The release of a mortgage by the mortgagee is not a bar to his action to recover upon the note from a mortgagor who has conveyed his equity of redemption, but the latter may, in such action, set off against the amount due on the note whatever damage he has suffered by reason of the loss of the security. In the present case the plaintiff, owner of a third mortgage, quitclaimed its interest in the property to B, who had bought the property from the defendant, the original mortgagor. In consideration therefor, S, the owner of the second mortgage and the husband of B, agreed that the plaintiff should receive any excess over the first two mortgages if the property were sold. Held: 1. That since the trial court found that the security transferred was absolutely without value, such transfer would not avail the defendant if he had claimed a set off, which he did not. 2. That the plaintiff did not acquire any interest in the property by reason of his agreement with S, since S was not the owner of the equity of redemption, and the defendant was not discharged from liability upon his note on that account.
BANKS, J.
A mortgagor who has conveyed his equity of redemption has a right to have the mortgaged property applied to the payment of the mortgage debt so far as necessary for his protection against personal liability for the debt secured. 2 Jones on Mortgages (8th Ed.) § 839. The mortgagee is not, however, obliged to tender an assignment of the mortgage security as a condition of recovery upon the note. Barnes v. Upham, 93 Conn. 491, 495, 107 A. 300. The mortgagor may justly complain if his personal liability upon the note is allowed to remain, while the means which he has provided for meeting it has been disposed of. But all that he would be entitled to, if the mortgage had not been released, would be the right to have it assigned to him, upon his payment of the debt, so that he may avail himself of such security as the mortgage affords in obtaining reimbursement. He has no right to insist that his liability is wholly discharged because the mortgagee releases the mortgage which is the security for the debt, unless the security was sufficient to have fully paid the debt. He is discharged only to the extent that he has been injured. Worcester Mechanics Savings Bank v. Thayer, 136 Mass. 459; Norton v. Henry, 67 Vt. 308, 31 A. 787; 2 Jones on Mortgages (8th Ed.) § 839. It follows that the release of the mortgage by the mortgagee is not a bar to his action to recover upon the note from the mortgagor, but that the latter may, in such action, set off against the amount due on the note whatever damage he has suffered by reason of the loss of the security.
That was the extent of the defendant's rights in this action. He was not harmed by the failure to receive notice of the plaintiff's intention to release the third mortgage. He was entitled in this action to set off against the amount due on his note the value of the security which was lost by the plaintiff's quitclaim deed of its interest in the property to Bertha Soldan. He did not claim such set-off in his answer, and, if he had, it would not have availed him, since the court has found that the security was absolutely without value, and that finding is not attacked. The case of Townsend Savings Bank v. Munson, 47 Conn. 390, upon which the defendant relies, is not, upon the facts there present, an authority in support of his claim that the release of the mortgage is an absolute bar to an action upon the debt, even though the security parted with was worthless and the defendant was in no way damaged by the plaintiff's action. In that case the plaintiff mortgagee had ample security for the full amount of the note which was $3000 and, without the knowledge or consent of the defendant, released a portion of the mortgaged land, the portion retained being of the value of only $1155. The action was brought against the mortgagor to recover only the unsecured balance of the note, and, in its conclusion that the plaintiff could not recover, the court reached the same result as if, in an action for the full amount of the note, the defendant had been permitted to set off the value of the security released.
The defendant further claims that the plaintiff is not entitled to judgment on the note because it still retains an interest in the property by virtue of the agreement made with Soldan, the second mortgagee, at the time that it quitclaimed its interest in the property to his wife, and that the value of that interest cannot be determined until February 28th, 1931. That writing was merely the personal agreement of Soldan, who was not the owner of the equity of redemption, and the plaintiff did not thereby acquire any interest in the property itself. If the plaintiff should hereafter receive anything under the Soldan agreement, applicable upon the third mortgage, it concedes that the defendant, having paid the note, would be entitled to any such avails of the mortgage given to secure it. The conveyance of the plaintiff's interest in the property to Bertha Soldan, and the taking of the agreement from her husband, did not have the effect of discharging the defendant from liability upon his note in this action.