Finance Co. of America v. Heller

Hornby, J., delivered the opinion of the Court. ⁷¹⁶ The question presented by this appeal is whether a mortgagor-grantor of land who conveys his equity of redemption therein subject to the mortgage and upon default of the grantee makes payments on the mortgage to protect his interest, may be subrogated to the rights of the mortgagee in a subsequent foreclosure proceeding to the extent of the payments made. William S. Heller and his wife entered into a written contract with George E. Banks, III, wherein it was agreed that if the Hellers should purchase a certain tract of land they, in turn, would convey a portion of it to Banks; that the buyers would obtain a purchase money mortgage on the entire tract; that when the portion was conveyed to Banks, he would pay a proportionate part of the mortgage debt and taxes; and that the Hellers would have a right of subrogation in the event they were compelled to make any of the mortgage payments Banks agreed to pay. The agreement was never recorded. Subsequently, the Hellers, having bought the land in question and executed a purchase money mortgage thereon to the Baltimore Federal Savings and Loan Association, conveyed a part of the tract of land to Banks subject to the mortgage.

Later Banks executed a second mortgage to The Finance Company of America, but he made no payments on either mortgage. The Hellers, to protect their interest in the land, had to make payments for Banks of $2706.15 on the first mortgage and real estate taxes of $93 — a total of $2799.15. Ultimately, a relative of the Hellers, having become the assignee of the first mortgage, instituted a foreclosure proceeding against the Hellers and Banks and sold the entire tract. After the payment of costs and the balance due the assignee under the foreclosed mortgage, there was a surplus of $7384.36.

The court auditor distributed the entire sum to the finance company in partial satisfaction of its second mortgage, whereupon the Hellers filed exceptions to the report of the auditor asserting that they were entitled to priority in the surplus proceeds to the extent of the payments (aggregating $2799.15) they had made for Banks on the first mortgage. The chancellor, basing his decision on the doctrine of equitable subrogation (and not the subrogation agreement between the parties), ordered distribution of $2799.15 to the Hellers and the balance ($4585.21) ⁷¹⁷ to the second mortgagee. On appeal, the finance company contends that even if the doctrine of subrogation is applicable it was not a bar to the collection of the debt secured by its mortgage. We think the chancellor was right and that his order must be affirmed.

When one pays a debt for which he is not primarily liable in order to protect his interest, the courts generally apply the doctrine of equitable subrogation and allow him to stand in the place of the creditor with the right to enforce whatever security there may be for the payment of the debt. 5 Tiffany, Real Property (3rd ed.), § 1506; 4 Pomeroy, Equity Jurisdiction (5th ed.), § 1212; Mullen, The Equitable Doctrine of Subrogation, 3 Md. L. Rev. 201 . Ordinarily, the question as to whether one is entitled to subrogation, depends on whether the claimant is a mere volunteer and, if not, whether he is on equitable principles entitled to such subrogation as against other claimants. Milholland v. Tiffany, 64 Md. 455, 460 , 2 Atl. 831, 834 (1886). A mortgagor may or may not be entitled to subrogation