Summary
Appeal from the Circuit Court of Baltimore City.
The bill in this case was filed by the appellees against the appellant and others for the foreclosure of the following mortgage, which was properly executed :
“This mortgage made this 31st of May, in the year 1869, by Matthew W. Kilgore, of the City of Baltimore in the State of Maryland.
“Whereas, Margaret A. Warner, of the City of Baltimore aforesaid, has this day endorsed three promissory notes all of even date herewith, drawn by the said Matthew W. Kilg'ore, each note for the sum of five hundred and seventy-five dollars and fifty cents, and interest payable in seven, thirteen and nineteen months respectively after date, .and-duly stamped, the said notes in the aggregate amount to the sum of one thousand seven hundred and twenty-six dollars and fifty cents.
“And whereas, it was a condition precedent, and which condition has induced the said Margaret A. Warner to endorse the three promissory notes aforesaid, that the said Matthew W. Kilgore shall make and execute unto her a mortgage upon his dwelling house and premises hereinafter described, to secure her from any and all loss she may sustain by the non-payment by the said Matthew W. Kilgore, or any one in his behalf, of the said promissory notes, or any of them upon their maturity, respectively. And whereas, it is the desire of the parties to these presents, that such agreement shall be carried out in good faith in every particular :
“Now this mortgage witnessetb, that in consideration of the premises, and of one dollar, the said Matthew W. Kilgore, doth grant and assign unto the said Margaret A. Warner, her executors, administrators and assigns, all that lot or parcel of ground situate in the City of Baltimore aforesaid, and described as follows, that is to say :
“ To have and to hold, the said described property, with the rights and appurtenances aforesaid, unto the said Margaret A. Warner, her executors, administrators and assigns, during all the residue of the term of years yet to come, and unexpired therein, witli the right and benefit of renewal of said term forever, subject to the payment of the yearly rent of fifty-one dollars, payable in equal half-yearly instalments on the first day of January and July, in each year respectively ; provided, that if the said Matthew W. Kilgore, his executors, administrators or assigns, shall pay or cause to he paid the three promissory notes aforesaid, at their maturity, respectively, to the holder or holders of them, or in case the said Margaret A. Warner, her executors, administrators or assigns, shall he compelled to pay the said notes or any of them, and the said Matthew W. Kilgore, his executors, administrators and assigns, shall pay or cause to he paid to the said Margaret A. Warner, her executors, administrators and assigns, the amount she or they may have been compelled to pay, so that it shall not exceed the sum of $1,726.50 and interest, and shall perform the covenants herein contained on his and their part to he performed, then this mortgage shall be void, and of no effect. And the said Matthew W. Kilgore doth hereby declare his assent to the passing of a decree by the Circuit Court of Baltimore City, or any other Court of competent jurisdiction, for a sale of the property hereby mortgaged, to take place at any time after default shall have been made in payment of the mortgage debt aforesaid, or any part thereof, or of the interest thereon, whether the time limited for the payment of the whole debt shall have expired or not, pursuant to the provisions of the Maryland Code of Public Local Laws, Article IY, section 782, &c., relating to mortgages in the City of Baltimore, and in the event of a sale under such' decree, the imoceeds thereof shall be applied to the payment of all claims of the said mortgagee, her representatives or assigns under this mortgage, whether the same shall have matured or not. And it is agreed between the said parties, that until default be made in the premises, the said mortgagor shall hold and possess the hereby mortgaged property, and receive the rents and profits thereof, upon paying, in the meantime, the ground-rent and all taxes thereon, and also, the mortgage tax on the debt hereby secured, which ground-rent, taxes, mortgage debt and interest, the said mortgagor for himself, his heirs, executors, administrators and assigns, hereby covenants to pay when legally demandable. And also during the continuance of this mortgage, to keep the improvements on the said mortgaged premises named, against damage or loss by fire, to the amount of at least one thousand seven hundred and twenty-six 1V0 dollars, and to cause the policy of such insurance to be so framed or endorsed, as that in case of loss by fire, the avails thereof, shall inure to the benefit of said mortgagee to the extent of her lien or claim under this mortgage.”
