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Individual and corporation mortgages; a statement for laymen of the Legal principles online

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' nil AM LILLY

M«r« OF




Gift U.C. Library

VlmsA Tni'jt Company of CaE&rnid



and Corporation


A Statement for Laymen of
the Legal Principles




^mmgk fej Um^i J Tr;2.

New York

Doubleday, Page & Company


Investment Bankers Association

of America



U V.34

Copyright, igi8, by
Investment Bankers Association of America

All rights reserved, including that of

translation into foreign languages,

including the Scandinavian.




Education Committee

Lawrence Chamberlain, Chairman

E. W. Bulkley

Neither the Investment Bankers
Association of America nor its
Education Committee assumes
responsibility for any statements
made in this volume or in any
book referred to in the volume.



Formerly it was the general belief, and it still
is a common idea, that business must be re-
garded in the nature of a trade, of which a
knowledge can be acquired only through the
accumulation of personal experience, or through
transmission from the older to the younger man.

There is now a constantly enlarging number
of people who believe that business can be and
should be made more and more to approximate
the nature of a profession, and that at least some
of the accumulated experience can be set forth
in writing for the benefit of the younger men
who are engaging or expecting to engage in busi-
ness pursuits. Such written statements about
business at first must be fragmentary, and they
are likely to be dogmatic. It is perhaps not
unreasonable to hope that they will become
more and more scientific, more and more in the
nature of principles deduced from the multi-
farious facts.

It is in the hope of enlarging by its contrib-
uting mite the body of useful written matter
on the subject of business that this brief state-
ment of the legal incidents of a mortgage has
been written. The legal aspect of business


transactions is of course a part of the total
nature of, and completely pervades, the trans-
actions themselves. The fact that the law has
long undergone its scientific development makes
it one of the most penetrating instruments for
the study of business. This accounts partly for
the fact that lawyers have often made markedly
competent business men.

It is a maxim that "ignorance of the law ex-
cuses no one. " Certainly the more general and
sound the understanding of legal matters in a
community the better for the welfare of the
community. A business man certainly must
acquire a considerable acquaintance with the
law in his accumulation of business experience.
In fact he comes to regard certain fundamental
things as elementary; he presumes that every
one knows them. He assumes, for example,
that every one knows the general nature of a

Increasing complexity of business resulting
in greater specialization probably makes a gen-
eral knowledge of the law much less common
now than formerly. Many young men entering
business are very hazy about the precise nature
of such a thing as a mortgage. Certainly the
young man choosing finance as the particular
occupation he intends to follow should not be
foggy in his ideas about this particular legal
instrument. The nature of the investment con-
tract is of the very essence of the security of a
corporate obligation. No one can hope really
to understand the corporate mortgage bond who

[ viii ]

has only the vaguest idea of the nature of a
mortgage. The most elaborate of corporation
mortgages has for its basis the same funda-
mental principles which underlie the simplest
mortgage of an individual on the humblest
house and lot. Any study of corporation
finance or investments should have near its very
beginning a study of the legal aspects of a mort-
gage sufficient to afford an understanding of its
nature and pervading principles. The legal
treatises, however, are too voluminous and too
technical for the layman. Those brief state-
ments of the law which previously have been
written for laymen are not sufficiently compre-
hensive for the student of corporation finance
and investments.

It would be impossible to discuss all the prin-
ciples of law which have a bearing on mortgages
within the scope of a short volume. It is hoped,
however, that a sufficient number of the prin-
ciples of law and equity governing mortgages
will be found in the following pages to fill at
least in part the needs of the layman in gaining
an understanding of the mortgage as a legal

Mr. William M. Wherry of the New York
bar read the manuscript and made valuable
suggestions. Mr. Hastings Lyon, my partner
in the practice of the law, has been of constant
assistance in the preparation of this Httle book.

William Lilly.
New York City,
July 24, 191 8.





"Vif-gage'* and "Mort-gage**

There were two methods known to the Anglo-
Saxons for the return of real property pledged
by a debtor to secure the repayment of a loan.

