Fidelity & Casualty Co. v. Massachusetts Mut. L. Ins. Co.

• Decision Date: 08 January 1935
• Docket Number: No. 3749.,3749.
• Citation: 74 F.2d 881
• Parties: FIDELITY & CASUALTY CO. OF NEW YORK v. MASSACHUSETTS MUT. LIFE INS. CO.
• Court: U.S. Court of Appeals — Fourth Circuit

74 F.2d 881 (1935)

FIDELITY & CASUALTY CO. OF NEW YORK v. MASSACHUSETTS MUT. LIFE INS. CO.

No. 3749.

Circuit Court of Appeals, Fourth Circuit.

January 8, 1935.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

Robert Ruark, of Raleigh, N. C. (Ruark & Ruark, of Raleigh, N. C., on the brief), for appellant.

J. O. Carr, of Wilmington, N. C. (Carr, Poisson & James, of Wilmington, N. C., on the brief), for appellee.

PARKER, Circuit Judge.

This suit was instituted by the Fidelity & Casualty Company of New York, surety upon a bond given by T. A. Green of Wilmington, N. C., to stay collection of income taxes assessed against him pending appeal to the Board of Tax Appeals. The bill asked that complainant, having paid the taxes assessed against Green, be subrogated to the lien of the United States on certain real estate owned by Green, which subsequent to the docketing of the lien for taxes had been mortgaged by him and purchased by the defendant Massachusetts Mutual Life Insurance Company at mortgage sale, and that the lien be foreclosed. The answer, in addition to pleading the statute of limitations, which is not relied on in this court, averred that the lien of the government on the property in controversy had been extinguished as the result of the execution of a release by the collector of internal revenue, that complainant had released property properly applicable to the satisfaction of its claim in advance of the property of defendant, and that complainant, subsequent to the acquisition of the rights of defendant, had executed a bond undertaking to protect against the lien the purchaser from defendant of property which in equity should have been subjected to the satisfaction of the lien in advance of the property in controversy. The court below dismissed the bill, and complainant has appealed.

The facts have been stipulated. Those relating to the lien may be briefly stated. On March 12, 1926, the Commissioner of Internal Revenue assessed additional income taxes and penalties against Green for the year 1920, amounting to $20,172.27; and notice of this assessment was duly filed in the office of the register of deeds of New Hanover county on April 2, 1926, and created a lien for the amount of the taxes on the property of Green in that county. Green appealed from the assessment to the Board of Tax Appeals; and, on April 3, 1926, filed with the collector of internal revenue for North Carolina a bond in the sum of $20,000, with complainant as surety, to stay the collection of the taxes pending appeal. On December 11, 1928, the Board finally determined the amount due under the assessment appealed from, fixing the liability for tax, penalty, and interest at $4,746.34. Green being unable to pay the amount so assessed, it was paid by complainant, on May 2, 1929, as surety on his bond; and a certificate was executed by the collector of internal revenue reciting that the taxes had been paid and that the lien therefor had been discharged in full, "in so far as the United States is concerned, payment having been made by the Fidelity and Casualty Company of New York, surety for the taxpayer, under its bond to Gilliam Grissom, Collector, dated April 3, 1926."

The property which the complainant seeks to subject to the lien under the principles of subrogation is the Garrell building in Wilmington, New Hanover county, N. C. This building, which was valued for taxation at $80,000, was owned by Green at the time of the docketing of the tax lien on April 2, 1926. Six days later, on April 8, 1926, he executed a deed of trust on it to one Rawlings as trustee to secure a debt of $50,000 to the defendant. He defaulted in the payment of the debt so secured, and the property was sold by the trustee under the terms of the deed of trust on February 25, 1929, and was purchased by defendant.

The property with respect to which the answer avers a release from the lien was the St. Francis Hotel property. This was sold on December 21, 1929, under a deed of trust antedating the lien, for a sum $3,035.39 in excess of the debt secured; and this excess was paid into the hands of the clerk of court of New Hanover county and distributed among creditors in a special proceeding. Complainant, being a party to this proceeding, received $1,943.44 of this amount and consented that the remainder be distributed to lien claimants whose liens upon the property were junior to its own. There can be no question but that, to the extent of the funds thus released to junior claimants, which it might have applied upon its claim, it has waived any right which it may have had to enforce the tax lien in question against the property of defendant. Jones v. Myrick, 8 Grat. (Va.) 179; Jackson v. Finance Corporation, 59 App. D. C. 309, 41 F.(2d) 103; 38 C. J. 1376. If we correctly understand the position of complainant in this court, it does not make serious contention to the contrary.

