White Eagle Polish American Building & Loan Ass'n v. Canton Lumber Co.

Pattison, J., delivered the opinion of the Court. The Hart-Miller Islands Company, a body corporate, one of the appellees, executed unto the appellant, the ²⁰¹ White Eagle Polish American Building & Loan Association of Baltimore City, three mortgages; the first executed on August 26th, 1926, to secure a loan of $37,000, the second, executed on August 16th, 1927, to secure a loan of $8,000, and the third, executed on March 24th, 1930, to secure a loan of $30,000. These mortgages were recorded on August 26th, 1926, August 19th, 1927, and April 1st, 1930, respectively. The Hart Miller Islands Company defaulted in its compliance with the terms and covenants contained in the mortgages, and, on December 16th, 1930, mortgage foreclosure proceedings were instituted upon the three mortgages for the sale of the lands embraced therein.

At that time, as disclosed by the statement filed by the mortgagee, there was due upon the mortgages the sum of $62,442.18. The property was sold in the proceedings so instituted by Frank E. Poffel, the attorney named in the mortgages, at and for the sum of $40,500. The appellant, the building and loan association, being the highest bidder therefor, became the purchaser of the property. The sale was reported to the court and, after exceptions had been filed thereto by the Canton Lumber Company, one of the appellees, and evidence heard thereon, the sale was finally ratified and confirmed.

Before distribution of the money was made, the Canton Lumber Company filed its petition, in which it alleged that it, on September 25th, 1930, had filed its mechanics’ lien claim for $6,911.62, against a building located on the land conveyed by the mortgages and which was sold under the foreclosure proceedings. The petition alleged that the third mortgage, executed on March 24th, 1930, for $30,000, was to secure future advances to be made from time to time by the building and loan association to the mortgagor, in payment of construction work, aggregating approximately $30,000. It further alleged “that said third mortgage was not a ‘participating’ mortgage made by the building association to one of its members, and for that reason requiring the repayment of an un ²⁰² certain sum of money at an uncertain time, but was made to secure a building on construction loan of definite amount, to wit: thirty thousand dollars, the same to be repaid with interest at the expiration of a definite period.” It was then alleged that such third mortgage was invalid so far as it affected the petitioner’s claim, in that it was in conflict with, or in violation of, the provisions of section 2 of article 66 of the Code of Public General Laws of Maryland, inasmuch as it did not “state the amount or amounts of the future loans or advances which it was intended to secure” and alleged that, because of such violation of the statute, the mortgage “should be set aside” and that in the distribution of the proceeds of sale the mechanics’ lien should be preferred over the claim of the building and loan association under its third mortgage. An answer was filed to the petition by the appellant, the mortgagee, and evidence was taken, upon which the court passed its order or decree, dated the 28th day of February, 1984, to the effect “that the mechanics’ lien claim * * * be and it is hereby preferred to the claim of the third mortgage * * * and in the distribution of the surplus” the mechanics’ lien claim of the Canton Lumber Company shall be preferred over the claim of the building and loan association under its third mortgage.

It was from this order or decree that this appeal was taken. The appellant is a building and loan association, incorporated for the purposes, as stated in its charter, “of providing for its members a safe and secure investment for their earnings, for loaning such members upon such security as may be provided for by the by-laws, funds to enable them to purchase homes, for the buying, selling, mortgaging, leasing or otherwise dealing in real or leasehold property in the State of Maryland, and for all those purposes which are usual and proper to be exercised of building and homestead associations under the Public General Laws of the State of Maryland, and that the said corporation is formed upon the articles, conditions and provisions herein expressed and subject in all par ²⁰³ ticulars to the limitations relating to corporations which are contained in the General Laws of this State.” In the third mortgage, the one in question in this case, is found this statement, “whereas, the said mortgagor being member of the said body corporate has received therefrom an advance of thirty thousand ($30,000.00) dollars, on three hundred shares of stock, the due execution of this mortgage having been a condition precedent to the granting of said advance.” Then follows the granting clause, which is followed by a provision authorizing the sale of the property in case of default in any of the covenants therein contained. Among the covenants is the following: “The said mortgagor for itself covenants with the said mortgagee, its successors and assigns to pay and perform as follows; that it to pay weekly to the said mortgagee, its successors, or assigns, the sum of seventy-five dollars as dues until the said sum of thirty thousand dollars shall be repaid; and also to pay weekly, at the time and place specified by the mortgagee, the sum of thirty-six dollars as interest until the sum of one hundred dollars shall be repaid in weekly dues, when the said weekly payments of interest shall be reduced twelve cents; and so on, and as often as one hundred dollars shall be so repaid in dues, the weekly payments shall be so reduced twelve cents; to pay all fines and penalties that may be imposed upon it by said mortgagee in accordance with its charter, constitution or by-laws, which by-laws are hereby made a part hereof; to pay all taxes and water rent, and other public dues and charges for which the property hereby mortgaged is now or may become liable, when payable.” Although the mortgage contains the aforegoing acknowledgment by the mortgagor of the receipt of the $30,000, at the time of the execution of the mortgage, the whole of this amount was not then actually paid. Only the sum of $2,520.25 was then paid to the mortgagor, but, in accordance with an agreement made by and between the mortgagor and the mortgagee, contemporaneous with the execution and delivery of the mortgage, it was agreed ²⁰⁴ that the balance of the $80,000 should be retained by the mortgagee and credited to the mortgagor upon the books of the building and loan association, to be used from time to time in payment of the construction work upon the mortgaged property, when and as the work was done and approved by the mortgagor, and the building and loan association authorized by it to pay the same.

