Harris v. Cheshire

Connor, J. It was adjudged that plaintiff, Joe E. Harris, recover of defendants, John Cheshire, George A. Holderness and Edgecombe Homestead & Loan Association the sum of $355.06, with interest from 2 September, 1920, and that plaintiff, Pender Hardware Company recover of said defendants the sum of $264.81, with interest from 1 January, 1921. George A. Holderness,' trustee, from the proceeds of the sale of the Home Place, paid to Edgecombe Homestead & Loan Association, its note executed by John Cheshire and secured in mortgage recorded on 8 June, 1920. At the date of the sale, 'these two plaintiffs had docketed liens on said “Home Place,” effective 6 April, 1920, and 31 May, 1920, respectively. These liens were prior to said recorded mortgage, and manifestly the judgments secured by these liens had priority over the mortgage to the association, and should have been paid before the application of the surplus remaining in the hands of the trustee, after fully satisfying the note of Farmers Banking & Trust Company, taxes, assessments and costs, to the indebtedness secured in the mortgage to the association. There was no exception to the judgment as affecting these claims. On 15 April, 1922, the date of the foreclosure sale by George A. Hold-erness, trustee, the Farmers Bank & Trust Company, and said trustee, by — 227 — virtue of tbe paper-writing recorded on 7 January, 1920, bad first lien on tbe “Home Place,” and also on tbe “personal property” sold by tbe trustee, upon default by Jobn Cheshire in tbe payment of the note for $7,500 secured in said paper-writing. Plaintiffs, other than Joe E. Harris and Pender Hardware Company, whose claims have been satisfied by judgment against Edgecombe Homestead & Loan Association and the trustee, had liens only on tbe Home Place in the following order of priority, to wit: (1) E. G. Davis, claim filed 16 February, 1921, lien as of 5 August, 1920, for $340.19, with interest from 30 November, 1920, and costs; (2) Johnson & Wiggins, claim filed 16 February, 1921, lien as of 16 August, 1920, for $438.62, with interest from 29 August, 1920, and costs; (3) W. M. Wiggins, claim'filed 30 March, 1921, lien as of 21 August, 1920, for $1,961.95, with interest from 19 January, 1921, and costs. T. P. Cheshire, as assignee and transferee of the note for $2,500, secured in mortgage from John Cheshire and wife to George A. Holderness, trustee, recorded on 19 October, 1920, was postponed as to his right to proceeds from sale of said Home Place to these liens. He was not entitled to any part of the surplus left in the hands of the trustee, until these prior liens bad been fully paid and satisfied'. Although tbe notices of claim, upon which these liens were acquired were subsequent to tbe registration of bis mortgage, tbe liens related back to tbe commencement of tbe work and tbe furnishing of materials for tbe construction of tbe residence, by these respective claimants, and as established by the judgments these liens were all prior to his mortgage. McAdams v. Trust Co., 167 N. C., 494. The Farmers Banking & Trust Company and George A. Holderness, trustee, had two sources from which to derive money for the payment of the balance due on its debt: (1) Tbe Home Place, (2) Tbe personal property. These lien creditors bad only one source — the “Home Place.” The trustee, having sold both tbe personal property and tbe Home Place, should have applied tbe proceeds of tbe sale of tbe personal property as a payment on tbe note held by tbe Farmers Banking & Trust Company, and thus have increased the surplus in his hands arising from the sale of the Home Place, after tbe payment therefrom of all claims prior to tbe claims of these lien creditors. Upon tbe facts found by tbe referee, this would have left in bis bands, applicable to these claims, in tbe order of their priority, as among themselves, eight hundred dollars. It is true that these lien creditors bad no lien upon tbe personal property sold by tbe trustee, but they had an equity recognized in our jurisprudence and uniformly enforced by tbe courts. “Where one person has a clear right to resort to two funds and another person has a — 228 — right to resort to but'one of them, the latter may compel the former, as double creditor, to exhaust the fund on which the latter, as single creditor has no claim.” Eaton on Equity, p. 513. “It is well settled that if one party has a lien upon two pieces of property and the other has a lien on one piece only, the latter has the right in equity to compel the former to resort to the other piece of property in the first instance if this is necessary to satisfy the claims of both parties. There is no difficulty in applying this principle when the property is in the possession of the mortgagor.” Harrington v. Furr, 172 N. C., 610. At the date of the sale, while the trustee had in his possession the proceeds of the sale of both the Home Place and the personal property, he had notice, both actual and constructive, of the facts upon which the equity of the lien creditors arise. The payment of the $800 to T. P. Cheshire, rather than