According to one method the creditor took
title to the property and also all the rents and
profits until he recouped himself for the loan.
This was called a live pledge — "vif-gage.'*

By the other method the creditor took title
to the debtor's property with the agreement that
the debtor should repay the loan on a day
certain, and if the loan was not repaid on the
day so fixed by the parties, which was called
the "law-day," the creditor became the owner
of the property absolutely and forever. This
was called a dead pledge — "mort-gage."

A Common Law Mortgage

What is a common law mortgage?
Jones, the absolute owner of a parcel of land
worth $15,000, conveys all his right, title and


interest in it, by deed under seal, to Brown, as
security for the repayment three years there-
after of the sum of ^10,000 which Brown there-
upon loans to him.

The deed contains a provision that if Jones
repays the loan on the day when it becomes due,
the deed shall become void; otherwise it is in
full force and effect.

Accordingly, Jones is under no liability to
repay the loan when it becomes due. If he does,
he gets back his land; if he does not, Brown
becomes the absolute owner, taking the land
in lieu of repayment of the loan.

A simple transaction. Yet it contains all the
elements of, and is in fact, a common law mort-
gage of realty.

That Jones might have conveyed the land to
Brown, not as security for the repayment of a
loan, but as security for the performance of
some other act for which Brown has given him
something of value, does not alter the essential
nature of the transaction.

Hence, "at common law a mortgage of realty
may be defined as an estate created by a con-
veyance, absolute in its form, but intended to
secure the performance of some act, such as
the payment of money or the like, by the
grantor or some other person, and to become
void if the act is performed agreeably to the
terms prescribed at the time of making such
conveyance. "^

* ("Cyclopedia of Law and Procedure," Vol. 27, p. 957.)

Common Law Doctrine

The law of mortgages does not, however, end
with the respective rights of the parties thus

By the strict doctrine of the common law,
Brown, upon having parted with something of
value to Jones and received the deed, became
entitled forthwith to possession, being con-
sidered the absolute owner of the land, and
could maintain a suit to eject Jones from it;
although if Jones punctually performed the
condition of the mortgage, that is, made pay-
ment of the debt, or performed whatever other
act he was to do, on the day appointed in the
mortgage — the **law day" — Brown's ownership
thereupon ceased and determined. But, as
the deed had conveyed the legal title, it was
necessary for Brown to reconvey it by deed
under seal, in order to restore Jones to the abso-
lute ownership of the property at law.

If Jones failed, however, to perform punc-
tually on the law day, he forfeited all his right
and interest in the property.

Equitable Doctrine — Equity of Redemption

This harsh doctrine of the common law where-
by Jones would absolutely forfeit his estate upon
failure to perform his obligation fully and punc-
tually on the law day, met with disfavor at an
early date in the English courts of equity. They
were not bound by the same rules as the courts
of law, but were clothed with power to deal out


justice between parties when the law might
otherwise work an injustice. Accordingly, the
rule was established that in equity the debtor
should still have a right to redeem his estate by
fulfilling his obligation after the law day. Equity
considered the debt as the principal thing and
the mortgage merely as accessory thereto. This
right of the debtor to save his estate in equity
after forfeiture at law was called "the equity of
redemption,'* and the same term came to be
applied to the interest or estate retained by
Jones after he had executed ^the mortgage — in
terms of currency $5,000 in the case just cited.
Thus equity intervened and abrogated to a
certain extent the principles of the common law.

Present Status of the Law

The doctrine of the common law still prevails
in some of the states of this country, but in most
states it has been modified by the equitable
principle just stated, either at the hands of the
courts, or by statute, and in these states a mort-
gage is considered a mere lien or security for a
debt, passing no title or estate to the mortgagee,
and giving him no right or claim to possession of
the property.

In Texas all mortgages and deeds of trust
upon lands or chattels are but securities.. The
legal estate and the right of possession remain
in the mortgagor.

In Louisiana by reason of the Spanish and
French occupation the Civil law derived from


the old Roman law still prevails. There the
legal title and possession passes to the creditor,
but subject to the borrower's right to repay the
loan and redeem his property, and on failure to
repay. the loan on the day fixed by the parties,
the property must be sold at judicial sale and
the surplus, if any, paid to the borrower.

