German Savings & Loan Soc. v. Tull ( 1905 )

ROSS, Circuit Judge.

The main facts of this case are stated in the opinion of our Brother MORROW, and it is therefore unnecessary to state them here. We agree with him in regard to the jurisdiction of the court and the conclusiveness of the judgment in the state court of Washington in the case between these parties in respect to all matters there determined. We are unable to agree that the equities now sought to be set up by the appellant were not among those matters. According to the express declaration of the Supreme Court of the state of Washington (Dormitzer v. German Savings & Loan Soc., 23 Wash. 207, 62 Pac. 886) the decisive question in that case was “whether the respondent [appellant here] took its mortgages upon the property in controversy in good faith, without knowing, or having the means of information by which it might, by the exercise of common prudence, have known, of the acts of the guardian and F. M. Tull in transferring the property from the minor children to F. M. Tull, and whether those acts were fraudulent.” . The Supreme Court of Washington, as did the United States Circuit Court from which the present appeals come, acquitted the appellant German Savings & Loan Society of any intention to commit or participate in any fraud upon the minor children of Tull, for the reason that the appellant based its action in the proceedings upon the advice of its attorney and agent at Portland, Or., to the effect that such proceedings were not illegal, but, on the contrary, valid; the Supreme Court of Washington saying, in its opinion (23 Wash. 220, 62 Pac. 890):

“The proof is uneontradicted, and it is admitted by the respondent in its brief, that the probate proceedings were for the purpose of vesting title to the entire piece of property in the father, so that he might mortgage it to the respondent in order to get money to go on with the buildings in course of construction on part of the property, and that, in place of the children’s interest being sold for cash, they were to get a mortgage, second and subordinate to the respondent’s, for a sum the father was to go through the form of bidding, which had been agreed upon in advance by the probate court, on testimony taken as to the fair value of the children’s interest. The testimony of P. D. Tull, the appointed guardian, shows that he was used as an instrument by the father to accomplish this end. He was in no sense of the word ‘guardian.’ He did just as he was directed to do by the father, and, it seems, with full knowledge of the probate court. The father was the actual guardian. The law as it existed at the time these alleged sales by the guardian were made authorized the probate court, when the estate was suffering waste, or a better investment of the value could be made, to sell the infant’s interest in real estate. Here no bona fide sale in the open market to the highest bidder was contemplated. If we should uphold these transactions, the interest of infants in real property in this state would be under a very precarious tenure. It may be conceded that there was no intention — and we think that is a fact — on the part of the attorneys, the probate judge, Tull, and the respondent to injure the appellants, and that they acted from the best of motives; but the fact stands out, nevertheless, that they perpetrated in law a fraud upon the children.”

The opinion of the Supreme Court of the state concluded with these words:

“The judgment and decree of the lower court is reversed, with costs to appellants. This cause is remanded to the court below, with instructions to enter a judgment and decree herein adjudging and decreeing that Dora May Dormitzer, William D. Tull, and Ernest B. Tull, the appellants herein, are entitled to an unincumbered undivided one-half of the real estate described in' the pleadings in this action, and that the guardian deeds described in said pleadings and orders of the probate court of Spokane county, directing the sale of said half interest, or in any way affecting the same, and the said guardian deeds conveying the same to F. M. Tull by P. D. Tull, as guardian of said appellants, as set out in the pleadings, be declared fraudulent, null, and void; and also decreeing that the plaintiffs in the action below recover their costs.”

