Newby v. Fox

• Citation: 90 Kan. 317,133 P. 890
• Decision Date: 05 July 1913
• Docket Number: 18,824
• Parties: T. C. NEWBY, Appellant, v. MARTHA Fox et al. (J. J. NORTON et al., Appellees; THE EL DORADO NATIONAL BANK OF EL DORADO, KANSAS, Appellant)
• Court: Kansas Supreme Court

133 P. 890

90 Kan. 317

T. C. NEWBY, Appellant, v. MARTHA Fox et al. (J. J. NORTON et al., Appellees; THE EL DORADO NATIONAL BANK OF EL DORADO, KANSAS, Appellant)

No. 18,824

Supreme Court of Kansas

July 5, 1913

Decided July, 1913.

Appeal from Butler district court.

Judgment modified.

SYLLABUS

SYLLABUS BY THE COURT.

1. MARSHALING SECURITIES--Rights of Senior and Junior Mortgagees. The owner of a tract of land, who gives a mortgage upon it and then conveys it in consideration of the buyer assuming the mortgage debt and giving him a note for the rest of the purchase price, secured by a second mortgage on a part of the tract, is not precluded by the fact that he is personally liable for the payment of the first mortgage from requiring a marshaling of securities, so that the parcel of land on which he has no lien shall be appropriated to the payment of the first mortgage before the remainder of the tract is resorted to for that purpose.

2. Same. In the situation stated the right to a marshaling of securities is not defeated by the sale of the tract which is subject only to the first mortgage to a purchaser for value who from the record has notice of both mortgages, and of the assumption of the first mortgage debt by the maker of the second mortgage, although such sale is made before such right has been asserted.

3. Same. In that situation the rights of one who has purchased the first mortgage are not diminished by the fact that such purchase was made at the instance and for the benefit of the owner of the tract covered only by that mortgage.

V. P. Mooney, E. D. Stratford, George J. Benson, and T. A. Kramer, all of El Dorado, for the appellants.

C. L. Aikman, of El Dorado, for appellee Charles Bradshaw.

OPINION

MASON, J.:

T. C. Newby owned a farm containing 520 acres. He procured a loan upon it for $ 4500, executing to the Warren Mortgage Company a mortgage and a commission mortgage, which will be spoken of as one instrument. Later he sold it to J. J. Maxey, who in the deed assumed the payment of the existing mortgage on the entire tract, and also gave Newby a note for $ 10,100, secured by a second mortgage upon 360 acres of it. Maxey then sold the land to W. F. Young who sold it to J. J. Norton. Neither Young nor Norton became personally liable for any part of the mortgage debt but each accepted a deed reciting that the land was subject to both mortgages. Norton sold to Charles Bradshaw the 160 acres that were not covered by the second mortgage, the deed providing that this tract should be subject to 36 per cent of the first mortgage. Both mortgages being in default, Newby began an action for the foreclosure of that owned by him, making Charles Hartronft, who had purchased the first mortgage, a party. A decree was rendered for the foreclosure of both mortgages. The two tracts, that owned by Norton and that owned by Bradshaw, were ordered to be sold separately, 64 per cent of the first mortgage debt to be paid from the proceeds of the former, and the remaining 36 per cent from the proceeds of the latter. Newby appeals, his chief contention being that the entire proceeds of the tract on which he had no lien should have been appropriated, so far as necessary, to the payment of the first mortgage, which covered both tracts, before the other was resorted to for that purpose.

The principle which the appellant invokes has been thus stated:

"The equitable remedy of marshaling securities, with that of marshaling assets, depends upon the principle that a person having two funds to satisfy his demands shall not, by his election, disappoint a party having but one fund. The general rule is, that if one creditor, by virtue of a lien or interest, can resort to two funds, and another to one of them only, as, for example, where a mortgagee holds a prior mortgage on two parcels of land, and a subsequent mortgage on but one of the parcels is given to another, the former must seek satisfaction out of that fund which the latter can not touch." (4 Pomeroy's Equity Jurisprudence, 3d ed., § 1414; 19 A. & E. Encycl. of L. 1256.)

"The doctrine of marshaling assets and securities is that where a creditor has a lien on two funds in the hands of the same debtor, and another creditor has a lien on one of them only, equity, on the application of the latter, will compel the former to make his debt out of that fund to which the latter can not resort." (26 Cyc. 927.)