Mortgage a Contract Agreement

A mortgage is a contract agreement, and can
never arise except by agreement between the
parties. Jones and Brown, as free contracting
parties, may by agreement insert almost any
provision in the mortgage permitted by law.
Indeed, even statutory provisions unless ex-
pressly mandatory, may be waived by express
agreement of the parties.

Sale or Transfer of Respective Interests

Furthermore either Jones or Brown may at
any time sell, assign, or transfer his interest in
the property.

Construing a Mortgage — Requisites

To ascertain the rights and liabilities created
by a mortgage today, it is therefore necessary
to examine the mortgage agreement not only in
the light of the common* law, but also with a
view to such modifications as may be met with
at the hands of equity courts and the state


Such is the field of mortgages — almost

Yet there are certain principles of the com-
mon law relating to mortgages still of almost
universal application, and where modified, the
courts have commonly applied certain well-
recognized principles of equity, that have com-
monly found their way, expressed in one form
or another, into such statutes as may obtain.

A statement of these general principles will
afford a fairly clear conception of the law of
mortgages, if the fact is constantly kept in mind
that exceptions may be found either in the
decisions of the courts or the statutes of any
particular state.

Equity, however, so dominates the law of
mortgages that in view of the familiar maxim
"equity follows the law," it is important to
understand something of the dual nature of
English jurisprudence, from which American
jurisprudence is for the most part derived.

What is Equity?

"Equity is that system of justice which was
administered by the High Court of Chancery in
England in the exercise of its extraordinary
jurisdiction. * * * Equity, in its technical and
scientific, legal sense, means neither natural
justice nor even all that portion of natural justice
which is susceptible of being judicially enforced.
It has, when employed in the language of the
English law, a precise, definite, and limited sig-


nification, and is used to denote a system of
justice which was administered in a particular
court. "^

After the Norman conquest the supreme judi-
cial authority rested in the King, assisted by his
councils, the great council, afterward called the
Parliament, and the smaller council, which
advised the King between the sessions of the
great council.

The common law courts were governed by
hard and fast rules. There was no writ by
which a defective instrument could be reformed,
a mistake or accident rectified, a fraudulent
conveyance set aside, or the beneficial interest
in property enforced against the holder of the
legal title. Moreover, a judgment was unequiv-
ocally either for the plaintiff or for the defend-
ant. This gave rise to the practice of a party
litigant making application to the Chancellor,
who was the secretary of the King and also
probably secretary of the small council, to have
his cause heard by the small council whose
decree could be so molded as to work out
complete justice between the parties.

From this practice of making application to
the Chancellor and obtaining a decree from the
small council, evolved the High Court of Chan-
cery, and its counterparts, the courts of equity
in this country. 2 By the " Supreme Court Judi-

* (Bispham's "Principles of Equity," Ninth Edition, pp. I
and 2.)

*(W., Chapter I.)


cature Act of 1873" the distinction between
courts of law and courts of equity was abolished
in England.^ Similar enactments have accom-
plished the same results in a majority of the
states of this country, so that both law and
equity are administered by the same court.

It is, nevertheless, still important to distin-
guish the principles of the common law from
those of equity origin. The principles guiding
the court in the exercise of its equity jurisdic-
tion are for the most part succinctly expressed
in maxims which will be considered in due

The Mortgage Agreement

The mortgage agreement must be distin-
guished from the term *' an agreement to mort-
gage. " The former is the mortgage instrument
itself; the latter is a contract between the par-
ties, which may be very informal, wherein one
party agrees to execute some time in the future
a mortgage in favor of the other.

It is impossible to describe a simple mortgage
of realty universally ideal owing to the variation
in the laws and prescribed forms of mortgages of
the several states.

However, the following examples may suffice
as a basis for consideration of such essential and
such desirable, though non-essential, elements
of a mortgage as would fulfill the requirements
in a majority of the states.

