Opinion
Submitted October term, 1932.
Decided January 23d 1933.
Equity regards a grantee's assumption of a mortgage debt as a covenant to indemnify his grantor. Accordingly, if the mortgagee releases the mortgagor of all liability, the assuming grantee's liability is at an end.
On appeal from an order of the court of chancery advised by Vice-Chancellor Backes, who delivered the following opinion:
"The complainants foreclosed their mortgage resulting in a deficiency of $20,000 and upwards, which they seek to recover from the grantee of the mortgagor and two consecutive owners, each of whom, in turn, assumed and agreed to pay the mortgage debt. The mortgage was given by David S. Forman to secure an $18,000 bond, given by him and Harry Forman. Forman conveyed the mortgaged premises to the defendant Shapiro, who conveyed to the defendant New Gretna Realty Company, which conveyed to the defendant Towne Holding Company. An assumption clause is in each conveyance. After the foreclosure, the complainants for $5,000 `remised and released and forever discharged' the Formans `from all obligation and liability and covenants upon their part contained in the aforesaid bond and mortgage and/or by reason of the deficiency established through and by the aforesaid foreclosure proceedings.' The defendants Shapiro and New Gretna Realty Company plead the release and the motion is to strike the answer as insufficient and as untrue. The answer is informal, but there is no criticism on that score.
"The complainants take the position that the assumptions by the defendants, to pay the mortgage debt, were contracts made for the benefit of the complainants and hence the release of the bondsmen did not discharge the defendants of their distinct obligations; and that section 28 of the Practice act ( Comp. Stat. p. 4059) modifies the common law rule and permits a suit on such a contract under seal to be brought by the party for whose benefit it is made. All that need be said in answer is that if the proposition be sound, the complainants have a perfect remedy at law, and this court is without jurisdiction. How the law courts may treat the undertakings is not our concern. The complainants have come here seeking equitable relief and the bill must be so regarded; it is so framed.
"Equity regards a grantee's assumption of a mortgage debt as a covenant to indemnify his grantor; as between themselves the grantee is held to be the debtor and the mortgagor the surety; the covenant inures to the mortgagee on the equitable principle that the surety's security is appropriable to the payment of the debt; the liability of the grantee is enforced in equity to avoid circuity of actions, if the grantor be not personally liable at the time of assumption, the covenant is a nullity; if his liability be released and nothing remains to be indemnified against, the covenant is exhausted. These equitable doctrines are so familiar that we pause in citing the outstanding cases of Klapworth v. Dressler, 13 N.J. Eq. 62, and Crowell v. Hospital of St. Barnabas, 27 N.J. Eq. 650; Green v. Stone, 54 N.J. Eq. 387, and the case of Reeves v. Cordes, 108 N.J. Eq. 469. In the case in hand, the assumptions originally were binding obligations; at the institution of this suit, the bondsmen, the Formans, stood discharged of the debt and, consequently, the defendants' liability was at an end; the indemnity fell with the debt; the complainants' derivative equity perished with the extinction of the Formans' right to indemnity. The plea of the release is well founded.
"It is argued that the plea of the release is sham, the contention being that it is, in truth, merely a covenant not to sue. The difference in legal effect between a release and a covenant not to sue, is given in Crane's Admr. v. Alling, 15 N.J. Law 423. The instrument discharges the bondsmen in words explicit and absolute in the language just quoted. Added are two paragraphs; one, that the Formans waive their right to redeem the mortgage, the other, that the complainants would, if they recovered the full amount of the mortgage debt and their costs from any other persons, repay the Formans the price of the release; such suit to be optional with the complainants. The waiver of the right to redeem combined with the conditional promise to reimburse, the complainants insisted, cut down the release to a covenant not to sue; that that was the intention. If it was so meant, simple words could have been used and distortion of plain language avoided. The discharge is in words unmistakable. There is no reservation of rights against the defendants and none is implied by the vagrant promise to reimburse. But if the release be construed as a covenant not to sue, it affords the Formans the same immunity as does a release. Crane v. Alling, supra. Their liability being terminated leaves the defendants with nothing to indemnify and nothing remains in the Formans to which the complainants may succeed. The result is the same.
"The motion to strike the answer is denied."
Messrs. Lindabury, Steelman, Zink Lafferty, for the appellants.
Mr. Paul Q. Oliver, for the respondents.
The order appealed from will be affirmed, for the reasons stated in the opinion delivered by Vice-Chancellor Backes in the court of chancery.
For affirmance — TRENCHARD, PARKER, LLOYD, CASE, BODINE, DONGES, BROGAN, HEHER, KAYS, HETFIELD, WELLS, KERNEY, JJ. 12.
For reversal — None.