Fidelity-Philadelphia T. Co. v. Hale & Kilburn Corp.

• Decision Date: 16 September 1937
• Docket Number: No. 6553.,6553.
• Parties: FIDELITY-PHILADELPHIA TRUST CO. v. HALE & KILBURN CORPORATION et al.
• Court: U.S. District Court — Western District of Pennsylvania

24 F. Supp. 3

FIDELITY-PHILADELPHIA TRUST CO. v. HALE & KILBURN CORPORATION et al.

No. 6553.

District Court, E. D. Pennsylvania.

September 16, 1937.

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W. Heyward Myers, Jr. (of Morgan, Lewis & Bockius, of Philadelphia, Pa.), for plaintiff.

Isaac A. Pennypacker and William Carson Bodine, both of Philadelphia, Pa., and Allen McCarty, of New York City, for defendant Hale & Kilburn Corporation.

Richardson Dilworth, of Philadelphia, Pa., and Paul D. Miller and H. G. Pickering, both of New York City, for defendant American Motor Body Co.

David H. Kinley, of Philadelphia, Pa., for defendant Hale & Kilburn Co.

KIRKPATRICK, District Judge.

This is a suit in equity brought by the plaintiff as Trustee under a corporate mortgage executed by Hale and Kilburn Corporation, the first of the three defendants. The bill is to foreclose the mortgage, with the usual prayer for deficiency judgments. The defendants will be referred to respectively as follows: Hale & Kilburn Corporation —"H & K Corporation"; American Motor Body Company—the "Body Company"; Hale & Kilburn Company—"H & K Company."

The question involved is whether a trustee for bondholders who has foreclosed a corporate mortgage against property in the hands of the third of three successive owners of the property may, in the same suit, recover deficiency judgments against the two prior owners, each of whom assumed the mortgage debt upon taking title.

H & K Corporation gave the mortgage in 1919. In November, 1920, the mortgaged property was transferred to the Body Company and in June, 1923, by the latter to H & K Company (then under another name). Upon each of these transfers, the succeeding corporation, in accordance with one of the provisions of the mortgage, executed a separate instrument (called a Supplemental Indenture) by which it agreed "to pay the principal and interest" of the bonds and "to perform and fulfill all the terms, covenants, and conditions of the said first mortgage"; and the Trustee also executed the instruments, in each case accepting, "this indenture and agreement under and subject to all the terms and provisions of said first mortgage." In 1930, H & K Company defaulted in interest and sinking fund payments, and, after proper authorization by a majority of the bondholders, the Trustee began this foreclosure suit on May 6, 1931, against all three corporations.

The first two defendants, H & K Corporation and the Body Company, appeared and filed answers to the bill on the merits, denying all liability, by reason of novations, and setting forth certain other defenses.

H & K Company, however, did not answer, and the plaintiff obtained an order to take the bill pro confesso as to it on June 10, 1931. On August 29, 1934, a final decree of foreclosure and sale was entered against the H & K Company. This decree, in the usual form, directed the defendant to pay the mortgage debt in the amount of $1,346,548.16 and provided that in default of such payment the mortgaged property should be sold and that, in case of a deficiency, upon the report of a special master (appointed by the decree) as to the amount, the plaintiff should have judgment against the defendant, H & K Company, for the amount of any such deficiency. Pursuant to this decree, all the mortgaged property and assets were sold at public auction, and the sale was confirmed on October 15, 1934.

The plaintiff then filed a petition under the Pennsylvania Deficiency Judgments Act, to fix the fair value of the property sold. Upon the report of the Special Master, confirmed on September 9, 1935, the Court, on January, 1936, entered a decree in favor of the plaintiff and against H & K Company for a deficiency in the amount of $729,391.13.

On June 24, 1936 (no further proceedings having been taken up to that time upon the answers of H & K Corporation and the Body Company) the plaintiff caused the suit to be set down for final hearing. Over the objection of the defendants, the suit was placed upon the Equity Trial List and heard in March, 1937.

The foregoing may be taken as special findings of fact.

My general conclusions of law are the Body Company is not liable for the deficiency, but that H & K Corporation is.

A number of questions of law were raised by both defendants, and, since appeal is probable, I think it would be well to state my conclusions upon most of them, although all may not be strictly necessary to the decision of this case.

