Opinion
The right of the holder of a mortgage to recover upon an assumption by a subsequent grantee is allowed either on the theory that he is a third party beneficiary of the promise of the grantee, or that, by his promise, the grantee becomes the principal debtor and his grantor the surety, and that the holder is subrogated to the right of the mortgagor against his grantee; in either aspect, unless there is a valid contract no rights can arise in favor of anyone. The trial court found that the defendant was induced by the fraud of M and L to join in the purchase of real estate in Florida and enter into a declaration of trust by which he agreed to share in the expenses of the property including mortgage payments. The property was conveyed to M as trustee subject to the plaintiff's mortgages which he assumed and agreed to pay. The defendant discovered the fraud December 15th, 1927, and immediately upon verifying the facts on January 16th, 1928, rescinded the contract between himself, M and L and notified them that he refused to accept any interest in the property. In a former appeal it was held that the promises of the defendant were for the direct and substantial benefit of the plaintiffs, who were therefore entitled to maintain these actions as third party beneficiaries. Held: 1. That the subordinate facts clearly disclose fraud such as would justify the defendant in repudiating his agreement with M and L. 2. That the defendant's agreement to pay a part of the mortgages not being enforceable by the other signers of the declaration of trust, it is not therefore enforceable at the hands of the plaintiffs as third party beneficiaries under the law of Florida, as they have no greater rights than the original obligees and are subject to the same defenses. 3. That under the finding, which cannot be corrected, the defendant was not guilty of laches. 4. That the fact that the defendant had an adequate remedy against M and L does not impair his defense, since he elected to disaffirm the transaction.
Argued January 29th, 1930
Decided March 31st, 1930.
ACTIONS to recover upon two series of notes, those in one case secured by a first mortgage and in the other by a second mortgage upon real estate situated in Florida, brought to the Superior Court in New Haven County and tried to the court, Brown, J.; judgments for the defendant and appeal by the plaintiffs in both cases. No error.
These cases were tried together and involve the same issues. they were before this court ( Tuttle v. Jockmus, 106 Conn. 683, 138 A. 804, and Curry v. Jockmus, 106 Conn. 697, 138 A. 809) upon appeals from decisions of the Superior Court sustaining demurrers to the complaints, and we there held that the complaint in each case stated a good cause of action. The plaintiff Tuttle was the owner of a certain tract of land in Florida containing about sixty acres which he transferred to the plaintiffs, Curry and associates, taking back a purchase money mortgage of $96,000 securing four promissory notes of $24,000 each. Subsequently Curry and associates transferred the property to Palmetto Properties, Incorporated, subject to this mortgage which it assumed and agreed to pay, Curry and associates taking back a second mortgage of $37,000 securing twenty-four promissory notes. On the same day Palmetto Properties, Incorporated, transferred the property to H. A. Musick, trustee, subject to these mortgages which he as trustee assumed and agreed to pay. Musick, as trustee, and the defendant Jockmus, Lalley and Musick individually, as cestuis que trustent, entered into an agreement called therein a declaration of trust, containing among other provisions an agreement by Musick to hold the property in trust for the benefit of the cestuis que trustent, and an agreement on their part that they would pay their pro rata share of any and all expenses, including mortgage payment, in the proportions specified for sharing in the profits or proceeds which were, Jockmus 69.6 per cent, Lalley 15.2 per cent and Musick 15.2 per cent. An instalment of interest on each series of notes securing the Tuttle and the Curry mortgages fell due and was unpaid, and, under an acceleration clause contained in the notes, the principal of the notes, at the option of the owners, thereupon became due and collectible. These actions were brought to recover from the defendant 69.6 per cent of the principal of the notes upon his agreement to pay the same contained in the declaration of trust. Upon the trial the foregoing facts were not in dispute, but the cases were tried on issues raised by an affirmative defense filed by the defendant in each case alleging that he was induced by the fraud of Musick and Lalley to enter into the declaration of trust, and that because of such fraud the declaration of trust was void and of no effect. Upon this issue of fraud the court found the following facts: Musick and Lalley, having learned that this property could be purchased for $180,000, formulated a secret plan to persuade the defendant to purchase it at a price greatly in excess of that amount, in such a manner that they might secure for themselves a substantial interest in it at his expense, without expending any money themselves. In pursuance of this plan Musick represented to the defendant that he would undertake to purchase the property for $200,000, and that he and Lalley would advance thirty per cent of the purchase price if the defendant would supply the remainder. The defendant, relying