Broadway Nat. Bank of Chelsea v. Hayward

• Decision Date: 26 February 1934
• Citation: 189 N.E. 199,285 Mass. 459
• Parties: BROADWAY NAT. BANK OF CHELSEA v. HAYWARD et al.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

285 Mass. 459

189 N.E. 199

BROADWAY NAT. BANK OF CHELSEA

v.HAYWARD et al.

Supreme Judicial Court of Massachusetts, Suffolk.

Feb. 26, 1934.

Appeal from Superior Court, Suffolk County; Sisk, Judge.

Suit by the Broadway National Bank of Chelsea against George B. Hayward, individually and as trustee of the Glenwood Trust, and another. From interlocutory decrees sustaining demurrers to the bill and from a final decree in favor of the defendants, the plaintiff appeals.

Affirmed.C. A. Warren and N. R. Voorhis, both of Boston, for appellant.

J. H. Powers, of Boston, for appellee George B. Hayward and another.

W. E. Crowley, of Boston, for appellee Boston Penny Sav. Bank.

LUMMUS, Justice.

This case comes up on appeal from a final decree after the sustaining of demurrers to a bill which alleged the following facts: One Stober, owning real estate in Boston, had mortgaged it for $85,000 to one Clisby, and the mortgage and mortgage note had been assigned to the defendants Boston Penny Savings Bank as collateral security for a loan of $60,000 to Clisby. Clisby also had made a second assignment of the mortgage and mortgage note, subject to the preceding assignment, to the plaintiff Broadway National Bank of Chelsea as collateral security for a loan of $25,000 to Clisby. The equity of redemption in the real estate had passed from Stober to the defendant Hayward as trustee of the Glenwood Trust.

With matters in that situation, Hayward proposed to the plaintiff on September 3, 1931, that it release its interest in the first mortgage and mortgage note, and accept instead a second mortgage for $25,000, payable in five years, securing a note to be signed by Hayward as trustee of the Glenwood Trust; that Hayward pay to the Boston Penny Savings Bank $10,000 and obtain from that bank a reduction of the first mortgage to $50,000 and an extension of it for three years; and that Hayward personally guarantee to the Boston Penny Savings Bank the performance of the covenants and conditions of the first mortgage as reduced and extended. All this was carried out by a series of written documents. But, the bill alleges, Hayward further agreed with the plaintiff that he ‘would faithfully keep and perform the obligations, the performance of which he promised to thereby guarantee,’ and did in fact guarantee, to the first mortgagee, the Boston Penny Savings Bank. And this last agreement with the plaintiff, the bill alleges, has been broken. Hayward, it is alleged, has failed to perform the covenants and conditions of the first mortgage as reduced and extended, by failing to pay taxes and interest and by suffering strip and waste of the mortgage premises. For that reason, the Boston Penny Savings Bank has advertised a foreclosure sale under its first mortgage.

The plaintiff asserts that the Boston Penny Savings Bank has two securities or funds to which it may resort, (1) the land itself, and (2) the personal covenant of the defendant Hayward, whereas the plaintiff can resort to only one of them, the land. The plaintiff claims the right to have these securities or funds marshaled so that the Boston Penny Savings Bank will have to exhaust the one which it has alone before resorting to the one which it holds in priority to, though in a sense in common with, the plaintiff. It prays that the defendant Hayward be ordered to cure the breaches of the condition of the first mortgage and to perform its covenants, and that the defendant Boston Penny Savings Bank be restrained from foreclosing the first mortgage until it has exhausted its remedies against Hayward on his covenant.

Hayward, on the other hand, contends that as guarantor of the first mortgage his equity is superior to that of the second mortgagee. He contends that he is the one entitled to be subrogated to the first mortgage upon payment of it, and that if any marshaling is to be done the real estate should be applied to the first mortgage debt before calling on him to pay. Whether his contention is correct, depends upon the construction of the contract with the plaintiff,alleged in the bill. The bill is silent as to whether the contract between the plaintiff and Hayward was oral or written, and consequently it cannot be assumed on demurrer to have been oral (Quinn v. Quinn, 260 Mass. 494, 157 N. E. 641), even if within the statute of frauds at all. Williston, Contracts, § 460; Hubon v. Park, 116 Mass. 541. If the defendant Hayward, having become a guarantor of the first mortgage to the Boston Penny Savings Bank, merely promised the plaintiff that he would abide by his guaranty, that did not amount to a personal assumption of the first mortgage debt or affect his right to have the land stand as the primary fund for the payment of that debt. The contention of the plaintiff is, that Hayward agreed in substance to assume and pay off the first mortgage debt for the benefit of the second mortgagee, and that consequently its equities are superior to those of Hayward. A minor contention of the plaintiff, leading to the same result, is based upon an alleged liability of Hayward upon the covenants of the second mortgage deed. Without deciding, we assume for the sake of the argument that the plaintiff shows the superior equity.

