Burnham, Hanna, Munger & Co. v. Citizens Bank of Emporia

The opinion of the court was delivered by Aijjln, J. : 2' estoppel?-It is contented that the provision in the mortgage from Campbell to the bank, allowing him to check out half the proceeds of the December sales, renders the whole mortgage void. We shall assume that, if attacked by a creditor who had done nothing to estop him, it would be void. The plaintiffs, however, claim under a mortgage which contains the following provision : “ It is hereby represented, and this mortgage accepted on faith of said representation, that there are no claims or liens of any kind on the above property, but this mortgage is a first lien, except a claim in the nature of a chattel mortgage held by the Citizens Bank of Emporia, Kas., and sub-jeet thereto.” The plaintiffs, by accepting a mortgage containing this clause, recognized the validity of the mortgage to the bank, and are estopped from now questioning it. (Jones, Mortg., §744.) [550] L glge-iwtkio1:' [549] It is contended by the plaintiffs, however, that they must recover even if the validity of the bank’s mortgage is conceded, because it appears from the findings of the court that the bank realized from the securities it held more than enough to pay all of Campbell’s indebtedness to it, and actually paid over to him $1,999.75, out of 'which the plaintiff’s claim should of right have been paid. The mortgage to the bank being a prior lien, it was not bound to account to the [550] plaintiffs for any surplus realized from a sale of the mortgaged property without express notice of the plaintiff’s rights. The recording of plaintiff’s mortgage subsequent to that of the bank did not, under the authorities, impart constructive notice to the prior mortgagee. (1 Jones, Mortg., §562; McLean v. Lafayette Bank, 4 McLean, 480 ; Meacham v. Steele, 93 Ill. 135 ; Dewey v. Ingersoll, 42 Mich. 17.) The findings of the court as to actual notice we think not in accordance with the evidence. The case comes to us just as it did to the trial court, on written evidence reported by the referee. Brooks, the agent of the bank, in charge of the stock of goods, testified that he knew of the mortgage to Burnham, Hanna, Munger & Co. at the time it was given; that he informed his principal that Campbell had given another mortgage on the stock of goods right away by writing; that he knew of the terms and conditions contained in the mortgage. D. W. Eastman, the cashier of the bank, testified: “ Q,. When did you first learn of the mortgage to Burnham, Hanna, Munger & Co. ? A. I do not know ; some time after it was given. “Q,. How long would you say after it was given? A. I do n’t think we knew of it until one time Mr. Brooks came up here, some time after it was given.” [551] s' funior1 n“n-equity [550] This witness also testified that he had made search, and failed to find any letter informing them of the plaintiff’s mortgage. This testimony we think fairly shows that the bank had actual notice of the plaintiff’s mortgage while it still held securities sufficient to satisfy both its own claims mentioned in the findings of the court and that of the plaintiffs. The indebtedness due the bank was secured, not only by mortgage on the stock of goods prior to the plaintiff’s mortgage [551] but also by a mortgage on the fixtures, notes and accounts which were not covered by the plaintiff’s mortgage. The general rule enforced in equity is that, where one creditor is secured by mortgage on several pieces of property while another creditor is secured by a junior mortgage on only a part of the property, the prior creditor, when chargeable with actual notice of the rights of the junior creditor, is bound to exhaust his security on the property not covered by the junior lien, and that he must account to the junior lienholder if he releases his security on, or pays over to the mortgagor, the proceeds of the property not covered by the lien of the junior mortgagee after actual notice of the junior lien. (2 Jones, Mortg., §§1268 et seq. ; 2 Pingrev, Mort., § 1929 ; McLean v. Lafayette Bank, supra.) [552] 4. Recitals in mortgage-^ [551] Judging from the findings of the trial court alone, we should infer that the indebtedness of Campbell to the bank had been satisfied, and that a surplus remained of $1,999.75, which was paid oyer to Campbell, but in the evidence of Eastman we find a statement that Campbell was still indebted to the bank on account of debts of himself or of the firm of Campbell ,& Johnson, or Campbell & Bros, between $1,500 and $1,600. "Whether these claims were otherwise secured does not appear. It- would seem quite remarkable that the bank should pay over a portion of the proceeds of the mortgaged property to Campbell while a portion of its claim still remained unpaid ; but if the indebtedness to the bank secured by its mortgages were sufficient to exhaust the entire proceeds of the mortgaged property, the plaintiffs could not complain of its doing so. The trial - court held, not only that the provision in the mortgage for. the payment to Campbell, the mortgagee, of one-half of the proceeds [552] of the December sales did not render the mortgage void, but that the acceptance by the plaintiffs of a mortgage recognizing the validity of the mortgage to the bank, recognized as well the provision for this payment to the mortgagor. The mortgage to the plaintiffs in terms conveys to them all the interest Campbell had in the goods. It represents “that there are no claims or liens of any kind on the above property, but this mortgage is a first lien, except a claim in the nature of a chattel mortgage held by the Citizens Bank of Emporia.’' Can it be said that Campbell still reserved an interest in the goods altogether indefinite m amount, and on which Burnham, Hanna, Munger & Co.- acquired no lien by virtue of their mortgage? The reservation in the mortgage to the bank of the proceeds to an amount not to exceed one-half the sales during the month of December, 1887, was to be used for the purpose of payments on his other indebtedness. He was then indebted to the plaintiffs. The amount of sales to be made in December was altogether indefinite, and depended entirely on the action of the bank. It might be nothing, or it might be the whole stock. Campbell had an undoubted right to mortgage every interest he had in the property not already conveyed to the bank, including as well as the proceeds of sales to be made in December as of those made at a later day. There is no reserva•tion to himself of any interest in the property by the terms of the mortgage to the plaintiffs, except the ultimate surplus after the payment both of the claims of the bank and the plaintiffs. The bank was not bound to make any sales in December, but having done so, one-half of the proceeds inured to the benefit of the plaintiffs. [553] The judgment is reversed, and a new trial ordered between Burnham, Hanna, Munger & Co. and the Citizens Bank. We find no evidence that the Citizens Bank had actual notice of the mortgage to Kellogg & Sedgwick, and the judgment as to the other plaintiffs in error is affirmed. JOHNSTON, J., concurring.