upon the confidential relationship which existed between himself and Musick, and believing that the latter and Lalley were prompted by their honest belief in the value of the premises to contribute thirty per cent of the purchase price, agreed to join with them in the purchase of the property. Musick and Lalley thereupon caused to be organized Palmetto Properties, Incorporated, which corporation was a mere form devised by them in furtherance of their scheme to defraud the defendant, and intended to create a false impression as to the salability of the property, and to enable them to secure a secret profit at the defendant's expense, and arranged for the purchase of the property by Palmetto Properties, Incorporated, for $180,000. They informed the defendant that his share of the cash payment for the property, subject to the first mortgage of $96,000 to the plaintiff Tuttle and the second mortgage of $37,000 to the plaintiffs Curry and associates, was $46,666.67, and at Musick's request the defendant sent him his check for that amount. This sum was used by Musick and Lalley to make the cash payment in the ostensible sale from Curry and associates to Palmetto Properties, Incorporated, and they then caused that company to convey the premises to Musick, trustee, subject to the mortgages which he as trustee assumed and agreed to pay for their joint enterprise. In the transfer of title to Palmetto Properties, Incorporated, there were certain adjustments of taxes, interest and commissions, so that it appeared that the sum of $46,666.67 advanced by the defendant amounted to 69.6 per cent of the purchase price, and the sums falsely represented as contributed by Musick and Lalley represented, as to each of them, 15.2 per cent of the purchase price. Musick rendered to the defendant a statement of account in which it was represented that Palmetto Properties, Incorporated, had allowed the former one half of a commission of five per cent, namely $5000 and that $4221.23 net had been credited to defendant's share of the purchase price. No such commission was in fact paid. No more than a trifling amount of money was advanced by either Musick or Lalley as part of the purchase price, and in the apparent adjustments there was a small balance of the $46,666.67 actually retained by Musick. Upon being informed by Musick that the property had been purchased and title taken in his name as trustee, the defendant requested some form of document which would protect his interest in the property, and Musick caused to be prepared and executed the so-called declaration of trust. The defendant was induced to enter into the agreement with Musick and Lalley for the purchase of this property by their fraudulent representation that the purchase price was $200,000, and that they were prepared themselves to furnish thirty per cent of the purchase price. The defendant first learned of the fraud that had been practiced on him on or about December 15th, 1927, and immediately upon verifying the facts on January 16th, 1928, rescinded the contract between himself and Musick and Lalley, and notified each of them by letter that he declined to accept any interest in the property or to recognize any obligation under the declaration of trust.
O. K. Reeves, of Tampa, Florida, and Philip Reich, for the appellants (plaintiffs).
William H. Comley, for the appellee (defendant).
The plaintiff in each case is suing upon an alleged promise of the defendant to pay a portion of a mortgage debt evidenced by a series of promissory notes drawn in his favor. The defendant is not a party to the notes or the mortgages securing them, but by virtue of a declaration of trust is an owner in part of the equitable title to the property covered by the mortgages. In the deed conveying the legal title of the property to Musick, trustee, the latter assumed and agreed to pay these mortgage debts, and in the declaration of trust the defendant agreed to pay them in proportion to his interest in the property. Upon the former appeal we held that these promises were for the direct and substantial benefit of the plaintiffs and that, under the law of Florida which accords with the law of this State, the plaintiffs were entitled to maintain these actions to recover the portion of the mortgage debts which the defendant had agreed to pay. Tuttle v. Jockmus, 106 Conn. 683, 138 A. 804. Since the facts alleged in the complaint in each case are not in dispute, the plaintiffs are entitled to recover, unless such recovery is barred by reason of the facts alleged in the special affirmative defense pleaded by the defendant. This defense in substance alleges that the defendant was induced by the fraud of Musick and Lalley to join in the purchase of this property and the execution of the declaration of trust, and that the latter is therefore void and his agreement to pay any portion of the mortgage debt of no effect.
The appellants' assignments of error may be comprehended under three heads: First, that the subordinate facts do not support the court's conclusion that there was fraud on the part of Musick and Lalley which induced the defendant to take part in the purchase of this property; second, that, if there was fraud, it is no defense in these actions by the plaintiffs who were not parties to it; and, third, that the defendant did not take the proper steps to avoid his obligation by promptly disaffirming his agreement and surrendering the interest he acquired in the property.
