowa 308, 12 N. W. 309.

It is provided by section 12772 of the Code of 1931 as follows:

“All proposed investments of trust funds by fiduciaries shall first be reported to the court or a judge for approval and be.ap proved and unless otherwise authorized or directed by the court under authority of which he or it acts, or by the will, trust agreement or other document which is the source of authority, a trustee, executor, administrator or guardian shall invest all moneys received by such fiduciary, to be by him or it invested, in securities which at the time of the purchase thereof are. included in one or more of the following classes: * * * ”

At the time the loan in question was made, section 364 of the 1913 Supplement to the Code and section 365 of the Code of 1897. were in force. These sections are as follows:

“Sec. 364. Where investments of funds are to be' made, including those to be made by executors, administrators, trustees and guardians, and no mode of investment is pointed out by statute, they may be made in the stocks or bonds of this state, or of those of the United States, or in bond or mortgage upon real property of the clear, unincumbered value of twice the investment or under order of court in bonds issued by or under the direction of cities, towns, counties, school or drainage districts of this state.

“Sec. 365. When such investment is made by order of any court, the security taken shall in no case be discharged, impaired or transferred without an order of the court to that effect, entered on the minutes thereof.”

The court is divided in opinion as to the correct interpretation of the foregoing statutes. A minority of the court are of the opinion that section 365 of the Code of 1897 must be limited in its application to the italicized portion of section 364. The italicized portion of section 364 first appeared in the section upon the enactment of chapter 38, Laws of the Thirty-fifth General Assembly. The legislative history of section 365 begins with the Code of 1851, appearing therein as section 2508. It has continued through the several revisions of our statutes to the present without change. It would seem from this legislative history that the legislature, by the enactment of chapter 38, Laws of the Thirty-fifth General Assembly, expressed no intention to limit the terms or scope of section 364. The loan by the guardian to McEwen was not reported to, or specifically authorized by the court, but that it was made in pursuance of the general order and authorization previously entered must be conclusively assumed. The loan was, therefore, made under au ihority and order of the court and could be legally released only upon compliance with section 365 of the Code of 1897. To hold otherwise would be, in effect, a denial by the court of the protection vouchsafed to wards by solemn legislative enactments. These statutes were not enacted for the benefit of guardians or third parties, but solely for the benefit and protection of the property of the wards of the court.

The precise question now before us does not appear to have been previously passed upon by this court. The case nearest in point is Citizens State Bank v. Victoria Sanitarium, 179 Iowa 671, 161 N. W. 664. The action there involved was in equity to foreclose a mortgage upon real estate. Acting under the authority of the court, the administrator who appeared with others as an intervener in the case had released a prior mortgage of record. The contention of interveners was that the order of the court, for reasons stated, was illegal and void. Interveners asked that it be canceled, set aside, and held for naught. The court, under the facts of that case, sustained the order, but, in the course of the discussion, this court gave serious consideration to the necessity for such order and authority. Manifestly, the attempted release by the guardian of the mortgage in question without payment was constructively fraudulent as against the ward and the sureties upon the guardian’s bond. The release was illegal and wholly ineffective as between the parties, the ward, and the sureties on the guardian’s bond for at least two reasons, namely, the debts secured thereby were not paid and it was not preceded by a proper order of court. Of course, if the execution of the release had been preceded or accompanied by payment of the mortgage indebtedness and the guardian had made proper accounting thereof in the ward’s estate, the lien would, of necessity, have ceased to exist.

The question to be answered at this point presents much greater difficulty and possible uncertainly. It is not uncommon for an issue as to the actual or apparent authority of a mortgagee to release a mortgage to arise. It is clear that the release in question was executed without authority. Whether an issue of apparent authority is, under the facts of this case at this time involved, we deem it unnecessary to consider. It is conceded that appellee and each of his predecessors in title through McEwen, the mortgagor, had actual notice of the mortgage and of the purported release. They were shown upon abstracts of title exhibited to each grantee prior to the consummation of the purchase. No element of actual fraud is involved under the issues. Were the respective purchasers of real property, including appellee, charged with notice of the defect in the authority of the guardian to release the mortgage?

