Merchants' Nat. Bank of Clinton v. Otero

175 P. 781, 24 N.M. 598

• Court: New Mexico Supreme Court
• Decided: May 28, 1918
• Docket: No. 2108
• Status: Published

Opinions

OPINION OF THE COURT.

PARKER, J.

This is an appeal from the district court for the county of Guadalupe, by the Merchants’ National Bank of Clinton, Iowa, from a judgment rendered against it in an action by it upon a note and to foreclose a mortgage.

On August 27, 1903, the appellant made, executed, and delivered to Edward G. Austin its deed for 874.02 acres of land, more or less, situated in Guadalupe county. This land was comprised of nine contiguous tracts. The deed recited ¡.that the intention was to convey an absolute title in fee to said real estate, including any right of homestead therein, and contained a covenant of warranty, and that the grantor had full right, power, and authority to sell the same as well as a covenant against incumbrances. On the same day, in order to secure the payment of a promissory note for $1,700, executed by the said grantee and Miguel A. Otero and James W. Raynolds, and delivered to the grantor, and representing a portion of the unpaid purchase price of said real estate, the said grantee executed and delivered 'to the appellant a mortgage on said property. The note was made payable on or béfore five yeafs from date, and provided for interest at the rate of six per cent, per an-num from date until paid. The note was dated September 1, 1903.

On September 2, 1903, Austin deeded the premises to Otero and Raynolds. On January 3, 1908, Otero and Raynolds deeded the same to the Lagunita Live Stock Company, and on November 3, 1911, the latter deeded the same to the Salado Live Stock Company. It is admitted that the latter holds the title to said premises, except as to 160 acres thereof, title to which failed. It 'is also admitted that at the time the appellant conveyed said premises by deed to Austin that it had no title to 160 acres of said land, the same then and since being vested in parties not in privity with the appellant.

The two live stock companies and J. J. Jaffa, trustee, were made parties defendant upon the allegation that they claimed to have some interest in the premises. The Salado Live Stock Company and Jaffa, trustee, answered, setting up the title to which reference has heretofore been made, and alleging that title to the 160-acre tract failed, because appellant was not vested with title thereto at the time it pretended to convey the same to Austin; that the note was without consideration and void; that appellant refuses to warrant and defend title to said ■last-mentioned tract; and that the same is of the reasonable value of $4,000, wbicb sum it asks as damages •against the appellant.

The answer of Otero, in substance and effect, alleged that, in the purchase of said real estate from the appellant, Austin acted for himself and for Otero, the appellant having knowledge thereof, and that title to the 160-acre tract failed, because the same was and ■since has been, in two designated persons; that consideration for said note failed; that by operation of law ■the appellant, by virtue of its said deed, covenanted that at the time of the execution of said deed it possessed an irrevocable possession in fee simple to said property, which was untrue as to the 160-acre tract; and that the reasonable value of said tract is $4,000, damages therefor being prayed. A reply admitting and denying certain matter in said answers was filed by the appellant. A stipulation was also filed by the parties, settling most of the facts in the case.

[1] Neither Otero nor the Salado Live Stock Company acquired any cause of action against the appellant on its covenant of good right to convey, in so far at least as the rights of those parties as intermediate and remote grantees are concerned. The covenant is in prassenti and universally regarded as personal. If broken at all it is broken when made, and a cause of action thereupon instantly arises in favor of the covenantee, which does not pass to his grantee merely by virtue of the deed of conveyance. 4 Elliott on Contracts, § 3887; 7 R. C. L. “Covenants,” §§ 29 and 36; 2 Devlin on deeds (3 Ed.) § 942.

[2] Nor did either Otero or the Salado Live Stock Company, as intermediate and remote grantees, acquire a cause of action against the appellant for breach of its covenant of warranty contained in its deed of said premises to Austin. This covenant runs with the land, and inures to the benefit of subsequent grantees, so long as no breach thereof has occurred. The instant a breach of covenant has occurred a chose in action arises in favor of the evicted person, or the one claiming the right and title to the land, and who is in privity with the coven-antor, and this chose in action is not transferred or assigned simply by virtue of a deed of conveyance. In 3 Washburn on Real Property, § 2386, it is said:

“The broadest and most effective of the covenants contained in American deeds is that of warranty, which is, in some states, the only one in general use. It is future in its terms, and operation, and runs with the estate, in respect to which it is made, into the hands of whoever becomes the owner of such estate. But, if once broken by an eviction, the covenant of warranty stands upon the same ground as the covenants which are broken as soon as made.”