^ (Bispham's "Principles of Equity," Ninth Edition, p. 2.)
[ lO]

(Habendum Clause)


Know all men by these presents, that
(Name of Mortgagor) I, [John Jones,] for and in consideration
(Am't of consideration) of the sum of [$io,ooo] to me in hand be-
fore the dehvery hereof well and truly
(Name of Mortgagee) paid by [James Brown,] the receipt
whereof I do hereby acknowledge, [have
(Words of grant com- granted, bargained and sold, and by
monly called"Grant- these presents do give, grant, bargain,
ing Clause") sell, alien, enfeoff, convey, and confirm

unto] the said James Brown, his heirs and
assigns forever,

(Here insert description of Property)
[To HAVE AND TO HOLD the Said granted
premises, with all the privileges and
appurtenances to the same belonging to
him, the said James Brown, and his heirs
and assigns, to his and their own proper
use and benefit forever.]
(Covenants of Mortgagor may be inserted
(Name of Mortgagor's And L [Mary Jones,] wife of the said
wife) John Jones, in consideration aforesaid,

C^'ife joins in mortgage [do hereby rehnquish my right of dower
deed, relinquishing in the before mentioned premises.]
common law right of
(Defeasance clause [Nevertheless, it is to be considered
making deed operate and the condition of the foregoing deed
as a mortgage) is such, that if the said John Jones, his

heirs, executors and administrators, shall
well and truly pay unto the said James
(Am't of consideration) Brown, his heirs and assigns, [$io,ooo]
then the foregoing deed is to be void, and
of no effect;] otherwise to remain in full
force and virtue.

[In witness whereof, we have hereunto
set our hands and seals this [isth day of
June in the year of our Lord, 1917.]!
(Signature of Mortgagor) [John Jones] (Seal)

(Testimonium clause)

(Signature of Mort-
gagor's wife)
(Attestation clause)

(Signature of attesting
witness or witnesses)

[Mary Jones] (Seal)

[Signed, sealed and delivered in the
presence of:]

[Henry Bullock.]


A Form of Acknowledgment for Husband

and Wife

State of New Jersey, >
County of Essex, i '

On this 15th day of June in the year
1917, personally appeared before me, Tim-
othy. Smith, a commissioner of deeds in
and for the state of New Jersey, John
Jones and Mary Jones, his wife, who, I am
satisfied, are the grantors mentioned in
the above deed of conveyance; and I
having first made known to them the
contents thereof, they did severally duly
acknowledge that they signed, sealed and
delivered the same as their voluntary act
and deed; and the said Mary Jones, being
of full age, on private examination apart
from her husband, before me acknowl-
edged that she signed, sealed and deliv-
ered the same as her voluntary act and
deed, freely, without any fear, dread or
compulsion of her said husband.

In Witness Whereof, I have hereunto
set my hand and seal this 15th day of
June, 1917.

Timothy Smith,
Commissioner of Deeds,

County of Essex,
State of New Jersey.

(Seal of Tim-
othy Smith,
of Deeds,
State of New

(Name of Instrument)

(Name of Mortgagor)
(Address of

(Name of Mortgagee)
(Address of


[This Indenture] made the [15th day of
June in the year nineteen hundred and
seventeen,] between [John Jones] of
[No Street, Borough of Manhat-
tan, City, County and State of New
York,] hereinafter described as party of
the first part, and [James Brown] of [No.

Street, Borough of Manhattan,

City, County and State of New York,]
hereinafter described as party of the
second part,



(Reference to bond
or note accompany-
ing the mortgage)

(Am't of consideration)

(Here interest is

(Covenant of Mort-
gagor as to

(Events of default)

(Amount of considera-
tion by reference to
bond, or note, as
case may be, ac-
companying the

(Granting clause)
(These words convey
the estate in fee
simple — an absolute
grant of the entire

(This clause adds "fix-
tures and personal
property attached
to or used in con-
nection with, the
property covered by
the mortgage")

(This adds the appur-
tenances also to the

(Habendum clause)


