Opinion
No. 4-2620
Opinion delivered September 26, 1932.
1. TAXATION — SUBROGATION — JUNIOR MORTGAGEE PAYING TAXES. — A junior mortgagee who paid taxes or furnished money therefor, taking the tax receipts in its name as agent for the mortgagors, will not be subrogated to the State's lien therefor as against the senior mortgagee who was not notified of such payment by the junior mortgagee. 2. MORTGAGES — LIEN OF JUNIOR MORTGAGEE FOR IMPROVEMENTS. — Where a house on mortgaged land was destroyed by fire, a junior mortgagee furnishing the money to replace it could not hold the senior mortgagee responsible for the cost thereof.
Appeal from Clay Chancery Court, Eastern District; J. M. Futrell, Chancellor; affirmed.
Oliver Oliver, for appellant.
J. R. Crocker and C. T. Bloodworth, for appellee.
STATEMENT BY THE COURT.
On March 11, 1921, C. P. Mabry, the owner of a large tract of land, mortgaged it to the First National Bank of Corning, Arkansas, to secure an indebtedness of $2,791, and on April 6, borrowed a further sum, the whole amount being evidenced by a note for $2,992.54, for which he again mortgaged the land as security. These mortgages were duly recorded.
Later Mabry, the mortgagor, conveyed a part of the tract of land to F. G. Mabry and another part to Carl Mabry retaining the remainder himself. Each of the three Mabrys borrowed money from the Federal Land Bank, appellee, in the sum of $5,000, $6,000 and $7,500, respectively and to secure same executed mortgages to the land bank conveying the entire tract of land, which had been first owned by C. P. Mabry and upon which two mortgages had been executed by him to the First National Bank of Corning, which later agreed to and did permit the mortgages of the Federal Land Bank to have priority over the mortgages to it, the cashier of the First National Bank indorsing consent on the margin of the record that the lien of its mortgages should become junior or subject to those of the appellee bank.
In April, 1929, the First National Bank was taken over by the Corning Bank Trust Company, and in November, 1930, the Corning Bank Trust Company became insolvent, and about that time a receiver was appointed to liquidate the First National Bank. The appellant, the Corning Bank Trust Company, formed in 1931, later became the owner of all the assets of the other two banks and was by agreement substituted for them as the real party in interest in this suit.
On the 4th day of September, 1929, the appellee bank filed three suits, one against each of the Mabrys, asking foreclosure of its mortgages against them. The Corning Bank Trust Company, appellant, was made a party and filed an answer and cross-complaint. The First National Bank filed an interpleader claiming the same rights as the Corning Bank Trust Company.
In the pleadings it was alleged that the First National Bank had a lien upon the property involved, and, in order to protect it, had been compelled to pay, and had paid, certain State taxes and drainage assessments upon the property, and prayed the right of subrogation for collection thereof. In the Carl Mabry case it was alleged that in the fall of 1928 the house standing upon the land had been destroyed by fire, that the lands could not be rented or cultivated unless the house was replaced, and, in order to protect its lien upon the land, it had been compelled to replace the house, which was completed on the 7th day of April, 1929, at a cost of $666.76, for which it prayed judgment out of the proceeds of the sale of the tract of land.
The lands were sold pending the outcome of this suit, and appellee bank became the purchaser, obtaining the new house on the lands.
Appellee denies the allegations of the cross-complaint and the payment of taxes as alleged and the bank's right of subrogation to the lien for payment of taxes. Appellee alleged that it had no knowledge, during the years the First National Bank had paid the taxes on the lands, that it was being done by the bank, although it had made annual examinations of the tax records to ascertain if the taxes had been paid and by whom; that such examinations disclosed that said payments had been made by the Mabrys or the bank as agent for them; that it relied upon the records as it had the right to do; and that the First National Bank failed to notify it of its payment of the taxes and its right to any subrogation to the lien therefor. It also alleged that the property had depreciated in value until it was insufficient to pay the appellee's mortgages, and that appellee had been misled and lulled into inactivity by the showing made on the tax records that the taxes had been paid.