to Farmers Banking & Trust Company, in reduction of its note, was a denial of the rights of these creditors. There is no error in his Honor’s judgment that these creditors, in the order of their priority, recover of the trustee the sum of $800, with interest from the date of the sale. Nor is there error upon the facts appearing to the court, in adjudging that W. M. Wiggins recover no part of said $800. The right of these creditors to recover judgment against Farmers Banking & Trust Company for the money which the trustee failed to collect and pay upon its note, is not clear, but the Farmers Banking & Trust Company does not assign error in this respect. It joins the trustee in a common defense to the claim of the lien creditors and seems content to share with the trustee the results of the litigation. Plaintiff, W. M. Wiggins, contends, and by his assignment of error presents to this Court for review, upon appeal, his exceptions to the refusal of his Honor to hold, that Farmers Banking & Trust Company and George A. Holderness, trustee, should have seized and taken into possession the crops, grown by John Cheshire on the “Ballyhack Farm” during 1920, which were subject to lien held by the said company, and’ which were conveyed to the trustee, by the paper-writing, recorded on 7 January, 1920, as security for the payment of the note for $7,500, and that such security should have been exhausted before the sale of the personal property or the Home Place, conveyed to the trustee in said paper-writing as additional or further security for said note. This contention was not made until after the said crops had been sold and the proceeds disposed of by John Cheshire, the mortgagor. The said crops were never in the possession of the said company or the trustee, and therefore the principle successfully invoked by the lien creditors, E. G. Davis and Johnson & Wiggins, with respect to the personal — 229 — property, seized and sold by tbe trustee, and tbe proceeds of tbe sale thereof does not apply to this contention. W. M. Wiggins at no time bad any lien upon or legal claim to said crops. At most,, be bad an equity, at tbe maturity of tbe note beld by tbe Farmers Banking & Trust Company, and while bis lien, upon tbe Home Place, which attached thereto upon tbe commencement of tbe labor and tbe furnishing of material upon tbe residence, was maturing. This equity, if it existed at all, to compel tbe company and tbe trustee, to take possession of tbe said crops, on or after 1 November, 1920, was not a lien, but an equity to be administered. “Tbe doctrine of marshalling is not determined by tbe situation when tbe successive securities are taken, but is to be determined at tbe time tbe marshalling is invoked. If defendant (who was insisting upon tbe equity) bad any right to have tbe securities marshalled, be should have begun proceedings before tbe sale.” Harrington v. Furr, 172 N. C., 610. “Tbe equity (of marshalling) is a personal one against tbe debtor, and does not bind tbe paramount creditor, nor tbe debtor’s alienee for value.” Adams Equity, star page 272. “Though tbe proposition, that a creditor of two funds will be restrained from proceeding against tbe doubly charged fund, till be has exhausted tbe other, is often repeated in tbe decisions, it has been acted on in general, only where both funds were actually within tbe control of tbe court.” Adams Equity, note on page 272, note by Bispham. Plaintiff says that bis right to recover in this action is not dependent upon tbe doctrine of marshalling; that be is seeking to recover of tbe banking company and tbe trustee for that they should be required to account for tbe value of tbe security, which they released, or failed to seize and apply, as a primary security, to tbe payment of tbe note due tbe company. It has been beld that if a senior creditor, with notice of tbe junior creditor’s lien, releases or discharges tbe security not available to bis junior, be is accountable for tbe actual value of tbe property in tbe adjustment of tbe equities of tbe parties with regard to tbe property on which both have liens. 18 R. C. L., 465, and cases cited. This principle, however, does not aid appellant here, .for neither tbe Banking & Trust Company nor tbe trustee bad notice, actual or constructive, of tbe lien of tbe appellant, until 30 March, 1921, when notice of tbe claim of lien was filed. Appellant by filing bis claim of lien, acquired a lien as of 21 August, 1920, but this does not suffice as notice to tbe company or tbe trustee prior to tbe date on which notice of claim was filed. Tbe filing of notice of claim of lien could have no other effect than to give claimant priority from tbe date on which tbe work was begun or tbe first material was furnished, over subsequent liens on tbe property, subject to tbe liens. All tbe crops made by John — 230 — Cheshire, during 1920, on the “Ballyhaek Farm” had been sold prior to 30 March, 1921, the date on which the first constructive notice o£ the claim of W. M. Wiggins of lien on the Home Place was given to the company or the trustee. Knowledge that John Cheshire was having