See, also, section 2394 of the same work; 7 R. C. L. “Covenants,” § 56; 11 Cyc. 1096, 1097, 1138.

In Prestwood v. McGowin, 128 Ala. 267, 275, 29 South. 386, 389, 86 Am. St. Rep. 136, 140, it was said:

“ ‘If at the time of the conveyance the grantor had neither title nor seisin, nothing passed by the deed, and the covenant remains with the grantee and cannot be enforced by an as-signee. * * * The assignee in possession at the time of the breach is generally the only person who can maintain an action upon the covenant.’ Tiedeman on Real Prop. § 860.”

See, also, Bull v. Beiseker, 16 N. D. 290, 113 N. W. 870, 14 L. R. A. (N. S.) 514, and note, Davidson v. Cox, 10 Neb. 150, 4 N. W. 1035, and McConaughey v. Bennett’s Executors, 50 W. Va. 172, 40 S. E. 540. In the case last cited it was held:

“After breach of such covenant it can no longer run with the land, nor has it any existence or virtue, save for the purpose of supporting a right of action for damages on the part of him who' held it at the time of the breach, against the cove-nantor.”

In the case at bar it is admitted that the. appellant breached its covenant of warranty at the time it executed the conveyance to Austin, it having no legal title nor possession in and to a portion of the lands it attempted to convey. It will therefore be unnecessary to discuss the.law of eviction and acts which, in contemplation of law, are considered equivalent thereto, and we may therefore state as a fact that the covenant was breached at the time it was made. Under the doctrine heretofore announced Austin acquired a right of action against the appellant for breach of that covenant, but Otero did not, nor did the Salado Live Stock Company, in so far as their rights as grantees of Austin are concerned.

[3] Otero, however, occupies a somewhat different status from that occupied by the Salado Live Stock Company. In his answer he alleged that in the purchase of said lands, and in obtaining and accepting the warranty deed therefor from the appellant, Austin acted on his own behalf, and for and on behalf of Otero and Raynolds, ‘ ‘ as plaintiff then and there well knew. ’ ’ The trial court found, among other things, that the foregoing facts alleged in the answer of Otero were true. A reasonable and fair construction of this finding is that at the time this conveyance was executed Austin, while acting for himself, was also acting as a,gent for Otero and Raynolds, and that this relationship was disclosed to the appellant. The legal consequence of this is that Austin was the holder of the legal title to the premises, but was a trustee as to the undivided interests of Otero and Raynolds therein, and that Otero was and is one of the real parties in interest, the conveyance having been executed for his benefit as well as that of Austin. In Bishop on Contracts (2d Ed.) § 1216, the author says:

“And all persons who, in any of the innumerable ways possible, take or retain a title to either real or personal property, which is truly another’s, are by the law made the trustees of the true owner.”

Austin took the title of this property in his own name, for his own advantage and benefit, and for the advantage and benefit of Otero and Raynolds, with the knowledge of the appellant.

It was a rule of the common law that no one but parties to a contract could be bound by it or obtain rights under it. With but two or three exceptions, it was held that suit could not be brought upon a covenant except by a party to the contract. The rule was grounded upon privity of contract. 2 Elliott on Contracts, § 1406. But in so far as the rights of a third person, for whose benefit such contract was made, are concerned, that rule does not prevail in a majority of the states of the Union. At section 1411 the author of the last-mentioned work states:

