Wilson Brothers v. Cooey

Singley, J., delivered the opinion of the Court. On 18 January 1965, Holiday Barn, Inc. (the Barn) took title to an unimproved lot fronting 180 feet on the Hagerstown-Smithsburg Pike with a depth of 150 feet, theretofore owned by Holiday Acres, Inc. Immediately thereafter the Barn mortgaged the lot to Colonial Estates, Inc. (Colonial), to secure a loan of $110,000. On the same day, Colonial assigned the mortgage to Farmers and Mechanics National Bank of Frederick (Farmers and Mechanics), and on the following day borrowed $71,200 from the bank. On 11 February 1965, Colonial borrowed an additional $31,000 from Farmers and Mechanics, thus increasing its total indebtedness to $102,200.

These two loans were evidenced by Colonial’s notes, guaranteed by Herman F. Stouffer, 1 president of Colonial (who also presided over ³⁵² the destinies of the Barn and Holiday Acres) and his wife, and were secured by a collateral pledge of the Barn’s mortgage and of three other mortgages owned by Colonial, hereafter referred to as the Ramsey, Oden and Nixon mortgages, the principal amounts of which were $14,000, $3,800 and $10,000 respectively. Sometime after the borrowing, the Barn constructed a small shopping center on the mortgaged premises. 2 In July of 1966 the appellants (the Lienors) filed mechanics’ liens against the shopping center in the following amounts: Wilson Home Supply Co., Inc., $7,379.72; Wilson Brothers, $21,834.00; Hagerstown Paint and Glass Company, $1,282.19. By the time the shopping center was completed, Colonial had defaulted on its loan, and the Barn, on its mortgage. Farmers and Mechanics assigned the Barn’s mortgage to Cooey, the appellee, for foreclosure proceedings which were instituted by Cooey.

On 15 November 1966 the Barn’s property was sold at public sale for $51,991.06 (including a proration of county and state taxes in the amount of $991.06) and the sale was ratified on 12 December 1966. On 17 January 1967, shortly after the ratification of the sale, Maryland National Bank (Maryland National) intervened in the foreclosure proceedings. In its petition, it recited that on 25 January 1966, more than a year after the $110,000 mortgage had been given, the Barn had executed and delivered to Colonial what purported to be a $151,000 first mortgage on the same property which had been mortgaged in 1965. The new mortgage had been immediately assigned to Maryland National as security for a loan of $60,000 made to Colonial.

Relying on its rights as the holder of the 1966 mortgage, Maryland National claimed the proceeds of the foreclosure sale. A day later, the Lienors intervened in the foreclosure proceedings. In their petitions, each of them asked that: “All recorded mechanics liens filed against the realty foreclosed herein be consolidated in these proceedings and be adjudicated as to validity and amount prior to ³⁵³ distribution of any surplus remaining after payment of all amounts due the plaintiff, the senior lien- or.” (Emphasis added) Later, the auditor’s first account was filed, which provided that the proceeds of sale in the hands of the assignee for foreclosure be first charged with the payment of expenses of the sale; then, with the satisfaction of the Farmers and Mechanics’s claim, and that the remaining proceeds of $941.60 be distributed to Maryland National. The Lienors filed exceptions to the auditor’s account in which they said: “The auditor erred in allowing $941.60 to be paid to the Maryland National Bank in partial satisfaction of its mortgage dated and recorded on January 25, 1966, in the principal amount of $60,000.00.

Your Orators have each filed mechanic’s liens which are duly and seasonably recorded among the records of the Clerk of the Circuit Court for Washington County, as recited in the petitions to share in the proceeds of the mortgage surplus in this case as well as to have the mechanic’s liens adjudicated as to validity and priority. Your Orators credibly believe that the mechanic’s liens on these premises are liens prior in time to the second mortgage lien held by the Maryland National Bank and that any surplus from this sale is properly payable to the holders of the mechanic’s liens rather them the second mortgagee. “The auditor erred in determining that $46,998.08 is payable to the Farmers and Mechanics National Bank of Frederick, Maryland, because your Orators credibly believe that the actual indebtedness on the mortgage which has priority over the holders of the mechanic’s liens is substantially less than the amount recited in the affidavit of indebtedness filed by the Banners and Mechanics National Bank in this case.” (Emphasis added) After hearing the exceptions, the chancellor entered a decree on 4 August 1967 holding the Farmers and Mechanics’s mort ³⁵⁴ gage to be a first lien; directing that expenses be a first charge on the proceeds of sale; ordering that the Farmers and Mechanics’s claim for principal and interest, after taking credit for the Oden mortgage, be satisfied; and directing that any balance be held subject to the further order of the court. 3 The Lienors have appealed from this decree. Their basic contention is that the Farmers and Mechanics’s mortgage was taken for future advances and is therefore valid; or, alternatively, if the bank’s mortgage is valid, that there should be a marshalling of the assets held by the bank. An examination of the auditor’s second account, filed in conformance with the decree of 4 August, points up the difficulty confronting the Lienors if they cannot prevail over the Farmers- and Mechanics’s claim.