The property which Green and complainant have dealt with in such way as to give rise to the principal equitable claim of defendant is the Wilmington Hotel property. This property was owned by Green at the time of the docketing of the tax lien, and was valued for taxation at $175,000. Green executed a deed of trust on this property on December 1, 1927, more than a year and a half after the execution of the deed of trust securing the debt to defendant. This deed of trust was given to secure a loan of $125,000 made by the Old Dominion Mortgage Company, which, before making the loan, required Green to furnish a title insurance policy in the sum of $25,000 to protect it against the tax lien in question. The Lawyers' Title Insurance Company executed this policy, but, as a condition of executing same, required Green to furnish it an indemnifying bond in the sum of $25,000, which was executed by complainant. The condition of this bond was that the title insurance company be protected against the tax lien. It is stipulated that at the time of the execution of this bond defendant's deed of trust on the Garrell building was on record in New Hanover county, but that complainant had no actual knowledge thereof. On default by Green, the Wilmington Hotel property was sold under the deed of trust on April 6, 1929 and was purchased by the Old Dominion Mortgage Company.

We entertain no doubt as to the general principle that the surety on a bond executed to the government to stay the collection of taxes pending appeal, who is required to pay the taxes because of the execution of the bond, is subrogated to the rights of the government under any lien for the taxes which it may have. See In re Baltimore Pearl Hominy Co. (C. C. A. 4th) 5 F.(2d) 553; ?tna Life Ins. Co. v. Middleport, 124 U. S. 534, 8 S. Ct. 625, 31 L. Ed. 537; Dayton v. Treasurer of Pueblo County, 241 U. S. 588, 36 S. Ct. 695, 60 L. Ed. 1190; and notes in 24 A. L. R. 1504 et seq., and 83 A. L. R. 1133 et seq. And we do not think that here the certificate of release executed by the collector when the taxes were paid by the surety destroyed the surety's right to subrogation to the lien. The purpose of the amendments made by the Act of May 29, 1928, to section 3186 of the Revised Statutes (26 USCA ß 115), was to permit the clearing of titles against tax liens where these liens had become unenforceable or bond had been given securing the payment of the taxes, not to destroy rights of subrogation under existing liens of persons who might be called on to pay taxes under bonds which they had executed or who might pay same for the protection of their interest in the property; and paragraph (d) of the act (26 USCA ß 115 (d), providing that a certificate of release or partial discharge issued under the section should be conclusive that the lien upon the property had been extinguished, must be construed in the light of this purpose. The certificate upon which defendant relies recites that the taxes have been paid by the surety; and this shows that they have not been "satisfied" in the sense in which that term is used in the statute, but had been paid by the surety in such way as to preserve the lien for its benefit.

But we think that complainant must be denied subrogation because of the equity of defendant, under what has been called the "inverse order of alienation" doctrine, to have the lien satisfied out of the Wilmington Hotel property rather than out of the Garrell building. That doctrine, laid down in Sir William Herbert's Case, 3 Coke, 11, and by Lord Chancellor Hardiwicke in Lanoy v. Duke and Duchess of Athol, 2 Atk. 444, and followed by Chancellor Kent in Clowes v. Dickenson, 5 Johns. Ch. 235 and by the Supreme Court in National Savings Bank v. Creswell, 100 U. S. 630, 641, 25 L. Ed. 713, is recognized as the law in North Carolina. Page Trust Co. v. Godwin, 190 N. C. 512, 130 S. E. 323, 325; Brown v. Harding, 170 N. C. 253, 86 S. E. 1010, Ann. Cas. 1917C, 548. Briefly stated, it is that a mortgagee or other lienor, where the land subject to lien has been aliened in separate parcels successively, shall satisfy his lien out of the land remaining in the grantor or original owner, if possible, and, if that be insufficient, that he shall resort to the parcels aliened in the inverse order of their alienation. 18 R. C. L. 468; 34 C. J. 619; Drexler v. Commercial Savings Bank (C. C. A. 8th) 5 F.(2d) 13, 15; Neely v. Williams (C. C. A. 8th) 149 F. 60, 63.

Although this equity is frequently discussed as arising out of the equity to marshal assets where a senior incumbrancer has two funds and a junior only one out of which his debt may be made, the two doctrines are quite distinct. The equity of marshaling, until it is asserted, is a mere inchoate equity subject to displacement, whereas the equity of the purchaser of land subject to a lien to have that lien satisfied out of land remaining in the grantor and then out of the parcels subsequently conveyed in inverse order of alienation, where it exists at all, is a fixed indefeasible right. 18 R....