McCracken v. German Fire Insurance

Stewart, J., delivered the opinion of .the Court. There is no reason why any equities pertaining to the original note should not extend to and govern its renewal by the note, payment for which, out of the funds in Court, from the mortgaged property, is claimed by the bill in this case. Such must be taken to have been the understanding of the parties to the transaction as indicated by the endorsement of the note in question ;• and it must be treated in equity, as substituted for the former note, and entitled to the benefit of all its equities. Markell vs. Eichelberger, 12 Md., 78. The mortgage given by Ratcliffe to the Liberty Association purported to secure the repayment of mone}^ advanced by it, but it seems the note of the Company was, in fact, substituted in place of the money, and, of coirrse, subjecting the mortgagor to any loss occasioned by the conversion of the paper into money. It is to be- presumed that in order to give its paper greater credit, and to facilitate its exchange for the cash, the note in question was endorsed or secured by the mortgage; thus assuring and notifying the holder of the note that, besides [477] the responsibility of the Company for its payment, he had the right to resort to the mortgage given to the association and held by it as additional security. The mortgage was thus held by the Company as the fiduciary of the complainant, for the payment of this note. Nothing is better settled than that the mortgage is but an incident of the debt. The complainant, as the holder of the note, and consequently of the debt secured by the mortgage, is, in equity, to be considered the real mortgagee, or as substituted to all the rights of indemnity secured by the mortgage upon the property. The mortgage, in truth and fairness, could not be discharged or released by the association under such circumstances, without the consent of the complainant, or payment of the note, more especially as the Company was not able to pay its debts at the time. See Boyd vs. Barker, ante page 182. Before the association undertook to release the mortgage they should have taken care, in good faith, to have seen that the note of the complainant was paid. His debt not being paid, and the Company insolvent, he liad the right to resort to the indemnity furnished by the mortgage. The release of the mortgage by the association, as his trustee, without the payment of his debt, was a breach of trust, totally unauthorized, and did not destroy his lien on the property. Under the circumstances disclosed by the testimony in the cause, it was the duty of the Insurance Company to have ascertained if the note on which the mortgage was given as a security, was paid, or still outstanding ; otherwise it took the risk of the incumbrance. The custom of the association to substitute its notes in place of the money, must be considered as known to the Insurance Company, from its dealings with the association in this transaction, if no other. The mortgage being peculiar, and the debt stipulated to he paid in instalments, would have afforded ground for doubt whether the debt bad been paid, according to its [478] tenor, but the manner in which the Insurance Company had settled the mortgage and taken one from Mr. Ratcliffe, in its own favor, relieves the matter of all 'question as to its knowledge. The circumstances alone were sufficient to have warned' the Insurance Company to make enquiry whether the note'entitled to the indemnity of the mortgage had been satisfied. In determining upon the relative equities of parties, the Courts are careful to see there has been no laches on the part of parties claiming its protection. They ought to be vigilant in making all pertinent inquiries, otherwise they must suffer the consequences if anyone is injured by their remissness or neglect. (Decided 14th January, 1876.) But besides the facts stated, which ought to have been regarded, it seems the Insurance Company, through its President, had received a list of the notes of the association outstanding, in which this note was included, some six months before the mortgage to his Company of this property, but this list, it appears, was not examined particularly by him. That certainly must be held as sufficient, in a Court of Equity, to have put his Company on enquiry as to the character, extent and operation of this lien. We think the Fire Insurance Company does not occupy an attitude, according to the tenor of the evidence, to claim that it ought to be considered as a bona fide and innocent holder of its mortgage, without any notice of the equity of the complainant. There can be no doubt the claim is entitled in equity to be paid out of the fund arising from the sale of the mortgaged property, and that the Circuit Court erred in the rejection of the claim of the complainant. We must reverse the order and decree appealed from, and remand the case, that the claim may be allowed in conformity with these views. Order and decree reversed, and cause remanded.