“It has already been mentioned that at common law the only party entitled to maintain 'an action on a contract is the one from whom the consideration therefor moved. Under the common law, and in those jurisdictions adhering to its principles on this point, a man cannot acuqire rights under a contract to which he is stranger; that is to say, two persons cannot enter into an agreement and thereby confer certain contractual rights upon a third person, even though the contract is made for such third person’s special benefit. * " * The rule apparently had its origin in the primal conception underlying assumpsit. At first, action on a promise was permitted on the theory of giving a remedy for damages sustained by reason of the nonperformance of a deceitful promise. This theory of the remedy would clearly limit the right of action for breach of a simple promise to the person from whom the consideration moved; but, however this may be, it nevertheless remains true that, when two parties enter into a contract for the benefit of a third person, the promisor owes a duty to such third person to perform his obligation. Yet, while this duty might rest upon the promisor, the third person had no remedy , by which to enforce it. In other words, the contractual duty was broader than the remedy. In the edevelopment of the law of contracts the remedy did not keep pace with the development of ■ the law of contracts generally, but was still confined largely within its original limits. But even the English judges have upon several occasions'^ shown a tendency to disregard the ancient common-law form of action, and to recognize the right of a third person to sue on a contract made for his benefit. And in this country, where forms of action have in the main been abolished and where the courts have never been so completely dominated by common-law theories of actions as in England, the .right of a stranger to sue on a contract made for his benefit is generally recognized. The remedy is made as broad as the contractual obligation. If, under the facts of the case, a legal liability is shown to exist, the one in whose favor it runs is given the right to enforce it.”

At section 1412 the author says that a majority of the courts of this country hold that the beneficiary, though not a party to the contract, may maintain an action thereon directly in his own name, where the contract was made for his benefit. While the foregoing principles are addressed to simple contracts, as distinguished from contracts under seal, they nevertheless apply to the latter class of contracts, because the distinctions between sealed and unsealed instruments have now been generally abolished. Section 1424, Id. The distinction is abolished in this state by virtue of section 4761, Code 1915. The common-law principle as to the right of a stranger to sue upon the contract made in the names of others is of no force here because of sections 4069 and 4070, the former providing, in effect, that actions shall be prosecuted in the name of the real party in interest, the latter providing that a trustee of an express trust may sue in his own name “without joining with him the person for whose benefit the suit ■is prosecuted. ’ ’

In Hall v. Plaine, 14 Ohio St. 417, 422, it was held that while the breach of warranty occurred at the time of the execution of the deed from Plaine to Ebbert, still Hall could maintain his counterclaim in a suit by Plaine •on a note given by Ebbert, because Ebbert was Hall’s agent in said purchase, and received the legal title to the premises, and held'the same in trust for Hall. Eb-bert held the legal title conveyed to him by Plaine for but a few days, when he conveyed the same to.Hall. The court said:

“Tke beneficial interest and equitable title was in Hall from the beginning. Before the code Hall could have sued on the covenant, in the name of Ebbert, for his (Hall’s) use. Hall would have been entitled to the damages ‘recovered, because he was the party, and not Ebbert, by whom the damages was sustained. Since the code that form of procedure is not re-quired. Section 25 of the code provides that ‘every action must be prosecuted in the name of the real party in interest, except as otherwise provided in section 27.’ In section 27 it is permissive: ‘An executor,' * * * trustee of an express trust, * * * may bring an action without joining with him the person for whose benefit it is prosecuted.’ Although under this section an action might have been brought by Ebbert, in his own name, ‘as the person in whose name the contract was made,’ yet this was not required. Ehbert is a party defendant, and Hall is the real party in interest.”

In Crawford County Bank v. Baker, 95 Ark. 438, 130 S. W. 556, the court said:

“It is next insisted that the right of action accrued immediately in favor of the grantee, T. B. Baker, if it accrued at all, and did not run with the land. [Authorities.] This is correct. But the undisputed evidence is that T. B. Baker purchased the land for the plaintiff, and that the latter paid for it. T. B. Baker took the conveyance in his own name, but, until he conveyed it to the plaintiff a few d.ays later, he held as trustee for the plaintiff. The action could have been maintained in the name of T. B. Baker, as the covenant was executed to him for the benefit of the plaintiff (Kirby’s Dig. §602); but plaintiff is the real party in interest, and the action was properly instituted in his own name (Kirby’s Dig. § 5999).

For other authority on these propositions generally, see Hays v. Galion Gas, etc., Co., 29 Ohio St. 330, 336; Webster v. Fleming, 178 Ill. 140, 52 N. E. 975, 979; 3 Elliott on Contracts, §§ 2100, 2111; Clark & Skyles on Agency, §§ 526, 620; 11 Cyc. 1138.

