Rachal v. Smith

SHELBY, Circuit Judge, after stating the case as above, delivered the opinion of the court. Darius C. Rachal was the owner in fee simple of the real estate in controversy. The entire tract owned by him embraced 1(5,000 acres. On March 27, 3885, having borrowed $20,000 of the British & American Mortgage Company, Limited, he executed a deed of trust on the land to securé the debt. On September 15,1887, be also executed a second mortgage on the land to secure $10,000 borrowed of John Redmond. Darius C. Rachal’s wife joined him in the execution of these mortgages, and they were duly recorded. There is no dispute as to their validity. It is well to note that Darius O. Radial was the owner of these lands at the beginning of the transactions out of which the litigation arises, and that it is unquestioned that they were then subject to the two mortgages for $30,000, with accrued interest. On April 12, 1888, Darius C. Rachal conveyed, with warranty of title, all these lands, except 200 acres, to Frank S. Rachal, his son, and P. A. Hunter, his son-in-law. The grantees assumed to pay the two mortgages. The recited consideration out of which the mortgages were to be paid was $48,865.20. This sale and conveyance made F. S. Rachal and P. A. Hunter the owners in fee simple of the land, hut it remained subject to the two mortgages. With the title and ownership standing this way, the trade was made on which the plaintiff Lula M. Rachal bases her right to equitable relief. She made a parol purchase in the summer or fall of 3888 of 1,626 acres of the land at $4 an acre. She received no conveyance at first, but took possession and fenced and improved the land. Finally, on March 26, 1890, she obtained a conveyance of the land, dated ¡November 3, 3889, but not acknowledged until April 14, 3890, and it was recorded on March 2L, 1891. This deed was executed by Darius C. Rachal and his grantees in the conveyance of April 32, 1888, — F. S. Rachal and P. A. Hunter. LulaAl. Rachal made sales of small parts of the tract conveyed to her, but, in tin1 view we take of the case, these transactions are not material. The two mortgages on all the land remained unpaid. On December 4, 3889, Darius O. Rachal, F. S. Rachal, and P. A. Hunter made written application to Francis Smith,, one of the appellees who was engaged in negotiating loans, to borrow $514,009, at 9 per cent, interest, to he used in paying off the two mortgages on the land. The written application i'or the loan asserted that the title to the lands was in P. S. Rachal and P. A. Hunter, and that the lands were in the possession of Darius C. Rachal and P. A. Hunter. The fact that the land had on it the two mortgages was stated, and the applicants authorized Francis Smith, if the loan was made, to pay the mortgages out of it. These mortgages were bearing 32 per cent, interest. After examining the real estate, Francis Smith agreed to make the loan applied for. In this he acted as the agent of the Alliance Trust Company. On the 15th of January, 1890, Francis Smith, as such agent, lent the $34,000 to the applicants Darius C. Rachal, F. S. Rachal, and P. A. Hunter, who executed a deed of trust on the 16,000 acres of land to A. S. Thompson, as trustee, to secure the loan. After the deed of trust was [164] executed, Francis Smith paid out of the loan to the owner of the $20,000 mortgage debt the amount thereof, with interest;, and he also paid out of the loan to the owner of the $10,000 mortgage the amount thereof, with interest. Both debts, with interest, amounted to $82,440. Francis Smith did not have these debts transferred to him or to the Alliance Trust Company. He had the owners of the debts, who received the money on them, to execute releases, which were recorded. Francis Smith received into his possession the releases and the original $20,000 mortgage and note, and the original $10,000 mortgage and note, and he still holds them in his possession. Darius C. Rachal, F. S. Rachal, and P. A. Hunter having failed to pay the loan of $34,000 when due, and the trustee failing to act, a substituted trustee sold the real estate on the 4th of September, 1897, under the power of sale in the deed of trust; and Francis Smith became the purchaser, and received a conveyance from the substituted trustee. Francis Smith then sued, in an action at law in the circuit court of the United States for the Western district of Texas, to recover the lands, and on the 7th day of December, 1898, had judgment entered in his favor for them. This suit in equity is to enjoin the enforcement of the judgment at law. On the facts of this case, is the