Appellant responded, denying that appellee had made an examination of the tax records to determine that the taxes had been paid, and alleged that, if such examination had been made, it would have disclosed that payment of taxes had been made by appellant, and further that appellee had actual knowledge of the fact that the taxes were being paid by the First National Bank, knowing it had liens upon the lands, and that the taxes were paid by it to protect said liens; denied all the other allegations of the amended complaint.
After the proof was taken and the case ready for submission the second time, further proof was taken tending to show that the First National Bank had paid the taxes as claimed; but in rebuttal it was shown that, although the First National Bank had paid the taxes, it had been charged up against the Mabrys and their notes taken therefor along with the amount of supplies furnished the Mabrys for making the crops on the lands; the amount of the notes unpaid, being renewed each year, included the taxes paid on the lands and the balance due for supplies, etc.
The court denied the right of appellant to subrogation to the lien for taxes paid, and decreed a foreclosure. of the mortgages of appellee, from which decree this appeal is prosecuted.
(after stating the facts). It is undisputed that the three notes sued on and for which the mortgages were sought to be foreclosed were made by the Mabrys to the appellee bank, and that its mortgages. constituted a first lien upon the property. Nor is there any controversy about the Mabrys being indebted to the First National Bank, which released its prior lien and mortgage upon the lands involved, and voluntarily became a junior mortgagee subject to the lien of the appellee's mortgages.
Although it is denied that appellant bank paid the taxes, and that the First National Bank paid the taxes alleged to have been paid, it was shown that such taxes were paid by the First National Bank, which claimed to have paid them to protect its interest in the lands under the junior liens, which is admitted it held. While a junior mortgagee who in good faith pays the taxes due to protect its lien may be subrogated to the State's lien therefor and recover the amount paid, even as against the prior mortgagee, this principle of subrogation is administered, not as a matter of legal right, but to subserve the ends of justice and to do equity in the particular case; but, where such junior mortgagee pays the taxes over a three-year period, or furnishes the money to the mortgagor with which to pay them, the tax receipts being taken in the name of the mortgagor or in the name of the bank furnishing the money and paying the taxes as his agent without the senior mortgagee's knowledge, meanwhile furnishing yearly supplies to the mortgagors for the production of crops and the payment of money to it on the junior mortgages, it has been held that such junior mortgagee is not entitled to subrogation to the State's lien for such taxes as against the prior mortgagee, there being no disclosure of the true situation as would give notice to the senior mortgagee of the nonpayment of the taxes, giving it an opportunity to pay the delinquent taxes for its own protection. Federal Land Bank v. Richland Farming Co., 180 Ark. 442, 21 S.W.2d 954. Appellant knew the taxes were not being paid by the mortgagors, loaned them the money with which to pay same, and paid such taxes, taking the receipt therefor in its own name as agent for the mortgagors without notifying the senior mortgagee of the delinquencies and giving it an opportunity to pay the taxes, as appellant regarded it was bound to do. It knew that it had advanced the money to the mortgagors with which to pay the taxes and also, from the receipts of the money paid by it for the taxes, that it was paying the taxes for the mortgagors as their agent as disclosed by such tax receipts. Of course, if the taxes had been paid by the mortgagors as it was their duty to do, there could have been no right of appellant, who claims to have paid the taxes, to subrogation to the State's lien thereto, since it was the duty of the mortgagors to pay the taxes. The court did not err therefore in its decree denying appellant the right of subrogation to the State's lien for the payment of taxes claimed to have been paid by it for the mortgagors to protect its junior lien.
Neither was error committed in refusing appellant a decree for money expended by it in replacing one of the houses on a tract of the mortgaged land which had been destroyed by fire. It was not the duty of the junior mortgagee to make any such replacements, nor could it hold the senior mortgagee responsible for the cost thereof.
The decree is accordingly affirmed.