Mortgage, Of real estate. Interest. Building Loan. If one owning land subject to mortgages sells it to one who wishes to build on it, and the purchaser makes a first mortgage of the land for $5,000 to be advanced from time to time for the purposes of paying off the prior mortgages and applying the surplus to the erection of a building upon the land and also to the payment of $247 in another transaction, which without the knowledge of the seller of the land he orally agrees with the lender of the money to pay, and at the same time with the knowledge of the first mortgagee gives to the seller of the land a second mortgage for $500 to pay him for his equity, and if subsequently the purchaser goes into bankruptcy and the holder of the first mortgage for $5,000 forecloses it under a power of sale in that mortgage, in a suit by the seller of the land against the first mortgagee to compel him to account for the surplus of the proceeds of the foreclosure sale, in order that it may be applied toward the payment of the plaintiff's second mortgage for $500, the defendant is entitled to charge the payment of $247 which by the oral agreement was to be made by the mortgagor in the outside transaction as a payment properly covered by the mortgage, the defendant's knowledge of the second mortgage to the plaintiff to secure the purchase money for the land having put him under no obligation to the plaintiff to see that the money advanced under the first mortgage was applied, after paying off the prior incumbrances, to increasing the value of the property by the erection of the contemplated building.
If one lends upon a mortgage of certain land $5,000, which, after the discharge of certain prior incumbrances, is to be advanced in instalments from time to time as a building to be erected by the mortgagor reaches certain stages of completion, and by the terms of the mortgage and the mortgage note the mortgagor agrees to pay $5,000 in four months with interest thereon monthly at the rate of one and one quarter per cent per month, and if after a part of the advances have been made the mortgagor goes into bankruptcy and the mortgagee forecloses the mortgage under a power of sale contained in it, in accounting to the holder of a second mortgage on the same property for the surplus that should be in his hands from the proceeds of the foreclosure sale, he is entitled to charge interest on the full amount of $5,000 only during the time that he was required to keep that amount in readiness, and from the time the mortgagor went into bankruptcy, when the obligation of the mortgagee to make further advances ceased, he can charge interest only on the amount actually advanced.
SHELDON, J.
1. On the facts found by the master, the fourth item in the defendant's account for $247 was rightly allowed. This amount was really paid by Babcock to Garland in the manner agreed upon between them when the mortgage was given. The fallacy of the plaintiff's argument is in its assumption that it was the duty of Babcock to see to it that what he advanced under the mortgage went, after the discharge of the previous mortgages, to pay for the expenses of improving the property by erecting a building thereon. But this is not so, nor did Babcock owe any duty to the plaintiff to see that this should be so. Even independently of his oral agreement with Garland, he was to make advances to Garland when the building to be erected by the latter should have reached certain stages of completion; Garland might make such application of the advances as he should choose. If Babcock had so advanced $247 more than he did, and then Garland had paid Babcock that sum for the other indebtedness, either out of the money so advanced or from other resources, the result would have been the same; but the plaintiff could have made no complaint. The plaintiff has lost nothing by having that done directly which might have been done indirectly. But besides this the master has found that Babcock's mortgage was taken with the express agreement that this item should be secured by it, and that only subject to this agreement was it what is popularly called a "construction loan mortgage." The plaintiff's claim could not be supported without affirming that a first mortgagee who learns that part of the purchase money is secured by a second mortgage must at his peril see that all his future advances are applied to increasing the value of the property. None of the authorities cited by the plaintiff go to this length; and we are not willing to take such a position. Johnson v. Thompson, 129 Mass. 398.
2. The Superior Court was right in its ruling as to interest. Garland had agreed to pay interest on the full amount of $5,000. This appears by the terms of both the note and the contemporaneous agreement between them. As Babcock was required to keep the full amount in readiness, this was necessary to his full compensation. But when Garland went into bankruptcy Babcock's duty to make further advances ceased; and, as against the plaintiff at any rate, he no longer should be allowed interest on anything more than the amount actually advanced. Bangs v. Fallon, 179 Mass. 77. Lewin v. Folsom, 171 Mass. 188.
No other questions were argued before us.
Decree affirmed.