Lichtstern v. Forehand

Doerfler, J. In the contention of defendants’ counsel and in their principal assignment of error herein it is claimed that the insurance moneys were improperly and illegally applied upon the amount claimed to be due on the notes secured by the $10,500 mortgage; that the $12,000 mortgage constituted a first-mortgage lien upon the Platteville real estate; that the $10,500-mortgage constituted a second-mortgage lien; and-that by the application of the proceeds of the insurance policies to the $10,500 mortgage, valuable property covered by said last named mortgage was released, to the great detriment both of Sickle and his estate and of the Forehands. In its opinion the trial court found that the contract in — 224 — question and the execution of the two- mortgages constituted in law one transaction, and that while in fact two mortgages were actually executed, in reality they constituted one mortgage, and that the insurance moneys were properly applied first to the payment of the notes secured by the $10,500 mortgage, because the notes secured by such mortgage matured first. No provision being contained in either of the mortgages indicative of a priority, we must look to the contract and to the surrounding facts and circumstances in order to ascertain the intention of the parties upon the subject. The contract in express terms denominates the $12,000 mortgage as a first lien and the $10,500 mortgage as a second lien. The transfer of the property and the execution of the two mortgages unquestionably resulted from the written contract, and inasmuch as this contract in substance was carried out, the provisions, in so far as they do not conflict with or modify or change the ultimate agreement of the parties, are persuasive of the intention of the parties upon the subject. The court found, and in our opinion correctly, that the execution of the contract and the transfer and execution of the mortgages were a part of one transaction, and thus permitted the introduction of the contract in evidence. While the two mortgages were executed contemporaneously, the $12,000 mortgage was first recorded by the mortgagee in point of time, and while ordinarily a difference in time of ten minutes in the recording of documents of this nature is not conclusive on the subject' of priority, nevertheless it is proper, evidence of the intention of the parties on that subject. Unfortunately, at the time of the trial both Mr. Rafter, the president of the Platteville Realty Company, and the mortgagee, Sickle, had died, so that their evidence was not only unavailable, but witnesses who might otherwise have been competent to testify upon the subject, under the provisions of the statutes became incompetent witnesses. The fact that the notes secured by the $10,500 mortgage matured first, under, ordinary circum — 225 — stances might indicate that it was the intention of the parties that the mortgage securing such notes was intended as a first mortgage, but such inference can have but little weight in the absence of any evidence tending to^ show a different intention than that expressed in the contract itself. It is true, as found by the court, that the entire purchase money might have been secured by one mortgage, and that every object sought to be attained might have been substantially accomplished in that manner. The court, however, cannot enter the realm of speculation upon a subject where the intentions of the parties are so clearly expressed. Both advantages and disadvantages might have resulted to the mortgagee in the execution of one mortgage covering- the entire transaction. It is very probable that the mortgagee considered that a first mortgage upon the Platteville real estate would be more readily negotiated than one mortgage upon the entire premises. It is also very likely that the parties had in mind a sale of a part or of the whole of the farm lands situated in Grant county and the application of the proceeds upon the payment of the so-called second mortgage. That this was in contemplation of the parties is made quite clear from subsequent developments, for the Forehands during the time of their ownership actually made sales from time to time and applied the proceeds upon the so-called second mortgage, so that when the property was transferred to the Platteville Realty Company the principal of the notes secured by the so-called second mortgage had been reduced h> the sum of $7,000. Such application of the proceeds derived from the sale of lands is persuasive to show that it was the intention of the parties not that the two mortgages should be considered as one, but, on the contrary, as separate obligations. We therefore conclude that when the two mortgages were executed it was the intention of the parties to constitute the $12,000 mortgage a first lien or in-cumbrance on the Platteville real estate and the $10,500 mortgage a second mortgage or lien thereon. — 226 — When the property was transferred by the Forehands to the Realty Company and the latter assumed the payment of the notes and mortgages, the relationship of principal and surety was created, the Realty Company becoming the principal obligor and the Forehands the sureties. Lumbermen’s Nat. Bank v. Corrigan, 167 Wis. 82, 85, 166 N. W. 650. Was the mortgagee aware of the