Here Hartronft and Newby each have a personal claim against Maxey, who by the assumption of the first mortgage became directly indebted to Newby. Hartronft's claim is secured by a first lien on the tract owned by Bradshaw and also on that owned by Norton. Newby's claim is secured only by a second lien on the Norton tract. Newby has a right to require that Hartronft shall look first to the Bradshaw tract, unless this right is defeated either (1) by the fact that he is personally liable on the debt secured by the first mortgage, or (2) by the fact that the Bradshaw tract is no longer owned by Maxey, but has been bought and paid for by Bradshaw. Hartronft has no real concern in the matter. His security is abundant, and in any event he can suffer no prejudice from being required to resort first to one tract rather than to the other. The controversy is between Newby and Bradshaw, and turns upon the question--Which has the superior equity?

It has been said that a marshaling of securities can not be required by a "single creditor" (that is, one having a lien only on a single fund) who is himself bound to the "double creditor" (the one having a lien on both funds). (19 A. & E. Encycl. of L. 1286, note 7; 26 Cyc. 937, note 46.) In the case cited in each of the notes referred to Lord Westbury said:

"The doctrine of marshalling is no more than this, that where one person has a clear right to resort to two funds, and another person has a right to resort to one only of these two funds, the latter may say that, as between himself and the double creditor, that double creditor shall be put to exhaust the security upon which the single creditor (if I may so call him) has no claim. But it would be utterly impossible to apply that doctrine to a case where the single creditor is in truth himself bound to the party entitled to the other security." (Dolphin v. Aylward, 4 Eng. & Irish App., L. R., 486, 505.)

There, however, the situation was such that the "single creditor" had no right to require the debt he owed to be made out of the property, as appears from the statement: "Nor is any contract taken that the land shall be the primary . . . fund for the payment of these debts." (p. 504.) The intimation is clear that if the primary liability had been against the property, the fact that the "single creditor" was also personally liable would not have destroyed his right to ask a marshaling of securities. "Where land is sold subject to a mortgage, the effect, as between the grantor and the grantee, is to make the land the primary fund for the satisfaction of the incumbrance." (27 Cyc. 1343.) Here Newby sold the land to a buyer who assumed the mortgage debt. Young and Norton each took subject to the mortgage. While the deed from Norton to Bradshaw purported to convey title to the 160 acres subject only to 36 per cent of the first mortgage, this was consistent with the theory that Newby's personal liability was secondary to the lien on the land. And doubtless no arrangement between the grantor and grantee in that instrument could re-establish the primary liability of Newby. He, therefore, owed no duty to Bradshaw to pay the first mortgage, and his obligation to Hartronft was not fatal to his claim for a marshaling of securities.

If proceedings to enforce the two mortgages had been begun while Maxey still owned the land Newby would clearly have had the right to insist that the tract on which he had no lien should be first exhausted. To determine how far his rights in this respect were affected by the sale to Bradshaw involves the consideration of a question concerning which there is some conflict in the authorities. After noting one aspect of this conflict, the author of the article on "Marshaling Assets" in the American and English Encyclopaedia of Law continues:

"Subject to the foregoing qualifications it may be stated as a general rule that the right of the junior creditor as against the common debtor is practically absolute, and consequently prevails against all those claiming under the debtor by lien or title subsequent in time. Generally, however, the equity will not be enforced to the prejudice of one having an equal or superior right. Subsequent purchasers or encumbrancers with actual or record notice of the facts giving rise to the equity have no such superior standing, however, as to enable them to prevent the application of the doctrine." (19 A. & E. Encycl. of L. 1260.)

Where a condition has arisen under which the holder of a mortgage on a part of a tract, the whole of which is covered by a prior mortgage, would have a right to invoke the doctrine of marshaling securities against the first mortgagee and the common debtor, this right continues against any one who acquires an interest in the part of the tract not covered by the second mortgage in any of the following ways: by virtue of an attachment or judgment lien; by a voluntary or fraudulent conveyance; by purchase with actual or constructive notice that the second mortgagee has already asserted such right. (See context to last citation, and notes.) There are cases holding that the right may be successfully invoked against one who has purchased and paid for the tract which is subject only to the first mortgage with notice from the record of the existence of the second mortgage; this is on the theory that such purchaser has...