Appeal from the Circuit Court for Carroll County; Boylan, C. J.
Brune, C. J., and Hammond, Horney, Marbury and Sybert, JJ. Horney, J., delivered the opinion of the Court.
The principal question presented on this appeal is whether a lienholder or attaching creditors are entitled to the proceeds from a sale of dairy cattle, farm equipment and other chattels sold at a public sale under a written agreement between the owners and an auctioneeer and sales manager who was also the lienholder and an unsecured creditor.
V. Kenneth and Ella Mae Groomes (the Groomes') in August of 1960, executed a chattel mortgage and a conditional sales contract (collectively herein referred to as "lien" or "liens") on their cattle, farm equipment and other chattels to Guy A. LaMunion (LaMunion, lienholder or auctioneer) for the sum of $11,850, payable in thirty monthly installments of $495 each. LaMunion was a dealer in dairy cattle and farm equipment as well as an auctioneer. In July of 1961, the Groomes', who were also indebted to the Maryland Cooperative Milk Producers (Maryland Cooperative), arranged to make monthly payments of $75 on account of such indebtedness out of their milk checks. Thereafter, whenever the aggregate monthly payments they were required to make left the Groomes' without sufficient means to operate their farm, LaMunion would assist them by paying their cattle feed, electric and telephone bills.
Finally, due to financial difficulties, the farm of the Groomes' was sold at a mortgage foreclosure sale. The payments on the chattel liens being also in default, the Groomes', in March of 1962, entered into a written agreement with LaMunion under which he was to sell all the livestock and other personal property on the farm at public sale. LaMunion was to furnish the auctioneer and sale clerks, receive a commission of 10% and collect the proceeds of the sale. After deducting the sale expenses and commissions, LaMunion was to apply the net proceeds to the chattel lien indebtedness and other obligations due him by the Groomes'. The balance, over and above $8,250, was to be paid to the owners. The advertisement stated that the sale was being held by the Groomes' and others as owners because their farm had been sold and they were discontinuing dairying. LaMunion was named in the advertisement as "auctioneer and sales manager."
The sale was held on April 10, 1962, and grossed $7,320. At the conclusion of the sale, writs of attachment, issued the day before by Maryland Cooperative and Southern States Westminster Cooperative (Southern States) on confessed judgments entered against the Groomes', were laid in the hands of the auctioneer and sales manager as garnishee. As of the day of sale, the sum of $4,856 was due under the chattel liens, and the Groomes' also owed LaMunion $1,859.05 for money he had advanced them to pay current bills and a chattel lien payment of $406.02 he had made to his assignee (the Dairy Credit Company) on behalf of the Groomes' in October of 1961. LaMunion used the proceeds of sale to pay the amount due him as lienholder*fn1 and applied the balance to the sale costs and the unsecured obligations due him by the Groomes'.
As garnishee, LaMunion filed a plea of nulla bona and another pleading to the effect that the net proceeds of the sale did not pay in full the debts due him by the Groomes'. But the lower court ruled that the sums due the lienholder under the chattel liens and on open account were subordinate to the sums due Maryland Cooperative and Southern States and entered judgments in their favor against LaMunion.
The specific questions raised on appeal are: (i) whether or not the lienholder, who entered into an agreement with the owners to sell the chattels for them and apply the proceeds of sale to the indebtedness due under the liens, loses his priority to the proceeds to attaching judgment creditors of the owners; and (ii) whether or not the lienholder as an unsecured creditor, who was also directed to pay himself the indebtedness due by the owners to him on an open account, may claim priority to the balance of the proceeds over the attaching judgment creditors.
The point raised here is one of first impression in this Court. The rule adopted by some courts is that a chattel mortgagee, who unconditionally consents to or acquiesces in a sale of the
mortgaged chattels by the mortgagor and the receipt by him of the proceeds of sale (if and when followed by a sale pursuant thereto), thereby waives the lien of the mortgage, and that other creditors of the mortgagor may, generally speaking, attach the proceeds of sale before they are applied in satisfaction of the mortgage indebtedness. See 10 Am. Jur., Chattel Mortgages, §§ 192, 194; Annotation, 97 A.L.R. 646, and cases therein cited. These courts have applied this rule on the theory that the consent of the mortgagee to allow the mortgagor to sell the mortgaged chattels and apply the proceeds of sale to the mortgage debt amounts to a substitution of the mortgagor's promise for the security afforded by the mortgage, see Southern Wisconsin Acceptance Co. v. Paull, 213 N. W. 317 (Wis. 1927), and, accordingly, have generally held that the proceeds of sale were payable to the attaching ...