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6. In this action, judgment should be for
The friend took possession of Goldacre and made several mortgage payments, which the bank accepted. Now, however, neither the friend nor the carpenter has made the last three mortgage payments. The bank has brought an appropriate action against the friend for the amount of the delinquent payments.
Several years ago, a carpenter purchased Goldacre, financing a large part of the purchase price by a loan from a bank that was secured by a mortgage. The carpenter made the installment payments on the mortgage regularly until last year. Then the carpenter persuaded a friend to buy Goldacre, subject to the mortgage to the bank. They expressly agreed that the friend would not assume and agree to pay the carpenter's debt to the bank. The carpenter's mortgage to the bank contained a due-on-sale clause stating, «If Mortgagor transfers his/her interest without the written consent of Mortgagee first obtained, then at Mortgagee's option the entire principal balance of the debt secured by this Mortgage shall become immediately due and payable.» However, without seeking the bank's consent, the carpenter conveyed Goldacre to the friend, the deed stating in pertinent part «.. . subject to a mortgage to the bank [giving details and recording data].»
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The mortgagor of a property is generally free to transfer title to that property BUT: (i) the mortgagor remains personally liable on the mortgage; and (ii) all subsequent grantees take the property «subject to» the mortgage. Subsequent grantees do not become personally liable on the mortgage unless they explicitly assume the mortgage. In sum, the mortgagor will always be personally liable on the mortgage, only subsequent grantees who assume the mortgage will be personally liable on it, and all subsequent grantees (whether they assume the mortgage or not) can lose the property through foreclosure if the mortgage is not paid.
Privity of estate arises when the parties share a relationship with the land (e.g., a landlord and a tenant).
A is correct. The facts state that the carpenter and the friend «expressly agreed that the friend would not assume and agree to pay the carpenter's debt to the bank.» The friend thus did not assume the mortgage, which means she has no personal liability to the bank with regard to the mortgage payments. Although she voluntarily made payments for a few months, she was under no contractual obligation to do so. And when the carpenter conveyed Goldacre to the friend without first obtaining written consent from the bank as required by the due-on-sale clause, this allowed the bank to demand immediate payment of the entire outstanding mortgage balance from the carpenter (not the friend). However, the friend may still lose the property because the bank has the right to foreclose on the mortgage if the payments are not made by anyone.
B is incorrect. This answer reaches the correct answer with the wrong reasoning. Judgment should be for the friend, but not because she is not in privity of estate with the bank. Because the friend did not assume the mortgage, privity is not an issue. A buyer may purchase property that is «subject to» a mortgage, meaning she will not be personally liable for the mortgage payments. Here, the property was «subject to» a mortgage that the friend did not assume. The carpenter's failure to ensure that payments were made gives the bank the right to foreclose, but not to hold the friend personally liable for payments.
C is incorrect. The call of the question asks who judgment should be for in the suit by the bank against the friend, not the carpenter. The bank may have an immediate demand against the carpenter for the full amount of the mortgage balance for violating the due-on-sale clause, but the issue presented is whether the bank can recover from the friend. As explained above, the bank may not hold the friend liable because she did not assume the mortgage, and her rights are unaffected by the due-on-sale clause.
D is incorrect. This is a misapplication of the rules governing privity. As previously explained, the friend did not assume the mortgage that the carpenter had secured through the bank. As a result, the friend was not in privity with the bank, so this is not a relevant issue here.