1. In support of their contention that there was no proof of fraud on the part of Musick and Lalley the plaintiffs ask numerous corrections of the finding. Many of these seek merely to eliminate from the finding the words "fraud" and "fraudulently" as descriptive of the acts and conduct of Musick and Lalley. Granting the plaintiffs' contention that such characterization of their conduct represents a conclusion of fact, it is a conclusion which is amply supported by the subordinate facts found. Any correction of the finding which could justifiably be made would still leave a clear record of a deliberate scheme to cheat and defraud this defendant. The claim that the subordinate facts do not disclose such fraud as would justify the defendant in repudiating his agreement with Musick and Lalley does not really warrant discussion.
2. The plaintiffs further maintain — and this is the contention upon which they chiefly rely — that no fraud on the part of Musick and Lalley, whereby the defendant was induced to enter into this transaction, is available to the defendant as a defense in this action. The plaintiffs assert that the defendant, Musick and Lalley were engaged in a joint enterprise which involved the purchase of this property and its disposition at a profit to be divided among them in the proportions specified, that for the purposes of that adventure the relationship between them was that of partners, and that the defendant's liability is to be determined by the familiar principle of partnership law that the fact that one is induced by fraud to become a member of a partnership is not a defense in an action against him as a member of the partnership by a creditor of the same. The principle is well established but is not applicable to the situation here presented. It assumes the existence of a valid existing claim on the part of the creditor. To grant that assumption would be to beg the question which we are asked to solve. This is not the case of a creditor of a partnership upon a claim for goods sold or for breach of contract, as to which one of the partners denies liability upon the ground of fraud in connection with the formation of the partnership. In this case the fraud alleged inheres in the very contract by virtue of which the plaintiffs seek to recover in this action. They are claiming as third party beneficiaries. The very phrase indicates the nature of their claim and its limitations. As beneficiaries of the contract by which the defendant is held to have agreed to pay a portion of these mortgages their only claim against him is under and by virtue of that contract. If for any reason that contract is void, or voidable by this defendant, if it is tainted with fraud such that he cannot be held bound by it to those with whom he contracted, neither can he be held bound by it to these plaintiffs who stand in their shoes and can claim no superior rights. As gratuitous beneficiaries of his contract their right is a derivative one, and subject to all the defenses which the defendant has as against his original obligees.
The right of the holder of a mortgage to recover upon an assumption of the mortgage by a subsequent grantee is allowed, either on the theory that he is a third party beneficiary of the promise of the grantee, or that, by his promise, the grantee becomes the principal debtor and his grantor the surety, and that the holder is subrogated to the right of the mortgagor against his grantee. In this jurisdiction the relation between the mortgagor and his grantee in such case is held to be that of surety and principal ( Cacavelle v. Lombardi, 106 Conn. 339, 342, 138 A. 155), and right of recovery by the mortgagee upon such promise of the grantee is specifically granted by statute. General Statutes, § 5610. The rights of the parties under these conveyances and the declaration of trust are to be determined by the law of Florida. The statutes of that State do not authorize an action by the holder of a mortgage upon an agreement by a grantee of the equity to pay the mortgage debt, but by the law of that State he may sue as a third party beneficiary of a contract made for his direct and substantial benefit, and, as we held upon the former appeal in construing this declaration of trust, the promises of the defendant made therein were for the direct and substantial benefit of the plaintiffs, who were therefore entitled to maintain these actions as third party beneficiaries. Tuttle v. Jockmus, 106 Conn. 683, 138 A. 804. "On whichever theory the transferee's liability is based, there is no reason why the mortgagee, who has paid nothing to secure the agreement, should be allowed to enforce it when lacking the reality of consent necessary to its enforcement by the promissee." 3 Tiffany on Real Property (2d Ed.) p. 2497. "The foundation of any right the third person may have, whether he is a sole beneficiary or a creditor of the promise, is the promisor's contract. Unless there is a valid contract no rights can arise in favor of anyone. . . . Further, if there is a contract valid at law, but subject to some equitable defense — as fraud, mistake, or failure of consideration — the defense may be set up against the third person." 1 Williston on Contracts (1920 Ed.) § 394. "There can be no donee beneficiary or creditor beneficiary unless a contract has been formed between a promisor and promise; and if a contract is conditional, voidable, or unenforceable at the time of its formation, or subsequently ceases to be binding in whole or in part because of the impossibility, illegality or the present or prospective failure of the promise to perform a return promise which was the consideration for the promisor's promise, the right of a donee beneficiary or creditor beneficiary under the contract is subject to the same limitations." American Law Institute Restatement, Contracts, p. 165, § 140. The cases uniformly uphold these statements of the rule. Dunning v. Leavitt, 85 N.Y. 30; Clarinda National Bank v. Kirby, 191 Iowa 786, 183 N.W. 478; Becker v. Nelson, 164 Minn. 367, 205 N.W. 262; Johns v. Wilson, 6 Ariz. 125, 53 P. 583; Saunders v. McClintock, 46 Mo. App. 216; Union City Realty Trust Co. v. Wright, 145 Ga. 730, 89 S.E. 822; Ellis v. Harrison, 104 Mo. 270, 16 S.W. 198; Green v. Turner, 86 F. 837; Osborne v. Cabell, 77 Va. 462; Keller v. Ashford, 133 U.S. 610, 10 Sup. Ct. 494; 21 A. L. R. 488; 2 Jones on Mortgages (8th Ed.) § 944.