Under a finding of the trial court, to which no exception was taken by the appellant, Otero must be held to be one of the real parties in interest in the covenants made in the deed from the appellant to Austin, and consequently he is entitled to assert the same rights in the premises that Austin, the named grantee, might assert. On account of the appellant’s breaches of covenant of good right to convey and of warranty, a chose in action accrued unto Otero the same as it did unto Austin.

[4] This leaves for consideration only the proposition as to whether the judgment for damages was correct. The appellant contends that where a breach of covenant of warranty occurs, the breach being as to only a portion of the lands conveyed, the covenantee recovers protanto only, and that the measure of damages in such cases is the relative value which the part taken away bears to the whole, as the latter is fixed by the consideration price, subject, however, to proof that the lost part was of greater or less value.

The appellee contends that the rule of damages which the appellant asserts should have been applied, applies only where the land described in the deed is of the same value, and that the amount of damages recoverable in such an event is obtained by a mere mathematical computation, based upon the proportion that the value of the 160-acre tract bears to the total acreage sold. The trial court found that the 160-acre tract was more valuable per acre than the remainder of the tract; that the 160-acre tract contained 20 acres of irrigable lands of the value of $50 per acre, and that there is no other irrigable land within the tract described in the deed. - It was also found that the lands within the large tract were not of uniform value per acre, and that the 160-acre tract was of the value of $1,700, which amount was deducted from the amount represented by the note upon which suit was brought.

The proof of appellees as to damages was addressed solely to the value of the tract of land lost to them by failure of title. There was no evidence offered tending to show the actual value of the 714 acres preserved unto tíre appellant’s grantee. It is true that evidence on the part of the appellant tended to disclose that the lands to the east of the 160-acre tract were rough, and that the lands to the west of the tract contained hay vega lands to some extent, and that the 160-acre tract was of the same general character as the balance of the larger tract, but no evidence of value thereof appears in the record. It was stipulated that the consideration paid for the large tract was $3,400. It will thus be seen that, if the judgment of the trial court is to be sustained, we must adopt the rule that the measure of damages for partial failure of title is the value of the lands lost, independent of the value of the remainder of the lands at the price agreed upon and paid for the whole. A few of the courts, those of the New England states alone, maintain this doctrine but a majority of the states hold that the rule for which appellant contends is the correct one. In 11 Cyc. 1159, the rules are thus stated:

“Various rules have been laid down for the proper measure of damages in case of a partial ■ eviction. Thus it has been stated that the damages should hear the same proportion to-the whole purchase money that the value of the part to which the title has failed hears to the price of the^ whole premises. Again, the value of the land from the date of sale, with interest, has been held the measure. * * * ”

In 3 Elliott on Contracts, § 2260, it is said:

“Where the failure of title concerns only part of the land, the measure of damages is such proportional part of the consideration money as the value of the land to which title fails hears to the whole tract, with interest on such sum.”

In 2 Devlin on Deeds (3d Ed.) § 934, tbe author says:

“In some of the states the measure of damages for a breach of these covenants is the value of the land at the time of injury by defect of title and eviction. But the general rule now is that the damages for a breach of these covenants are measured by the consideration, or what the lands were worth as determined by the parties or by the consideration price, together with interest for the time the purchaser has lost the mesne profits. * * * Por a partial breach, damages are recoverable, according to the same rule, in proportion to the extent of the breach.”

Actual value of the lands lost is not the true test or measure. The damages recoverable are relative or comparative, the standard being the consideration or price paid for the whole tract. Thus there must be an apportionment, based upon the relative value of that portion to which the title fails and of that portion to which the title proves good. 7 E. O. L. “ Covenants, ’ ’ § 87. That this can be determined only by showing the-■price paid for the whole, the value of the lands lost, and the value of the lands preserved, seems apparent. In a discussion of this subject in 2 Sutherland on Damages. (4th Ed.) § 609, it is said:

“Por a partial breach damages will be assessed pro tanto, according to the recognized standard for a total breach. Thus, for example, if a conveyance is made of several parcels,' and the grantee is evicted hy paramount title from one of them, the value of that parcel, measured hy the consideration, or the valuation at the date of eviction, as the rule may he, will he the measure of damages. Applying the same rule to a case where a part of one parcel is lost hy failure of title, or the title to the undivided part of the whole, the measure of damages is a ratable part of the consideration or value of such parcel, or of the entirety, ascertained in the same manner.”