a residence erected upon his lot was not notice that W. M. Wiggins was performing labor or furnishing material in the construction of said residence or that Cheshire was n'ot paying him. Conceding that the company and the trustee, in contemplation of law, released the crops to which they were entitled as security, neither had notice of the claim of W. M. Wiggins, subsequently asserted, and the principle here invoked by W. M. Wiggins upon which to hold the company and the trustee liable for such release, fails to establish such liability on account of lack of such notice. Plaintiff, W. M. Wiggins, further contends that his right of recovery in this action is not dependent upon any general principle or doctrine of equity, but is to be determined by the terms of the paper-writing under which the company and the trustee acquired lien upon and title to the crops and Home Place, involved in this contention. It is true that as between John Cheshire, as debtor, and the company as creditor, and the trustee, under the express terms of the paper-writing, the trustee was required to sell first the crops. A third party, who subsequently acquired, for value, title to or lien upon any of the property conveyed, as security, in said paper-writing, it may be conceded, also acquired the right to insist, for his protection, upon the sale of the several properties, in the order as required by John Cheshire. If W. M. Wiggins, by virtue of his lien had the right to require the trustee to sell the crops first, he should have made demand upon the trustee and the company while the crops or their proceeds were available for sale or application to the company’s debt. Neither the company nor the trustee had notice, by demand or otherwise, of any fact by virtue of which appellant acquired or claimed any rights with respect to the sale of the crops or the application of their proceeds to the debt of the company. The principle applicable is thus stated in Bispham’s Equity, section 341: “When the paramount creditor has been guilty of some negligence or default, as where he has put one of the funds beyond his own reach, with full knowledge that his debt cannot be satisfied out of the other fund without injury to the interests of third persons, he may be restrained from coming in upon the second fund.” We cannot hold that the failure of the bank and the trustee to foreclose the lien and deed of trust immediately upon the maturity of the note of John Cheshire, was negligence such as to subject them to liability to Cheshire or to any one claiming under him, for any loss which was — 231 — thereafter sustained, certainly, in the absence of any demand to foreclose or of any notice of the existence of any facts upon which rights of third parties had arisen or might thereafter arise, in or to any property covered by the lien or deed of trust. Nor is the assignment of error with respect to the amount retained by the trustee as commission sustained. This amount was fixed by contract between the parties to the paper-writing and no facts appear upon which we can hold that the amount retained was excessive. Banking Co. v. Leach, 169 N. C., 706. Both appeals in this case are determined by the existence or lack of existence of notice. In defendant’s appeal, the trustee had notice, both actual and constructive, at the date of the sale of the personal property, of the rights of appellees, as determined upon the uncontroverted facts, and in accordance with a well-settled principle of equity. With knowledge of such rights, arising from such notice, he applied the proceeds of the said sale, in disregard of the rights of appellees. His Honor held that the trustee was liable to appellees for the misapplication of the proceeds of the sale of the personal property. This holding is approved by us, as a correct application of a well-settled principle of equity to the facts found by the referee. In plaintiff’s appeal, neither the Farmers Banking & Trust Company, nor the trustee had notice, either actual or constructive, until after the crops had been sold and the proceeds disposed of by the debtor, of the rights or claims of appellant. They cannot be held liable to one of whose rights or claims they had no knowledge or notice from which knowledge can be imputed to them. As between themselves, the debtor and creditor could waive rights and liabilities arising out of the terms of the paper-writing, by which the debtor had secured the creditor. The creditor cannot be held liable to a third party, who, although he had rights subsequently acquired which might be or were affected by the waiver, gave no notice actual or constructive to the creditor or trustee of such rights or claims and made no demand for the protection by the creditor or the trustee of such rights or claims as he had or might thereafter have. His Honor held that appellees are not liable, in any aspect of the case, to appellant with respect to the crops or the proceeds of same. This holding we approve, as sustained upon principle and by'authoritative text-writers, and decisions of the courts. Upon both appeals, the judgment is Affirmed.