It is the law long settled in this state that actual notice exists where the facts and circumstances were such as to lead a reasonably prudent person to make inquiry which, if made, would have resulted in ascertaining the truth. This is sufficient to constitute actual notice. Mill Owners Mut. Life Ins. Co. v. Goff, 210 Iowa 1188, 232 N. W. 504; Johnson v. Chicago, B. & Q. R. Co., 202 Iowa 1282, 211 N. W. 842; Aultman & Taylor Machinery Co. v. Kennedy, 114 Iowa 444, 87 N. W. 435, 89 Am. St. Rep. 373; Weare & Allison v. Williams, 85 Iowa 253, 52 N. W. 328; Traer v. State Board of Medical Examiners, 106 Iowa 559, 76 N. W. 833; Benton County Savings Bank v. Boddicker, 105 Iowa 548, 75 N. W. 632, 45 L. R. A. 321, 67 Am. St. Rep. 310; Allen v. McCalla, 25 Iowa 464, 96 Am. Dec 56; Wilson v. Miller & Beeson, 16 Iowa 111.

Appellee and his predecessors in title were bound to know and to take cognizance of statutes defining and limiting the authority of guardians and other similar trustees. Such officers are a part of and act under the authority and direction of the court. Both the language of the mortgage and of the release gave notice that the mortgagee was the guardian of her minor son and acted solely in her capacity as such. The statute in specific terms forbade her to discharge or impair the security she held for the protection of her ward’s estate without previous authority of the court entered on the minutes thereof. The purported release contained no recital that it was executed in pursuance to and observance of an order of court. Actual knowledge of. the statutory requirements and the limited authority of the guardian were not essential to impart legal notice and knowledge to appellee. Manifestly, if the statutes imposing limited authority upon the guardian had been actually familiar to appellee, he wohld have at once demanded a showing upon the abstract of full and complete compliance therewith. He was bound by the law and must be held to have had notice and knowledge thereof. The slightest inquiry upon his part would have resulted in full knowledge of all the essential facts including the all important fact that the indebtedness secured by the mortgage was not paid. This precise question was before the Court of Civil Appeals of Texas in Freiberg v. De Lamar, 7 Tex. Civ. App. 263, 27 S. W. 151. The court said:

“The guardian, Mrs. De Lamar, had no power without authority from the probate court to discharge Merritt from his liability for the debt, and release the lien by which it was secured; and, notwithstanding her act in receipting the note and executing the instrument to Freiberg, the debt was not discharged, and the lien to secure it continued in full vigor. Freiberg knew of the existence of the charge against the property in favor of the minor, was charged by law with notice of the guardian’s want of power to release it, and must abide the legitimate consequences of the failure to pay the debt.”

See, also, International Trust Co. v. Preston, 24 Wyo. 163, 156 P. 1128.

Some reference is made by counsel to section 11826 of the Code of 1931 which requires certified copies of orders or judgments affecting real estate in any county other than that in which administration or guardianship is originally granted to be forwarded to the clerk of the county in which the real estate is situated. The guardianship in this case was in Mahaska and the mortgaged premises in Keokuk county. No record or order approving or authorizing the guardian to release the mortgage here involved was ever made in Mahaska county. There was, therefore, nothing, even if required in cases of this character, to be certified by the clerk of the district court of Mahaska county to the proper officer in Keokuk county. It is not easy to perceive just how appellee would claim advantage under this statute. Both the guardian and the mortgagor knew that the purported release was fraudulent as against all interested parties. This is true whether they; in fact, intended to perpetrate a fraud upon innocent parties or not.

Another circumstance to be considered is that the note secured by the mortgage did not mature until 1925. Perhaps little weight should be attached to this fact. This court, however, in Day v. Brenton, 102 Iowa 482, 71 N. W. 538, 63 Am. St. Rep. 460, in which a release by a trustee without payment and after the note secured thereby had been transferred was involved gave great emphasis in argument to the fact that the note was past due when the release was executed. Some reliance is placed by appellee upon the holding of the court in the above case sustaining the release. We find nothing in the language of the court in any sense in conflict with the conclusion reached herein. The cases are distinguishable upon the facts.

It is the conclusion of the court that appellee must be held to have purchased the mortgaged premises with notice or knowledge of the invalidity and ineffectiveness of the purported release and may not now assert, as a defense, the right of an innocent purchaser for value or defeat the claimed right of appellants to subrogation under the doctrine of equal equities. In the absence of such notice or knowledge, a contrary conclusion must necessarily have followed. We deem it unnecessary, therefore, to discuss or refer to the many' authorities cited and relied upon at this point by appellee.