The trial court has found that the defendant was induced to execute the declaration of trust by the fraud of Musick and Lalley. As one of the cestuis que trustent under that instrument he adopted as his own the conveyance by Palmetto Properties, Incorporated, to Musick, trustee, containing the assumption by the grantee therein of the plaintiffs' mortgages. Tuttle v. Jockmus, supra, p. 694. It was Palmetto Properties, Incorporated, therefore, in legal effect, with which the defendant made the agreement to pay his proportionate share of these mortgages. But Palmetto Properties, Incorporated, was but one of the agencies employed by Musick and Lalley to deceive the defendant, and his promise made to it was a promise procured by their fraud acting through that corporation. Whether, therefore, the defendant's agreement in the declaration of trust to pay a part of these mortgages be regarded as one made with Musick and Lalley, the other signers of the instrument, or as by adoption a promise made to Palmetto Properties, Incorporated, it was one procured by fraud, which could not be enforced, either by Musick and Lalley, or by Palmetto Properties, Incorporated. It is not therefore enforceable at the hands of the plaintiffs who have no greater rights than the original obligees.
3. Finally, the plaintiffs contend that the defendant has been guilty of laches and has lost his right to rescind the contract because of a failure promptly to disaffirm it and surrender the interest he acquired in the property. The trial court has found that the defendant first learned of the fraud that had been practiced upon him on or about December 15th, 1927, whereupon, immediately after verifying the facts, on January 16th, 1928, he rescinded the contract between himself and Musick and Lalley, and notified each of them by letter that he declined to accept any obligation under the declaration of trust. This finding is attacked in the motion to correct the finding but is amply sustained by the evidence, and supports the conclusion of the trial court that the defendant was not guilty of laches. Neither title nor possession of the property had been transferred to the defendant, and no tender of reconveyance was necessary or required. Harbor Business Blocks Co. v. Gregory, 102 Kan. 33, 169 P. 191; 3 Black on Rescission Cancellation (2d Ed.) § 630. The most that he could do, or was required to do under the circumstances, was to notify Musick and Lalley that he disaffirmed the contract and refused to accept any interest in the property under the declaration of trust. This he did. To put the parties in statu quo this would require that the defendant receive from Musick, trustee, the $46,666.67 advanced by him for the purchase of the property. The record does not disclose that he has received this sum or the probability that he ever will. Furthermore it does not appear that the plaintiffs, the fortuitous beneficiaries of this agreement, have been misled or injured in any way by any laches of the defendant, or any failure on his part in effecting a rescission of the agreement contained in the declaration of trust. 2 Jones on Mortgages (8th Ed.) § 943; Clarinda national Bank v. Kirby 191 Iowa 786, 183 N.W. 478; Johnson v. Maier, 194 Mo. App. 169, 187 S.W. 143; Lloyd v. Lowe, 63 Colo. 288, 165 P. 609.
The fact that Jockmus had an adequate remedy against Musick and Lalley does not impair his defense to this action. Two remedies were open to him, to disaffirm the transaction and return or offer to return what he had received upon recovery of what he had parted with, or to affirm the transaction and recover the damages suffered by the fraud. Bitondi Sheketoff, 91 Conn. 123, 126, 99 A. 505. He chose the former.