The bill stated : “ That on the 81st of May, 186.9, a certain Matthew W. Kilgore, then of the City of Baltimore, but now residing in Baltimore County, being indebted to your orators in a large sum of money for goods sold and delivered, made and executed his three several promissory notes for $575.50 each, payable respectively in seven, thirteen and nineteen months after date, to the order of Margaret A. Warner, now of Baltimore County ; that the said Margaret A. Warner, on the same day, endorsed the said notes to your orators, and on the same day the said Kilgore executed to the said M. A. Warner, a mortgage upon certain property in the City of Baltimore, to secure the payment of said notes to whomsoever might be the holder thereof, and to indemnify her from loss by reason oí' the endorsement thereof. All of which will appear by a duly certified copy of said mortgage, to be hereafter filed ; that the said notes were duly protested for non-payment, and are still held by your orators — as will appear by said notes and the protests thereof, herewith filed as Exhibits E. L. P. & Co., Nos. 1, 2 and 3.”
“ Tour orators further shew, that the said Matthew W. Kilgore did, on the 30th of June, 1870, sell and convey the said mortgage property to William A. Boyd, of said City of Baltimore ; and your orators are advised that they are entitled, as holders of said notes, to the benefit of the security afforded by the said mortgage, but that they can only obtain the same by the aid of this Honorable Court.”
There was a prayer for a sale of the mortgaged premises and for subpoena, against Matthew W. Kilgore, Margaret A. Warner and William A. Boyd.
The separate answer of William A. Boyd, states, “ That he is ignorant of the fact charged in said bill, that the said Matthew W. Kilgore, one of the defendants, being indebted to the complainants in a large sum of money, for goods sold and delivered, made and executed his three several promissory notes for $575.50 each, payable respectively in seven, thirteen and nineteen months after date, to the order of Margaret A. Warner, and that the said Margaret A. Warner, the same day, endorsed the' said notes to the complainants, and requires proof of such indebtedness, and of the making, execution and endorsement of said notes.”
“ This defendant denies, as is alleged in said bill, that the said Kilgore executed to the said Margaret A. Warner, a mortgage upon certain property in the City of Baltimore, which was afterwards conveyed by said Kilgore to this defendant, to secure the payment of the said notes to whomsoever might be the holders of the same, and to indemnify her against loss by reason of endorsement, but, on the contrary, avers that the said mortgage was expressed to be for the purpose of indemnifying her against loss by reason of the endorsement of certain promissory notes mentioned in said mortgage, and for no other purpose, but that it does not appear from said mortgage that the notes therein mentioned had been endorsed to any one, or had even been passed out of the possession of the said Kilgore and Warner — as will appear by reference to the copy of said mortgage filed in this case. This defendant denies that the notes mentioned in the bill of complaint, and filed therewith, are the notes mentioned in the mortgage of said Kilgore.
“ This defendant admits that on the 30th of June, 1810, he purchased from the said Kilgore, the leasehold lot of ground on Eden Street, which is described in the said mortgage from Kilgore to Warner, but he charges and avers, that at the time he made said purchase, the said property was free from all incumbrances, and especially the said mortgage from Kilgore to Warner, had been released by the mortgagee therein named, in the form and manner provided by the Code of Public General Laws of Maryland, for releasing mortgages — as will appear by reference to the cojjy of said mortgage filed in this case.
“■This defendant avers, that on or about the 30th of June, 1810, he agreed to purchase from said Kilgore through'said Kilgore’s agent, a certain Samuel H. Hooper, (this defendant having no acquaintance with the said Kilgore,) the property mentioned, for the sum of three thousand one hundred dollars cash, said property to be free from all incumbrances ; that this defendant employed counsel to examine the title to said property, and that his said counsel reported to him that there were several mortgages and a judgment, existing liens thereon, viz : a mortgage to David W. Caskey, dated the 30th of October, 1867, for the sum of twenty-two hundred dollars, which had been subsequently assigned by the said Caskey to a certain Robert D. Berry, a mortgage to the Steuben Building Association, dated 30th of October, 1867, and * * * the mortgage to Margaret A. Warner above mentioned ; and a judgment in the Court of Common Pleas of Baltimore City, in favor of Brother, for the sum of nine hundred dollars ; that the said Kilgore was informed by this defendant’s counsel, that the property would have to be relieved of the incumbrances aforesaid, before a deed would bo accepted by this defendant and the purchase money paid, when the said Kilgore proposed that this defendant should clear the said property of its incumbrances with the said thirty-one hundred dollars, the purchase money aforesaid, that the defendant accordingly paid off the mortgage of Berry, and obtained from him a release of the same, paid off what was due on the mortgage of the Steuben Building Association, and obtained a release from said Association, and in consideration of the payment of the sum of three hundred dollars, obtained a release of the property in question from the lien of the said judgment in the Court of Common Pleas.