[Whereas, the said John Jones by virtue
of a certain bond or obligation bearing
even date herewith is justly indebted to
the said party of the second part in the
sum of [ten thousand dollars,] lawful
money of the United States, secured to
be paid, [together with the interest] there-
on, at the time and in the manner ex-
pressed in said bond or obligation.
[It being thereby expressly agreed,
that the whole of the principal sum shall
become due] [after default in the payment
of interest, taxes, or assessments,] as
hereinafter provided.


the party of the first part, for the better
securing of the payment of the sum of
money mentioned in the said bond or
obligation, with the interest thereon, and
also for and in consideration of one dollar
paid by the party of the second part,] the
receipt whereof is hereby acknowledged,
does hereby [grant and release unto the
party of the second part, and to his heirs,
executors, administrators and assigns for-
ever,] all

(Description of property)

[Together with all fixtures and articles
of personal property attached to, or used
in connection with said premises, all of
which is declared to be covered by this

[Together with all the appurtenances,
and all the estate and rights of the party
of the first part, in and to said premises.]
[To have and to hold the above granted
premises unto the party of the second
part, his heirs, executors, adminis-
trators and assigns forever,] [Provided
always, that if the party of the first part
John Jones or the heirs, executors or




(Signature of

(Attestation clause)
(Signature of witness

or witnesses)

administrators of the party of the first
part shall pay unto the party of the
second part, his heirs, executors, adminis-
trators or assigns, the said sum of money
mentioned in the said bond or obligation,
and the interest thereon, at the time and
in the manner mentioned in the said bond
or obligation, that then these presents and
the estate hereby granted, shall cease,
determine and be void.]
And the party of the first part covenants
with the party of the second part as
follows :

(Covenants of Mortgagor)
[In witness whereof, the said party of
the first part has signed and sealed this
instrument the day and year first above

[John Jones] (Seal of

[In the presence of:]

[Henry Bullock.]

A Form of Acknowledgment for Individual

State of New York, i
County of New York, )

On this 15th day of June, in the year
1917, before me personally came John
Jones, to me personally known and
known to me to be the individual de-
scribed in and who executed the fore-
going instrument, and acknowledged that
he executed the same for the uses and
purposes therein mentioned.

(Seal of Tim-
othy Smith,
of Deeds,
State of
New York.)

Timothy Smith,

Commissioner of Deeds,

County of New York,

State of New York,

New York County

Register's No


Name of Instrument

Technically an indenture is an instrument
executed by two or more parties containing pro-
visions binding each one to the other. It was
originally deemed essential that the instrument
be written in two copies upon a different part of
the same parchment which was then cut asun-
der in a waving or notched line. Hence the
name "indenture, " One copy was sealed by one
party who delivered it to the other and received
from the latter in turn the other part, with his
seal thereon. This distinguished it from a
"deed-poll" which was a deed by which but one
party made a grant or bound himself to the other
party and was so designated because the parch-
ment on which it was written was cut straight
at the top instead of being indented.

Today the term has lost much of its former
technical significance owing to the fact that even
where an instrument for the conveyance of land
is executed by both parties, it is usual to make
one instrument and deliver it to the grantee.
The practice of recording deeds leads to dis-
pensing with a counterpart.^

The ordinary mortgage of today is commonly
called an indenture although it may be signed
only by the mortgagor.


Who is Jones? Jones is the borrower. He
conveys or grants the land to Brown, and in that

^(See Birdseye's Abbott's "Clerk's and Conveyancers' Assis-
tant," Third Edition, Note, pp. 646, 647.)


sense is called the "grantor." But since the
conveyance is intended to operate merely as
security for the repayment of a debt, or the per-
formance of some other act, Jones is called the

As mortgagor, Jones may be any one of lawful
age, capable of owning land, and of understand-
ing the ordinary affairs of life; Jones may be a
woman, married and enjoying the right underthe
law to own property apart from her husband, or
a co-partnership consisting of several partners
or an artificial person, such as a corporation.

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Online LibraryWilliam LillyIndividual and corporation mortgages; a statement for laymen of the Legal principles → online text (page 1 of 10)