I. The Body Company, upon conveying the mortgaged property to H & K Company in June, 1923, was discharged from all liability in respect of the mortgage debt, by virtue of the provisions of Pennsylvania Act of June 12, 1878, P.L. 205, 21 P.S. §§ 655, 656.

The Act of 1878 has to do with the personal liability for the mortgage debt of persons who take title to real estate which is subject to a mortgage given by another. The first section (21 P.S. § 655) provides that unless there be an express assumption of such personal liability on the part of the grantee, none will arise. This assumption of liability may be directly to the mortgagor, and it may be assumed that when the Body Company took title to the mortgaged property and executed its Supplemental Indenture, it became fully liable to the plaintiff in respect of the mortgage and bonds.

The second section (21 P.S. § 656) provides in part as follows: "nor shall such personal liability continue after the said grantee has bona fide parted with the encumbered property, unless he shall have expressly assumed such continuing liability."

It seems to me almost too plain for argument that this means that, in order to hold an intermediate grantee who no longer owns the land, he must have said in so many words that he agreed to remain liable after he conveyed the property. The words "expressly assumed such continuing liability" can have no other meaning. The entire purpose of the legislation was to prevent unwitting owners of mortgaged property from being held to obligations which they did not intend to assume, but which the law imposed on them by reason of ownership or implied from general words in the deed which might amount to something less than an explicit assumption. The Act answers two questions. First, under what circumstances may personal liability be created? Second, what is necessary to carry it on after the grantee ceases to be the owner of the property? In each case the answer is the same. Whether it is a liability which begins with ownership or one that continues after ownership is terminated, there must be an express agreement to assume that particular liability. Plainly an agreement to assume one liability was not intended to act as an assumption of the other, and consequently a general assumption of liability upon taking title was never intended to import an agreement that it should continue beyond the time when the property was deeded away.

The plaintiff bases its argument mainly upon an expression of the Supreme Court of Pennsylvania in Kirker v. Wylie, 207 Pa. 511, 56 A. 1074. That case did not present the same situation as the one now before the Court. There, the original mortgagor (corresponding to H & K Corporation) had been sued upon his bond, after foreclosure proceedings against a second grantee (corresponding to H & K Company) had resulted in a deficiency, and had been compelled to pay it. He then sued his immediate grantee (corresponding to the Body Company). The mortgagee was in no way involved, having collected the deficiency from the original mortgagor. The court said, "It is argued, however, that the defendant is relieved by the second section of the act, having parted with the property in good faith, and not having assumed a continuing liability. * * * The liability assumed, which the grantee agreed to pay, was a part of the consideration for the conveyance. It was as much a continuing liability as an obligation to pay a fixed sum of money, and it could be discharged only by payment."

This certainly looks as though the court was construing the Act of 1878 and deciding that a general assumption of liability upon taking title was sufficient to import an agreement to assume a continuing liability in compliance with the terms of that Act. But it is clear, in the light of later decisions, that the Act of 1878 had nothing to do with the case which was before the court; i. e., a case involving rights and liabilities solely between successive owners of the land. This could not have been stated more plainly than it was in Greenspan v. Margolis, 70 Pa.Super. 373, where the court said, "The Act of 1878 applies to the relations between the grantee and the holder of the encumbrance, it does not affect the covenant of the grantee to protect the grantor against loss through his personal liability for the debt to which the conveyance of the land has been made subject." See, also, Appeal of May's Estate, 218 Pa. 64, 67 A. 120; Nedwidek v. Larson, 119 Pa.Super. 198, 201, 180 A. 722. If the court in Kirker v. Wylie, was undertaking to construe the Act of 1878, it was doing so in a case to which the Act had no application, and its construction was pure dictum, based upon an erroneous promise which has been subsequently overruled.

Sloan v. Klein, 230 Pa. 132, 79 A. 403, comes very close to being on all fours with the present case against the Body Company. There (as in the present case) the suit was against an intermediate grantee for a deficiency after foreclosure against the land in the hands of a second grantee. The intermediate grantee did not assume any continuing liability at the time he conveyed the land away. He had, however, assumed liability by a general convenant when he took title. The only point of difference between that situation and the present case was that his agreement was made with his grantor and not, as in the present case, with the mortgagee. One of the two grounds upon which the court put the decision for the defendant was...