In re McElmurray

• Decision Date: 09 October 1942
• Docket Number: No. 4378.,4378.
• Citation: 47 F. Supp. 15
• Court: U.S. District Court — District of South Carolina
• Parties: In re McELMURRAY.

47 F. Supp. 15

In re McELMURRAY.

No. 4378.

District Court, E. D. South Carolina, Aiken Division.

October 9, 1942.

Hendersons & Salley, of Aiken, S. C., for Mrs. McElmurray.

W. M. Smoak and M. A. Wilder, both of Aiken, S. C., for Pillsbury Flour Mills Co.

TIMMERMAN, District Judge.

This matter is before me on a petition to review and reverse an order of the Referee in Bankruptcy adjudging the validity of a certain real estate mortgage. The controversy is between Pillsbury Flour Mills Company, a creditor of the bankrupt, and Mrs. Lilliam B. McElmurray, the assignee of a purchase money real estate mortgage made, executed and delivered by the bankrupt to O. B. Whatley on February 8, 1937.

Relevant and explanatory facts forming the background of the issues made, and about which there seems to be little if any question, are as follows:

The note which the above referred to mortgage secured was executed and delivered the same day that the mortgage was executed and delivered — November 8, 1937 — and it obligated the bankrupt, Edward Warren McElmurray, Jr., to pay to O. B. Whatley, or order, the sum of Three Thousand Five Hundred Dollars ($3,500), in installments of Three Hundred and Fifty Dollars ($350) per year until the full amount of the indebtedness should be paid, with interest from date at the rate of 5% per annum, payable semi-annually, and with the provision that the entire amount should become due and payable in case of default in the payment of either principal or interest as the same became due. The mortgage, which was duly recorded two (2) days after its execution, covered a certain lot of land, with building thereon situate, in North Augusta, County of Aiken, State of South Carolina. Among other covenants in the mortgage there was one obligating the mortgagor to insure the building on said lot from loss or damage by fire and assign the same to the mortgagee, his executors, administrators or assigns, with the proviso that in case the mortgagor should neglect to insure said building the mortgagee, his executors, administrators or assigns could do so and have reimbursement therefor under the mortgage. The building was largely destroyed by fire on April 16, 1941, while the policy of insurance was in force. The fire loss was adjusted at $3,143.97 and paid by the check of the insurance company on or about June 13, 1941. This check was made payable to the mortgagor, the mortgagee and a fire loss adjuster. The check was endorsed by said parties and deposited in a bank to the credit of O. B. Whatley, the mortgagee. The mortgagor was adjudged a bankrupt on March 12, 1942, approximately 11 months after the fire and 9 months after the adjustment and payment of the fire loss. July 17, 1941, for value received, the original mortgagor, O. B. Whatley, transferred and assigned said mortgage and the note it secured to Lillian B. McElmurray without recourse. This assignment was duly recorded in the Clerk of Court's office for Aiken County, South Carolina, July 21, 1941, or 7 months and 3 weeks before the mortgagor was adjudged a bankrupt.

Pillsbury Flour Mills Company contends that the receipt of the funds arising under the insurance policy by the mortgagee amounted to a payment pro tanto on the mortgage indebtedness, and that the assignee of said note and mortgage could claim nothing thereunder further than remained due thereon after deducting the full amount of the insurance fund.

Mrs. McElmurray contends that the full amount of the insurance fund was never credited on the mortgage indebtedness, that part of said fund, $1,000, was by an agreement between the mortgagor and mortgagee applied on the cost of reconstructing the burned building, and that said parties had the legal right to make such application of the insurance fund.

By way of a contention counter to that of Mrs. McElmurray, Pillsbury Flour Mills Company insists that the evidence does not establish such an agreement, in the first place, and that, in the second place, any such agreement, if made, was null and void for the reason that the law applied the fund on the debt, and the parties could not contract otherwise.

On the issue of whether the mortgagee and mortgagor agreed on the application of the insurance fund before its receipt, the Referee found as a fact that the mortgagor and the original mortgagee did agree, after the fire and before the payment of the fire loss by the insurance company, that such portion of the insurance fund as might be necessary therefor should be used in replacing the burned structure; and he further found that the sum of $1,000 of said fund was so used in accordance with said agreement. I am convinced that the evidence warrants the conclusion reached by the Referee, and I therefore affirm his ruling in that respect.

