Artisti-Kote Co. v. Benefactor Building & Loan Ass'n

• Decision Date: 21 March 1933
• Docket Number: No. 4929.,4929.
• Citation: 64 F.2d 407
• Parties: ARTISTI-KOTE CO. v. BENEFACTOR BUILDING & LOAN ASS'N.
• Court: U.S. Court of Appeals — Third Circuit

64 F.2d 407 (1933)

ARTISTI-KOTE CO. v. BENEFACTOR BUILDING & LOAN ASS'N.

No. 4929.

Circuit Court of Appeals, Third Circuit.

March 21, 1933.

George E. Beechwood, of Philadelphia, Pa., for appellant.

L. Halpern Miller, of Philadelphia, Pa., for appellee.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY, Circuit Judge.

In July, 1927, Robert H. Scroggins, a citizen of Pennsylvania, executed and delivered to the Benefactor Building and Loan Association, a corporation of Pennsylvania, his bond for $110,000, and also his mortgage for the same amount, secured upon an apartment house situated in Pennsylvania, subject to a prior mortgage for $225,000. Simultaneously with the delivery of the bond and mortgage Scroggins subscribed for and assigned to the loan association 550 shares of its stock as additional collateral security, pursuant to the familiar theory on which building and loan associations operate that payments of installments and credits of earnings upon the stock will in time equal and re-pay the loan. Later, Scroggins sold and conveyed the apartment house subject to both mortgages and transferred to the grantee all his right, title and interest in the pledged shares of stock which, through other transfers, eventually reached the plaintiff. They then had a value of about $25,000.

By November, 1930, times had changed and with them had changed the values and returns in what, at the beginning, appeared to be a safe transaction for both borrower and lender. After default of interest the loan association obtained judgment on its second mortgage for about $149,000, issued execution and at sheriff's sale purchased the property for $100, subject to the first mortgage. Thereupon the last assignee of the pledged 550 shares of loan association stock filed a bill in the District Court alleging that the mortgaged premises were at the time of the sheriff's sale worth $500,000; that the loan association, in purchasing the property for $100 when only $335,000 of principal mortgage indebtedness stood against it, was paid in full and that, in consequence, it could not in law appropriate the shares pledged as additional collateral but should in equity be required to hand them over to the plaintiff-assignee. The learned trial court, after answer but before hearing, resorted to Equity Rule 29 (28 USCA § 723) which gave it power to call up and dispose of any question of law "going to the whole or a material part of the cause of action," and dismissed the bill. The plaintiff appealed.

We are disposed to pass by the doubtful question of jurisdiction, raised by the defendant, in order to bring to an end a controversy in which, though aggravated by industrial conditions, we discern no doubt in law.

The appellant's first grievance is that the trial court, at a hearing similar to one on demurrer, erred in refusing to accept as true its allegation that the mortgaged premises were at the time of sale worth $500,000. It contends that, had this fact been assumed or admitted, the court would have been forced to action opposite that which it took.

It is very plain that a recognition of this allegation is the basis of and therefore is essential to the appellant's theory of its right to the shares in question; but we regard its admission or assumption in no sense necessary to a decision of the case under what the learned trial court ruled, and we shall decide, is the applicable law.

As the obligations in question are Pennsylvania contracts and the properties to which they refer are from their location or situs Pennsylvania properties, the case clearly turns on Pennsylvania law. We shall, therefore, look for the law of Pennsylvania in respect to a debt whose payment is secured by a bond and mortgage and by additional collateral of the character shown by the amended bill (Exhibit A).

Under the law of that state, a mortgage is not a conditional deed or a defeasible conveyance. Though of high grade, it is simply a security for the payment of the amount due on the bond. The bond is the primary obligation and stands for the principal debt; the mortgage is collateral security. Eagle Beneficial Society's Appeal, 75 Pa. 226; In re Davis (C. C. A.) 174 F. 556, 557. Therefore the mortgage, being merely a security for payment of the debt evidenced by the bond, confers upon the mortgagee nothing more than a lien upon the land described. Commonwealth v. Wilson, 34 Pa. 67. Yet both bond and mortgage concern in different ways the same debt. In consequence, satisfaction of the bond extinguishes the debt and discharges the mortgage. Hodgdon v. Naglee, 5 Watts & S. (Pa.) 217; Tubb's Appeal, 161 Pa. 254, 28 A. 1109; Neale v. Dempster, 179 Pa. 569, 576, 577, 36 A. 338. Sale of the land under foreclosure...