American Building & Loan Ass'n v. Waleen ( 1892 )

Mitchell, J.

At first sight the question raised by this appeal might seem somewhat perplexing, but, upon applying to the facts familiar principles of law, its solution is not difficult.

The facts, as alleged or admitted in the answer to which the demurrer was interposed, are, so far as here material, substantially as follows: The plaintiff, having agreed to make a loan to Waleen, to be secured by mortgage on real estate, exacted from him, as a condition of making the loan, a bond executed by himself and two sureties, the recitals and condition of which were that whereas, Waleen had applied for a loan to be secured by mortgage on certain real estate; and whereas, certain buildings had. been recently erected on the premises, and the same were liable to liens for labor and material, performed or to be performed, furnished or to be furnished, for the construction of such buildings; and whereas, Waleen had agreed to fully complete said buildings, and pay all claims for such labor and material performed or furnished as aforesaid, and save the plaintiff forever harmless by reason of the enforcement of any such liens: * * * “Now, therefore, if said Waleen shall pay, or cause to be paid, all claims or liens as aforesaid, and shall do and perform all other acts and things necessary or required to be done and performed as hereinbefore more particularly recited and set forth, then this obligation shall be void, etc.” Subsequently one Satherli filed a claim for a lien on the premises for material furnished to Waleen for the construction of the buildings, and, in an action wherein Satherliwas plaintiff and Waleen and the present plaintiff were defendants, this claim was adjudged a lien on the premises superior jo the lien of plaintiff’s mortgage. Intervening between the date of filing the claim of lien and the date of the judgment in the action referred to, plaintiff, on default being made in the conditions of the mortgage, foreclosed under a power of sale and bid in the premises for the full amount due on the mortgage, and then, to protect its title under this purchase, paid off the Satherli claim, and now brings this suit on the bond to recover the amount thus paid out. The contention of the defendants is that the bond was merely one of indemnity; that the sale of the mortgaged premises fully paid and satisfied the debt; and therefore plaintiff, having thus received all it was entitled to, has not been damnified, and consequently has no cause of action on the bond.

The first question to be considered is what the contract of the bond was, — whether it was merely one of indemnity to protect the mortgage security against liens which would diminish its value or an affirmative and absolute contract to pay all claims for labor and material performed or furnished for the construction of the buildings.

If it was the former, then damage must be shown before the party indemnified is entitled to recover; if it is the latter, then the mere failure to pay these claims would constitute a breach of the condition of the bond, and it would be no defense to say that the plaintiff had not been thereby damaged.

Some of the earlier cases, without, perhaps, giving due weight to the manifest purpose of the bond as indicated by its provisions as a whole, and the relations of the parties to its subject-matter, were inclined to lay hold of the language of a particular clause, and, because it was in the form of a stipulation to do a particular act or pay a certain sum, to hold that the bond was not one of mere indemnity,' but an affirmative contract to do the specified act or to pay the specified sum. But the tendency of the more modern authorities is to adopt as the cardinal principle to be applied in the construction of such bonds that actual compensation can only be given for loss actually sustained, unless it is evident that the parties have stipulated for some other and more extensive remuneration; and to give more weight to the general purpose of the bond as indicated by its provisions as a whole, and the interests of the parties in the subject-matter, than to the precise form of words used in a particular clause.

In the present case the plaintiff had no interest in the premises except as security for its loan. It did not interest it what liens might be created against them, except so far as this might decrease or in- ■ juriously affect the mortgage security. The claims for labor and material were not debts for which the plaintiff was liable, and it had no interest in their payment except to prevent their becoming liens on the premises paramount to that of the mortgage. Under these circumstances, it can hardly be supposed that the bond was intended as an absolute affirmative contract to pay all such claims, or that it was intended that plaintiff should be entitled to recover the amount of them in a suit on the bond merely because Waleen had failed to pay them.- In view of these considerations, we think the good sense and sound construction of the bond is that it is merely one of indemnity. We think that, in nearly every well-considered case, where-similar language in a bond has been construed as being, not a mere contract of indemnity, but an affirmative contract to pay a certain claim, it will be found that the claim was the debt of the obligee of the bond, and for which he remained liable to some third party, — a class of eases clearly distinguishable from the present.

The bond in suit, then, being one of indemnity merely, it follows that plaintiff has no cause of action, unless it has been damnified. We think that, upon the facts, it has not. If its mortgage had been paid in full in cash,it would not be claimed that plaintiff had sustained any damage. But it is undoubtedly the law that a sale of the mortgaged property pays and extinguishes the mortgage debt to the amount of the purchase money, whether the premises are sold to a third party or bid in by the mortgagee. It is also the law that a purchaser at a foreclosure sale is bound, as well as presumed, to know the condition of the title which he purchases; and if the mortgage contains no'covenants of title, and the title proves defective, he has no claim upon the mortgagor to make it good. What he buys in such a case is just what title the mortgagor had at the time of the execution of the mortgage, — nothing more and nothing less, — and the amount of his bid is presumed to be determined with reference to that fact. He takes the risk of the mortgagor’s having any title that passed by the mortgage. Where the mortgage contains covenants of title which run with the land, different considerations apply. In that case the purchaser'buys the covenants, and the consideration which he. pays represents the value of the land as warranted by the covenants.

Applying these principles to the present case, the result seems to us inevitable. What was offered for sale on the foreclosure, and what plaintiff bought, was just such title as the mortgagor had, and it was for that title, whatever it was, that plaintiff bid the fall amount of the mortgage debt; and therefore it has received full satisfaction of its claim, just as much as if paid in cash. At first it might seem that the case is analogous to one where a party purchased in reliance on real covenants in the mortgage, and that the plaintiff’s bid might be held to hav'e been made on the basis of the value of the land with the title indemnified against paramount liens by this bond. But the eases are not at all parallel. The covenants of title run with the land, and pass to the purchaser. Not so with this bond. If this land had been bid in by a third party, he would have no right of action on the bond. What he wmuld have paid his money for would have been the land with this prior lien upon it and, in the absence of covenants in the mortgage, he would have had recourse on no one to recover the amount paid to remove the lien. Neither would the plaintiff in such case have had any right of action on the bond, because it would have received full payment of it3 mortgage, and hence have sustained no damage. It cannot be that the right of action on the bond depends on who is the purchaser at the foreclosure sale. If so, then the mortgagee and third parties would bid at the sale on an entirely different basis, — the former with reference to the bond, and the latter independently of it. Suppose, for example, the amount of the mortgage is $2,000, and of the prior liens $1,000, and the property worth $3,000, and that an outside party is willing to give that sum for it. He could only bid $2,000, for he would have to pay off the $3,000 prior liens in order to get a clear title. But, if the mortgagee may bid with reference to the bond of indemnity, he might get the property by bidding $2,100, a,nd then, after paying off the prior liens, recover back the amount in an action on the bond; and thus, if there was no redemption, obtain for $2,100 the mortgagor’s property worth $3,000, and for which the other bidder was willing to pay that amount. This illustration, we think, demonstrates the fallacy of plaintiff’s position. We have not overlooked some possible embarrassments that may result to mortgagees who have taken bonds of indemnity against mechanic’s liens, but, to say nothing of the practical difficulties as well as injustice that would result from a different conclusion, we are unable to get away from what seems to us the inexorable logic of the legal principles applicable to the facts. If the paramount liens consisted of judgments or prior mortgages, the existence as well as the amount of which were fixed by judicial determination, or by the contract of the parties, the case might seem plainer, but the principle is the same.

As the ground upon which we place the decision is probably decisive of the case, it is unnecessary to consider the sufficiency of the complaint.

Order affirmed.