Schumacher v. Marling

Rosenberry, J. The appealing defendants do not in any respect assail the findings of fact made by the trial court, but contend that the court erred in its conclusions of law in applying the doctrine of subrogation to the findings of fact. The appealing defendants argue that subrogation is not for- strangers; that the payment of the money by Green to Gunderson, who received it as attorney for Pammesber-ger, discharged the Pammesberger debt and extinguished the mortgage; that the equities of the various parties are equal and in that situation the law should prevail; and in a reply brief argue that the equities of the appealing defendants are superior to those of the respondents Marling. We are convinced that if the rights of the respondents Marling depend upon the law of subrogation, the appealing defendants must prevail. The Marlings had no interest in — 448 — tract No. 1 and could not have been obliged or compelled to pay the debt secured by the Pammesberger mortgage. Although Green obtained the fund from the Marlings by fraudulent representations, there was no understanding or agreement between Green and ’the respondents Marling that the money should be used to discharge any particular obligation of Green’s, much less the Pammesberger mortgage. Nor were the respondents Marling ever to secure any lien upon the property covered by the Pammesberger mortgage. The respondents Marling accepted as their sole security the mortgage upon tract No. 2 without inquiry as to what use or disposition was to be made of the fund. This position is fully sustained by the authorities. Murphy v. Baldwin, 159 Wis. 567, 150 N. W. 957; Watson v. Wilcox, 39 Wis. 643; Ætna L. Ins. Co. v. Middleport, 124 U. S. 534, 8 Sup. Ct. 625; Acer v. Hotchkiss, 97 N. Y. 395. The respondents Marling seek to sustain the judgment by the application of principles of law relating to constructive trusts. Their argument is that Green’s fraud in obtaining the money of respondents Marling made him a constructive trustee thereof, impressed it with a trust in their favor, and gave them the right to follow it into and reclaim it out of the Pammesberger mortgage which it was used to pay, since there are no intervening rights or equities on the part of appellants Schumacher and Harper, or any one else. The principle is firmly established that one from whom money has been obtained by fraud may follow and reclaim it, or have a trust imposed upon property into which it has gone, so long as it can be distinctly traced and identified, and provided that no injustice is done to one who stands in the position of a purchaser for value without notice. 39 Cyc. 528, 533, 545, 546; 26 Ruling Case Law, 1232, 1348, 1351; Bent v. Barnes, 90 Wis. 631, 64 N. W. 428; Wisdom v. Wisdom, 155 Wis. 434, 145 N. W. 126; Emigh v. Earling, 134 Wis. 565, 115 N. W. 128; Boyle v. Northwest — 449 — ern Nat. Bank, 125 Wis. 498, 103 N. W. 1123, 104 N. W. 917; Hyland v. Roe, 111 Wis. 361, 87 N. W. 252; 3 Pomeroy, Eq. Jur. (4th ed.) § 1053. That Green obtained the $2,000 in question under such circumstances as to make him a constructive trustee thereof and to entitle the respondents Marling, from whom he obtained it, to reclaim it or to follow it, seems too clear to admit of argument. The appellants contend that by the payment of the debt owing by Gunderson to Pammesberger, to secure which the mortgage was given, the mortgage lien was destroyed, or at least merged in the estate of Green, the owner of the property, and hence was in his hands a nullity; that this having occurred, the rights of the subsequent mortgagees attached, and that the obligation so extinguished by payment cannot be revived so as to deprive them of their rights thus acquired, citing Rice v. Winters, 45 Neb. 517, 63 N. W. 830. In Rice v. Winters we find no fact alleged in the complaint or found by the court from which it may be inferred that the party asserting a right of sub-rogation was defrauded, neither was there any right asserted to follow the fúnd under the doctrine of constructive trusts. While Watson v. Wilcox, 39 Wis. 643, is there cited to the proposition that the doctrine of subrogation would not be applied where one having no interest to protect voluntarily loans money to a mortgagor for the purpose of satisfying and canceling the mortgage, taking a new mortgage for his own security, nevertheless, as we understand the cases of Charmley v. Charmley, 125 Wis. 297, 103 N. W. 1106, and Poluckie v. Wegenke, 137 Wis. 433, 119 N. W. 188, this court would have held under the facts in Rice v. Winters that the party claiming the right of subrogation was entitled thereto, although the Nebraska court held the contrary. Hughes v. Thomas, 131 Wis. 315, 111 N. W. 474; Wilton v. Mayberry, 75 Wis. 191, 43 N. W. 901. So that if it were applicable to the present — 450 — situation, as it is not, we could not apply the reasoning of the court in Rice v. Winters in the determination of the issue