condition in the deed from the Forehands to the Realty Company under which the latter assumed and agreed to pay the mortgages upon the property? It appears from the evidence that after the transfer to the Realty Company the company paid the interest upon the mortgage maturing in January, 1919. It further appears that after the fire the mortgagee did not communicate with the Forehands, either with respect to the collection of the insurance policies or the application of the proceeds thereof. The mortgagee treated solely with the Realty Company and its attorneys. The proceedings to collect on the fire insurance policies were instituted by the mortgagee and the Realty Company jointly. When the proceeds of the policies were collected they were sent to the mortgagee, who arbitrarily applied them first towards the payment of the so-called second mortgage, and upon receipt of the money derived from the policies he sent the canceled notes secured by such mortgage to Kopp & Brunckhorst, the attorneys representing the Realty Company, without, however, executing or delivering a release of such mortgage, and such canceled notes, from the time of their delivery until the pendency of the present litigation, were retained by the attorneys, Kopp' & Brunckhorst. In fact, during the lifetime of the mortgagee, after the transfer of the property, he entirely ignored the Forehands and dealt solely with the Realty Company and its attorneys. The Forehands were vitally interested in a proper application of the proceeds of this insurance, but the mortgagee saw fit not to deal with them but with the company. From these facts the inference is irresistible that the mortgagee was fully aware of the pro — 227 — vision in the deed from the Forehands to the Realty Company pursuant to which the latter assumed and agreed to pay the mortgage indebtedness, and having this knowledge, by virtue of the creation of the relationship of principal and surety between the Realty Company and the Forehands the mortgagee was in duty bound to recognize the rights of the Forehands as sureties and to be guilty of no acts which would prejudice them. The doctrine is well stated in 3 Pomeroy, Eq. Jur. (4th ed.) § 1206, as follows: “As between the mortgagor and the grantee, the grantee becomes the principal debtor primarily liable for the debt, and the mortgagor becomes a surety, with all the consequences flowing from the relation of suretyship. As between these two and the mortgagee, although he may treat them both as debtors and may enforce the liability against either., still, after receiving notice of the assumption, he is bound to recognize the condition of suretyship and to respect the rights of the surety in all of his subsequent dealings with them. Payment, therefore, by a grantee who has assumed the entire mortgage debt, completely extinguishes the mortgage; he cannot be subrogated to the rights of the mortgagee and keep the mortgage alive for any purpose. While the mortgagee may release the mortgagor without discharging the grantee, his release of the grantee, or his valid extension of the time of payment to the grantee without the mortgagor’s consent, would operate to discharge the mortgagor. In short, the doctrines concerning suretyship must control the dealings between these three parties.” In Pauly Jail B. & M. Co. v. Collins, 138 Wis. 494, 120 N. W. 225, this court has expressly approved of the same doctrine in the following language: “A mere right or privilege as against the principal becomes a duty to the surety when failure to exercise it may prejudice him.” Under the doctrines thus announced by the foregoing authorities, how can it be contended that the mortgagee in the instant case had an arbitrary right to apply the proceeds of the insurance policies as he did, which, if upheld, would — 228 — result in great damage and detriment to the original mortgagors, who with the knowledge of the mortgagee had become the sureties, while the grantee, the Realty Company, had become the principal debtor. Under all the authorities that we have been able to find, the insurance policies represented additional collateral to the mortgage indebtedness. The proceeds of the insurance policies in the instant case were designed, in the event of fire, to stand in the place of the buildings destroyed by fire. Under ordinary circumstances, without the consent of the mortgagor and the mortgagee they cannot be applied by the mortgagee to the satisfaction of the mortgage indebtedness before such indebtedness becomes due, but are held by him in trust under, the provisions of the policies as additional security, and to be used by him upon the maturity of the indebtedness in paying- or reducing the mortgage indebtedness. It is said in 1 Jones on Mortgages (7th ed.) § 410: “The insurance money received by the mortgagee takes the place of the mortgaged property, and the mortgagee would receive it, if the debt was due and unpaid, as he would receive the mortgaged property which it represented, to reasonably account for its use; but if no part of the debt was ■due he would hold it in the same manner, unless he or the mortgagor saw fit to use it to restore the property burned.” See, also, Gordon v. Ware Sav. Bank, 115 Mass. 588; Powers v. New England F. Ins. Co. 69 Vt. 494, 38 Atl. 148; Fergus