Iowa Loan & Trust Co. v. Holderbaum

Granger, J. 1. Practice in supreme court: parties: substitution. I. Since the entry of the decree in the district court, A. C. Holderbaum was by a proceeding in that court relieved from duty as executor of the estate of Michael Holderbaum, and the action of the district court was, on appeal, affirmed in this court. F. D. Campbell was duly appointed and has qualified as successor, and the plaintiff moves to substitute F. D. Campbell as administrator with the will annexed as party defendant in lieu of A. C. Holderbaum. The motion meets with resistance, but we think it should be sustained. Our views upon the main propositions in the case will indicate the reasons for our conclusion. The administrator is a proper, if not a necessary, party; No prejudice can result from the substitution. 2. Wills: construction: power of executor. II. We now notice the provisions of the will as to what the testator intended, without reference to the validity of his act. The following are the important provisions in this respect: “Item 2. I desire that all my just and equitable debts be paid' out of the first realized assets of my estate. * * ’* “Item 3. I desire that my executor, hereinafter named, shall stand in my place and stead for the purpose of managing and controlling my real and personal property in such a way and manner as to realize the largest and best income therefrom, and in paying off the indebtedness on said real property. ‘ ‘Item 4. I desire that my said executor, for the purpose expressed in item 3, shall have full power and authority to negotiate a loan or loans for the purpose of meeting said indebtedness on said real estate, and to make and execute a mortgage or mortgages on part of said real estate, and generally to do and make and execute such paper or papers as shall or may be for the best interest of my said estate, as I might or could do for the same purpose, limiting my said executor as to [5] mortgages, so that'll o new mortgage shall he given on the quarter section known as the ‘Home Place.’ “Item 4‡. I desire that my personal property and proceeds from real estate be first used to pay off indebtedness, and real estate not .to be so used unless my said executor should find that by disposing of a portion of said real estate., not to exceed a half section (exclusive of the home place), he could realize enough to pay off all liens on said real estate. Then, and in that case, I desire my said executor to dispose of so much of said real estate (exclusive of the home place) as shall pay such incumbrance as may remain unpaid, instead of procuring new loans, and in this, as in all matters, to do all for the best interest of the said estate.” It is very manifest that the testator intended that the indebtedness of his estate should be paid by his executor taking and controlling his real and personal property in a way to secure the largest “income therefrom.” The will places no limitation on the right of the executor to dispose of personal property, but it does as to real estate, limiting the amount of sales to one half section exclusive of the home farm. Such a sale is permitted providing the proceeds thereof shall be sufficient to remove all liens on the real estate. Although not free from doubt, we conclude that the intent of the testator was that mortgages on the real estate should only be given “for the purpose of meeting said indebtedness on said real estate.” To that extent the executor possessed a discretionary power to make loans and secure them by mortgage. 3. -: right of testator to direct manner of administration: rights of creditors. III. We next inquire as to the validity of such a provision, and upon this question there is a vigorous contention; it being urged by the defendants that at the death of the testator the law fixed the rights of devisees and credft0rs, and that any provisions of the will prejudicially affecting such rights are of no force; the [6] precise point as to creditors being that the law creates a lien on real estate for the payment of claims 'filed and allowed as provided by law, and that no testamentary act can defeat the lien. This claim by the defendants has reference to the laws providing how claims against an estate shall be established, and how the property of the estate shall be applied in satisfaction of them; it being found that the personal estate shall be thus applied, and, if “found inadequate to satisfy such debts and charges, a sufficient portion of the real estate may be ordered to be sold for that purpose.” We know of no provision of the statute creating a specific lien upon real estate for the payment of established claims. If there is a lien, it is one resulting from the provisions by which the property, both real and personal, is under the directions or orders of the court to be applied to such a payment. There can be no question but that the law contemplates that the property not exempt should be used to pay the debts of the estate, so far as it is needed. The law undertakes to provide how it shall be so used, and upon this particular point we think the defendants misconceived the true spirit of the law by omitting a part of it. In the absence of a method being provided in a will, the law fixes one, and that one is the usual method by which the personal property is first applied, and for remaining debts the court orders real estate to be sold, and payment made from the proceeds. The law, however, contemplates that a testator may provide- the manner in which his estate shall be administered. The following is section 2406 of the