Opinion ID: 2176933
Heading Depth: 1
Heading Rank: 5

Heading: Third Parties Equitable Mortgages

Text: Handler contends that, even if CoreStates' mortgage had record priority pursuant to Section 2106, the Court of Chancery was powerless to discharge Handler's subsequently recorded legal mortgage. Handler's contention is premised upon the proposition that the Court of Chancery may enforce an unsealed mortgage only between the parties to that equitable agreement. Handler's argument is refuted by the relevant authorities. In support of its contention that an equitable foreclosure on an unsealed mortgage is only enforceable between the parties and, thus, ineffectual in discharging a subsequently recorded legal mortgage, Handler relies primarily upon a footnote by this Court in Monroe Park, citing Professor Thompson's Commentaries on the Modern Law of Real Property. See Monroe Park v. Metropolitan Life Ins. Co., 457 A.2d at 736 n. 7 (quoting 9 Thompson, Commentaries on the Modern Law of Real Property § 4669). In the quoted portion of his treatise, Professor Thompson states: A mortgage executed without a seal, where it is required, is not a legal mortgage. In equity it amounts to a compact for a mortgage, and as such creates no lien as against purchasers from the mortgagor, or as against his creditors, or even against an assignee under a general assignment for the benefit of creditors. 9 Thompson, Commentaries on the Modern Law of Real Property § 4669, at 70 (footnotes omitted), quoted in Monroe Park v. Metropolitan Life Ins. Co., 457 A.2d at 736 n. 7. Handler's reliance on this footnote is misplaced. Before the institution of recording acts, the liens of third parties without actual notice of the prior equitable mortgage were not subject to discharge upon foreclosure of that equitable mortgage. See 1 Story, Commentaries on Equity Jurisprudence § 395. Even though modern recording acts allow for constructive notice of a prior mortgage to third parties, there are certain kinds of equitable mortgages, such as the deposit of title deeds and the deed absolute intended as a mortgage, that may necessitate a third party's actual notice as a prerequisite to the discharge of a subsequently recorded mortgage. See id. [7] Compare Hall v. Livingston, 3 Del.Ch. at 382-83, 396-97. In the vast majority of circumstances, however, constructive notice pursuant to a mortgage recording statute is adequate to subordinate subsequently recorded interests in the mortgaged property, because the prior recorded document generally reflects the parties' intentions to create an equitable mortgage. Conly v. Industrial Trust Co., Del.Ch., 29 A.2d 601, 602 (1943). See 25 Del.C. § 2106. The foregoing fundamental rule of equity, long recognized by Delaware courts, is that a party taking with notice of an equity takes subject to that equity. See Adams, The Doctrine of Equity  (Ralston, 8th ed. 1890) (footnote and internal quotations omitted). See Hall v. Livingston, 3 Del.Ch. at 382-83, 396-97. See also 2 Story, Commentaries on Equity Jurisprudence § 1231. Adams explains this principle of equity as follows: [I]f a person acquiring property has, at the time of acquisition, notice of a prior equity binding the owner in respect of that property, he shall be assumed to have contracted for that only which the owner could honestly transfer, viz., his interest, subject to the equity as it existed at the date of the notice. Adams, The Doctrine of Equity  151 (footnote omitted). Absent statutory authority to the contrary, such notice may be either actual or constructive in nature. Id.  n. 1. Consequently, it is well-established that a third party's actual or constructive notice of an equitable lien is sufficient to render the lien enforceable in relation to that third party. Hall v. Livingston, 3 Del.Ch. at 398-99. [8] In fact, in another section of his treatise, Professor Thompson accepts the foregoing principle as settled: a bona fide purchaser for value of property subject to an equitable mortgage, with notice of such mortgage, takes the property subject to the equitable mortgage. See 9 Thompson, Commentaries of the Modern Law of Real Property § 4711, at 229. Therefore, the quotation from Professor Thompson's treatise in Monroe Park cited by Handler must be read in the context of the myriad forms of equitable mortgages discussed earlier in this decision. For example, a deed absolute on its face, recorded as a deed, is valid and effectual as a mortgage only as between the parties, if it was intended by them to be merely a security for a debt. 4 Kent, Commentaries on American Law . See also Hall v. Livingston, 3 Del.Ch. at 374, 382-83. The distinction between a deed absolute and an unsealed mortgage with respect to third parties is significant: the recordation of a deed absolute provides no constructive notice of its status as security for a debt, whereas the recordation of an otherwise valid mortgage that lacks a seal provides clear and undoubted notice of the prior lien interest of the first mortgagee. See Hall v. Livingston, 3 Del.Ch. at 396. The United States Supreme Court has stated: It has been settled, upon fundamental principles of equity jurisprudence, by many precedents of high authority, that when the seal of a party, required to make an instrument valid and effectual at law, has been omitted by accident or mistake, a court of chancery, in order to carry out his intention, will, at the suit of those who are justly and equitably entitled to the benefit of the instrument, adjudge it to be as valid as if it had been sealed, and will grant relief accordingly.... Bernards Township v. Stebbins, 109 U.S. 341, 349, 3 S.Ct. 252, 258, 27 L.Ed. 956 (1883) (emphasis added). [9] In this case, the unsealed CoreStates equitable mortgage read, in relevant part, as follows: WHEREAS, Mortgagor is justly indebted to Mortgagee, having executed and delivered to Mortgagee a promissory note (the Note) bearing even date herewith and evidencing Mortgagor's promise to pay Mortgagee the principal sum of Fifteen Million Two Hundred Sixty-Three Thousand Dollars ($15,263,000.00) or so such thereof as shall have been advanced pursuant to a certain Loan Agreement (the Loan Agreement) of even date between Mortgagor and Mortgagee and remain outstanding (the Loan), lawful money of the United States of America, with interest thereon at the rate and times and in the manner and according to the terms and conditions specified in the Note, all of which are hereby incorporated herein by reference; and NOW THIS INDENTURE WITNESSETH, that Mortgagor, in consideration of the indebtedness and as security for the payment to Mortgagee of the principal with interest, and all other sums provided for in the Note, the Loan Agreement and in this Mortgage, including, but not limited to, any future advances that may be made by Mortgagee to Mortgagor, (the Note, the Loan Agreement and all other agreements and instruments executed in connection with the Loan being hereinafter collectively referred to herein as the Loan Documents), and for performance of the agreements, conditions, covenants, provisions and stipulations contained in this Mortgage and the Loan Documents has granted, bargained, sold, released and confirmed, and by these presents does hereby grant, bargain, sell, release and confirm unto Mortgagee that certain tract or parcel of land lying and being in Mill Creek Hundred, County of New Castle, and State of Delaware, as more particularly described and set forth in Exhibit A attached hereto and made part hereof (hereinafter the Land). The record reflects that Handler had actual and constructive notice of CoreStates' prior equitable mortgage on the Hitchens Farm real property.