A clear statement of tbe rule, found in 3 Sedgwick on Damages (9th Ed.) § 975, is as follows:

. “As the rule is usually stated, the measure of damages is such part of the original price as hears the same ratio to the whole consideration that the value of the land to which the title has failed hears to the value of the whole tract conveyed; or when action is upon a covenant of warranty in states adopting the New England rule, the actual value of the part from which the grantee has' been evicted. If, however, the land sold at an agreed price per acre, and title fails to part, the measure of damages is the agreed price per acre for the entire number of acres to which title failed. Evidence is admissible to show that the portion lost was especially valuable in comparison to the portion remaining. * * * ”

See, also, 8 A. & E. Enc. of L. (2d Ed.) 174. In Aiken v. McDonald, 43 S. C. 29, 34, 20 S. E. 796, 798, 49 Am. St. Rep. 817, 821, tlie court said:

“As the sum of $450, mentioned as the consideration of the deed to Bell, must he regarded as the value of the fee in the land, in order to arrive at the true measure of damages occasioned hy the partial breach of the covenants of warranty, it will he necessary to ascertain the relative value of the life estate of Mary Marion, assuming that the sum of $450 was the value of the fee, and the value of the life estate, ascertained upon this basis, should be deducted from the said sum, and the balance, with interest, * * * will constitute the true measure of the plaintiff’s damages. * * * ”

In Beaupland v. McKeen, 28 Pa. 124, 134, 70 Am. Dec. 115, 121, the court said:

“The relative value of the part to the whole is to he estimated with regard to the price fixed hy the parties for the whole. The whole purchase being assumed to he worth the price agreed on, what part of the price would fairly be represented hy the part taken away?”

In Dalton v. Bowker, 8 Nev. 190, 197, the reason given for the rule was that it produced certainty, it being most natural to suppose that the parties mean that the purchase money, the standard of value to which they have both agreed, shall be the measure of compensation if the land be lost. The court further said that, where the eviction is partial, “the law will apportion the damages to the measure of value between the property lost and the property preserved.” It will be seen that the law seeks to compensate the injured party, but not beyond the price agreed upon for the whole by the parties, and that in any event a covenator cannot be mulcted in damages, independent of fraud, beyond the consideration price of the land. He binds himself, in default of warranting the title, that he will return the purchase price, with interest, or, for partial breach, that he will “return a ratable proportion of the purchase money and interest.” Phillips v. Reichert, 17 Ind. 120, 123 (79 Am. Dec. 63). In Mayer & Schmidt v. Wooten, 46 Tex. Civ. App. 327, 102 S. W. 423, 426 the court, referring to a former decision, said that the plain inference from that case was that the value of the lands lost and that remaining should be taken into consideration in fixing the amount of damages. In Lemly v. Ellis, 146 N. C. 221, 59 S. E. 683, the cause was reversed because the measure of damages adopted by the trial court was the value of the land lost, without reference to the consideration price and the. value of the land remaining. In California a statute existed declaratory of the rule of damages followed by the majority of the courts. In Hoffman v. Kirby, 136 Cal. 26, 68 Pac. 321, there was no finding as to the value of the land preserved under the warranty, and the cause was consequently reversed. In White v. Holley, 3 Tex. Civ. App. 590, 596, 24 S. W. 831, 833, the court said:

“But because the conflict is only a partial conflict, and because we are not informed as to wbetber the part not in conflict is worthless or not, we conclude that the judgment of the lower court should be reversed.”

The appellees in this case recovered, in effect,- the actual value oí the land lost. That consequently the judgment must be reversed is evident. Perchance the value of the 714 acres, title to which the covenantee received, may be in excess of $3,400, or of a value in excess thereof. The value of the part preserved is essentially necessary to ascertain in order to determine what, if any, damage was sustained.

Other propositions argued by the parties will not be discussed. We have examined those propositions, but do not find that they are decisive of this case. For the reasons stated the judgment of the trial court will be reversed, and the cause remanded for a new trial, and it is so ordered.

HaNNA, C. J., and Roberts, J., concur.