Alliance Trust Company subrogated to the rights of the original mortgagees? The contention of the learned counsel for the appellees is that Francis Smith, as the. agent of the Alliance Trust Company, having furnished money to the Rachals and Hunter to pay off the two mortgages, and the same having been paid by him at the request of the borrowers, he is thereby subrogated to the previous liens, and equity keeps them alive for his use and benefit, to the exclusion of Lula M. Rachal, who bought subject to the mortgages, but before the lien of the Alliance Trust Company. If this contention is well founded, it is conclusive in equity against the appellants; for Lula M. Rachal has no equity superior to the mortgagees, who held recorded liens on the lands at the time of her parol purchase. She clearly took the land subject to the two mortgages on it. If Francis Smith, as the agent of the Alliance Trust Company, had not paid the mortgages, they would now be on the land, and would be superior to the equity asserted by Lula M. Rachal. If we hold that the Alliance Trust Company is the equitable owner of the two mortgages, by applying the doctrine of subrogation, Lula M. Rachal is in no worse position than she would have been if the mortgages had never been paid.- She does not and cannot complain that the subrogation makes her position less favorable than it would have been if Francis Smith had not advanced the money to pay the mortgages. Her claim, in effect, is that she, and not the Alliance Trust Company, should have the benefit of the payment made by Francis Smith as its agent. Since the equitable doctrine of subrogation was ingrafted on the English equity jurisprudence from the civil law, it has been steadily growing in importance, and widening in its sphere of application. It is a creation of equity, and is administered in the furtherance [165] of justice. It is applied to give the party who actually pays' the debt the full benefit and advantage of such payment. It has been long settled, and it is not controverted, that the doctrine applies where a junior incumbrancer discharges the prior incumbrance, and where the surety pays the debt of his principal, and in cases of like character. A just limitation of the application of the doctrine is that it does not apply to payments made by a mere volunteer or stranger. “No one can be allowed to intrude himself upon another as his surety; and therefore if a man voluntarily pays the debt of another, without any agreement to that effect with the debtor, he cannot take the place of the creditor, or in any way recover the money so paid, of the debtor, because the law does not permit one man thus officiously and without solicitation to intermeddle with 1he affairs of another.” Winder v. Diffenderffer, 2 Bland, 199; Harris, Subr. p. 558, § 810, note h. ’ This objection is made in the present case. It is urged that Francis Smith, in advancing the money to pay the mortgages, was a mere volunteer, within the meaning of the authorities, and that the doctrine of subrogation, therefore, does not apply. It will be remembered that the money was lent and applied to.the payment of the mortgages at the request of the debtors, the new mortgage being taken on the same lands covered by the older mortgages. “A person who has lent money to a debtor may be subrogated by the debtor to the creditor’s rights; and if the party who has agreed to advance the money for the purpose employed it himself in paying the debt, and discharging the incumbrance on land given for its security, he is not to be regarded as at stranger. Dix. Subr. 165; Payne v. Hathaway, 3 Vt. 212. The real question in all such cases is whether the payment made by the stranger was a loan to the debtor through a mere desire to aid Mm, or whether it was made with the expectation of being substituted in the place of the creditor. If the former is the case, he is not entitled to subrogation; if the latter, he is. If a person pays a debt at the instance, request, or solicitation of the debtor, he is neither a volunteer, stranger, or intermeddler; nor is the debt re-, garded as extinguished, if justice requires that it should be kept alive for the benefit of the one advancing the money, who thereby becomes the creditor. Association v. Thompson, 32 N. J. Eq. 138.” Harris, Subr. p. 569, § 811, note 1. Pomeroy, after stating the general rule as to subrogation or equitable assignment in cases of payments made by persons" who have subsequent interest in the premises, adds: “The doctrine is also justly extended by analogy to one who, having no previous interest, and being under no obligation, pays off the mortgage, or ad-, vanees money tor its payment, at the instance of a debtor party, and for bis benefit. Such a person is in no true sense a mere stranger and volunteer.” 