Opinion
03-24-1896
FUREY v. KNIGHTS OF PYTHIAS BUILDING & LOAN ASS'N.
Manning & Collins, for complainant. Mr. Glen, for defendant.
Bill by Catherine Furey against the Knights of Pythias Building & Loan Association for cancellation of a mortgage. Decree for complainant.
Manning & Collins, for complainant.
Mr. Glen, for defendant.
EMERY, V. C. This bill is filed for the cancellation of a mortgage given by the complainant, a member of a building and loan association, to the defendant, the association. The mortgage was made and recorded in anticipation of complainant's securing a loan upon certain terms, and for the sole purpose of securing the loan when made according to the rules and by-laws of the association. Although the mortgage was recorded, the loan was not actually made, for the reason that, at the time when the bargain for the loan was to be consummated and the money was ready to be paid over, the defendant claimed the right to make certain deductions from the gross amount of the loan, $5,000, and refused to pay over any more than the $5,000 less these deductions. The complainant refused to consent to the deductions, and, after some negotiations in the endeavor to settle the dispute, the contract for the loan was finally abandoned by both parties. The complainant files his bill to procure cancellation of the mortgage, making no offer to pay any amount, and claiming that nothing is due upon the mortgage; and the defendant claims that there is due to it the sum of $447.42, with interest from October 19, 1891, being the date when the money which it had held for the loan to complainant was finally returned to the association for its general purposes. For the amount so claimed to be due, the defendant insists that it is entitled to hold the mortgage as security, even though no loan was effected.
The following facts in relation to the circumstances of giving the mortgage are established by the evidence: On April 20, 1891, the complainant became a member of the defendant association, by subscribing for 25 shares under its rules, and paying thereon the deposit of $1 per share. This membership entitled the complainant to bid for the loans offered for sale by the association, and at the same meeting she bid off a loan of $5,000, at a premium of 5 1/4 per cent.,—$262.50. The rules of the association (article 11, § 5) require a shareholder, before receiving the loan, to give to the association a bond and mortgage upon unincumbered real estate, to secure the full payment of the sum loaned, together with all fines that may be imposedfor failure to pay installments (upon the shares of stock) or interest, or both, when the same shall become due and payable. The location and value of the real estate is to be first approved by the board of directors, and, in case of failure to give satisfactory security for the loan within one month, the month's interest shall be charged to the borrower, and the loan shall revert to the association, unless further time shall be granted by the board of directors. The directors to whom the loan in this case was referred declined to approve the property as security for more than $3,000, and approved the loan for this reduced amount on April 25, 1891; and on April 27, 1891, the board granted the loan of $3,000 until improvements on the property warranted an increase. The complainant did not accept this offer of a loan of $3,000, but on May 18, 1891, made a proposal in writing to the board, offering, if the full loan of $5,000 was granted, to accept the same, subject to certain specified conditions as to improvements to be first carried out by her. She stated, also, that the offer of $3,000 at present, with a promise of a future advance if repairs were made, would be of no service, but that if assured of the full amount requested, provided the repairs be made, she could go on and have them done before the money was loaned. On May 25, 1891, the board recommended that the loan of $5,000 be granted to complainant, in conformity with her offer, and she was notified of this granting of the loan. The complainant then proceeded with the repairs, and, shortly after, the solicitor of the association began the searches of the title. By article 8 of the constitution, the solicitor of the association, an officer annually elected, is to examine all titles and make the necessary searches on all property offered for mortgage security, to prepare the bonds, mortgages, and other instruments to be taken, and his charges for fees and disbursements in making searches, etc., preparing mortgages, etc., shall be borne by the party applying for the loan. It was the custom of the solicitor here, in preparing the bond and mortgage for the loan, to have them formally executed by the borrower, and the mortgage put upon record, before the actual advance of the money. This was done to insure the mortgage being a first mortgage, before the money is actually advanced; and there was the additional reason for this course, in the present case, that a prior mortgage of $3,000 was to be paid off from the proceeds of the loan, and the solicitor, it was expected, .would deduct this amount, and take up the first mortgage. On July 6, 1891, the bond and mortgage were executed by the complainant, at the request of the solicitor; and he placed the mortgage upon record on July 8, 1891, the money not having yet been advanced. The bond and mortgage were both dated April 20, 1891, the date of the original application for the loan. The bond was in the penal sum of $10,000, and both bond and mortgage were conditioned for the payment of $25 per month, dues on 25 shares, also the interest on $3,000, at the rate of 6 per cent. per annum, payable monthly, amounting to $25 per month, and in all amounting to $50 per month, the first payment to be made on the third Monday of May, 1891, and subsequent monthly payments on the third Monday of each month, to continue until the 25 shares were each of the value of $200, and also conditioned to pay all fines and other payments charged upon the borrower by the constitution and by-laws of the association. There was a further provision that, on default in the payment of interests or installments for six months, then, at the option of the association, the principal, $5,000, or balance due thereon, with arrearage of interest, should become immediately due and payable. As to fines, the constitution of the association provides (article 2, § 4) for a monthly fine of five cents on each dollar, for failure to pay monthly installments on shares, and (article 11, § 7) for the same fine on failure to pay monthly interest. At the time of executing the mortgage, the complainant had made no payment other than the $25 for the first payment on the shares, and, under the rules of the association, she had made default on the installments of May and June due on these shares. For these defaults, and the fines thereon, the stock held by her was charged (article 2, § 4); but there had been no agreement or communication between the parties in reference to deducting the amount of these installments