Peterson v. Reid

The opinion of the court was delivered by

Swayze, J.

The defendants claim the right to have deducted from the amount of a purchase-money mortgage unliquidated damages for breach of an executory covenant. The covenant was made not by the present holder of the mortgage, but by her assignor, and not with the present owner of the equity of redemption, but with a predecessor, in title. There is no privity of contract. The de- • fendants seem to rest their claim either on the theory that the present holder of the mortgage is bound by a covenant made by her assignor, or the theory that she acquired the mortgage subject to an equity of the defendants to have the deduction.

(1) We think the first theory is untenable. Even if the case were one where the burden of a covenant could run with the land, the complainants interest is, in equity, a mere security for her debt. The suggestion that the burden of a covenant made by a mortgagee with the mortgagor runs with the mortgage and binds the assignee is novel. Plain language would be necessary, l'n the present case, the mortgage merely recites that it is given to secare the conditions in the deed. It does not purport to bind assignees. The language is inapt to impose an obligation upon the mortgagee in favor of the mortgagor, since by its terms it “secures” the conditions by a conveyance of the mbrtgagor’s land to the mortgagee. The complainant could not have been bound to perform the covenant, since she had no right of entry on the land for the purpose, and the owners persistently treated the realty company as the party bound. The case differs from cases of restrictive covenants where equity charges upon subsequent owners the duty to observe the restrictions. The covenant in this case involves labor and expenditure as well as the right of entry on the land. The burden of such covenants does not run with the land even in equity. Haywood v. Brunswick Building Society, 8 Q. B. D. 403; 51 L. J. Q. B. 73; Austerberry v. Corporation of Oldham, 29 Ch. Div. 750; 55 L. J. Ch. 633, cases which were cited with approval in De Gray v. Monmouth Beach Club House Co., 50 N. J. Eq. (5 Dick.) 329 (affirmed on the vice-chancellor’s opinion by this court, see 67 N. J. Eq. (1 Robb.) 619). Even if we disregard the curious use of language which makes the mortgagor give a mortgage on his land to secure performance of a covenant for his benefit, and calls the covenant a condition, and if we assume that the intent was to secure performance of the covenant to fill contained in the realty company’s deed to Beid,’the defence is not helped. That covenant was a covenant of the Carteret Bealtv Company to fill on or before December 1st, 1905. It was subsequently abandoned by mutual agreement between the realty company and Erank T. Morrill & Company, the agreement of June 26th, 1906, substituted therefor, and all damages were waived. By means of this new agreement, Erank T. Morrill & .Company secured the use of the dock, and this consideration probably led them to abandon the original covenant. The covenant in the deed was thereby -abrogated by novation, and neither the realty company nor Mrs. Peterson are liable thereon.

(2) The defence must rest on the theory that the complainant took the assignment subject to an equity in favor of the mortgagor against the original mortgagee, the complainant’s assignor. We assume that she took with notice of the existing facts. One reason that courts allow a deduction from the amount of a purchase-money mortgage aside from cases where fraud justifies rescission and cancellation, is that thereby circuity of action is avoided. Shannon v. Marselis, 1 N. J. Eq. (Saxt.) 413. Before such a defence can prevail there must be a right of action in the mortgagor and damages must have been sustained. This right of action depends, as counsel for the defendants argue, upon a failure of consideration, and it! is because the abatement from the face of the mortgage, in a case like the present, depends upon a failure of the consideration therefor, that the right is limited to purchase-money mortgages, where there are covenants against encumbrances, of warranty, or the like, or cases of fraud or mistake.