Code: “When the interest of creditors will not thereby be prejudiced, a testator may prescribe the entire manner in which his estate shall be administered on; may exempt the executor from the necessity of giving a bond; and may prescribe the manner in which his affairs shall be conducted until his estate is finally set7 tied, or until his minor children shall become of age.” The provisions of the sections are very liberal to the testator, with the limitation that their exercise must not be to the prejudice of creditors. How the question is to be settled as to whether or not the manner prescribed is or would be prejudicial we are not considering. It will be noticed hereafter. We refer now only to the legal right of a testator to provide a method of settling his estate other than by the sale of property, as the law contemplates when no different method is attempted; or we may, perhaps, better meet the case in hand by saying we refer to the legal right of a testator to provide that his real estate may be incumbered by mortgage for the payment of his debts, when by so doing the interests of creditors will not be prejudiced. To determine this it is only necessary to inquire if such an act would come within the purview of the language of the section giving him the right to “prescribe the entire manner in which his estate shall be administered on” or “in which his affairs shall be conducted until his estate is finally settled.” We think such a provision would be, to the extent of the requirement, prescribing the manner of the administration, and clearly permissible under the law. Such a construction comes both within the letter and spirit of the statute, and has the support of its being an equitable rule of administration. Why, we may add, should not the owner of real estate, which he may have acquired with a special view to inheritance, to be possessed and enjoyed by his heirs, and which may constitute his entire property available to pay his debts, provide for their payment by an incumbrance thereon, and leave to his heirs the discharge of the incumbrance? That he may do so is sustained both upon reason and the authority of the statute cited. [8] 4. -: -: mortgage by executor superior to claims of creditors. [7] IV. Having determined that atestator may prescribe such a manner of administration, we should next [8] determine whether or not claims of creditors are liens prior to that of such a mortgage when executed. Without say-that claims merely established against the estate are ever liens on the real estáte, we think a proper construction of the statute would not give them a priority over such a mortgage, but that the mortgage' would be a lien superior to such claims. It should be kept in mind that the mortgage incumbrance is one created by the administration, and is a means of raising money to aid in settling the estate. It is a means provided by the law whereby the real estate is used in the settlement. In a very significant sense it may be said that the real' estate, to the extent of the incumbrance, has been exhausted, and the proceeds used in payment of debts. We may aid the thought by the supposition that the loan secured by the mortgage is the entire value of the land, — all that it could be sold for under an order of the court. With such a state of facts, the real estate would as clearly be. exhausted as if sold in the usual way, reserving by the transaction an equity of redemption. If incumbered for but a fraction of its value, it is for the same reason partly exhausted, and the remainder, the equity of redemption, remains to be sold, if needed, and the court should so order. To our minds, there are no considerations leading to a conclusion that claims against - the estate are liens superior to such a mortgage. 5. -: -:‘ assent of V. Thus far we' have considered the intent of the testator in making the provisions under consideration, and from an abstract point of view determined the right of testators so to do. We must now look at the legality of these particular provisions of the will in connection with the facts of the case. Administration was granted in the ' estate of Michael Holderbaum about November, 1879. The incumbrances upon • the real estate not filed were [9] from thirteen thousand dollars to fifteen thousand dollars, and the unsecured claims filed and established from ten thousand dollars to twelve thousand, dollars. The mortgage in suit was executed on the first day of January, 1886; the debt secured by it to mature on the first day of January, 1891, unless default should be made in the payment of interest, etc., in which event, at the election of the payee, it might become due in ten days after the default. This suit was commenced in August, 1889, because of a default in such payment. Annually after the appointment of the executor he filed his report, as to which no objections were made, till the seventh report was filed and styled as his final report. These reports show that the executor was acting- under the provisions of the will as to making loans on the real estate, and using the money for the payment of debts; each report showing the balance due the estate or the executor, as the fact might be. The reports indicated the obtaining of loans by the executor under the provisions of will, the payment of such loans, and the annual interest thereon. This method of procedure was known to the court, and fully open to the knowledge of all parties interested. In this connection it will be well to consider a point that will bear upon many of the questions presented, and will render unnecessary