By the time the second account was stated, the unpaid principal amount of Colonial’s obligation to-Farmers and Mechanics, originally $102,200, had been reduced to $40,120.95 by (i) a $50,000 repayment on 19 April 1965 ; (ii) $8,475.98 received in the foreclosure of the Ramsey mortgage, held as collateral; and (iii) a credit for amounts received and. to be received in satisfaction of the Oden mortgage, also held as collateral. Unpaid interest amounted to $4,788.64 on 28 August, with the result that the total amount of the Farmers and Mechanics’s claim was $44,909.59. Expenses of the foreclosure sale had totalled $5,824.67, so that after satisfying the Farmers and Mechanics’s claim and meeting expenses there remained in. the hands of the assignee for foreclosure a balance of $1,256.80, the amount being held subject to order of court. The Lienors point to the provision of Maryland Code (1957, 1964 Replacement Volume) Art. 66, § 2: “* * * No mortgage to secure future loans or advances shall be valid unless the amount or amounts of the same and the times when they are to be made shall be specifically stated in said mortgage; * * *” and say that since it was uncontroverted that no money passed from Colonial to the Barn, and that the proceeds of Colonial’s- ³⁵⁵ loan never reached the Barn, the mortgage was invalid as to subsequent creditors of the Barn.

They rely on Groh v. Cohen, 158 Md. 638 , 149 A. 459 (1930); Baltimore High Grade Brick Co. v. Amos, 95 Md. 571 , 52 A. 582 (1902) and In re Shapiro, 34 F. Supp. 737 (D. Md. 1940) affd 118 F. 2d 348 (4th Cir. 1941). The difficulty with this contention is that the rule which the Lienors seek to invoke applies only as between a mortgagor (or his creditor) and the mortgagee. Watkins, Maryland Mortgages for Future Advances, 4 Md. L. Rev. 111 (1940) points out that while mortgages for future advances were good at common law, the practice of using such mortgages to promote fraudulent or preferential arrangements between lender and borrower which were prejudicial to creditors became widespread in Maryland and led to the adoption of Chapter 50 of the Laws of 1825, the statutory progenitor of Art. 66, § 2. There are several exceptions to the sanction of invalidity imposed by the statute, one being “* * * mortgages to indemnify the mortgagee against loss from being endorser or security * * A” Our predecessors were not persuaded by the ingenuity of borrowers who contrived to come within the letter but not the intent of the law by relying on an instrument which masqueraded as an indemnity mortgage but actually secured future advances.

Groh v. Cohen, supra. In form, the Barn’s mortgage was not an indemnity mortgage. The fact that Maryland documentary stamps in an amount of only $99.00 were affixed was an intimation that it might have been a purchase money mortgage. Code, Art. 81, § 277 (a), (b).

The chancellor concluded that the Barn’s mortgage was not a mortgage for future advances, categorizing the mortgage as “one made as collateral for notes” without formally determining that the mortgage qualified as an indemnity mortgage permitted by Code, Art. 66, § 2. Under our view of the case, we need neither accept nor reject this conclusion since the result reached by the lo-wer court can be supported on other grounds. The cases relied on by the Lienors deal with the rights of mortgagors (or creditors of mortgagors) and of mortgagees under mortgages which are unsupported by consideration or fail ³⁵⁶ to meet statutory requirements. However, once an assignment of a mortgage is made to a bona fide purchaser for value without notice, an entirely different set of rules comes into play.

Groh v. Cohen, supra, dealt only tangentially with the rights of an assignee who had notice of the fraudulent scheme. “While ordinarily the assignee of a mortgage cannot occupy the position of bona fide holder for value as against the mortgagor, yet he may occupy such position as against creditors of the mortgagor. Even though the mortgage was gotten without consideration by the mortgagee and could, therefore, be set aside by the mortgagee even in the hands of an assignee, yet if the mortgage gets into the hands of a bona fide assignee for value, who has no notice of lack of consideration, it will be good as against creditors of the mortgagee.” Ginsberg, Mortgages and Other Liens in Maryland (1936) at 231. To the same effect, Glenn, Mortgages (1943) § 324 at 1361-62; 37 Am. Jur.

Mortgages § 1235 (1941). See also 80 A.L.R. 395 . In Economy Savings Bank v. Gordon, 90 Md. 486 , 45 A. 176 (1900)