Union Cent. Life Ins. Co. of Cincinnati, Ohio v. Drake

• Decision Date: 16 April 1914
• Docket Number: 4005.,4003
• Citation: 214 F. 536
• Parties: UNION CENT. LIFE INS. CO. OF CINCINNATI, OHIO, et al. v. DRAKE. DRAKE v. BURGOYNE et al.
• Court: U.S. Court of Appeals — Eighth Circuit

214 F. 536

UNION CENT. LIFE INS. CO. OF CINCINNATI, OHIO, et al. v. DRAKE.

DRAKE v. BURGOYNE et al.

Nos. 4003, 4005.

United States Court of Appeals, Eighth Circuit.

April 16, 1914

(Syllabus by the Court) [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted]

C. C. Flansburg, of Lincoln, Neb. (Leonard Flansburg, of Lincoln, Neb., on the brief), for Union Cent. Life Ins. Co., of Cincinnati, Ohio, and Burgoyne.

F. A. Brogan, of Omaha, Neb. (A. M. Post, of Columbus, Neb., on the brief), for trustee.

Before SANBORN and HOOK, Circuit Judges, and POPE, District Judge.

SANBORN Circuit Judge (after stating the facts as above).

McKillip, the bankrupt, caused Steffes to apply to the insurance company for the loan of $10,000, to represent to it that his mortgage for that sum on the three forties which he held for the exclusive benefit of McKillip, should be a first lien thereon, and that the money derived from it would be applied to the payment of the liens prior to his mortgage of August 14, 1907, and to covenant with the insurance company in that mortgage that the mortgaged property was free and clear of prior liens and that he would warrant the title thereto against them, so that McKillip and the three forties were bound by these representations and covenants as completely as was Steffes. Laying aside the question of res adjudicata, which will be subsequently considered, Drake, the trustee in bankruptcy of McKillip's estate, took these three forties subject to the legal and equitable claims of the insurance company, under which McKillip held them, as against the claim of the insurance company to the $8,608.59, which was realized from them in excess of the amount required to pay the mortgage for $10,000. He stands in the shoes of McKillip and has no greater or better equity or right in this surplus fund than McKillip, his grantor, had, so that the rights and equities of Drake and the insurance company in this sum of money are the same that they would have been if Drake had owned the property, made the representations and covenants of Steffes, and committed the wrongful acts of McKillip. Hence the first question in this case reduced to its lowest terms is: If a mortgagor induces a mortgagee to loan him $10,000 in consideration of his mortgage on his land that is incumbered by prior mortgages for $9,600, by means of his representation and agreement that he will pay and satisfy those mortgages with the money so borrowed so that his mortgage for the $10,000 shall be a first lien upon his land, and he thereby obtains and then misappropriates the $10,000 to his personal use so that the mortgagee is subsequently compelled to pay, and does pay, $10,080 more to secure releases of the prior mortgages and to make his mortgage a first lien, and the mortgaged property subsequently produces at a lawful sale $8,608.59 more than the amount required to pay the mortgage for $10,000, is the equity of the mortgagor to this surplus fund so superior to that of the mortgagee as to move the conscience of a chancellor to grant him a decree for it? Many reasons occur why this question must be answered in the negative.

In the first place, it is a settled and salutary principle of equity jurisprudence that where money is lent in reliance upon an express promise, representation, or contract of the mortgagor that it shall be used to discharge existing incumbrances on the borrower's property, and that the lender is to be secured by a first lien on that property, and by reason of the breach of the agreement or the making of the representation false by the borrower it becomes necessary for the lender to pay the existing incumbrances in order to make his mortgage a first lien, and he does pay them and cause them to be released, he has the right in equity to subrogation to the rights of the holders of those incumbrances as against the borrower or his assignee in bankruptcy, or any other party who has not been induced to change his relation to the mortgaged property to his injury in reliance upon the releases. Memphis & Little Rock R.R. v. Dow, 120 U.S. 287, 301, 7 Sup.Ct. 482, 30 L.Ed. 595; Cumberland Building & Loan Ass'n v. Sparks, 111 F. 647, 651, 652, 49 C.C.A. 510, 514, 515; In re Lee, 182 F. 579, 582, 105 C.C.A. 117, 120; Platte Valley Cattle Company v. Bosserman Gates Live Stock Co., 202 F. 692, 696, 121 C.C.A. 102, 106, 45 L.R.A. (N.S.) 1137, and cases there cited; Union Mortgage Banking & Trust Co. v. Peters, 72 Miss. 1058, 18 So. 497, 30 L.R.A. 829, 833; Skinkle v. Huffman, 52 Neb. 20, 71 N.W. 1004.

