Andersen Yard Co. v. Citizens State Bank

Jones, J. It is a familiar rule in equity that when a mortgagee has a lien on two parcels of land, on one of which another person has also a lien, and such other person will be prejudiced by allowing the first lienor to satisfy his claim out of the land subject to both claims, a court of equity will compel the latter to take satisfaction out of the land on which the other party has no lien. The rule has a broader application than this. As stated by Mr. Pomeroy in sec. 1414 of the third edition of his Equity Jurisprudence: “The equitable remedy of marshaling securities, with that of marshaling assets, depends upon the principle that a person having two funds to satisfy his demands shall not, by his election, disappoint a party having but one fund. The general rule is that if one creditor, by virtue of a lien or interest, can resort to two funds, and another to one of them only — as, for example, where a mortgagee holds a prior [63] mortgage on two parcels of land, and a subsequent mortgage on but one of the parcels is given to another, — the former must seek satisfaction out of that fund which the latter cannot touch. If, therefore, the prior creditor resorts to the doubly charged fund, the subsequent creditor will be substituted, as far as possible, to his rights.” This interference with the strict legal rights of the prior lienor is based on the principle that justice requires that he should not arbitrarily or capriciously ignore the rights of another creditor of the same debtor having a less favored security. The appellant’s counsel do not question this general rule as to the marshaling of assets, but argue that it has no application to the facts of this case. The lien of the plaintiff attached on July 22, 1920, when the first material was furnished. At an early day this court construed the statute to mean that it gave a lien from the commencement of the building, equal in power and effect with the lien of another creditor who has obtained and docketed a judgment. Rees v. Ludington, 13 Wis. 276. The findings of the court that the defendant had notice of this claim for a lien before making the payment to the mortgagor and that such payment was made without the plaintiff’s consent are well sustained by the evidence. The testimony also shows that, in communications between the agent of the plaintiff and the officers of the defendant bank, the bank was made acquainted with the fact that the plaintiff was looking to the insurance money as a fund which would help to make its claim secure. The plaintiff had the right to entertain that expectation for the reason that the mortgagor had procured the insurance 'policies as additional security to the mortgagee, and when the bank received this insurance money it represented and stood for the building burned. The money was, in the hands of the bank, a part of the security for the debt. Fergus v. Wilmarth, 117 Ill. 542, 7 N. E. 508; Powers v. New England F. Ins. Co. 69 Vt. 494, 38 Atl. 148. Instead of applying the moneys thus received [64] on the mortgage indebtedness, the bank promptly paid to the mortgagor $1,709.14, doubtless believing it had the right so to do in carrying out the parol agreement contemporaneous with the mortgage. There is much discussion in the briefs as to the admissibility of evidence to establish that agreement. Although the trial judge found that such an agreement was made, he also found that it was void because it varied or contradicted the written agreement, the note, and the mortgage. Counsel for the appellant cite numerous cases to their proposition that the parol agreement had no such effect; for example, cases where parol evidence was received to prove how notes were to be paid, to show a different consideration than that stated in the writing or a parol guaranty on the assignment of a mortgage. We do not think these cases are authority for the proposition made. When the note and mortgage in question were executed they constituted an agreement between the parties that all the land mortgaged should stand as security for the indebtedness until paid. By contemporaneous parol agreement only part of the land was to stand as security after the payment of a specified amount. In other words, the parol agreement was not collateral to or independent of the writing, but a direct contradiction of it, and was open to all the objections which exist to receiving evidence to vary 'or contradict written instruments by evidence of contemporaneous parol agreements. But there are several exceptions to this general rule. Although neither of the parties in any litigation between themselves could be heard to give evidence contradicting or varying the written contract, this rule does not apply to strangers who have not assented to the writing. This is a rule recognized by all the works on evidence and by innumerable decisions. By the great weight of authority it is also held that, since strangers to the writing have the right to show the full nature of the transaction, parties to the written instrument must have the same right in litigation between themselves and strangers; that both must be bound by the [65] writing or neither. See the elaborate note in L. R. A. 1916A, pp. 603 et seq. Although evidence of this parol agreement may have been admissible, it does not follow that the plaintiff was bound by it. The agreement was not known to the plaintiff and it had no reason to assume that any such understanding existed. The plaintiff had its claim for a lien, which was just as meritorious as the claim upon the mortgage although the latter was prior to the lien. There were telephone conversations between the officers of the two corporations from which it appears that the plaintiff was informed that the insurance money was expected to be paid and the defendant learned that the plaintiff expected to be paid from that source when the bank should receive the money. The record does not disclose on what day the bank paid over the $1,709.14 to the mortgagor, but it seems quite probable from the evidence and findings that it was paid by the bank the same day it was received. Counsel for the appellant argue that under the authority of Mathwig v. Mann, 96 Wis. 213, 71 N. W. 105, the plaintiff’s claim is wholly subordinate to the mortgage, which was recorded before any material was furnished. Since that decision the lien statute has been amended and now provides that the lien “shall also be prior to any unrecorded mortgage given before the commencement of such construction, repairs, removal, or work, of which mortgage the person claiming the lien has no notice.” Sec. 3314, Stats. 1919. The agreement on which the defendant'relied in paying part of the proceeds of the insurance to the mortgagor rested merely in parol and of course was not recorded. The plaintiff had the right to rely on the record and was not bound by an unrecorded agreement between the mortgagor and the mortgagee. He had the right to assume that when the insurance money should be paid into the bank it would be so applied that his lien would not be impaired by a distribution of the fund contrary to the rule governing the rights of prior and junior incum66 brances in such cases. Deuster v. McCamus, 14 Wis. 307; C. Gotzian & Co. v. Shakman, 89 Wis. 52, 61 N. W. 304; Union Nat. Bank v. Moline, Milburn & Stoddard Co. 7 N. Dak. 201, 73 N. W. 527; 4 Pomeroy, Eq. Jur. (3d ed.) § 1414. It seems very clear that the conduct of the bank did impair the security of the plaintiff. True, it is the general rule that in a proceeding for the marshaling of assets there must be no injury to the prior lienor. ' If the bank had acted with proper care and consideration for the rights of the plaintiff it would have suffered no injury by applying the insurance money on its mortgage. The trial court concluded that by paying part of the insurance money to the mortgagor at the time and in the manner it did, relying on its secret agreement and without disclosing such agreement to the plaintiff, the bank disregarded its duty to the junior lienor. With that view we agree. Nor do we think that under the circumstances the bank should be relieved from liability by reason of the fact that it suffers some loss in the marshaling of the assets. It is contended by counsel for the respondent that by foreclosing its mortgage on the east factory site and collecting $100 the bank was estopped from claiming that the east factory site had been relieved from the mortgage, and the court so found. This foreclosure suit was commenced nearly a year after the transactions complained of by the plaintiff. The prosecution of the foreclosure was no doubt inconsistent with the defense made in this action, but we • doubt whether the doctrine of estoppel can be applied. . However, it is unnecéssary to decide this question. It is urged by the appellant that the court erred in failing to allow costs to the defendant and in failing to provide for a judgment for deficiency in favor of the bank, but we find no error in these respects. By the Court. — Judgment affirmed.