“ This defendant charges that he had no notice of any indebtedness from the said Kilgore to the complainants, nor any notice whatever that the complainants were or claimed to be the holders of the notes mentioned in said mortgage, but, on the contrary, avers that careful inquiry was made by the counsel employed by him to examine the title of said property, from every one likely to have any knowledge in reference to the matter, and that his said counsel were informed that the notes mentioned in the said mortgage had never been made and .executed, and that the said mortgage was designed to.secure a debt due by said Kilgore to the said Margaret A. Warner, and this defendant now believes and charges, that if the notes filed with the bill in this case, are- the ones mentioned in the mortgage, the names of the complainants as the holders thereof were purposely omitted from the said mortgage for the purpose of concealing the fact that they were the holders thereof, and' were purposely withheld and concealed from this defendant by reason of a previous agreement and understanding to that effect between the said Kilgore and the complainants.
“This defendant further charges, that he is informed that this Honorable Court has no jurisdiction to pass a decree for the sale of said property, upon the bill of complaint filed by the complainants in this case. This defendant therefore prays the Court to be hence dismissed with his costs in this behalf so unjustly sustained, &c.”
Testimony was taken under a commission, the effect of which is sufficiently stated in the opinion of this Court.
The Court below (Brown, O. J. and Pinkney, J. concurring,) passed a decree in favor of the complainants from rvhich the defendant Boyd appealed.
The appellees have not, by sufficient evidence, shown themselves to be the holders of the notes mentioned in the mortgage. It must be remembered that it is not mentiond in the mortgage that the notes had been passed to the appellees, or even that they had been to any' one, but that the appellees claim the benefit of said mortgage, because they are the holders of certain notes, which, they say, are the notes mentioned therein, and they rely upon the correspondence in date, amount, &c., between their notes’and those mentioned in the mortgage, and upon the testimony of Parker and Poe, to establish their claim.
The claim of the appellees is based upon the general’ doctrine 'that, if a “principal has given any securities or other pledges to his surety, the creditor is entitled to all the benefit of such securities or pledges, in the hands of the surety, to be applied in payment of his debt.” 1 Story’s Eq. Jur., sec. 638.
In reference to this doctrine, applied to a contract of personal indemnity merely between the debtor and surety, the creditor has no independent rights under it, which arise at its making, and it follows from this, necessarily that he can claim no higher or greater right than the surety, that he is bound by the terms of the contract, which the surety, through whom he claims, has made with the debtor, and by any subsequent acts of the surety, which may have affected either the contract or the pledge ; that the surety may voluntarily return the security to the debtor ; that he may release it to a third party ; and that he may transfer it for a valuable consideration. Claiming through the surety, the legal status of the creditor must be that of the surety, as it exists at the time the claim is set up. Osborn vs. Noble, 46 Miss., 449; Bank of Va. vs. Boisseau, 12 Leigh, 387; Hopewell vs. Bank of Cumberland, 10 Leigh, 221, 222; Ohio Life & Trust Co. vs. Reeder, 18 Ohio, 46-47; Homer vs. Savings Bank, 7 Conn., 478; Thrall vs. Spencer, 16 Conn., 139; Jones vs. Quinnipiack Bank, 29 Conn., 25; Bibb vs. Martin, 14 Smedes & M., 87-92; Woodville vs. Reed, 26 Md., 191; St. Louis Build. & Sav. Asso. vs. Clark, 36 Missouri, 601.
There is a class of cases where the rights of the creditors have been apparently placed on broader grounds, and even maintained against adverse action of the surety, but, in such cases, there have always been some provisions in the contract, which rendered it more than one of personal indemnity to the surety, and made the property pledged liable for the payment of the debt. Such a contract is construed to create a trust; the surety becomes a trustee, and' holds the property placed in his hands, for the creditor, ■ who is the cestui que trust. The latter can enforce his equitable lien, and the trustee can not deprive him of it. In such cases he claims in his own right, as cestui que trust, under the terms of contract. This distinction reconciles all the cases. See cases previously cited, and Kunkel vs. Fitzhugh, 22 Md., 567.
The mortgage in this case, is, by its terms, one of personal indemnity only, and the surety having released it, the appellant took the property, free from any lien or claim of the appellees.
The recital, the object of which is to state the inducement for the execution of a paper, specifies that it is for the indemnity of the surety alone.