In response to a question by the Referee as to how much of the insurance money Mr. Whatley, the mortgagee, agreed for him to use in reconstructing the burned building, the mortgagor (bankrupt) said: "He agreed to let me have all back if I put it in the business but I used only $1000.00 of Mr. Whatley's insurance. I got the balance from my daddy. And he took up the note in the bank." He further testified:

"Q. Was that agreement made before hand between you and Mr. Whatley that he would let you have the money back? A. Just after the fire."

In the course of the testimony of Mr. Whatley, the original mortgagee, the following occurred:

"Q. Did you and Mr. McElmurray, Jr., have any understanding or agreement about what was done?

"Mr. Smoak: Mr. Wilder and I made the same objection.

"Q. Have you any agreement about what you could do with insurance money before you got the check? A. He wanted to repair the building and asked if I would advance him money from time to time, and I agreed. We came to your office and discussed this before it was done.

"Q. How much money did you advance to him for the repair of the building out of the insurance money? A. $1000.00.

"Q. Now, later on that was agreed on between you and him, — he would use that $1000.00 in the repair of the building? A. Yes, sir.

* * * * *

"Q. The amount you advanced was how much? A. One Thousand Dollars.

"Q. And about how soon after you got the insurance money was it before the work began? A. He had already started repairing the building before the check came in.

* * * * *

"Q. How much did you find the principal, interest and insurance premiums that you paid on the policy under this mortgage amounts to on the date you received the fire insurance? A. $3543.20.

* * * * *

"Q. You had an agreement with Mr. McElmurray, before you deposited or cashed the check, to let him keep $1,000.00 to restore the building?

(Objection by Counsel)

"Q. And that your mortgage was to lend (stand) at same face value? A. No specific amount was agreed on. I would make advances from time to time as improvements progressed. After he drew the $1,000.00 he had his daddy take up the mortgage.

"Q. Was it the agreement between you and him your mortgage would remain for the full amount including what you had let him keep to make repairs? A. Yes, sir. If he had made all the improvements necessary, it might take the entire check.

"Q. You might have let him take the whole check?

"Mr. Referee: It was your wish to let him put it all in the building?

"A. Yes. I felt like I wanted to help him and he did not ask for additional advances after the two $500.00 checks were given.

"Q. Your original mortgage was to remain in full force? A. Yes."

Having reached the conclusion that the Referee was warranted in holding that the mortgagor and the original mortgagee agreed to apply part of the insurance fund to the repair of the burned building and to apply the rest of said fund to the mortgage debt, before receipt of the fund, I now turn to the question of whether the agreement is valid as between themselves and as against creditors of the mortgagor.

Ordinarily the question here presented would be determined by the law of the State, but I have been unable to find any South Carolina decision settling the exact question at issue. It is quite true, as contended by counsel for Pillsbury Flour Mills Company, that an assignee of a non-negotiable chose in action has no rights superior to those held by the assignor at the time of the assignment, and that the assignee of such an instrument takes it subject to all equities and defenses that might have been asserted against the assignor. Woodrow v. Frederick, 133 S.C. 431, 131 S.E. 598.

It is equally clear that a payment on a mortgage debt satisfies the lien of the mortgage pro tanto; and that "when the application is once made, the parties cannot in any way change it, so as to affect the intervening rights of third parties, not consenting." McCown v. Westbury, 52 S.C. 421, 29 S.E. 663, 665, 30 S.E. 142.

In the case last cited, the mortgagor paid the mortgagee the sum of $250 on the mortgage debt. Later they agreed for the mortgagee to return the payment and leave the debt as it was before, but in the meantime the mortgagor had conveyed the mortgaged property to another person. The Court, in this situation, held that the interests of the alienee of the property would be adversely affected, and that the payment should stand as a credit on the mortgage debt. "Undoubtedly a creditor, having two or more claims against a debtor, has the right, in the absence of any direction by the debtor at the time of payment, to apply the payment as he chooses, as a general rule, and may exercise this right at any time before judgment or verdict. Bell v. Bell, supra 20 S.C. 34, 45." McCown v. Westbury, supra. The payment referred to in the foregoing citation did not arise from a sale of mortgaged property.

In the instant case the parties agreed how the insurance money should be applied, before it was received, viz, that $1,000 or more of it to the restoration of the mortgaged property, and the rest of it on the mortgage debt. It is the validity of this...