v. Wilmarth, 117 Ill. 542, 546, 7 N. E. 508. Under the above authorities we therefore hold that the insurance upon the Sickle Building constituted additional collateral security, to the payment of the mortgage indebtedness, and inasmuch as we have held that the $12,000 mortgage was a first mortgage upon the Platteville real estate, the proceeds of such insurance, in equity and in law, should have been first applied towards the payment of the first mortgage on such property. The present action was brought solely to foreclose the — 229 — first mortgage. The judgment as entered authorizes a deficiency judgment against the Forehands and confirms the application of the proceeds of the insurance policies as made by the mortgagee, and directs the satisfaction of the'so-called second mortgage. The question, therefore, confronting the court involves the relief, if any, in view of what has heretofore been held, which should be afforded the appellants in this action. In the case of Illinois T. & S. Bank v. Alexander Stewart L. Co. 119 Wis. 54, 94 N. W. 777, it was held that: “A vendee of a chattel mortgagor upon being called upon to pay off the mortgage indebtedness is entitled to have applied thereon all sums of money paid upon the same out of the proceeds of property covered by the mortgage that has been converted into money, whether included in the sale to such vendee or not.” It was also there held that where such vendee, out of the proceeds from the sale of such mortgaged property, pays a portion of the mortgage indebtedness, he is entitled to have the same applied upon such indebtedness, notwithstanding an agreement entered into between the mortgagor and the mortgagee authorizing the mortgagee to apply the payment in satisfaction of an unsecured claim. If the grantee, the Realty Company, with the consent of the mortgagee, had sold the Sickle Building, the proceeds derived from such sale would stand in the same position as to the rights of the parties as though such proceeds had resulted from the foreclosure sale. Upon a foreclosure sale of the property upon which the Sickle Building was located, the proceeds thereof could only be applied first to the payment or reduction of the indebtedness secured by the first mortgage. Counsel for the Forehands contend that inasmuch as the plaintiffs neglected for a period of upwards of a year to begin foreclosure proceedings after being so requested, the Forehands are released from their liability as mortgagors — 230 — to the extent of any injury they may have suffered by reason of such failure. This view does not find support under the decisions of this court. In Harris v. Newell, 42 Wis. 687, it is said: “A surety is not released at law by a failure of the creditor to proceed upon being notified by him to do so; but in some cases equity will interfere, at his suit, to compel the principal to pay the debt, or to- compel the creditor to proceed against the principal.” (Syllabus, par. 2.) • Counsel for the Forehands also contend that the mortgagee had no authority to adjust the claim on the $8,000 policy for an amount less than that represented by the face of the policy, and that the plaintiffs should account for the full amount of the policy. The policies of insurance were obtained by the Forehands after they became the owners of the property and in compliance with the provisions of the mortgage. A failure to obtain the consent to a change of ownership would result in invalidating the policies. The Platteville Realty Company became the owner of the real estate pursuant to the deed from the Forehands, and in order to protect its interests it became necessary to procure the requisite insurance. The policies were furnished by the Forehands to the mortgagee, and delivered to the insurance companies with the request that the insurance companies consent to the transfer, and such consent had never been obtained. A situation was therefore presented to the mortgagee and the grantee under which they were obliged to act in good faith for the protection of the rights of all parties involved, and it appears to us conclusively that the adjustment effected was not only accomplished in good faith, but that such adjustment constituted a result highly beneficial to all the parties involved, and one with respect to which the Forehands cannot complain. The action being one in equity, and the parties having acted in good faith, in order to do complete justice it is necessary not only that a proper application be made of the — 231 — proceeds of the insurance, but that the $10,500 mortgage and the indebtedness secured thereby be reinstated, subject only to any superior intervening equities. By the Court. — That portion of the judgment confirming the application of the insurance moneys to the payment of the $10,500 mortgage is reversed, as is also the direction of the lower court to satisfy such mortgage of record, and said mortgage is hereby reinstated, together with the indebtedness secured thereby. The cause is remanded to the lower court with directions for an accounting in accordance with this opinion, the proceeds of the insurance to be applied upon the payment of the $12,000 mortgage; and for judgment of foreclosure in the usual and ordinary form, and a deficiency judgment against the parties liable therefor.