An examination of the facts of the present case shows that the only failure of consideration alleged is the breach of the executory covenant. That, however, is not, strictly speaking, a failure of consideration for the mortgage,- since it was the promise itself and rot the performance of that promise that constituted the consideration. The mortgagor might have stipulated that the mortgage should become due only upon the performance of the agreement by filling the land; he was content to rely upon the mere promise to fill. The mortgage was valid for the full amount on the day it was given because the whole consideration—the-land and the promise to fill—had passed. When the contract is already executed on one side, as it was'in this case by giving the mortgage, and performance of a promise by the other party is to take place in the future, it necessarily is the promise and not the performance thereof that constitute the consideration. There is no equity to a deduction from the face of the mortgage until the mortgagor has a right of action and has been in fact damaged, since it would-be manifestly unjust to make a deduction where there might eventually be no loss. Even where there were paramount liens for taxes at the time of the deed and mortgage, but no covenant against encumbrances, we held that the deduction from the mortgage claimed on account of the tax liens could not be permitted by reason of the covenants for quiet enjoyment and general warranty. There had been no eviction; there was no right of action and no damage. Baudendistel v. Zabriskie’s Executors, 50 N. J. Eq. (5 Dick.) 453. The argument is stronger in a case like the present, where at the time of the conveyance there was a complete consideration in accordance with the intent of the parties, and the damages are claimed for a subsequent breach of an executory covenant, which could not have been even anticipated at the time. The learned vice-chancellor, however, was in error even if we could hold that the subsequent breach amounted to a failure of consideration. The only equity against the complainant is the equity that existed when the mortgage was assigned to her on July 13th, 1905. At that time there had been at most only a partial breach by failure to do the work required to be clone by June 1st; for the subsequent breach the defendant had a right of action against- the Carteret Realty Company, but ibis could not affect the complainant. She was not • hound to perform the covenant of the Carteret .Realty Company for reasons already stated. The extent to which the defendants could claim an equity as against an assignee of the mortgage, if they could claim an}', would he the amount of damages for the partial breach prior to the assignment. Even that cannot be allowed to 'the present owner of the equity, Prank T. Morrill & • Company. The covenant to fill was not made with it, but with Reid. • If we concede that the benefit of the covenant ran with the land, it clid not pass unless such was the intent of the parties effectuated by the conveyance. Whether the benefit of the covenant has passed to Prank T. Morrill & Company depends on what Reid conveyed to Morrill and Morrill .to the company. Each deed conveyed an equity of redemption, but the extent of that equity dépended on the amount to be paid on the mortgage. If Reid conveyed to Morrill no more than the equity beyond $10,-000, and the Morrill company were now allowed to redeem for less, they would obtain more than Reid conveyed, and thus would secure Reid’s property without paying for it. It is for this reason that it is held that where land is conveyed srxbject to a certain mortgage the grantee cannot ask to have the mortgage abated. He does not stand in the shoes of the mortgagor; the latter owned the whole estate, the. grantee only an eqxxity of redenxption. The mortgagor may convey his whole equity, or he may convey only a definite equity, and xvaive his defence to the mortgage in favor of the mortgagee. This was the view of Chief-Justice Green, speaking for this court in Brolasky v. Miller, 9 N. J. Eq. (1 Stock.) 807 (at p. 813). In Warwick v. Dawes, 26 N. J. Eq. (11 C. E. Gr.) 548, 555, 556, Chief-Jxxstice4 Beasley rested his decision upon the injustice of alloxving a pui’cliaser to profit at the expense of the mortgagee, when the mortgagor, who, if anj'-one, was the injured party, ahaixdoned his right. In Hackensack Water Co. v. De Kay, 36 N. J. Eq. (9 Stew.) 548, Mr. Jxxstiee Depue said that the theory on which cases of this class are foxmded is that the mortgagor having elected to affirm the mortgage by selling the mortgaged premises subject thereto, the purchaser, 1))’ his contract as expressed in his deed, takes an equity of redenxption only, and therefore cannot dispxxte the validity of’ the mortgage, and thus obtain an interest in the land which the mongagor never intended to transfer to him. In Trusdell v. Dowden, 47 N. J. Eq. (2 Dick.) 896, Vice-Chancellor Yan Fleet, speaking of a case of a xisurious mortgage, says that the doctrine that the purchaser of the eqxxity of redemption, who takes title subject to such mortgage, cannot set up the defence of usury, , does not rest on the theory that the taint has as between the original parties been purged from the mortgage, but upon the foundation that the purchaser by taking title subject to the mortgage axxd retaining oxxt of the price he agreed to pay sufficient money to pay the mortgage, places himself in a position where he cannot allege usury without attempting to keep back part of the money which he agreed to pay for the. mortgaged lands. Having retained enough of the purchase-money to pay the mortgage, under a promise that he would apply the money to the payment of the mortgage, lie woxxld, if he could successfully make the defence, defraud both bis grantor and the mortgagee. The rule has recently been reasserted aixcl applied by this court -to a case '■ where land was bought of a receiver of an insolvent corporation subject to the mortgage in suit, and one of the defences was that the mortgage was ultra, vires, and therefore invalid and void. Camden Safe Deposit, &c., Co. v. Citizens Ice, &c., Co., 71 N. J. Eq. (1 Buch.) 221. These cases