Lackawanna Trust & Safe Deposit Co. v. Gomeringer , 236 Pa. 179 ( 1912 )

Opinion by

Mr. Justice Stewart,

The record shows these facts. Gomeringer and Haefner, partners, with a view to establishing thereon a manufacturing plant, purchased from the Lackawanna Trust & Safe Deposit Company a lot of ground in the city of Scranton, giving in part payment therefor their bond in the sum of $3,250, secured by mortgage on the premises. Subsequently a corporation was formed under the name of the Standard Knitting Works, of which Gomeringer and Haefner were the principal promoters, to which they conveyed the lot of ground above mentioned, subject to the payment of the mortgage referred to. To supply the corporation with needed funds, certain of the stockholders and directors from time to time endorsed the notes of the corporation, and for their security took from the corporation a mortgage in the sum of $20,000, in the name of H. W. Mumford, trustee, payable in five years after date, the interest thereon payable semi-annually, with the provision that in default of payment of the semi-annual interest for a period of thirty days the entire principal and interest might be declared due and payable, and the mortgage foreclosed at the option of the holder. Mumford assigned the mortgage as additional security to the Dime Deposit & Discount Bank, the holder of the endorsed notes. Default occurring in payment of semi-annual interest due 1st July, 1911, at the expiration of thirty days thereafter, the default continuing, the bank caused execution to. issue and the property of the corporation was accordingly levied upon. On the application of the general manager of the corporation, a rule to show cause why the execution should not be stayed was granted. While this rule was pending and undetermined, the Lackawanna Trust & Safe Deposit Company caused judgment to be entered on the bond accompanying the mortgage given it as part of the purchase money for the lot conveyed to Gomeringer and Haefner, and subsequently conveyed by them to the corporation. Under this execution the property of the corporation was levied on and advertised to be sold. To avoid this sale the corporation authorized its general manager to secure funds necessary to pay off the purchase money mortgage. The latter applied to the County Savings Bank, the real party here in interest. This bank was willing to advance the necessary funds, if it .could be subrogated in the mortgage to the rights of the Lackawanna Trust & Safe Deposit Company, but not otherwise. When application was made to the latter company for its assent to such arrangement, it was discovered that certain directors of the Standard Knitting Works, Lorenz, Glatz and Leroy had become the owners of the mortgage by purchase, after the execution had issued thereon. These parties, against whom it is alleged that they were active in procuring the previous execution on the $20,000 mortgage, in which they were interested to issue, refused to make any assignment of the mortgage. The full amount of debt, interest and cost was tendered them, only on condition however that they would assign their rights in bond, mortgage and execution to the County Savings Bank, which was advancing the money; but the tender was declined because of the condition. Thereupon the money was paid into court, and then paid over to the execution creditors without contest; but at the same time a-rule was applied for and granted requiring Lorenz, Glatz and Leroy to show cause why the County Savings Bank should not be subrogated to the mortgage. This rule was made absolute, and from that decree this appeal has been taken.

It does not concern us at this point of the case to inquire into the relations the appellants sustained to the Standard Knitting Works. For present purpose they may be regarded simply as bona fide creditors. What we are first to consider is the right of the County Savings Bank, as against the resistence of the appellees, holders of a second mortgage, to be subrogated to the rights of the latter in connection with the first mortgage which the bank has paid.