a particular reference to many of them. The point is whether or not the manner prescribed by the testator for the settlement of the estate was prejudicial to creditors. At the outset, it may be well to observe that the mere fact that such & manner proved, in the end, prejudicial, could not operate to defeat a mortgage given before such facts were known, and this observation has direct reference to very many of the reasons presented in argument why this mortgage should be held void. We are not disposed to establish an invariable rule to govern in determining this question of prejudice, but merely to [10] determine the law as applied to the facts of this case. The testator prescribed how he desired his executor to act as to his real estate. This we have determined he had a right to do, if without prejudice to his creditors. Nothing upon the face of the will indicates that prejudice would result. When the will was probated, and the executor entered upon the discharge of his duties, the will, in so far as it directed his course, was to guide him; for which purpose the will or an authenticated copy was to be placed in his hands. Code, sec. 2844. Of this situation all parties in interest must take notice. For the observance of his duties in this as in other respects he executes a bond, unless exempted, as in this case, and subscribes an oath. With this situation, we think it was the duty of the executor to proceed to execute the will, unless otherwise directed. His sole authority for acting otherwise than as directed by the will was the court. A party desiring the action of the court should invoke it. This right the creditors and devisees had, and for seven years silently, at least, assented to this course of procedure. If at the outset, or thereafter, they believed the course prescribed was or would be to their prejudice, the plainest rules of equity and justice required that they should attempt to arrest the course of procedure by an objection or an application to the court. The executor has not and does not complain. He, by his answer, expressly assents to the judgment sought. 6. -: -: note of executor: form: mortgage. VI. It is urged that the note only imports the personal obligation of A. C. Holderbaum, because the promise to pay is not made by him as exeeu-tor, but the pronoun “I” is used, an(i the signature is “A. C. Holderbaum, Executor,” etc. The mortgage, however, is not open to the same objection, and is a pledge of the property by Holderbaum as executor, and the money was obtained and used without question by the executor, for the [11] estate. To the exteBt of enforcing the lien, the mortgage will control, even though the obligation 'on the note alone might in law be held to be that of A. C. Holderbaum. We may add that, conceding A. C. Holderbaum would be liable individually on the note, it does not follow, as a matter of course, that the estate is not liable; and hence the authorities cited, showing personal liability of trustees, etc., do not apply, for no individual liability is sought in this case. Such references as Roger Williams National Bank v. Groton Manufacturing Company, 17 Atl. Rep. (R. I.) 170, and Taylor v. Davis, 110 U. S. 330, 4 Sup. Ct. Rep. 147, are not authorities against the liability of the estate in this case. 7. -: -: construction: authority to re-mortgage. VII. In 1880, the executor, under the terms of the will, made on the land now in question a mortgage to one Bardeen, for two thousand dollars. The loan for which the mortgage in suit was wag ugec[ in part to pay off the Bardeen mortgage, and it is claimed that this land having been once mortgaged by the executor, the right to mortgage it was exhausted, and for that reason the mortgage to the plaintiff is void. Nothing in the terms of the will giving the right to mortgage the lands indicates a restriction to a single mortgage on the same tract, but they seem to invest the executor with a large discretion, permitting him to stand in the ‘ ‘place and stead” of the testator in controlling the real and personal property to realize the largest and best income therefrom to pay the debts on the real property. 8. -: -: mortgage: rights of mortgage: jurisdiction. VIII. In 1889, the creditors of the estate applied to the court for an order to sell the real estate, including that in question, and an order was made to that effect. There is, at least, some doubt whether the court did not intend that the sale should.be subject to the lien of this mortgage; but, if not, it is sufficient to say that the [12] plaintiff wasi not a party to the proceeding, and its interest could not be divested nor affected by such an order entered in-its absence. 9. -. . : • IX. The three thousand dollars realized by the loan from the plaintiff were used by the executor as follows: Two thousand, one hundred and twelve dollars and eight cents to pay off the Bardeen mortgage, and the remainder, eight hundred and eighty-seven dollars and ninety-two cents, was applied in part payment of a claim allowed in favor of one Swihart, which was an unsecured claim. It is urged that the application in part of the proceeds of the loan for the payment of the general debts of the estate is not authorized, and renders the mortgage void. The validity of the mortgage must depend upon the facts as they existed when the loan was made, and not on the conduct of the.executor in the application of the money. The executor was the person authorized by the law to receive and apply it. After the money was in the hands of the executor, tfye transaction as to the plaintiff was complete, and, if