The doctrine of subrogation is of equitable origin, but is supplemented to some extent in this state by statute. Section 11667, Code 1931. It has been too often defined and the principle stated to require elaborate discussion at this time. The court, quoting in part from Jackson Co. v. Boylston Mut. Ins. Co., 139 Mass. 508, 2 N. E. 103, 52 Am. Rep. 728. in Kent v. Bailey, 181 Iowa 489, 164 N. W. 852, said:

“ ‘Subrogation is the substitution of one person in place of another, whether as a creditor or as the possessor of any other rightful claim, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its right, remedies, or securities.’ * * * See Heuser v. Sharman, 89 Iowa 355, 56 N. W. 525, 48 Am. St. Rep. 390.

“It has been styled a legal fiction whereby an obligation which has been discharged by a third person is treated as still subsisting for his benefit, so that by means thereof one creditor is substituted to the rights, remedies, and securities of another.”

See further Mill Owners Mut. Life Ins. Co. v. Goff, supra, Heuser v. Sharman, 89 Iowa 355, 56 N. W. 525, 48 Am. St. Rep. 390, and Leach v. Commercial Sav. Bank, 205 Iowa 1154, 213 N. W. 517.

The doctrine is universally applied in behalf of a surety who has been compelled to pay the debt of his principal. Having held that appellee does not stand in the position of an innocent purchaser for value without notice of the mortgage in controversy and of the invalidity of the purported release, the right of appellants as the legal representatives of their decedent whose estate has been compelled to make good the defalcation on the guardian’s bond, to be subrogated to all the rights and remedies of the guardian and Burl Brubaker follows as a matter of course. As a part of the order of the probate court establishing the claim of Burl Brubaker against the estate of C. W. Randell, the court said:

“It is further ordered and adjudged by the court that upon the payment of the claim herein allowed by the estate of C. W. Randell, deceased, the said estate and Frank G. Randell and Charles A. Randell, as administrators thereof, shall be and they are hereby subrogated to any rights that Arda Brubaker McNulty, as guardian of Burl Brubaker, and Burl Brubaker, claimant herein, may have in and to the note and mortgage referred to in claimant’s claim, to the amount of $5,797.50 and interest thereon at six per cent per annum from this date and to the judgment rendered on said note.”

An appeal was taken from the order of the court allowing the claim of Burl Brubaker against the estate of C. W. Randell. The order was, however, affirmed. See In re Guardianship of Burl Brubaker, 214 Iowa 413, 239 N. W. 536. It is now urged by appellee that, because of appellants’ plea in resistance to the claims of Burl Brubaker that the mortgage had been released, the judgment entered in said action has become res adjudicata and that they may not now assert any right in conflict with such judgment. The record does not disclose.any adjudication of the point urged, nor do we find in the record in this case a plea of former adjudication. The point is without merit, and in no sense necessarily involved in the proceeding in probate.

There is also a plea of estoppel based in part upon the fact that the purported release was executed for the purpose of enabling the mortgagor to sell and convey the real estate free from incumbrance and, partly, upon the theory that the purchaser thereof paid value therefor without notice of the invalidity of the release. Manifestly, the plea is without equity. We have already announced the conclusion that McEwen’s immediate grantee was not an innocent purchaser without notice of the prior equity now asserted by appellants.

Another plea is the statute of limitations. This plea is also without merit. The right to which appellants were subrogated was to enforce the lien of the mortgage upon the real estate described therein. The debt was not barred by the statute and necessarily the right of foreclosure was not barred.

Other issues are tendered by appellee and ably presented in argument supplemented by the citation of many authorities. But, as what we have already said necessarily disposes of .the appeal, it would not be profitable to prolong this opinion by an extended discussion of each of the many propositions urged. We deem further discussion unnecessary. The judgment and decree of the court below must be and it is in all particulars reversed, and the cause will be remanded to the district court of Keokuk county for decree in harmony with this opinion. — Reversed.

Claussen, C. J., and Kindig, Stevens, Donegan, Anderson, and Kintzinger, JJ., concur.