The conditions in the mortgage state that it is to be void upon the happening of either one of two conditions, the payment of the notes, or the re-payment of the amount, the surety may be compelled to pay ; it may, therefore, by its terms become void, and yet the notes not be paid. Eor, if the mortgagee is never compelled to pay anything, by reason of her endorsement, which might readily happen, as by the failure of the holders of the notes to bind her by demand and notice, the mortgage is void, under the alternative conditions without the notes being paid. Can a mortgage be construed, as creating a trust for the payment of a debt, when, by one of its alternative conditions, it may become void, without the debt being paid ?
The mortgagor gives his assent to the passing of an ex parte decree, for the sale of the property, should default be made in the payment of the mortgage debt, &c., and it is provided, that in the “ event of a sale under such decree, the proceeds thereof shall be applied to the payment of all claims of the said mortgagee, her representatives or assigns, under this mortgage, whether the same shall have matured or not,” still looking to her indemnity alone. The Court is now asked to construe this mortgage, to be a trust for the payment of the debt of the appellees, when, by the terms of the instrument, if the trustee makes a sale, the proceeds thereof are to be applied, not to the payment of the debt, but to any claims which she, the mortgagee, may have under the mortgage.
The case of Kunkel vs. Fitzhugh, 22 Md., is a far different one from this. The recital in both seems to be almost identical, but the condition of the former is the single one of paying the note. There is not the important provision in reference to the disposition of the proceeds of sale, or of insurance ; nothing but the recital and the simple condition. It can readily be conceived that the (hurt might construe such a mortgage tó create a trust. As the mortgage was to remain in effect until the note was paid, it must be meant to provide for its payment. But in this case, the alternative condition, and the agreement as to the distribution of the proceeds of sale, and insurance, clearly show that payment of the notes was not intended, except as it might be necessary for the purpose of indemnity. Vide, 42 Miss., 54.
Where a mortgage is made to secure an endorser, the creditor cannot claim the benefit of it till the endorser’s liability is fixed ; and if the latter is discharged by his laches, he loses all title to the property. This is the necessary consequence of the doctrine of substitution. If the surety is not liable, and therefore has no claim, then there is nothing to which the creditor can be substituted. The mortgage is absolutely void. 1 Hilliard an Mortgages, (Ed. 1864,) 352; Tilford vs. James, 7 B. Monroe, 336.
The appellant is in equity, entitled to the rights of the former owners of the two prior mortgages, which were paid for by him, under the circumstances narrated in the evidence, and the claim of the appellees must be postponed to these encumbrances. <
Had the appellant procured the conveyance from Kilgore to himself, and subsequently received the release of the two prior mortgages, it was conceded that these instruments would have operated as assignments of the prior liens to him. The intent, that the title of the mortgagees was to be transferred to Boyd would have been indisputable, and this intent would have governed the construction to be given to the means of conveyance. Walker vs. Stone, 20 Md., 198.
Surely, no difference exists between an intent to transfer to Boyd, and an intent to convey to Kilgore, in order that he might transfer to Boyd. ' In the one case, the conveyance is direct, in the other, a third party acts as a conduit ; in both, the conveyances are made, that Boyd may receive the legal title. In the earlier precedents, there was some conflict on this point, and it was thought that the seizing of the person who serves as a conduit, must not be beneficial. In Maryland, however, - the equity of the question has won a victory, and it is now firmly settled, that even the favored claim of dower yields to that of the party who extinguishes a lien, in order to obtain for himself the lienor’s title. Ahern vs. White, 39 Md., 419-421; Rawlings vs. Lowndes, 34 Md., 639.
Any other holding would conflict with long established principles.
If the operation of the mortgage to Mrs. Warner was to raise a trust for the appellees, the appellant is to be discharged for want of notice of their claim. The law on this subject is, that a purchaser must use all reasonable means of inquiry, and pursue such avenues of information as are accessible. Price vs. McDonald, 1 Md., 416, 417.
The mortgage informed the appellant that there was a trust in favor of some parties unknown, if Kilgore had passed the accommodation notes, which it mentioned, to any one. The appellant applied both to Kilgore and the lawyer who drew the mortgage, and was induced to believe, by what they said, that no notes were outstanding. All of the circumstances combined to make him rely on Kilgore’s representations. As the notes were expressed to be accommodation notes, and not to be passed off by Mrs. Warner, he could not learn the names of the holders from her. She, moreover, had entrusted her release to Kilgore, thus contributing to increase his credit, and the appellees, by failing to prefer any claim on the first note, which had been overdue six mouths, and carefully omitting their names from the mortgage, as the holders of the notes, confirmed the statements of Kilgore and Mr. Higgins.