This is shown not only by the agreement contained in the record, but by a letter found therein from the mortgagor to the mortgagee, in which it is said: “With reference to the loan of $30,000, made to us by you, and secured by mortgage on our real estate at Swan Point, Hart and Miller Islands, it is understood that you are to retain the proceeds of this loan and disburse the same as the work” therein mentioned “progresses. As bills are rendered after the necessary work has been performed to certain degrees, we will O. K. the same if the work has been done by the contractors to our satisfaction and authorize you to pay same. After the work has been completed and all bills paid you may either apply the surplus remaining on your mortgage or pay over same to us for the company’s use. Under this agreement the mortgagor, through those with whom it had contracted, proceeded with the work, mentioned in the aforesaid letter, which was to be paid for out of the $30,000 borrowed.

The building and loan association made the following disbursements: Mar. 24, 1930 $ 2,520.25 Apr. 5 3.000. 00 Apr. 14 2.500.00 Apr. 23 4.000. 00 Apr. 24 600.00 Apr. 28 1.000. 00 Apr. 29 500.00 May 6 2.200.00 May 12 2,879.75 May 19 1,000.00 May 20 1,100.00 ²⁰⁵ May 23 500.00 May 26 750.00 May 27 2,200.00 June 2 2.700.00 June 3 300.00 June 9 2.250.00 $30,000.00 During the period in which the work was being done and the payments made therefor, the appellee, the Canton Lumber Company, sold and delivered unto the Hart Miller Islands Company, mortgagor, lumber totaling the sum of $8,480.02, less credits of April 29th, 1930, $68.40, for materials returned and payment of July 2nd, 1930, of $500, July 30th, 1930, $1,000, leaving a balance of $6,911.62. On September 25th, 1930, the Canton Lumber Company filed its mechanics’ lien, which was recorded, among the lien records of Baltimore County, for the sum of $6,911.62. It will be observed from the aforegoing statement that the mortgage was executed on the 24th day of March, 1930, and that on or before the 29th day of April, 1930, the day upon which the first sale and delivery of lumber was made by the Canton Lumber Company to the mortgagor, there had been paid by the building and loan association, out of the funds retained by it, including the cash payment of $2,520.25, made on the date of the execution of the mortgage, the sum of $14,120.25. Thereafter, the building and loan association, by payments made by it in accordance with the aforegoing agreement, disbursed the entire balance of the $30,000.

On September 25th, 1930, the Canton Lumber Company filed its mechanics’ lien. The evidence discloses that the Canton Lumber Company, before making sale and delivery of its lumber to the mortgagor, obtained from either Dunn or Bradstreet reports of the financial condition of the Hart Miller ²⁰⁶ Islands Company, which showed “a large equity in their holdings in Hart-Miller Islands, or with the Hart Miller Islands Company.” These reports likewise showed the existence of the three mortgages upon said land, executed to the building and loan association, aggregating the sum of $75,000. The general manager of the Canton Lumber Company was asked: “At the time of receiving this Dunn and Bradstreet report which you testified about that it showed mortgages, did you make any investigation as to these mortgages, the amounts, and whether or not they were recorded? No, I did not; my recollection is that the total assets that that report showed, the mortgages were of such a small amount that we never even considered them a factor in the case.

If my recollection serves me correct, the Hart Miller Islands on that report showed a net worth of close to $200,000.” It will be seen that the Canton Lumber Company had both actual and constructive notice of the existence of the mortgages to the building and loan association, at and before the beginning of the sales and deliveries of the lumber by them to the Hart Miller Islands Company. The facts stated, consisting of the agreement in relation to the retention by the mortgagee of the money loaned by it to the mortgagor, the credit given to the latter for the amount so retained, and the disbursement of that money, in the manner stated, as well as the facts given in relation to the mechanics’ lien, stating the times when the sales and deliveries were made, the knowledge by the Canton Lumber Company of the existence of the mortgages, and the fact that credit was given for the lumber sold and delivered to the Hart Miller Islands Company upon the financial reports received by it, without regard to the mortgages, which were not regarded by it as a factor at all in the decision of the question whether or not credit should be given, are here mentioned to show the absolute freedom of fraud and