We agree with the court below that the decision of the Supreme Court of Washington “fixes definitely and finally the rights of the Tull children as owners of an undivided one-half of the property unincumbered against any title or claim or lien which the German Savings & Loan Society can ever assert arising out of any transaction previous to the date of the mandate.” That counsel for the respondent in that case (appellant here) understood that decision to go to that extent, is, as said by the court below, clear; for, in addition to their petition for a rehearing of that cause, they moved the Supreme Court of the state, on the 25th day of January, 1901, to modify its order and decree so as to leave open for investigation and adjudication in the superior court of the state all questions relating to rents, issues, and profits of the premises, and all questions as to the value of permanent improvements placed upon the premises in question with moneys borrowed from tlie society, and all moneys advanced and paid by it for the necessary and proper repairs and maintenance of the property, for taxes, and for assessments for local improvements. If it be true that the remittitur from the supreme to the superior court of the state had then gone down, it was still within the power of the Supreme Court to recall the remittitur for the purpose of modifying or changing its judgment according to its decision in the case of Bell v. Waudby, 7 Wash. 204, 34 Pac. 917. We find it impossible to conclude that the Supreme Court of the state would have denied those motions, and adhered to its decision directing a decree adjudging the children “entitled to-an unincumbered undivided one-half” of the property, and adjudging the deeds and orders in question “in any way affecting the same” fraudulent, null, and void, if it had considered the society entitled to the equities there, as well as here, set up. Indeed, it is-impossible to see how that court could have held the society entitled to such equities, in view of its express adjudication to the effect that it was not a purchaser in good faith, but, on the contrary, that, while not intending to do so, it in fact participated in a legal fraud' upon the children in acquiring its asserted rights. That judgment is, as held in the opinion of our Brother MORROW, res adjudicata, and conclusive upon that question, as well as every other issue in the case. We must therefore accept Jt as an established fact that the present appellant does not occupy the position of a bona fide purchaser. Kven if that were not so, the evidence in the present suit shows the same thing; for while the appellant relied and acted upon the advice of its attorney and agent, and was therefore innocent of any intended wrong, it knew of the rights of the children, for they were matters of public record, of which it had not only constructive, but actual, notice. And as it, through its agents, knew of, and, indeed, was a party to, the-proceedings through which F. M. Tull sought to divest the interests of the children and invest the same in himself, and as those proceedings constituted a fraud in-law, as was adjudged by the Supreme Court of Washington and the Supreme Court of the United States, it is impossible to see how the appellant can, in any aspect of the case, be regarded in the light of an innocent purchaser for value of the children’s interest. A mistake in regard to the legal effect of transactions, of which a party has notice, never makes of him a bona fide purchaser. In other words, as said in Bodkin v. Arnold, 48 W. Va. 108, 35 S. E. 980 “plaintiff’s belief, to be bona fide, must be founded on ignorance of fact, and not ignorance of law.” To the same effect is Milwaukee & Minnesota Ry. Co. v. Soutter, 13 Wall. 517, 20 L. Ed. 543. In Williamson v. Jones, 43 W. Va. 562, 27 S. E. 411, 38 L. R. A. 694, 64 Am. St. Rep. 891, it was expressly held that “one having notice of facts rendering his title inferior to another, who, by mistake of law, regards his title as good, cannot claim for permanent improvements.”

The equities here set up by the appellant are not always accorded a purchaser in good faith, and are never awarded a tenant in common who becomes such mala fide. In Cosgriff v. Foss, 152 N. Y. 104, 46 N. E. 307, 36 L. R. A. 753, 57 Am. St. Rep. 500, the, Court of Appeals of New York refused to allow a tenant in common to recover for improvements; saying:

“They were not in the line ot restoration, but of a business venture. We know of no well-considered case in this state that would authorize an allowance for improvements under the circumstances. * * * Equity requires contribution from tenants in common only to prevent injustice; and, unless the rule is kept well in hand, it is liable to cause more injustice than it prevents.”

Authorities to the effect that a tenant in common who does not hold in good faith cannot recover for improvements put upon the property are too numerous to require citation. In Gillespie v. Moon, 2 Johns. Ch. 585, 7 Am. Dec. 559, Chancellor Kent said:

“Such an allowance would be confounding all moral distinctions, and be giving countenance and sanction to the most flagrant injustice.”

And in the case of Milwaukee & Minnesota Ry. Co. v. Soutter, supra, the Supreme Court of the United States, in speaking of a fraudulent purchaser of property, and asking if it was ever known that such a purchaser, deprived of its possession, could recover for his repairs or improvements or for incumbrances lifted by him whilst in possession, answered the question thus:

“If such a case can be found in the books, we have not been referred to it. Whatever a man does to benefit an estate under such circumstances he does in his own wrong. He cannot get relief by coming into a court of equity.”