The doctrine of subrogation rests fundamentally on the equitable principle that when a party is required to pay a debt for which another is also liable and which that other in good conscience ought to pay, such payment should operate to invest the party paying with the creditor’s rights and remedies against the other debtor. And this is the mode which equity adopts to compel the ultimate payment by him who in good conscience ought to pay the debt, to the relief of him to whom none but the creditor could ask to pay. A simple statement of the principle is all that is here required; any elaboration of it would be simply a repetition of what has been said so frequently in cases where the doctrine has been discussed and applied. This much is involved in the very definition of the principle, viz, that it can be invoked only for the protection of one who has paid the debt of another because he had made himself legally liable in connection therewith. When one under no liability himself in connection with the debt voluntarily pays it, no equity can arise from the transaction calling for protection. In such case payment extinguishes the debt, except as the creditor receives the money upon the understanding that the debt is to be assigned to the party paying. In such case the transaction being one of purchase and not payment, the debt survives. It is manifest however that the transaction can take this shape only as the creditor assents. All that the debtor can demand of the creditor is a discharge of his liability upon payment. He is in no position to require a transfer of it to another. A volunteer who steps in and pays the debt has no higher rights. So it is. evident that the right to subrogation can result only when the party paying was not a primary debtor, but yet a party legally liable for the debt at the suit of the creditor. In this case the primary debtors were Gomeringer and Haefner, who contracted the indebtedness and secured its payment by their bond and mortgage. But, in accepting a conveyance of the mortgage property, the Standard Knitting Works as between it and its vendors made the debt its own and assumed to protect its vendors: Moore’s Appeal, 88 Pa. 450; Stanhope’s Est., 184 Pa. 414. Here, therefore, while the primary debtors were Gomeringer and Haefner, ultimate liability rested on the Standard Knitting Works by its own undertaking, and had payment been exacted of Gomeringer and Haefner they would have had an equity over against the Standard Knitting Works which would have entitled them to be subrogated to the mortgage. But with ultimate liability resting on the Standard Knitting Works no payment by it of the mortgage could give rise to an equity calling for subrogation, for its payment was of its own debt for which it was ultimately liable. The County Savings Bank was an entire stranger to the whole transaction, without any liability in connection therewith, and when at the request of the Standard Knitting? Works it paid the mortgage no other or higher equity resulted than would have resulted to the Knitting Works had it paid the debt with its own funds. The learned chancellor before whom the case was heard clearly recognized in his opinion the rule.that denies subrogation to a mere volunteer; but held that the hank in paying this mortgage was not a volunteer. He rests his conclusion as to this upon the case of Haverford Loan & Building Asso. v. Fire Assn., 180 Pa. 522. In that case subrogation was allowed, but on facts radically different from these we have here. There, one Dougherty, in the belief that he was.the sole owner of certain lands encumbered by a mortgage, procured from a building and loan association acting in the same belief, a loan which he secured by a mortgage upon the land. At the request of Dougherty, the association applied part of the money in payment of the earlier mortgage. It was subsequently discovered that Dougherty owned but an undivided one-fifth interest in the land as a tenant in common with four others. It was conceded that Dougherty having relieved the common estate of an encumbrance, was entitled to distribution from his co-tenants and could enforce the right by subrogation to the mortgage. The only question was whether the association succeeded to this right in Dougherty. It was in connection with this one question that the expression occurs in the opinion in that case, that the association was not “a mere volunteer,” inasmuch as it had paid the prior mortgage at the request of Dougherty. No more in this case was the County Savings Bank “a mere volunteer,” in the same sense, as against the Standard Knitting Works, for the money was applied in payment of the mortgage at its request.. The distinction is that in the one case Dougherty had an equitable right to contribution as against Ms co-tenants, and because of this fact it was determined that to these rights the association succeeded; while in the present case, the ultimate liability for the payment of the mortgage resting on the Standard Knitting Works, that company could derive no equitable rights from paying its own debt, and could look to no one for contribution or reimbursement. Having no right in itself of this kind no one could claim such right through it. Not only does the case referred to afford no warrant for. the conclusion reached by the learned chancellor, but it may be confidently asserted that in no one of our authorities is any other standing than that of mere volunteer given to one who has paid the debt of another under circumstances similar to those we have here. Out of the many cases supporting the views we have expressed above special reference need only be made to the cases of McCormick v. Irwin, 35 Pa. 111; Dollar Savings Bank v. Burns, 87 Pa. 491; Webster and Goldsmith’s Appeal, 86 Pa. 409.

We come now to the second reason given by the learned chancellor in support of the decree made. He says, “They (the appellees) were officers of the defendant company charged with the duty of serving its interests. To the contrary thereof they bought the lien with intent to use it adversely to those interests; they bought admittedly for no other purpose than to seize the company’s property to their own personal use and advantage. True, they were creditors by virtue of the debt secured in the name of the Dime Bank on which execution had been stayed.....One is not unmindful of their contention that they were only seeking to protect themselves against the consequences of mismanagement, etc. But, so long as they retained the badge of office and claimed to. exercise its functions, they were the guardians of its estate and could not in good faith compass its death, nor take anything by their unsuccessful attempt. Such directors cannot be heard to assert any equity, by reason of their ownership of the second mortgage, to prevent the subrogation now asked for.” The error here is so manifest that it needs no discussion. Admitting the facts to be as stated, what relevancy have they to this issue? The appellants are not asserting any equity, but standing on their legal rights as creditors. The case must be determined not according to their equities, but according to the equities asserted by their opponents. The whole burden is upon the latter, who alone are asking for equitable relief. They have not shown themselves entitled to any equitable interference, as we have tried to make clear, and with their failure in this regard the case was necessarily at an end. The inquiry as to the conduct of appellants as directors of the Standard Knitting Works was not only wholly foreign to the issue that was before the court, but was a matter in which the real party in interest here, the County Savings Bank, could have no possible standing to be heard. The other petitioners would have had standing had they pursued the same course with respect to the execution on the first mortgage as they pursued with respect to the execution on the second., Instead of paying the latter off they asked a stay of execution on the ground that appellants being directors of the Standard Knitting Works had acquired the mortgage and were using it to “compass the company’s death and seize its property to their own personal advantage.” Had they done this and made good their complaint as to the facts, while the equity power of the court could not have divested appellants of their property, it would have been quite sufficient to restrain the exercise of their rights in connection therewith within such limitations as would have prevented their accomplishing a purpose which the law would condemn. The present proceeding afforded the court no such opportunity, and the facts upon which the chancellor so largely relied, were wholly outside the case.

The assignments of error are sustained, and the decree is reversed at the cost of appellees.