Patch & Co. v. First National Bank

Powers, J. No question is made as to the right of the Bank to apply the avails of the mortgaged property to the payment of the one thousand dollar note secured by the first mortgage. It is insisted, however, that such avails could not, as against the plaintiffs, be used to pay sums representing future advances under that mortgage, for the reason that the Bank, by taking the second mortgage to secure, among others, the notes on which the plaintiffs were sureties, (a fact well known to the Bank), cut off its right, as against them, to hold such advances under the first mortgage, and put the plaintiffs in a position to demand a ratable participation in the proceeds of the property. The plaintiffs never notified the Bank not to make further advances under its mortgage, but it is argued that the Bank’s actual knowledge of the second mortgage charged it with notice of their rights thereunder, and was sufficient to effect the results specified. This position is untenable. However it may be elsewhere, our rule is as thus stated by Chief Judge Williams in McDaniels v. Colvin, 16 Vt. 300, 42 Am. Dec. 512, ‘‘ The correct view of this subject is this, that the creditors, purchasers, or mortgagees may prevent further advances, when they become interested, by giving notice to the first mortgagee of their interest, and an intimation, [8] at least, that no further advances are to be made on the security of the mortgage as against them. Something more than a mere knowledge in the mortgagee of such subsequent interest of the creditor, etc., is necessary. Notice must be given to him to prevent any further dealings between him and the mortgagor on the security.” The court has not undertaken to say how this notice is to be given, or just what it is to contain; but it is apparent that it must contain enough to show that the junior interest objects to the making of the senior interest any larger. The defendant argues that the plaintiffs are not entitled to equitable relief because they have not paid or offered to pay all the notes secured by the second mortgage, or even the notes signed by them. In pursuing this argument, the defendant treats the plaintiffs as sureties seeking subrogation. Such, however, is not their exact position. They are sureties seeking participation in payments misapplied, as they say, to their prejudice; — or what amounts to the same thing, they are seeking exoneration to the extent they have been prejudiced by such misapplication. Subrogation is a purely equitable doctrine. But if a creditor receives payments and misapplies them to the prejudice of a surety, the latter may assert his right to participate in such payments in defence of an action at law. Hurd v. Spencer, 40 Vt. 581, was such a case. The avails of the mortgaged property here involved are to operate as an involuntary payment upon the mortgage debt. The law makes the application according to established rules; and such application is, in the eye of the law, made at the very time the money is received by the creditor. So if the defendant had sued one of these plaintiffs on the note signed by him, and it had been made to appear that it had received payments which the law would apply to his relief, he could have had the benefit thereof in defence of the action. In this respect the case does not differ from one wherein the creditor has released or misapplied security to the prejudice of the surety, in which case the latter’s rights will be protected in an action at law. This, too, is shown by our cases, Manchester v. Bartlett, 13 Vt. 315, 37 Am. Dec. 594; Smith v. Day, 23 Vt. 656; Hurd v. Spencer, 40 Vt. 581, all of which were actions at law. The concurrent jurisdiction of the court of chancery, however, is not here denied; but though this jurisdiction is admitted, it would be unfair to afford these plaintiffs equitable relief unless they are [9] ready to do what equity requires of them in this matter. He who seeks equity must do equity” says the maxim. And applied to this ease, this means that the plaintiffs shall not have the relief here sought unless they pay or at least offer to pay the amount equitably due from them or give a valid excuse for the omission. How it would be if by a proper application of the avails of the property the plaintiff’s note would be fully paid, we do not say. For, after taking from such avails enough to pay the note and advances hereinbefore referred to, there remains a sum insufficient to clean up the notes on which the plaintiffs are liable,— even though the apportionment be made as they desire. This very question seems to have been passed upon by this court in an unreported case referred to by Judge Redfield in McCollum v. Hinkley, 9 Vt. at p. 147. The doctrine of that case, as stated in the head note prepared by the judges, themselves, is that when a surety, who has been prejudiced by the action of the creditor, ‘ ‘ applies to a court of chancery, before suit is brought, as he may do, to be released from his obligation on such debt and it appears that such estate would not have paid the whole debt, the court will require the surety to pay into court, for the benefit of the creditors, the deficiency, out of which the surety will be permitted to deduct his costs, and the balance, if any, be paid to the creditor.’-’ The books furnish various other applications of this doctrine. Thus, it is held in McQuiddy v. Ware, 20 Wall. 14, 22 L. ed. 311, and Wilson Sewing Machine Co. v. Curry, 126 Ind. 161, that one will be denied equitable relief from an alleged irregular judgment who applies without tender of the amount actually due; in Ware v. Thompson’s Admr., 13 N. J. Eq. 66, and Cushman v. Sutphen, 42 Ill. 256, that one who seeks relief in equity from an usurious contract must offer to pay the sum legally due; in Montgomery v. Sayer, 65 Ala. 564, Smith v. Auditor General, 20 Mich. 398, and the State Railroad Tax Cases, 92 U. S. 616, 23 L. ed. 663, that one who seeks an injunction against the collection of a tax invalid in part must offer to pay the valid portion; in Creed v. Scruggs, 1 Heisk. (Tenn.) 590, that a surety who seeks an injunction against his co-surety who has improperly obtained a judgment against him as a principal, must first pay his just share of the debt; in Coburn v. Coke, (Ala.) 69 So. 574, that one who brings a bill to quiet title.on the ground that the foreign corporation from whom he had bor [10] rowed money and to whom lie bad given a mortgage bad failed to comply with tbe law and was therefore unauthorized to do business in tbe state, must offer to do equity by returning tbe money received; in Still v. Buzzell, 60 Vt. 478, 12 Atl. 209, that one who asks the court of equity to declare a deed absolute in form to be a mortgage and to order a reconveyance, must offer in bis bill to pay tbe balance found against him, if any; and in Powell v. Woodbury, 85 Vt. 504, 83 Atl. 541, that one having a right to redeem from a trust deed, who seeks an injunction restraining a sale thereunder, must at least offer to pay tbe trustee enough to satisfy tbe obligation and expenses of tbe trust. Whether tbe offer in this case must be broad enough to include all tbe notes secured by tbe second mortgage, or will be sufficient if it covers tbe notes on which tbe plaintiffs are liable, are questions not now for consideration. Decree affirmed a/nd cause remanded with leave to the plaintiffs to apply further under the provisions of P. 8. 1317, if they be so advised.