Schelling v. Thomas

Rexford Thomas (defendant) owned a timber patent and possessed, but did not own, buildings on a timber mill lot. Norine and Ernest McKee owned the buildings. In September 1922, W. J. Schelling (plaintiff) agreed to execute a $1,000 promissory note to First National Bank of Eureka (bank) to facilitate Thomas’s borrowing of $1,000 from the bank. In exchange, Thomas entered into a written agreement with Schelling in which Thomas agreed to turn over his patent and his buildings to Schelling until Thomas repaid the $1,000 to the bank, releasing Schelling from the note. In December 1922, the McKees began the process of deeding the two buildings to Thomas. In January 1923, to finance this transfer, L. J. Conley (plaintiff) loaned Thomas $2,000 in exchange for a deed of trust on the property. Both the deed of trust and the deed transferring ownership from the McKees to Thomas were recorded in late April 1923. Earlier in April 1923, Thomas executed a mortgage on the buildings to Homer and Annie Douglas in exchange for a $600 loan. In October 1923, The Douglases assigned their interest in the loan and the mortgage to E. N. Tooby (defendant) in exchange for $600. Thomas never repaid any of his creditors. In 1924, Conley sought to foreclose on the buildings. Schelling filed an action in court seeking a judgment that Schelling had an equitable mortgage on the property and had priority over Conley. The trial court found that, as to the lienholders to the buildings, Tooby had first priority, then Schelling, and finally Conley. Conley appealed.