This section is from the book "The Law Of Real Property and Other Interests In Land", by Herbert Thorn Dike Tiffany. Also available from Amazon: A Treatise on the Modern Law of Real Property and Other Interests in Land .
The transferee of an obligation secured by mortgage is ordinarily in the position of any transferee of a non-negotiable chose in action, and takes it subject to all equities and defenses which exist in favor of the debtor, such as illegality, failure of consideration, part payment, and the like, irrespective of whether he has actual or constructive notice thereof.61 And so it may be shown in defense to a foreclosure proceeding by such a transferee that though the mortgage purports to secure an indebtedness, no such indebtedness exists.62
The rule that the transferee of the mortgage debt takes subject to equities and defenses in favor of the debtor has been said not to extend to equities and defenses based on a matter or agreement "collateral" to the debt or mortgage.63 And in so far as the transN. Y. 575; Wright v. Eaves, 10 Rich. Eq. (S. Car.) 582; Knox v. Galligan, 21 Wis. 470; Conradt v. Lepper, 13 Wyo. 473, 81 Pac. 307, 82 Pac. 2; Darcy v. Hall, 1 Vern. 49; 2 Coote, Mortgages (8th Ed.) 849.
61. Matthews v. Wallyn, 4 Ves. 118; Adams v. Hopkins, 144 Cal. 19, 77 Pac. 712; Briggs v. Crawford, 162 Cal. 124, 121 Pac. 381; Foster v. McGuire, 96 Ga. 447, 23 S. E. 398; Olds v. Cummings, 31 111. 188; Hazle v. Bondy, 173 111. 302, 50 N. E. 671; Henry v. State Bank of Laurens, 131 Iowa, 97, 107 N. W. 1034; Frederick Central Bank v. Copeland, 18 Md. 305, 81 Am. Dec. 597; Fish v. French, 15 Gray (Mass.) 520; Nichols v. Lee, 10 Mich. 526, 82 Am. Dec. 57; Moffett v. Parker, 71 Minn. 139, 70 Am. St. Rep. 319, 73 N. W. 850; Vredenburgh v. Burnet,
31 N. J. Eq. 229; Magie v. Reynolds, 51 N. J. Eq. 113, 26 Atl. 150; James v. Morey, 2 Cow. (N. Y.) 246, 14 Am. Dec. 475; Crane v. Turner, 67 N. Y. 437; Nott v. Clark, 9 Pa. St. 399, 49 Am. Dec. 566; Horstman v. Gerker, 49 Pa. St. 282, 88 Am. Dec. 501; Moffatt v. Hardin, 22 S. C. 9.
62. Brown v. Witts, 57 Cal. 304; Cumberland Coal, etc., Co. v. Parrish, 42 Md. 598; Brooke v. Struthers, 110 Mich. 562, 35 L. R. A. 536, 68 N. W. 272; Magie v. Reynolds, 51 N. J. Eq. 113, 26 Atl. 150: Hill v. Hoole, 116 N. Y. 299, 5 L. R. A. 620, 22 N. E. 547; Rapps v. Gottlieb, 142 N. Y. 164, 36 N. E. 1052; Clowers v. Snowden, 21 Okla. 476, 96 Pac. 596; Carothers v. Sims, 194 Pa. St. 386, 45 Atl. 47.
63. McMasters v. Wilhelm, 85 feree of a chose in action ordinarily takes free of collateral equities, such as set off, in any particular jurisdiction, a matter as to which the courts arc not in accord,64 the transferee of a claim secured by a mortgage would so take.
The assignment of a chose in action is not effective as against the debtor until he has notice thereof, and the assignee of a debt secured by mortgage, as of one not so secured, consequently takes subject to all equities and defenses which may have arisen in favor of the debtor before notice to the latter of the assignment, even though after the actual assignment.65 The statement frequently found, that the assignee takes subject to equities existing at the time of the assignment, appears to be for the most part directed to cases in which the defense, as having arisen before the assignment, necessarily arose before notice thereof.66
In view of the fact that, as above stated, the transferee of a debt secured by mortgage ordinarily takes subject to equities and defenses in favor of the debtor, it follows that one is usually not safe in purchasing a mortgage oblication without first inquiring of the mortgagor whether there is any defense thereto in whole or in part.67 If upon such inquiry he is answered in the negative or, presumably, if the mortgagor refuses to answer, he may with safety purchase the obligation. In some communities it is the recognized practice for an intending purchaser of a mortgage obligation to take the very proper precaution of requiring a written statement from the mortgagor to the effect that the whole sum purporting to be secured is actually owing, and that there are no defenses to the claim. After the purchase of the obligation upon the strength of such a declaration by the mortgagor, the latter is estopped to assert the contrary.68 The mortgagor may also be estopped to assert any defenses as against a bona fide purchaser for value by his oral statements, or by conduct on his part, calculated to induce the purchase of the mortgage as a valid security for the whole sum named.69 And it has been decided that the mortgagor, after executing a mortgage in fraud of creditors, is estopped, as against a bona fide assignee for value, to assert that it was given to secure merely a pretended debt.70
Pa. St. 218. But see Lane v. Smith, 103 Pa. St. 415; Colehour v. State Sav. Inst., 90 111. 152. See Downing v. Sullivan, 64 Conn. 1, 29 Atl. 130.
64. See cases cited, Wald's Pollock, Contracts (Williston's Ed.), 2S5, note.
65. See Hammon, Contracts, p. 735, note; Wald's Pollock on Contracts (Williston's Edition), 282, 284, 286, notes; 5 Encyclopedia Law & Prac. 936.
66. That the assignee of a mortgage debt takes free from equities arising in favor of the assignor after the assignment, though based on a prior contract, was decided in Bush v. Cushman, 27 N. J. Eq. 131; Merchants Bank of Buffalo v. Weill, 163 N. Y. 486, 79 Am. St. Rep. 749, 57 N. E. 749, 29 N. Y. App. Div. 101, 52 N. Y. Supp. 37. See Timms v. Shannon, 19 Mo. 296, 81 Am. Dec. 632.
67. See Bouton v. Cameron, 205 111. 50, 68 N. K. 800; Cooper v. Smith, 75 Mich. 247. 42 N W. 815; Theyken v. Howe Mach. Co., 109 Pa. 95.
If a mortgage is executed without the creation of any debt, but merely to enable the nominal mortgagee to raise money for the mortgagor or for some particular purpose, and he does raise money by a sale of the mortgage obligation, the purchaser is not in the position of a transferee of a mortgagee's rights, so that he will take subject to the defense that the proceeds of the sale were applied by the nominal mortgagee for a purpose other than that designated by the mortgagor. The nominal transferee is in effect the mortgagee, and the nominal mortgagee is the mortgagor's agent clothed with apparent authority as owner to dispose of the mortgage obligation for any purpose whatsoever.71