Appeal from the District Court of the United States for the Southern District of Indiana, Indianapolis Division; Robert C. Baltzell, Judge.
Before EVANS and MINTON, Circuit Judges, and LINDLEY, District Judge.
Defendants' default on their payments and plaintiff's election to declare the full amount due, would unquestionably have necessitated the granting of a judgment for the amount of the note with interest, were it not for plaintiff's acceptance of a deed of the mortgaged property and its action at that time. Its action furnishes the basis of the two contentions which defendants make. It is conceded that the sum which plaintiff later realized from the sale of the premises should be applied upon the note.
Defendants argue that they are not liable for a deficiency judgment in the absence of foreclosure proceedings, because: (a) There was a merger in the mortgagee of the legal and equitable title to the real estate covered by the mortgage given to secure the note sued upon; (b) Even though there was no merger, they were released from all liability because plaintiff granted an extension of time of payment to the defendants' grantee.
As to the facts, there is no serious dispute.
H.H. Company received a warranty deed from defendants, subject to plaintiff's mortgage. It did not assume defendants' indebtedness. It proposed thereafter that plaintiff rent the property and apply the income upon the note and mortgage. Plaintiff replied by asking H.H. Company to execute a quitclaim deed to one L, an officer of plaintiff, and sign a socalled "covering agreement," which read:
"The purpose of the covering agreement is to avoid foreclosure and to give you a reasonable opportunity to sell the place and get something out of it for yourselves; the idea being that until noon of October 31, 1939, you can pay us off and make any disposition of the house you see fit, and may put it on the market at your own price. After that date, we are to be free to make any sale we can. * * *
"In order to protect ourselves, I am sending LeTourneau notice that we have declared the mortgage due for nonpayment of interest and taxes, and I enclose a copy of that notice to you."
The quitclaim deed to L carried an $8.50 stamp.
To make its position perfectly clear, plaintiff wrote a letter to H.H. Co. which was acquiesced in by H.H. Co., setting forth the understanding of the parties when plaintiff received the deed. The letter read:
"In consideration of this conveyance, the undersigned agree that to and including noon of October 31, 1939, it will not sell or convey these premises except with your written consent and that until that time it will convey these premises to any person you designate upon payment in full to this Bank of all sums owing to it under its mortgage on the premises, recorded in Book 522, Page 413, Recorder's Office, Peoria County, Illinois.
"This Bank may take possession of the premises at once subject to the terms of this Agreement.
"It is understood that the delivery of this Quit-Claim Deed is not intended by either party, nor by this Bank, to constitute or effect a merger of the ...