present two-theories, one that of “unjust enrichment” (to use the nomenclature now coming into vogue), on which the action for money had and received and what are now called “</wasi-contracts,” rest; the other that the intent of the parties was to convey only a definite and ascertained equity of redemption, the right to redeem by paying the specified amount of the mortgage. The theories are not inconsistent. Where only Ihe definite and ascertained equity is conveyed, it is an almost irresistible conclusion that allowance has been made by deducting the amount of the mortgage from the value of the land if unencumbered, and quite irresistible that if the'grantee of the equity is allowed to claim a deduction from the amount of the mortgage he gets something which he never bought, and was never conveyed to him. Where the amount of the mortgage is not deducted from the purchase-money, and the grantee does not purchase subject to the mortgage, the principle is not applicable (Van Winkle v. Earl, 26 N. J. Eq. (11 C. E. Gr.) 242), and so it is where the reference to the mortgage is only by way of excepting it from the operation of the covenants for’ title, or the conveyance is for part only of the mortgaged premises so that the presumption arises that the land retained is to answer for the whole or part of the debt. Magie v. Reynolds, 51 N. J. Eq. (6 Dick.) 113. An examination of the facts in the present case convinces us that the intent of the parties was to conve.y only the definite and ascei'tained equity of redemption that would remain after paying $10,000 on the mortgage. The equity in the whole mortgaged premises was conveyed. The language of Reid’s deed to Morrill does not evince merely an intent to except the mortgage from the covenants of title. It is “subject, however, to a mortgage amounting to the sum of ten thousand dollars,” and the language in Morrill’s deed to the Morrill company is the same with the omission of the words “the sum of.” The object of stating the amount could have been only to fix and determine the extent of- the equity intended to be conveyed. If the object had been to except the mortgage from the operation of the covenants for title, it-would have been quite unnecessary to mention the-amount. Moreover, when the deed from Morrill to the Morrill company was made, there had already been a partial breach of' the covenant to fill, and if the present contention of the company is sustained, the mortgage did not then amount to $10,000. This fact was known to the grantor, and the grantee is chargeable with notice; the covenant to fill was in a deed in its chain of title, and the fact that the filling liad not been done was visible-upon the ground. Under these circumstances the deed was'made and accepted subject to a $10,000 mortgage; the necessary inference is that knowing of the breach of the covenant to fill, the-grantor chose to convey and the grantee to accept what equity remained above the amount -fixed. This view is confirmed by the-fact that in Morrill’s deed to the company, made after the partial breach on June 1st, he assigns his claim against Eeid by-reason of the non-fulfillment of Eeid’s contract. If the parties-had meant to convey to Erank T. Morrill & Company, a right toelaim a deduction as against Mrs. Peterson, it is inexplicable that the grantor assigned and the grantee accepted a claim against Eeid, mentioned no claim as against the mortgagee and at the same time acknowledged that Mrs. Peterson’s mortgage amounted to $10,000. That neither party to the last-mentioned deed supposed that more was conveyed than the definite and ascertained equity over $10,000, appears further from the fact that instead of' assigning the benefit of the original covenant of the Carteret * Eealty Company,, or any right of action against that company for the existing partial breach, Morrill entered in a personal covenant himself to fill in to the depth of three feet before the ensuing - December 1st. If that covenant had been merely collateral to the original covenant of the Carteret Eealty Company, he would not, in the immediately succeeding clause, have referred to the mortgage as amounting to $10,000, without reference to any equity to a reduction of - amount. The parties throughout treated the cove- - nant to fill as a personal covenant, not running with the land either by way of burden or benefit, and on each conveyance a new-personal covenant was made by grantor with grantee. The case-resembles Davis v. Clark, 33 N. J. Eq. (6 Stew.) 579, where it: was held that there could be no deduction from the mortgage because there was no privity of contract between the holder of the mortgage and the owner of the equity of redemption. The Carteret Realty Company was liable for breach of its original covenant, and there was a novation of1 its liability by the agreement of June 26th, 1906. By this agreement, Frank T. Morrill & Company waived all damages up to October 1st, 1906, in effect, extending the time for performance to that date, and the Carteret Realty Company agreed to 511 in by October 1st. During the period between June 26th and October 1st, even‘the Carteret Realty Company was not in default. If any equity ever had attached to the mortgage in Mrs. Peterson’s hands by reason of the partial default on June 1st, 1905, that must have ceased when the owner of the equity waived its claim for damages. The only' breach now existing for which Frank T. Morrill & Company can claim damages is the breach of the agreement of June 26th, 1906; Mrs. Peterson cannot be charged with any liability for that breach; she was not a party to the agreement, and had acquired her mortgage a year before the agreement was made.

For these reasons we think the decree below is erroneous and must be reversed. The record should be remitted and a decree of foreclosure entered. The complainant is entitled to costs in both courts.

For affirmance—E one.

For reversal—The Chief-Justice, Garrison, Swayze, Ber- • CBN, VOOBHEES, MlNTURN, KaLISCH, BoGERT, VrEDENBURGH, Congdost, White—11.

Case Details

Case Name: Peterson v. Reid

Court Name: Supreme Court of New Jersey

Date Published: Nov 18, 1912

Citation: 80 N.J. Eq. 450

Court Abbreviation: N.J.