Opinion
No. 20319
Decided June 15, 1927.
Mortgages — Grantee's assumption thereof may be rescinded and grantee released, when — Grantee's answer, setting up rescission, a complete defense in foreclosure, when — Burden on mortgagee to prove acceptance before rescission of assumption.
1. A contract in a conveyance of real estate whereby the grantee assumes and agrees to pay the mortgage indebtedness thereon may be rescinded and the grantee released therefrom by the mortgagor before the mortgagee has accepted or adopted said contract or acted on the faith thereof.
2. An answer of a grantee setting up the rescission of such contract made in good faith and for a valid consideration states a complete defense, and the burden is upon the mortgagee to plead and prove prior acceptance or adoption of such assumption contract, or action by him on the faith thereof.
ERROR to the Court of Appeals of Logan county.
The questions of law presented in this case arose in an action brought in the court of common pleas of Logan county by the Community Discount Mortgage Company to foreclose a mortgage on certain real estate in that county. The People's Commercial Bank of Bellefontaine, Ohio, was made a party defendant, and filed an answer and cross-petition, setting up another mortgage on the same premises. In both the petition and cross-petition, judgment was sought against Adolph Joseph on the ground that he was personally liable for any deficiency by reason of an assumption of the mortgages, as grantee in a deed to said premises made to him after the execution of the mortgages.
The answer of defendant Joseph alleged that on or about the 14th day of February, 1922, defendants Ivah D. Williams and C.W. Hart transferred by deed to defendant Joseph, David A. Frampton, Karl C. Flickinger, and J.C. Byers an interest in the property described in the pleadings, which deed contained a clause providing for the assumption by said four parties of one-half of the amount of two certain mortgages then on said property, which are the mortgages set up in the petition and cross-petition. In his answer he further asserts:
"That said agreement for assumption of mortgages was for the sole benefit of the grantors and grantees in said deed, and was not accepted or ratified by the mortgagees."
It is then alleged that thereafter Joseph transferred all his interest in said premises by deed to Frampton, Flickinger, and Byers, who, in the deed, assumed the payment of said mortgages, and that as a part of the same transaction Williams and Hart, for a valuable consideration, in writing, released said Joseph from all liability incurred by him by reason of accepting said deed in which Joseph was one of the grantees. It is asserted that thereupon there was a complete rescission, cancellation, and release of the defendant Joseph from all liability on account of the assumption of said mortgages; that at the time of such rescission and release neither the note set up in the petition nor the one set up in the cross-petition was due, and that the holders thereof had done no act showing their adoption of said contract of assumption and had not acted on the faith of such assumption.
The plaintiff and the cross-petitioning defendant each filed a reply denying the allegations of the answer "concerning any rescission by Adolph Joseph of a contract of assumption" of its lien on said real estate.
Upon the hearing it was disclosed that the deed executed by Williams and Hart to Joseph and his three co-grantees contained the following clause:
"That said premises are free from all incumbrance whatsoever except $12,000 in mortgages, of which said grantees assume and agree to pay $6,000."
This deed was duly filed for record February 16, 1922. It was further disclosed that Joseph conveyed his interest in said premises to Frampton, Flickinger, and Byers by deed dated March 10, 1922, which deed contained a similar assumption of mortgage indebtedness by the grantees.
The mortgage set up by the Community Discount Mortgage Company was a first mortgage for the sum of $7,000. It was executed by Ivah D. Williams on February 14, 1922, recorded February 16, 1922, and transferred to the Community Discount Mortgage Company on March 21, 1922. The note which it secured was due two years from date. The mortgage of the People's Commercial Bank was a second mortgage in the amount of $5,000, due in two years from date, and was also executed by Williams on February 14, 1922, recorded February 16, 1922, and transferred to the People's Commercial Bank February 14, 1922.
It is further disclosed by the record that, as a part of the transaction in which Joseph conveyed to Frampton, Flickinger, and Byers his interest in said real estate, a certain paper was signed by Hart and Williams and delivered to Joseph, which, after a recital of the execution of said deed by Hart and Williams to the four grantees named and the clause therein providing for the assumption of the one-half of said two mortgages, reads as follows:
"And now in consideration of $1, and the further consideration of the conveyance by the said Adolph Joseph to the remaining three of said four parties of his interest in said property, with the like assumption of mortgage by them, we, the undersigned, agree to release and hold harmless the said Adolph Joseph from any and all liability incurred by him by reason of accepting said deed with exceptance of said mortgage clause contained therein."
The record discloses that the procurement of the release of Williams and Hart above set forth was a part of the consideration for the conveyance by Joseph of his interest in said real estate to Frampton, Flickinger, and Byers. It is not disclosed that the mortgage company or the bank had any notice or knowledge of this transaction. The only evidence appearing in the record bearing upon the question of the attitude or action of the Community Discount Mortgage Company or of the People's Commercial Bank in regard to the acceptance or ratification or adoption of Joseph's contract of assumption of mortgage indebtedness was that given by defendant Joseph in response to an inquiry as to when he first had notice that they made any claim against him "on account of these various deeds," his reply being that he never had any notice from them at all, or from anybody else, until he was served with summons. The interest paid on said notes had been paid by the mortgagors.
The court of common pleas found in favor of Joseph and dismissed the petition and cross-petition as to him. Upon proceeding in error the Court of Appeals affirmed the judgment of the court of common pleas.
Messrs. Miller Middleton, and Messrs. West Campbell, for plaintiffs in error.
Mr. John B. Morgan, and Mr. Forrest G. Long, for defendant in error.