In the second place, Drake, the trustee in bankruptcy, is the actor in this suit. He stands in the shoes of the mortgagor and subject to the equities of the insurance company against McKillip so that he, whose grantor in violation of his representation, covenant, and promise, by means of which he procured the $10,000 of this insurance company and then diverted that money to his personal use and compelled the company to pay out $10,080 more to make its mortgage a first lien, thereby causing it an irreparable loss, for he is insolvent, and even if the company secures the $8,608.59 it must still lose by his misappropriation, brings this suit and appeals to a court of equity to set its seal of approval upon the iniquity of his grantor and to render its decree to carry it into effect and to take from the insurance company that which by right of subrogation ought in equity to be its property. 'He who has done iniquity cannot have equity,' and, 'he who comes into a court of equity must come with clean hands,' are familiar maxims in equity. And the rule that one who has been guilty of bad faith, fraud, or any unconscionable act in the transaction which forms the basis of his claim is entitled to no relief in equity on account of that transaction forbids such a decree. 1 Pomeroy's Equity Juris. Secs. 397, 398, 400; Manhattan Medicine Co. v. Wood, 108 U.S. 218, 227, 2 Sup.Ct. 436, 27 L.Ed. 706; Marble Co. v. Ripley, 10 Wall. 339, 357, 19 L.Ed. 955; Michigan Pipe Co. v. Fremont Ditch Pipe Line & Reservoir Co., 111 F. 284, 287, 49 C.C.A. 324, 327. So it is that the equity of the insurance company in the surplus fund in controversy is so vastly superior to the supposed equity of the trustee in bankruptcy, if he have any, and that equity appeals to the conscience of a chancellor with such compelling power, in view of the facts of this case and of the principles of equity to which reference has been made, that it must be sustained unless some inviolable rule of law or equity presents an insuperable obstacle to such a disposition of the controversy.

Counsel for the trustee contends however, that the suit of the insurance company and Burgoyne against Drake, the trustee in bankruptcy, and the judgment of dismissal thereof, have rendered the issue whether or not the company's equity in the surplus fund by virtue of its subrogation to the rights of the first mortgagee is superior to the equity of the trustee in bankruptcy therein, res adjudicata and has estopped it from obtaining in this suit the relief granted to it by the court below. The two suits are between the same parties. The rules of estoppel by which this contention must be tested are: When the second suit is upon the same cause of action and between the same parties as the first, the judgment in the former is conclusive in the latter as to every question which was or might have been presented and determined in the former.

When the second suit is upon a different cause of action, but between the same parties as the first, the judgment in the former action operates as an estoppel in the latter as to every point and question which was actually litigated and determined in the first action, but it is not conclusive relative to other matters which might have been, but were not, litigated or decided. Cromwell v. Sac County, 94 U.S. 351, 24 L.Ed. 195; Grider v. Groff, 202 F. 685, 689, 121 C.C.A. 95, 99; Linton v. Ins. Co., 104 F. 584, 587, 44 C.C.A. 54, 57; Commissioners v. Platt, 79 F. 567, 571, 25 C.C.A. 87, 91; Board v. Sutliff, 38 C.C.A. 167, 171, 97 F. 270, 274; Southern Pac. Co. v. United States, 168 U.S. 1, 48, 18 Sup.Ct. 18, 42 L.Ed. 355; Southern Minn. Ry. Extension Co. v. St. Paul & S.C.R. Co., 55 F. 690, 5 C.C.A. 249.

Where the record is such that there is or may be a material issue, question, or matter in the second suit upon a different cause of action, which may not have been raised, litigated, and decided in the former action, the judgment therein does not constitute an estoppel from litigating this issue, question, or matter, unless by pleading or proof the party asserting the estoppel establishes the fact that the issue, question, or matter in dispute was actually and necessarily litigated and determined in the former action. Russell v. Place, 94 U.S. 606, 608, 24 L.Ed. 214; AEtna Life Ins. Co. v. Board of Commissioners, 54 C.C.A. 468, 474, 117 F. 82, 88; Cromwell v. County of Sac, 94 U.S. 351, 359, 24 L.Ed. 195; Nesbit v. Independent District, 144 U.S. 610, 619, 12 Sup.Ct. 746, 36 L.Ed. 562; Railway Co. v. Leathe, 84 F. 103, 105, 28 C.C.A. 279, 281; Harrison v. Remington Paper Co., 140 F. 385, 400, 401, 72 C.C.A. 405, 420, 421, 3 L.R.A. (N.S.) 954, 5 Ann.Cas. 314.

Counsel for the trustee assert and counsel for the insurance company deny that this suit is upon the same cause of action as was the former suit, and that it is therefore governed by the first rule cited above. The insurance company and Burgoyne brought the first suit to obtain a decree that the mortgage of December 20, 1907, made by McKillip to Burgoyne to secure the debt of McKillip to the insurance company, was valid and should be foreclosed. In their complaint they allege that on December...