Barton v. Cannon

SHEPARD, Justice.

All original parties to the matters at issue here are now deceased. Defendant F. R. Cannon, now deceased, executed mortgages covering the same piece of real property both to one J. B. Penard and one Mabel Nelson. The Penard mortgage was executed prior in time but recorded subsequent in time to the Nelson mortgage. In July of 1965, Cannon was in default on the Nelson mortgage and, for the purpose of avoiding foreclosure of the Nelson mortgage, executed a warranty deed covering the property to Mrs. Nelson. Their agreement provided that upon delivery of the deed the Nelson mortgage and note would be deemed satisfied and cancelled. Cannon also represented verbally to Nelson that the property was free and clear of any encumbrances excepting only the Nelson mortgage.

This action for foreclosure was brought upon the Penard mortgage. Elizabeth Hart, successor in interest to the Nelson mortgage and deed, filed a complaint in intervention. Hart then moved for summary judgment, contending that the warranty deed by Cannon to Nelson should be set aside and the Nelson mortgage reinstated in its original priority. That motion was granted, the summary judgment was entered in favor of the plaintiff in intervention, and this appeal follows.

Plaintiff-appellant (Jean Barton, executrix of the estate of J. B. Penard) contends that there were issues of fact remaining to be determined by the trial court relating to the intents of Nelson and Cannon in executing the warranty deed and agreement, and that summary judgment was therefore improper. We reject that contention. Analysis shows that the intentions of the parties to the execution of the Cannon-Nelson deed were not the criteria used to determine whether to set aside a deed and the resultant merger. Therefore, no factual issues as to intent are involved herein. Plaintiff-appellant further argues that the element of fraud remained to be determined as an issue of fact. The element of fraud was amply set forth and raised in the affidavits submitted by the plaintiff-in-intervention. No affidavits countering or controverting those assertions were made or introduced by plaintiff-appellant. While plaintiff-appellant by the introduction of proper affidavits might well have raised the issue of fraud as a controverted and material issue of genuine fact in the case at bar, no such affidavits were made and summary judgment is proper. Prather v. Industrial Investment Corporation, 91 Idaho 682, 429 P.2d 414 (1967); I.R.C.P. 56(e) and (f).

Plaintiff-appellant’s principal argument in this appeal is to the effect that when Cannon executed the warranty deed to Nelson, the equitable interest of the Nelson mortgage was merged with the legal title and the Nelson mortgage was thus destroyed. Plaintiff-appellant asserts that the trial court was powerless to relieve that merger and reinstate the original mortgage. Plaintiff-appellant also points to the fact that the Penard mortgage was recorded in the interim between the recording of the Nelson mortgage and the execution of the Nelson warranty deed.

It is stated:

“The question of merger of the interests of a mortgagee as mortgagee and his interests as transferee of the mortgagor is primarily a question of intention, and a merger will generally be held to take place where there is an intention to merge the two estates, and not to take place where there is an intention to keep the mortgage alive. This result has been regarded as prevailing whether such intention is expressed or implied. * * *

“In the absence of an expression of intention on the part of the mortgagee at the time he acquires the interest of the mortgagor in the mortgaged property, the general rule is that the mortgage is not merged if it is not to the interest of the mortgagee to have it merged. In such case, it must be presumed that the mortgagee intended to do that which was most advantageous to himself, and if this is that the two estates shall not merge, no merger will take place. This presumption, however, is not conclusive; it may be rebutted by evidence that would warrant a jury in finding that a merger had been expressly agreed to, or that the mortgagee’s conduct and action were such as could fairly be ascribed only to an intention to merge.” 55 Am.Jur.2d 1026, Mortgages §§ 1258, 1260. See also 95 A.L.R. 628 and 148 A.L.R. 816.