or fines out of the loan, nor had there been any agreement or understanding whatever in reference to deducting the monthly interest out of the loan. The bond and mortgage, so far as they can be taken, under the circumstances, as throwing any light upon the intention of the parties in reference to deducting the amounts out of the loan, would seem to indicate by their date and form that these were not to be deducted in advance out of the loan, but were to be secured, so far as the association was entitled to have them secured, by the mortgage itself. After the recording of the mortgage by the solicitor, and on July 27, 1891, the directors of the association, upon a report that the repairs were nearly completed, ordered the loan paid to her, less installments, fines, interest, etc., due. These installments, interest, and fines charged against the complainant on that date on the books of the association amounted to $153.50, in addition to the premium, $262.50, and the solicitor's charges, which had been settled at $41.42. The solicitor received from the treasurer a check to his order for the loan, $5,000, less the premium, $262.50, and then, by his own check to the treasurer, paid the $153.50 on complainant's account, and offered complainant the balance ($4,584), less his fees. The complainant declined to receivethis, claiming that these deductions were not proper charges against her, and repudiated the payment of $153.50 made on her account. The objection to this payment was made in good faith, so far, at least, as related to the interest and fines for nonpayment thereof while the loan was pending. The association insisted on its right of retention, and, declining to advance more than the balance, the loan was finally abandoned by both parties, and on October 19, 1891, the money was refunded by the solicitor to the association, which, as above stated, now claims to hold the mortgage as security for the sum of $447.42, with interest from that date. This sum is made up as follows:
| 5 1/4 per cent. premium on $5,000 | $262 50 |
| Six months' interest, 15—25—25—25—25—25.......................... | 140 00 |
| Fines, 2—4.50—7.00—2.50—5.00—2.00 | 28 50 |
| $431 00 | |
| April, 1891, credit one month | 25 00 |
| Balance | $406 00 |
| Solicitor's fees and disbursements | 41 42 |
| $447 42 |
Upon the above facts, it seems clear to me that, so far as relates to the complainant's right to have the mortgage canceled, there can be no question. The mortgage was made in anticipation of a loan of money, and for that purpose only; and, the loan having fallen through, the mortgage, considered simply in the light of a mortgage, cannot be retained as security for any of the items which were simply to be deducted out of the proceeds of the loan when made. The bond and mortgage were neither intended to be given nor received as security for the premium, installments, interest, or fines, or any of them, independent of the making of the loan; neither should they be retained for that purpose. Whether, as a condition of granting this relief of cancellation, the court should impose upon the complainant the terms of paying all or any part of the charges or deductions claimed, is another question; but, so far as the suit relates to retaining this mortgage as an incumbrance on the complainant's property is concerned, it seems clear that, with the lapse or failure of the loan, the whole object intended by the mortgage fails, and it cannot be retained as a present security given for either premium, installments, interest, or fines.
As to the imposition of any terms or conditions on the cancellation, the case turns upon the question whether the failure of the loan was due to the fault of the association, in claiming to deduct from the loan more than it was entitled to deduct. And this right to deduct must, I think, depend not simply on the question whether by its rules, or even by the form of the bond and mortgage, the amounts which it then claimed to be due from the complainant were actually due to it; for it will be observed that the claim to deduct in advance, out of the loan, all the charges claimed, and the refusal to advance more than the balance, is, in effect, a foreclosure of the mortgage to that extent, and compelled the complainant to yield to the demand on the penalty of not receiving the loan. So far as relates to the monthly interest and fines thereon on the whole $5,000, from the date of the bond, April 20, 1891, I think there is undoubtedly serious question whether it was chargeable; and the complainant, notwithstanding the form of the bond and mortgage, was entitled to raise this question on its foreclosure, for it related to a question of interest and usury. But, upon an agreement for the loan of a gross sum, no deductions can be made from the sum so to be loaned, except those which are expressly provided for as deductions to be made either by the express agreement of the parties or the rules of the association. These rules in the present case, fairly and reasonably construed, justify the retention of the premium for the loan and the solicitor's fees out of the proceeds of the loan; but I find no foundation, either in the rules or in any agreement between the parties, for deducting in advance, out of the loan, either the current interest, installments, or fines thereon. As to these, the association had the security for payment given by the possession of the bond and mortgage for their payment, and of the stock held as collateral under its rules. But, in my judgment, it does not have, in addition to these, also the right to deduct in advance, out of the loan, these items, as to which there was no agreement for payment by this method. As to these, the complainant was entitled to defend under the bond and mortgage or otherwise, if she chose to dispute them, and could not equitably be compelled to yield to the claim, or lose her loan.
In Bowen v. Association, 51 N. J. Eq. 272-275, 28 Atl. 67, affirmed, on appeal, 51 N. J. Eq. 278, 28 Atl. 67, Van Fleet, V. C, on a bill to foreclose a mortgage somewhat similar, seems to have allowed interest on $7,000, the amount paid over, only from the time it was actually passed over, although the bond and mortgage to the association, by their terms (see page 278, 51 N. J. Eq., and page 67, 28 Atl.), secured interest from the date of the bond (August 4th), and the mortgage was not delivered until September 3d (page 275, 51 N. J. Eq., and page 67, 28 Atl.). In the present' case the interest runs from April 20th, but the amount and terms of the loan were not agreed on until May 28, 1891, and none of the money was actually put at complainant's disposal until July 27, 1891. It was, perhaps, proved that the association could at any time after April 20th have advanced the $5,000 if the conditions of the loan had been complied with; but it was not shown that the $5,000 had actually lain idle in the treasury until July 27, 1891. The repairs and improvements upon which the loan was conditioned were in progress two months; and as the association were informed as to.