prejudice resulted to the creditors by a misapplication of the money, the redress is the same as if the money had been realized from a sale of the land in the usual way, and had then been misapplied. The facts that the executor was insolvent, and appointed without bond, as is true in this case, and prejudice resulted to the creditors or devisees, would not defeat the sale, and for the same reasons they would not defeat such a mortgage. The plaintiff was only required to know that the executor had authority to make the loan. It had no authority, nor was it its duty, to direct the application of the money. See 2 Williams, Executors, p. 1001; Field v. Schieffelin, 7 Johns. Ch. 150; Webb v. Chisolm, 24 S. C. 487. This consideration disposes of a question extensively argued, that the payment of the mortgage claims by the. executor was without the approbation of the [13] court. With proper restrictions, because of the difference as to the facts, we may profitably, quote, from Urban v. Hopkins, 17 Iowa, 105, where land was sold by direction in a will: “Whether the executor, therefore, made a proper showing of the debts of the estate, whether the demands of creditors required the disposition of the property, or whether the executor acted in good or bad faith in his management of the affairs Committed to his hands (no complicity being pretended so far as relates to defendants), is a matter of no kind of'importance.” The language in Deery v. Hamilton, 41 Iowa, 16, is quite significant, even where an unauthorized loan was made: “The estate has received the benefit of the money advanced by the defendant. It ought in good conscience to repay it with legal interest, * *' * on the ground that the estate has had the benefit of the money received from defendant.” 10. -: -: mortgage by executor with out and order of court validity. X. It is urged that the making of the mortgage by an executor without an order of the court is void. To our minds, the admitting of the will to probate, whereby it became, with the knowledge of all parties, an authority prescribing what should be done in certain particulars, is the only authority necessary, where all conditions precedent exist at the time of the sale, as is true in this case. The will, in terms, recognized the existence of the debts for the' payment of which the incumbrance was authorized. There seemed to be nothing for the court to determine as precedent to the authority of, the executor to act in this particular. It is, however, said: “Until the debts are paid, the estate is in the custody of the law, and no part of it can be disposed of by the executor, whether personalty or realty, without .an order of the court;” referring to Code, sections 2386, 2387. These are the • provisions by which the court may order the sale of real and personal property, when [14] necessary for the payment of debts. They in no way conflict with the authority of a testator to prescribe that the property of the estate may be sold with or without such a necessity. The section of the Code giving to a testator the right to prescribe the manner “in which his affairs shall be conducted-” is to be construed with the other sections, and effect given to all. 11. -: -: mortgage: diversion of fund by executor. XI. The district court, as we have said in the statement of facts, sustained the validity of the mortgage to the extent that the proceeds of the loan were applied to the discharge of the Bardeen mortgage on the land, which was two thousand, one hundred and twelve dollars and eight cents, with the accumulated interest thereon, making two thousand, five hundred and sixty seven dollars and sixty six cents, and for certain taxes paid and attorneys’ fees. As to the remainder of the mortgage debt, aggregating, with interest, eight hundred and eighty-seven dollars and ninety-two cents, the district court refused a foreclosure judgment, but allowed it as a claim against the estate of the fourth class. From this part of the judgment the plaintiff appealed, contending that it should have a foreclosure judgment for the entire amount. The district court in its decree assigns, as a reason for excluding the latter amount, that it was used “to pay and discharge a debt then existing against said estate in favor of J. W. Swihart.” The Swihart claim was not an incumbrance on the land, within the meaning of the will, and, conceding that its payment from the proceeds of the mortgage was a diversion of the fund from the purpose expressed in the will, it would not justify the decree in this particular. The diversion was after the loan was made, and there were debts against the land, within the meaning of the will, to which the excess could have been applied. The fact that it was not so applied would not affect the rights of the mortgagee. The diversion was [15] without its fault. This point has, in effect, been before considered. There should have been a decree for the plaintiff. There are numerous questions we have' not discussed. We have attempted to select such as would bring within the discussion the pivotal and more important questions in the case. Questions pertaining to the estate have before been in this court, incidently involving some of the questions now before us, and the main question in this case has been decided by the federal court in this state. See Schlarb v. Holderbaum, 80 Iowa, 394, Ames v. Same, 34 Fed. Rep. 224. Our conclusions are in harmony with the reasoning in those cases. These views lead to the following results: On the plaintiff’s appeal the case is reversed; on the defendants’ appeal it is affirmed.