3 Pom. Ifiq. ,lur. (1883) § 1212. If Francis Smith, instead of taking a release of the two mortgages, had taken an assignment of them, the questions here discussed would never have been raised. As he paid off the mortgages at the request of the debtors, they would unquestionably have been assigned to him without recourse, had he requested it. He was: [166] entitled to an assignment. Twombly v. Cassidy, 82 N. Y. 155. In equity, whatever rights accrue from the payment arise from the fact of payment.' If the one who makes the payment is entitled to the benefit of the doctrihe of subrogation, he becomes the equitable assignee of the claim paid. For this reason Pomeroy prefers and uses the term “equitable assignment,” instead of “subrogation.” 3 Pom. Eq. Jur. (1883) § 1212, note 1. If it be correct that Francis Smith’s position was not that of a volunteer or stranger, then it is immaterial that a release, instead of an assignment, was made. Where the rights of innocent third persons have not intervened, the release will not prevent the person making the payment from becoming the equitable assignee of the claim paid. Barnes v. Mott, 64 N. Y. 397, 401; Cobb v. Dyer, 69 Me. 494; Dillon v. Kauffman, 58 Tex. 696. We decide that on the facts of the case, in the absence of any agreement on the subject, the Alliance Trust Company is subrogated to the rights of the mortgagees, whose claims it advanced the money to discharge. The following Texas cases are cited as tending to sustain our conclusion: Whitselle v. Loan Agency (Tex. Civ. App.) 27 S. W. 309; Ploeger v. Johnson (Tex. Civ. App.) 26 S. W. 432; Bank v. Ackerman, 70 Tex. 315, 320, 8 S. W. 45; Mustain v. Stokes, 90 Tex. 358, 38 S. W. 758; Pridgen v. Warn, 79 Tex. 588, 593, 15 S. W. 559; Hicks v. Morris, 57 Tex. 658; Focke v. Weishuhu, 55 Tex. 33; Oury v. Saunders, 77 Tex. 278, 13 S. W. 1030; Cason v. Connor, 83 Tex. 26, 18 S. W. 668. This conclusion alone would lead to an affirmance of the decree refusing the injunction and dissolving the restraining order, but there is another view of the case that leads to the same result. If Lula M. Bachal has the superior claim to the lands in question, why could she not successfully assert it at law? The suit at law was not brought by Francis Smith until October 16, 1897. At that time her parol purchase, according to the averments of the bill, had been ratified by the execution of a deed. It is alleged that she obtained the conveyance in yts corrected form in time to have it entered of record on March 1, 1891. For five or six years before the suit at law was brought on the averments of the bill, she was in possession of the land, and in possession of it by a written title. If her averments and contentions are true as to her purchase, possession, and deed, did she not have the superior title at law? It is true that at the time she made the purchase the mortgages were on the land, and then unpaid; but, if they stood in the way of her defense at law while they were unpaid, it appears from the bill that they were paid and releases executed on the 15th of January, 1890, long before the suit was brought. It seems to us that, in deciding the case at la.w in favor of the plaintiff Francis Smith, the court necessarily held that the deed conveying the lands to Lula M. Bachal was for some reason invalid. Both parties to the suit at law deraigned title from Darius O. Bachal. The title offered by Lula M. Bachal was prior in point of time to the titles relied on by Francis Smith, and, unless the evidence showed her title to be invalid for fraud or for other legal reasons, she could successfully defend on her prior title. No bill of exceptions or writ of error was taken in the suit at law, and [167] that case is not before this court. It is only relevant to this litigation in showing, if it does show, that the plaintiff here, Lula M. Radial, asserts no title here that was not, or that could not, if valid, have been, successfully asserted in the case at law. Her title being the older one, and being a legal title by deed, if the court had held it to he valid she would have prevailed at law; and Francis Smith or the Alliance Trust Company would have been forced to apply to equity for relief, if he desired to avail himself of the doctrine of subrogation to enforce the two mortgages on the land which were older than the title of Lula M. Rachal. The decree refusing the injunction and dissolving the restraining order is affirmed.