‘The equitable doctrine of marshalling rests upon the principle that a creditor having two funds to satisfy his debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds.’ Sowell v. Federal Reserve Bank of Dallas, Texas, 268 U. S. 449, 456, 457, 45 S. Ct. 528, 530, 69 L. Ed. 1041,Beckman v. Alberts, 346 Ill. 74, 178 N. E. 367. In such a case, the junior creditor having the single fund may pay off the senior creditor having both the funds, and be subrogated to his security. Washburn v. Hammond, 151 Mass. 132, 139, 24 N. E. 33,Schaefer v. Metzger, 105 N. J. Eq. 307, 147 A. 774. Subrogation and marshaling are often different manifestations of the same equity, but where subrogation remedies injustice (Westinghouse Electric & Manuf. Co. v. Fidelity & Deposit Co. of Maryland, 251 Mass. 418, 146 N. E. 711), marshaling prevents it. Marshaling gives the junior creditor the additional right of compelling the senior creditor to resort in the first place to the fund which he alone holds. The present case is hardly a typical case of the doctrine of two funds, for ‘as a general rule at any rate, it is not to be applied where the two funds to which the creditors or sets of creditors may resort are not derived from a common source, or are not in the hands of a common debtor.’ Sheldon, J., in Carter v. Tanners' Leather Co., 196 Mass. 163, 166, 81 N. E. 902, 903,12 L. R. A. (N. S.) 965. See, also, Adams v. Young, 200 Mass. 588, 593, 86 N. E. 942;Baker v. Davie, 211 Mass. 429, 441, 97 N. E. 1094,37 L. R. A. (N. S.) 944. Perhaps the case for marshaling might be put on the ground, that by the covenant of Hayward with the Boston Penny Savings Bank and his agreement with the plaintiff, the personal liability of Hayward became the primary fund for the satisfaction of the first mortgage, and the land became a sort of surety, and that as an incident of the right of exoneration the plaintiff might restrain the Boston Penny Savings Bank from foreclosing the first mortgage until Hayward could be compelled to pay the debt. Bearse v. Lebowich, 212 Mass. 344, 99 N. E. 175; Id., 234 Mass. 492, 125 N. E. 621;Cotting v. Otis Elevator Co., 214 Mass. 294, 101 N. E. 367;National Bank of South Reading v. Sawyer, 177 Mass. 490, 59 N. E. 76,83 Am. St. Rep. 292; Ascherson v. Tredegar Dry Dock & Wharf Co., Ltd., [1909] 2 Ch. 401; Pavarini & Wyne, Inc., v. Title Guaranty & Surety Co., 36 App. D. C. 348, Ann. Cas. 1912C, 367, and note; Searcy v. Shows, 204 Ala. 218, 85 So. 444;Greenberg v. Leff, 104 N. J. Eq. 502, 146 A. 196, and cases cited; Matthews v. Matthews, 128 Me. 495, 148 A. 796;Robbins-Sanford Mercantile Co. v. Johnson, 166 Ark. 330, 266 S. W. 260,37 A. L. R. 1262. Compare In re Babcock, 3 Story, 393, Fed. Cas. No. 696; Webber v. Webber, 109 Mich. 147, 66 N. W. 960.

If we assume, without so deciding, that the relations of the parties in this case are such that the securities could be marshaled as the plaintiff desires, it does not follow that a decree for the plaintiff is required. Marshaling is not an absolute right. The defendant Boston Penny Savings Bank has both the underlying first mortgage on the land and the personal covenant of Hayward, and has the right to enforce either or both until it shall have received full satisfaction. At law it is no defence to a surety that the creditor has collateral security belonging to the principal which has not been applied to the debt. Mercantile Guaranty Co. v. Hilton, 191 Mass. 141, 77 N. E. 312;Miller v. Levitt, 226 Mass. 330, 115 N. E. 431; Sheldon, Subrogation (2d Ed.) § 115; Williston, Contracts, § 1276. Only in case justice to a junior incumbrancer or a surety reequires,...