Louisville J.S. Land Bank v. Bank of Pembroke

• Decision Date: 05 June 1928
• Citation: 225 Ky. 375
• Parties: Louisville Joint Stock Land Bank v. Bank of Pembroke.
• Court: United States State Supreme Court — District of Kentucky

225 Ky. 375

Louisville Joint Stock Land Bank v. Bank of Pembroke.

Court of Appeals of Kentucky.

Decided June 5, 1928.

1. Pleading. — Where mortgagee advancing money to pay outstanding first mortgage, with understanding that it should receive first mortgage, sought to enforce priority of its lien against second mortgage existing at time it advanced money claimed subrogation to rights under first mortgage for first time in responsive pleadings to answer, counterclaim, and cross-petition of second mortgagee, held that question of subrogation was properly presented under Civil Code of Practice, section 98, stating what reply may contain.

2. Subrogation. — Subrogation is creature of equity resting upon principles of natural justice, and generally arises where party granting it has advanced money to pay debt which in event of default of debtor he will be bound to pay, or where one making payment had some interest to protect, or where money advanced to pay debt was under agreement with debtor or creditor, express or implied, that he should be subrogated to rights and remedies of creditor.

3. Mortgages. — It is general rule that, where mortgage has been released or satisfied through accident or mistake, it may be restored in equity and given its original priority as lien, providing granting of such relief does not operate to detriment of intervening rights of third persons who may have relied upon release and who are not chargeable with notice of mistake.

4. Mortgages. — Generally, where mortgage is released in good faith upon mortgagor's representation that there were no junior incumbrances on property, and new mortgage executed to secure larger amount, such mortgage will be restored as against junior mortgagee to priority so far as it can be done without placing him in worse position than he was in before release.

5. Subrogation. — Where, through neglect of abstractor in examining title and on representation of mortgagor that property was free from junior incumbrances, mortgagee advanced sum with understanding that he should receive first mortgage, and that money advanced would be used to pay off existing first mortgage, fact that second mortgage was on record at time held not to deprive mortgagee of right to subrogation under existing first mortgage; rights of second mortgagee not being prejudiced.

6. Subrogation. — Right of one advancing money to satisfy first mortgage on property to be subrogated thereto as against rights of junior incumbrancer, where money was advanced without knowledge of junior incumbrance through neglect of abstractor in examining title and on representation of mortgagor that property was free from junior incumbrances, held not defeated because a new mortgage was taken by one advancing the money, since equity of such person arises because its money was used to discharge the anterior lien under a mistaken belief that he would have a like security.

7. Subrogation. — Right of one advancing money to discharge first mortgage and taking new mortgage therefor to subrogation against junior incumbrancer, where money was advanced without knowledge of junior incumbrance, due to neglect of abstractor in examining title and representation of mortgagor that property was free from junior incumbrances, held not defeated, though representations of mortgagor be treated as mere mistake made in good faith without any design to defraud, where one advancing money relied on assurance of a first mortgage to secure it for money advanced to pay existing first lien.

Appeal from Christian Circuit Court.

McKENZIE & SMITH and ANDREW M. SEA, JR., for appellant.

SELDEN Y. TRIMBLE and DOUGLAS BELL for appellee.

OPINION OF THE COURT BY JUDGE WILLIS.

Reversing.