There is no conflict here upon the proposition that, where a purchaser of mortgaged lands assumes and agrees to pay the mortgage, such liability inures to the benefit of the mortgagee and may be enforced by him. This general rule is recognized in practically all jurisdictions. Although frequently so stated, it is erroneous to say that such contract is made for the benefit of the mortgagee; it is made wholly for the benefit of the parties to it, as so clearly stated by Spear, J., in the opinion in Denison, University v. Manning, 65 Ohio St. 138, 61 N.E. 706. The mortgagee may elect to take advantage of it, but until he has done so, or taken some action in regard thereto and because thereof, may the parties in good faith cancel such contract and annul the obligation thereon? The authorities are numerous and persuasive which hold that such contract may be rescinded and the grantee released at any time before the mortgagee has accepted the agreement, or asserted his rights thereunder. The general rule applicable is stated in 41 Corpus Juris, p. 749, as follows:
"The assumption contract may be rescinded, or the grantee released therefrom by the mortgagor, so long as the mortgagee has done nothing to show his adoption of the contract or his acceptance of the grantee as the principal debtor. After the mortgagee has accepted or adopted the contract, or acted on the faith of it, the rule followed in the great majority of states is that it is not in the power of the parties, as against the rights of the mortgagee, and in the absence of his consent thereto, to change or annul it. An acceptance of, or acting upon, the assumption agreement by the mortgagee, precluding its rescission by the parties thereto, is evidenced by the bringing of an action on the agreement by the mortgagee, but not by his acceptance of a payment of interest on the mortgage by the grantee."
Cases supporting the text are there cited, and many cases wherein the question has been considered and decided by the courts of last resort of various states are collected and annotated in 21 A. L. R., 462.
The question here presented was before this court in the case of Brewer v. Maurer, 38 Ohio St. 543, 43 Am. Rep., 436. The issue in that case was made by demurrer to the answer of the defendants who had assumed and agreed to pay the mortgage. Their answer contained a defense that after a deed containing said covenant was executed and delivered, the grantor therein, for a good and valuable consideration, had released and discharged the defendants of and from any and all liability to him on account of said covenant, and that thereby the defendants were wholly discharged and released therefrom. In that case the mortgage had been executed in 1872 to one Braundel, who was the plaintiff in the foreclosure proceeding. The deed containing the covenant in question was executed more than two years subsequently. On the issue thus clearly presented this court held:
"In such an action by the mortgagee it is a good defense to show that before the plaintiff has assented to or acted on the promise made in his favor, the agreement has been rescinded."
In concluding the opinion it is stated, page 554 (43 Am.Rep., 436), that the "contract for the benefit of the mortgagee was one which he could avail himself of or not, at his election, but until he had done some act which fixed his right, it was competent for the parties thereto, in good faith, and for a valuable consideration, to rescind or cancel it."
The rule here announced is particularly applicable to the claim of the Community Discount Mortgage Company, for it is disclosed by the record that Joseph had been released from his obligation with reference to said mortgage indebtedness a month prior to the acquirement of said mortgage by that company. Hence it clearly appears that the mortgage company did not and could not have done any act which fixed its right prior to the rescission and cancellation of the contract entered into by the grantor and his grantee.
The mortgage held by the People's Bank was assigned to it upon the same day it was executed, February 14, 1922, and the deed wherein Joseph assumed the mortgage was executed the same day, but it was not filed for record until the 16th, and there is no averment or proof that the bank even had knowledge of the execution of that deed, and consequently it could not be concluded that its action in taking said mortgage was induced or influenced by such covenant. If the Community Discount Mortgage Company has the same right as Hart, from whom the mortgage was transferred, it having been executed the same day, the rights of the holders of the two mortgages are the same as against Joseph. In either event, the same principle applies to both mortgage holders. Under the holding of this court in the Brewer case, supra, the answer of the defendant Joseph, setting up his release from said obligation, was a complete defense, and if it were claimed by the holders of said mortgages that relying upon such covenant of assumption by the grantee they had placed themselves in a position from which they could retreat without loss if the agreement were not performed, and consequently the defendant Joseph was estopped from asserting the rescission of such contract, it was incumbent upon the holders of such mortgages to set up such estoppel by reply and support the same by proof. Crowell v. Currier, 27 N.J. Eq. 152; Willard v. Worsham, 76 Va. 392.
The burden of proving the negative was not cast upon or assumed by the defendant Joseph by reason of his having pleaded further by way of answer than was necessary to set up a complete defense, under the rule laid down in Brewer v. Maurer, supra, and in the absence of any evidence tending to show that the assumption of said mortgages had been accepted or adopted by the holders thereof, or that they had acted on the faith thereof prior to such rescission, or any evidence whatever indicating that the position of the holders of said mortgages, or either of them, had been altered by reason of relying in good faith on such contract of assumption, a judgment against Joseph would have been unauthorized. Kroll v. Close, Adm'r., 82 Ohio St. 190, 92 N.E. 29, 28 L.R.A., (N.S.), 571.
It has been suggested that upholding the right of rescission of such covenant of assumption of mortgage indebtedness may open the door for fraud, in that a responsible grantee may readily secure immunity from personal liability to a mortgagee when it is anticipated that the mortgaged premises, by reason of depreciation or otherwise, will not pay the indebtedness. That situation is not presented here, but it may not be amiss to call attention to cases cited in 21 A. L. R., 465, where it has been held that such transactions are violative of the statute of fraud and void as being in fraud of creditors.
Judgment affirmed.
DAY, ALLEN, KINKADE, ROBINSON and JONES, JJ., concur.