The record herein clearly indicates an intention to extinguish the mortgage and cancel the debt, and the agreement between Cannon and Nelson expressly stated that the note was to be cancelled, and of no further force or effect and that the mortgage would be “satisfied and discharged.” Therefore, if the above language constituted the sole theory upon which relief against merger could be granted, plaintiff-appellant would prevail. However, where other liens or interests have intervened during the time between the mortgage and the asserted merger, a different rule has evolved:

“Turning to cases in which the courts hold that the first mortgage will be preserved or reinstated as against intervening encumbrances or interest, in some of them the mortgage creditor clearly indicated his intention to keep the first mortgage in existence * * *. In a large number of cases in which there is no evidence of intention to keep the prior mortgage alive, other than that it would be to the interest of the mortgage creditor to do so, it is held that there is no merger. But the courts go beyond this and hold, in spite of an undisputed intent on the part of the mortgage creditor to discharge the first mortgage, that nevertheless he may use it for foreclosure purposes against junior interests. This is the almost uniform result where the mortgage creditor was ignorant of the intervening lien. Although there is some authority that his negligence in not discovering the existence of the later interest or in mistakenly relying on its not being enforced will prevent him using it against the subsequent claimant, other and, it is believed, better authority holds to the contrary. Indeed the rule may be laid down broadly that, except for the two cases stated at the outset of this section [basically with actual knowledge of or taking with express subjugation to intervening interests] merger will not operate to permit a later encumbrance to be elevated to a position of priority over the first mortgage regardless of its fate as between the parties to that first mortgage. Actual intent, where it exists, is an adequate basis for the result. The mortgage creditor has a legitimate interest to protect himself against the elevation of the later interest. By bringing a foreclosure action in which they were joined as parties defendant the property could have been sold free and clear of their interests and he could have bought it in that state. Acquisition of the redemption in any other way should not prejudice his position with respect to such junior interests if he did not intend it to do so and was not under a duty to do acts which would have that result. The owner of the junior interest, under such circumstances, cannot object to being kept or put back into his position in the rear because he never bargained for advancement that would come to him by destruction of the first mortgage. But more generally the decisions may be justified on grounds of unjust enrichment, a doctrine implicit in the rationale of fairness in giving effect to the mortgage creditor’s intent when it appears. By the destruction of the prior mortgage, the later lien or interest is elevated to a priority for which its owner paid nothing and hence is, as to him, a pure windfall. And it is a windfall at the expense of the prior mortgagee. * * * So, too, if he didn’t know of the later interest and so didn’t know that the result of his action with respect to the first mortgage would be to confer this advantage on it. That the ignorance or mistake was due to negligence on his part should make no difference. The only consequence of the negligence is to confer a benefit upon the later lienors or other claimants which, if taken away, would leave them in no worse position that they were before the occurrence. Since it does not put them at any disadvantage or cause them any loss, it should not prevent the first mortgagee from being restored to his position by reinstating his mortgage. And, it is believed that this principle of restitution to prevent unjust enrichment can be justifiably extended to include all cases in which there is no actual intent with respect to the later interest. And there is no ground for automatic merger of it regardless of intent. Indeed, whether the courts clearly analyse it in this way or not, it would seem to be the best justification of their reiterated statements that in the absence of express intention on the part of the mortgagee his intention will be presumed in accordance with his interests.” Osborne, Mortgages, 1951 ed., pp. 773-75. (Emphasis added)

It also appears to be the general rule that where fraud and false representations are the motivation for acceptance by the mortgagee of a conveyance of the property, a merger does not take place even to the extent that the mortgage might have been discharged and the evidence thereof surrendered. 55 Am.Jur.2d 1029, Mortgages § 1265; 95 A.L.R. 628.

It has also been held that where as here the Nelson interests by examining the public records could have learned of the Penard’s intervening interests, absence of actual knowledge will still permit relief from the merger. Osborne on Mortgages, 1951 ed.; Fowler Bros. v. Carter, 77 N.M. 571, 425 P.2d 737 (1967); Holzmeyer v. Van Doren, 172 Or. 176, 139 P.2d 778 (1943),

It appears that this is a question of first impression in the State of Idaho and, while there is some split of authority, we believe that the views above expressed and as ruled on by the trial court herein are the more logical and better reasoned. We point out, however, that our decision in the case at bar is to be limited to the facts herein, i. e., fraud on the part of the mortgagor-grantor, no actual knowledge on the part of the mortgagee-grantee of other intervening liens or interests and where the resultant effect lies only between the junior and senior lienors. We do not speak to cases whose facts are outside these parameters, for therein may lie different equitable concepts.

The summary judgment of the trial court is affirmed. Costs to the respondents.

McQUADE, C. J., and McFADDEN and DONALDSON, JJ., concur.