Moreover, the improvements .put upon the property in question, one-half the cost of which the appellant seeks to charge against the Tull children, were put upon it not by the appellant, but by its mortgagor, F. M. Tull. The appellant was not then a tenant in common. Certainly F. M. Tull was a mala fide purchaser of the children’s interest, for which reason, under the eminently just and thoroughly established doctrine above adverted to, he could not recover from them in a court of equity for any repairs or improvements, or for any incumbrances lifted by him whilst in possession. It is just as certain that the appellant could not acquire from F. M. Tull, either by conveyance or by subrogation, any other or greater rights than he himself possessed. Swarts v. Siegel, 54 C. C. A. 399, 117 Fed. 13. The only rights, so far as appears, that the appellant acquired through conveyance from F. M. Tull, were those derived from the mortgages executed b'y him to'the appellant, and the foreclosure thereof, the full scope of which, as has been seen, was conclusively determined by the judgment of the Supreme Court of the state in the case between these parties, already referred to.

As regards the claimed right of subrogation, it is sufficient to say that, even if the facts of the case admitted of the subrogation of the appellant to the rights of F. M. Tull, the rights here asserted to charge against the interests of his children one-half of the cost of the improvements, etc., never existed in him, for the reasons already stated, and therefore the appellant could get nothing by reason of such subrogation. Subrogation is a doctrine of equity jurisdiction, which does not depend on privity or contract, express or implied, except in so far as the known equity may be supposed to be imported into the transaction, and thus raise a contract by implication. It is founded on the facts and circumstances of each particular case and on the principles of natural justice. In general, it will be applied “wherever any person, other than a mere volunteer, pays a debt or demand which in equity or good conscience should have been satisfied by another, or where a liability of one person is discharged out of a fund belonging to another, or where one person is compelled for his own protection, or that of some interest which he represents, to pay a debt for which another is primarily liable, or wherever the denial of the right would be contrary to equity and good conscience. Subrogation being the creature of equity, it will not be permitted where it would work injustice to the rights of those having equal or superior equities. Thus it will not be enforced against a bona fide purchaser for value without notice, or in favor of a person guilty of fraud, or for the benefit of one who would thereby be enabled to derive an advantage from, or to' establish his claim through, his own wrong or negligence or inequitable or illegal conduct. Nor will it be enforced at the expense of a legal right, or where resort to a usurious agreement or security would be necessary for its establishment.” 27 Am. & Eng. Enc. of Law (2d Ed.) 203, 204, and authorities there cited. See, also, Ætna Ins. Co. v, Town of Middleport, 124 U. S. 534, 8 Sup. Ct. 625, 31 L. Ed. 537; Prairie State Bank v. United States, 164 U. S. 227, 17 Sup. Ct. 142, 41 L. Ed. 412; First National Bank of Seattle v. City Trust Safe Deposit & Security Co. of Philadelphia, 52 C. C. A. 313, 114 Fed. 529. Moreover, it is admitted by the pleadings in this cause that the property in question is worth $250,000, and it does not appear but that the appellant’s one-half interest in the property itself and its one-half interest in the rents, issues, and profits thereof is enough to reimburse itself for its loans, with interest. To apply the doctrine of subrogation so as to enable a party to a wrong to make a profit at the expense of the injured and innocent parties to that wrong would be quite foreign to the principles upon which the doctrine of subrogation is founded.

In the light of the foregoing authorities it would seem clear enough that the appellant cannot be awarded the rights now and here asserted by it by means of subrogation to the rights of F. M. Tull, first, for the reason that F. M. Tull never possessed any such rights; and, second, because upon the facts’ of the case as disclosed by the record the appellant is not entitled to the application of the doctrine of subrogation.

We are of opinion that, except in one respect, the judgment of the court below is right. It refused to allow “any interest on the account.” We think that the one-half of the various amounts of money received by the appellant from the property belonging to the complainants and cross-complainant should bear legal interest from the date they were respectively received by the appellant, and that the appellant is entitled to like interest upon the various sums of money paid out by it on account of the property that were allowed by the court below from the date of their respective payments.

The judgment of the court below will be so modified, and, as thus modified, will stand affirmed.