J.B. Carter owned a farm in Christian county, Ky. On December 2, 1918, he placed a first mortgage thereon to secure $6,000 borrowed from the City Bank & Trust Company of Hopkinsville. On August 16, 1921, Carter executed to the Bank of Pembroke a second mortgage on the same farm to secure $3,500, due in 6 months, which previously had been borrowed from it. In 1921, upon the advice of the cashier of the Bank of Pembroke, Carter made application to the Federal Land Bank of Louisville for a long-term loan of $6,500, to be secured by a first mortgage on the farm, the proceeds thereof to be used to extinguish the first and to reduce the second mortgage. Carter then had an understanding with the Bank of Pembroke that it would subordinate its mortgage to the new one, retaining a second mortgage for the remainder of its debt, maintaining the same relation in the new situation that then subsisted as to the two liens. The Federal Land Bank declined to make the long-term loan in the amount requested. Later, on October 21, 1922, Carter made an application to the Louisville Joint Stock Land Bank for a long-term loan of $6,500, to be secured and used in the same manner as was contemplated in his application to the Federal Land Bank. This loan was granted and closed on December 2, 1922. Appellant required Carter to furnish an abstract of title, which he did, but the abstractor inadvertently overlooked the second mortgage of the Bank of Pembroke. In his application for the loan, under a subdivision entitled "Incumbrances and Debts of Applicant," Carter had listed the City Bank & Trust Company mortgage. The application form directed that under that heading should be included all incumbrances, mortgages, and liens against the property offered for security and also all amounts due on account of purchase money, notes, or contracts covering purchase of the land. There was also a place under that subdivision where applicant should indicate whether he expected to pay the debt out of the proceeds of the loan. Carter there indicated only the City Bank & Trust Company loan, part of which was held by Trimble, and also answered that he expected to pay that debt out of the proceeds of the new loan. The same subdivision required him also to list his other debts and obligations and state whether secured by chattel or other mortgage and the property held as security. Under this part of the subdivision Carter listed the Bank of Pembroke second mortgage of $3,000 (not $3,500), but did not indicate what property was covered by the second mortgage or whether he intended to pay it out of the loan. Carter also made an affidavit on December 2, 1922, when the loan was closed, in which he stated that there was no prior or superior lien to that of the Louisville Joint Stock Land Bank against the land described in the mortgage, and its lien was the first and best lien against the said land. When the loan was approved, the money was sent to an attorney at Hopkinsville, who used $6,303.60 thereof to pay the City Bank & Trust Company debt, and caused the mortgage securing it to be released on the margin of the record. Certain fees were paid for Carter, and the balance of the new loan amounting to $43.40 was paid to him by check. He deposited the check at the Bank of Pembroke, and then, or soon thereafter, paid some interest on the debt due it. The mortgage to appellant recited that it was a first lien, and was acknowledged by Carter and wife before Douglas Graham, a notary public, who was also cashier of the Bank of Pembroke. It is clear that appellant, when it made the loan, had no actual knowledge of the mortgage of the Bank of Pembroke. Carter failed to meet his obligations, and was adjudicated a bankrupt. The farm depreciated in value, and in March, 1924, the Bank of Pembroke let it be known that it would claim a first lien under its mortgage, and this litigation resulted. The lower court decided in favor of the Bank of Pembroke, and adjudged it priority over the Louisville Joint Stock Land Bank, and the latter bank has prosecuted this appeal. The sole question involved is the priority between the lien of the appellant and that of appellee.

The appellant rests its right to priority on two grounds: It is claimed, first, that the Bank of Pembroke is estopped to assert its first lien; and, second, that it has in equity a right to be subrogated to the first mortgage lien of the City Bank & Trust Company, which its funds were used to discharge. The appellee stands on its strict legal right of precedence by virtue of its mortgage being first on record. The claim of estoppel is predicated upon pleading and proof to the effect that appellee, knowing that appellant was lending its money to Carter under the agreement, upon the sworn representation, and with the belief that it was getting a first mortgage, maintained silence as to its mortgage, when it was under duty to speak, and was thereby precluded from claiming priority as against it. The Bank of Pembroke insists that its mortgage was on record, and it had a right to remain silent in the belief that appellant would inform itself as to matters of record. The claim of subrogation is based upon the fact that appellant's money paid the City Bank & Trust Company debt, which was secured by a first lien, and, since appellant made a mistake in supposing that its own mortgage was first, it ought in equity to be restored to the position held by the City Bank & Trust Company. The appellee answers that the City Bank & Trust Company debt was paid and a new mortgage taken for a larger amount, and that, because of the negligence of the abstractor in failing to discover the second mortgage, the appellant has lost any right to claim subrogation.

If it should be found that the equities of this case require that the lien of first dignity be restored to the appellant in so far as its money was applied to its payment, it will be unnecessary to discuss or pass upon the claim of estoppel, and we will address ourselves, first, to the...