Kone v. Harper

I regret that I am unable to agree with my brethern in the disposition of this cause. I cannot agree with the finding of fact to the effect that Harold Shear or the Shear Company or the present holder of the $7,200 note knew that the first lien notes had been paid out of the $25,000 loan made by the Ward-Harrison Mortgage Company, or that the evidence is sufficient to charge them with notice of said fact, or sufficient to charge either of said parties with notice that the lien notes paid were canceled by a mistake; nor can I agree to the finding that the $25,000 was loaned by the Ward-Harrison Mortgage Company on the land which secures the $7,200 note. The record shows without dispute that the Ward-Harrison Company paid off out of the $25,000 loan about $10,000 against the 1,698 acres of land which secures the $7,200 note in question, and about $14,000 against another 1,000-acre tract, and took its mortgage against the whole 2,720 acres. I have carefully studied the statement of facts, and do not find any evidence that to my mind tends to show that Harold Shear or the Shear Company knew when it purchased the $7,200 note that the $25,000 loan by the Ward-Harrison Mortgage Company was used to pay off any liens of any kind, class, or character against any of the property involved in the litigation. It appears to me from the record that the evidence shows without dispute that neither Harold Shear nor the Shear Company nor the present owner and holder of the $7,200 note had any knowledge of any fact, nor were they charged with notice of any fact that would put them on inquiry that any of the funds from the Ward-Harrison loan were used to pay off any prior liens. The only evidence in the record that I have discovered bearing on this question is the deed of trust given by Harper to the Ward-Harrison Mortgage Company, dated August 10, 1922, and it does not in any way refer to or suggest that any of the loan was to be, or was, used to pay any prior indebtedness. The releases of the indebtedness that were on the land at the time the loan was negotiated recited that the notes were paid by other and different parties. The $8,000 note release recites that it was paid by Smith, the original signer thereof, and there is nothing in the release of the $800 note that indicates who paid same. The agent for the loan company who handled the making of the original $25,000 loan testified that it was the custom of the loan company to keep liens which the company paid out of its loans alive, but that in this particular case they did not intend to keep the liens alive, but had same released. Thereafter the Ward-Harrison Mortgage Company, on October 6, 1922, transferred without recourse the $25,000 mortgage note to the Kansas City Life Insurance Company, the present owner thereof. Harper, who held the $7,200 note, transferred same in December, 1921, to the Colonial Trust Company, and the transfer was placed of record March 31, 1922. The loan was made by the Ward-Harrison Mortgage Company to Harper on August 10, 1922, some five months thereafter. On August 18, 1922, eight days after the deed of trust was given by Harper to the Ward-Harrison Mortgage Company, Harper executed to the Ward-Harrison Company a subrogation agreement, under the terms of which he made the $7,200 note an inferior lien to the $25,000 note. At that time, however, the record shows without dispute that Harper did not own the $7,200 note, but that he had several months prior thereto transferred same to the Colonial Trust Company. The officers of the Colonial Trust Company as well as the officers of the Shear Company testified that, at the time the note was transferred by the Colonial Trust Company to the Shear Company, they all thought that the $7,200 note was a first and prior lien against the 1,698 acres. The application which Harper made to Ward-Harrison Mortgage Company for the loan recited that the $7,200 note was against said tract, and that he expected to use part of the funds to pay same. The contents of this application, however, were not known in any way to the Colonial Trust Company or the Shear Company. The only circumstance in the record that was in any way irregular, and that could have aroused the suspicion of the Shear Company at the time it purchased the note from the Colonial Trust Company, was that Harper, on August 18th, ten days after he had executed the mortgage to the Ward-Harrison Mortgage Company, gave a subrogation agreement, agreeing that the $7,200 note should be an inferior lien to the $25,000 lien held by the mortgage company. The record, however, as above stated, showed that at that time Harper did not own the $7,200 note, and had not owned it for more than eight months.

In my opinion, under the facts in this case, the Shear Company purchased the $7,200 note without any notice that it was not a first lien on the 1,698 acres of land. The Ward-Harrison Mortgage Company loaned its $25,000 on 2,720 acres, which embraced the 1,698 acres, and used the larger portion thereof to pay liens against various portions of the 2,720 acres, and, as shown by its own testimony, had not attempted to keep the liens alive, but had deliberately had them, and each of them, released of record, and thereby made it appear from the record that the $7,200 note was a first lien on the 1,698 acres of land as against their $25,000 lien. In my opinion, the Shear Company and the present owner and holder of the $7,200 note were innocent purchasers for value without any notice of any equitable lien held by the Ward-Harrison Mortgage Company or its assigns. Where a party holds a mortgage on property, and causes same to be released, and thereafter a mortgage which was a junior mortgage to the one released is sold for value, the purchaser of the Junior mortgage has a right to rely on the record which shows that the prior mortgage had been released, and, as against the parties who have caused the prior mortgage to be released, is entitled to be protected in his rights. The axiom that "he who causes the injury should be the first to suffer" should, I think, be applied in this case. The Ward-Harrison Mortgage Company having caused the prior liens to be released, and the Shear Company and the present holder, having purchased the $7,200 note, relying on the prior notes being paid, are entitled to have said note foreclosed as a first lien on the 1,698 acres, and, in my opinion, the trial court should have so decreed. Coonrod v. Kelly (C.C.A.) 119 F. 841; Washington Co. v. Slaughter, 54 Iowa 265, 6 N.W. 291; Amick v. Woodworth, 58 Ohio St. 86, 50 N.E. 437; 41 C. J. 583.