The mortgage from Kilgore to Mrs. Warner was not a mere indemnity to her to secure her against loss by reason of her endorsement of the notes therein referred to, which indemnity she could hold or surrender at her pleasure, but it must be regarded as a security for the notes themselves, which she had no power to release without the consent of the appellees, the holders of the notes.
That this is the true operation and effect of the mortgage is apparent upon a consideration of the conditions upon which it was to be void — from its covenants — and its special agreement for a sale in case of default, and for insurance upon the premises against loss by fire — and indeed from its whole scope and tenor. Clarke vs. Levering, 1 Md. Ch. Dec., 178; Ohio Life Ins. and Trust Co. vs. Winn & Ross, 2 Md. Ch. Dec., 37; Byles vs. Tome, 39 Md., 461.
But even if the mortgage can fairly be regarded simply as an indemnity to Mrs. Warner, it would still operate to secure the notes held by the appellees, and could not therefore be validly released by her without their consent. This precise question is res adjudicaba in Maryland. Kunkel vs. Fitzhugh, 22 Md , 567, and cases there cited.
The same principle was subsequently affirmed in Owens vs. Miller & Mayhew, 29 Md., 144. The case of Eastma,n vs. Foster, 8 Met., 19, adopted in Kunkel vs. Fitzhugh, is an express decision to the same effect.
The appellant had botli actual and constructive notice of the mortgage and of its provisions, and of course must be bound. by its true legal operation and effect. It was duly executed, acknowledged and recorded, which of themselves were sufficient notice. Moreover the counsel for the appellant discovered it whilst searching the title, and reported its existence to the appellant — and then without seeking the mortgagee and getting information direct from her, contented himself with the simple statements of Kilgore, in flat contradiction as these were with the plain and express recitals of the mortgage. As might have been expected these statements proved untrue, and this controversy is the result.
Had he gone to Mrs. Warner, he would, no doubt, have ascertained the exact facts from her, and without the production, delivery and cancellation of the notes, would, perhapsj have declined to accept her release of the mortgage, suspiciously executed as that was on the 28th of February, 1870, four months previously. Price vs. McDonald, 1 Md., 416.
The facts seem to show that the release of the mortgage was accepted, because as matter of law, it was supposed to be sufficient, and not because it was believed that there were no such notes outstanding as the mortgage recited.
If' however, the true view he that the mortgage was a valid security for the notes in whosesoever hands they might be, the instrument purporting to be a release of said mortgage was void against the appellees as the holders of said notes, and they are accordingly entitled to their lien, as if said release had never been executed.
The prior mortgages and incumbrances, when once paid, were extinguished and released, and their lien was absolutely gone. The parties did not intend that the lien of these encumbrances should continue to be kept alive, but that it should be absolutely extinguished.
To hold now that these liens still exist, would be to defeat the intent of the parties manifested in the most clear, apt and unequivocal manner. It is wholly immaterial that they were paid off out of the purchase money— •for they were not released to the appellant, but to Kilgore. If it had been the desire or the design of the parties to keep them alive, they should have been assigned to the appellant and not released to Kilgore. This precise question has been several times decided in Maryland. See Clabaugh vs. Byerly, 7 Gill, 354; Woollen vs. Hillen, 9 Gill, 185; Alderson vs. Day, 6 Md., 52; Swan vs. Patterson, 7 Md., 164; Walker vs. Stone, 20 Md., 198; Brawner vs. Watkins, 28 Md., 226; Virginia vs. Ches. & Ohio Canal Co., 32 Md., 545.
Upon the whole case it is submitted that the complainants, as holders of the notes recited in the mortgage to Mrs. Warner, are entitled to the benefit of the security given by Kilgore, the principal debtor, to her as the surety. That they are entitled to this security, notwithstanding their names are not mentioned in the mortgage. That the surety could not release the mortgage to the prejudice, and without the consent, of the appellees, and that they are not to be deprived of the benefit of the mortgage upon the ground that the purchase money was in part applied to the payment of the prior liens, inasmuch as these were expressly and formally released and extinguished.
Syllabus and headnotes are prepared by the reporter or publisher, not the court, and are not part of the opinion.
