Daily Development for
Tuesday, July 1, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
randolphp@umkc.edu

MORTGAGES; CONTRACTS; THIRD-PARTY BENEFICIARIES; DEFENSES: Mortgagee is the third party beneficiary of assumption agreement included in purchase of mortgaged property; and purchaser obligated under mortgage but could not invoke mortgagor's defenses to payment, including defense that mortgagee's right to collect was time-barred.

Joyner v. Vitale, 926 P.2d 1154 (Alaska 1996).

An attorney purchased a house encumbered by a deed of trust after determining that the debt might be time-barred. He nevertheless executed a warranty deed that recited the obligation and two pre-sale agreements indicating his intention to pay it, although he refused to sign a new note. The seller (heir to the original mortgagor) testified that the purchaser also had orally agreed to pay the mortgagee. The buyer never indicated to the seller that he believed the debt was time-barred and intended to raise that defense to payment

After acquiring the property, the purchaser commenced this action seeking to remove the deed of trust from title on the grounds that it was time-barred, or alternatively to have the obligation correctly calculated to a lower amount.

The Alaska Supreme Court affirmed judgment for the mortgagee, holding that the sale amounted to a third-party beneficiary contract for the mortgagee's benefit. Because that contract failed to expressly bestow the original mortgagor's defenses on the purchaser, the purchaser could not invoke them, under Restatement (Second) of Contracts, 309. The Supreme Court also reversed the trial court's ruling that the mortgagee could not enforce the attorney fee provisions of the original note and deed of trust, and instead held that the purchaser's contract with the seller incorporated the "rights and obligations" of the original instruments.

Comment 1: The attorney purchaser obviously was "too clever by half." The facts here were particularly useful in the analysis of the deal as a third party beneficiary contract. The owners of the property were heirs to an owner who had incurred a debt to the mortgagee for legal services. The spokesperson for the heirs testified that the heirs regarded the mortgage debt as a reasonable claim which they felt both legally and morally obligated to pay. The promise that it would be paid was part of the incentive for selling the house to the purchaser here.

Comment 2: It is a closer call, however, on the general third party beneficiary analysis. Is it always likely to be the contracting intent of the parties to confer a benefit upon the mortgagee? The court cites the general principle in Nelson & Whitman's excellent treatise, Real Estate Finance Law for the general proposition. It then cites the general proposition in the Calamari and Perillo hornbook that third party beneficiary obligors do not enjoy the personal defenses of their promissees.

Perhaps an argument can be made that in the modern world a time barred debt is still a credit problem and that the seller who exacts an assumption promise really does have a motive to confer a right on the mortgagee. But the editor is concerned with the notion that such conclusion ought to arise as a matter of course.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.