here presented. Disregarding the void satisfactions and regarding the facts as they actually existed on the 26th day of April, 1919, there was upon tract No. 1 the Pammesberger mortgage, which was a first mortgage, the Northwestern Securities Company mortgage, which was a second mortgage, the Schumacher mortgage, which was a third mortgage, the Harper mortgage, which was a fourth mortgage, and the Whalen mortgage, which was a fifth mortgage. We treat the mortgage given by Green to Gunderson as paid and discharged, as found by the trial court. Green was the owner of the fee. With the title in this situation, he procures from the respondents Marling by fraud and misrepresentation the sum of $2,000, which is traced directly into the hands of Gunderson, where it is paid for the satisfaction of the Pammesberger mortgage. This fund was one which the respondents Marling were entitled to follow into the hands of any person to whom it should come who had notice, or into any property into which it might be traced, purchased, or procured by Green. To present the facts more graphically it may be said that tract No. 1 was cut up into interests:a $2,000interest which secured the payment to Pammesberger of the amount loaned by him to Gunderson; a $1,600 interest which secured the payment of the amount loaned to Green by the Northwestern Securities Company; a $1,300 interest which secured the payment of $1,300 loaned to Green by Schumacher; an $1,800 interest which secured the payment of the amount loaned by Harper to Green; and a $2,000 interest which secured the loan made by Whalen to Green. Pursuant to the agreement contained in his deed, Green paid Gunderson’s debt to Pammesberger. By that payment Green’s liability to Gunderson was discharged and the $2,000 interest in tract No. 1, which secured the payment of Gunderson’s debt to Pammesberger, was — 451 — released. The trial court said that this $2,000 interest so released should stand as security for the benefit of the respondents Marling, who had fraudulently been deprived of the money which secured the release, and that such mortgage interest should be revived and constitute a valid and existing obligation solely against the defendant Clarence F. Green for the benefit of the respondents Marling. The interest of every subsequent mortgagee remained exactly as it was before the money of the respondent mortgagees had been used to satisfy the debt secured by the Pammes-berger mortgage. No subsequent incumbrancer has in any degree or to any extent changed his position by reason of such payment nor is he in any worse position than he would have been had the payment not been made. It is true, as argued, that upon the payment of the debt owing by Gun-derson to Pammesberger, which was secured by the $2,000 interest in the property, in the absence of countervailing equities the second mortgage would have become a first mortgage and each subsequent mortgage would have moved up one place. Have such subsequent incumbrancers equities superior to those of the respondents Marling, who, by fraud, were induced to. furnish the money which procured the release? We think not. That which Green purchased with the money so fraudulently procured, the release of the $2,000 interest represented by the Pammesber-ger mortgage, should in equity stand as security for the payment of the Marlings, who furnished the fund. The subsequent incumbrancers do not stand in the position of a purchaser for value without notice. They have parted with nothing, they have not changed their position, their rights, equitable and legal, remain exactly as they were before the payment was made. The principle contended for by the subsequent incumbrancers would, if applied, entirely defeat the right of subrogation.in most cases, for if in every instance where there was a satisfaction of a prior lien all subsequent incumbrancers could assert a vested right in the — 452 — benefits thereby accruing to them, no relief could be granted to the person claiming the right of subrogation in most cases. We see no reason why the principle applicable in subrogation is not applicable here, and that therefore the interest which was released by the payment of the Pammes-berger mortgage must stand charged for the benefit of those from whom Green fraudulently procured the fund. In this case innocent parties must suffer. The burden of wrongdoing falls upon those who have done no wrong, which is not infrequently the case. The parties are in a court of equity. Their rights must be determined in accordance with established equitable principles. If the doctrine of constructive trusts, which is well established in our law, is to be given any effect whatever, we see no reason why that which was procured by Green by means of the proceeds derived from his fraud should not stand for the benefit of those who furnished the fund which procured it. The judgment of the trial court is right and must be affirmed. By the Court. — So ordered.