Defendants’ default on their payments and plaintiff’s election to declare the full amount due, would unquestionably have necessitated the granting of a judgment for the amount of the note with interest, were it not for plaintiff’s acceptance of a deed of the mortgaged property and its action at that time. Its action furnishes the basis of the two contentions which defendants make. It is conceded that the sum which plaintiff later realized from the sale of the premises should be applied upon the note.
Defendants argue that they are not liable for a deficiency judgment in the absence of foreclosure proceedings, because: (a)* Therq was a merger in the mortgagee of the legal and equitable title to the real estate covered by the mortgage given to* secure the note sued upon; (b) Even though there was no merger, they were released from all liability because plaintiff granted an extension of time of payment to> the defendants’ grantee.
As to the facts, there is no serious dispute.
H. H. Company received a warranty deed from defendants, subject to plaintiff’s mortgage. It did not assume defendants’ indebtedness. It proposed thereafter that plaintiff rent the property and apply the income upon the note and mortgage. Plaintiff replied by asking H. H. Company to execute a quitclaim deed to one L,. an officer of plaintiff, and sign a so-called “covering agreement,” which read."
“The purpose of the covering agreement is to avoid foreclosure and to give you a reasonable opportunity to sell the place and! get something out of it for yourselves;, the idea being that until noon of October-31, 1939, you can pay us off and make any disposition of the house you see fit, andl may put it on the market at your own price. After that date, we are to be free to make-any sale we can. * * *
“In order to protect ourselves, I am.sending LeTourneau notice that we have-declared the mortgage due for nonpayment of interest and taxes, and I enclose a copy of that notice to you.”
The quitclaim deed to L carried an $8.50> stamp.
To make its position perfectly clear,, plaintiff wrote a letter to H. H. Co. which, was acquiesced in by H. H. Co., setting, forth the understanding of the parties, when plaintiff received the deed. The letter read:
“In consideration of this conveyance, the-undersigned agree that to and including noon' of October 31, 1939, it will not sell or convey these premises except with. *89your written consent and that until that time it will convey these premises to any person you designate upon payment in full to this Bank of all sums owing to it under its mortgage on the premises, recorded in Book 522, Page 413, Recorder’s Office, Peoria County, Illinois.
“This Bank may take possession of the premises at once subject to the terms of this Agreement.
“It is understood that the delivery of this Quit-Claim Deed is not intended by either party, nor by this Bank, to constitute or effect a merger of the above mentioned mortgage on the premises.”
On the same day Luke, the grantee named in the deed from H. H. Co., quit-claimed the property to plaintiff.
This action was brought, July 11, 1941. The bank’s notice of election to declare the full amount of the note, principal and interest due, was mailed, August 22, 1939.
Defendants’ argument that there was a release of liability (Conerty v. Richsteig, 379 Ill. 360, 41 N.E.2d 476) because plaintiff granted an extension of time to H. H. Co. is rejected for two reasons. First, there was, in fact, no extension of the date of the maturity of the debt. The most favorable construction to be placed upon plaintiff’s agreement was that it agreed not to sell the property before noon, October 31, 1939, and agreed to convey the property to any person to whom H. H. Co. might sell it if plaintiff received a definite sum of money, to-wit, the amount due on the note, with interest, before that hour.
Rejection of this contention is also based upon the Indiana practice. See State v. Traylor, 77 Ind.App. 419, 132 N.E. 608, where it is held that a discharge through an extension of time of payment is an affirmative defense and must be pleaded. Also see Rule 8, Federal Rules •of Civil Procedure, 28 U.S.C.A. following section 723c. This suit, having been brought in the State of Indiana, in the U. S. District Court, the law of Indiana governs as to the requirements and necessities of the pleadings.
It is also worthy of note that the case of Conerty v. Richsteig, supra, might be distinquished from this case. In the Conerty case the purchaser from the mortgagor assumed the mortgage indebtedness.
Whether there was a merger with the resulting satisfaction of the debt presents quite a different and a more difficult question.
Here, it is argued, the law of Illinois governs because the conveyances and their effect involved title to Illinois real estate. Under Illinois law, if there were a merger, the mortgage debt was extinquished. Forthman v. Deters, 206 Ill. 159, 69 N.E. 97, 99 Am.St.Rep. 145; 37 Am.Juris. page 429.
The controverted question, however, is not over the effect of a merger, so much as over the existence of a merger.
To refute the claim of merger, plaintiff relied upon its written statement to H. H. Co., written at H. H. Co.’s request, and to avoid dispute. This written statement made when the deed was executed and delivered to L contained these significant words:
“ * * * It is understood that the delivery of this quitclaim deed is not intended by either party, nor by this Bank, to constitute or effect a merger * *
For the purpose of this argument, in the absence of any such agreement by plaintiff and the H. H. Co., we may assume that there would have been a merger. Also we may assume, for the purpose of the argument, that if suit were brought in Illinois, a merger would have extinguished the debt.
Decisive, then, of the controversy, with these assumptions, is the question,— May the parties by agreement determine the consequence of their action, when such action consists of passing title to real estate by deed from a mortgagor to a mortgagee ? Our conclusion is that the parties could and did avoid the effect of a merger by their express agreement not to effect a merger. Lyman v. Gedney, 114 Ill. 388, 29 N.E. 282, 55 Am.Rep. 871; Forthman v. Deters, 206 Ill. 159, 69 N.E. 97, 99 Am.St.Rep. 145; First National Bank v. Watson, 277 Ill. 186, 115 N.E. 156; Shippen v. Whittier, 117 Ill. 282, 7 N.E. 642; Moffet v. Farwell, 222 Ill. 543, 78 N.E. 925; Campbell v. Carter, 14 Ill. 286; Security Co. v. Schlender, 190 Ill. 609, 60 N.E. 854; Richardson v. Hockenhull, 85 Ill. 124; Kessler v. Aller, 287 Ill.App. 606, 5 N.E.2d 761; Continental Ill. Bank & T. Co. v. Cunningham, 291 Ill.App. 180, 186, 9 N.E.2d 664; Jones on Mortgages (8th Edition), Sec. 1088, 1089.
For discussion of the question, see note to 95 A.L.R. 89.
*90It should be noted that defendants had parted with their title to the real estate. They had no equity of redemption. The purchaser from them found himself with property falling in value and worth less than the outstanding mortgage. He was willing to save the mortgagee the expense of foreclosure, yet if there were a recovery in real estate value, he desired to reduce, and if possible avoid, his loss. He offered to turn over the real estate upon conditions named. The mortgagee was unwilling to accept unless it was validly agreed that its rights against the debtor were unimpaired. In other words, if there were a merger, its claim on the note might be lost. It therefore declined to accept a deed, unless it were agreed there was no merger. They so agreed and put their agreement in writing.
Was this agreement effective? Did it prevent a merger?
We answer both questions in the affirmative.
The law is both clear and uniform as to the effect of a transfer .of mortgaged property by a mortgagor to a mortgagee. The result is the so-called merger which effects a discharge of the mortgage and the satisfaction of the debt.
Illinois has chosen to fortify or strengthen this law by a statute, but the result is the same, whether the origin is statutory or judicially-made law.
The query persists, however. Is there a merger if the parties agree that there is no merger intended ? When there would have been no deed passed (executed or accepted), unless there was an agreement not to discharge the debt, was there a merger?
Strong reasons support the right of the parties to turn over liened property without satisfaction of the debt. Expense of foreclosure, the possibility of lost sales, are both avoided by recognizing the right of the parties to so contract. Also, as here, the mortgagor could safely advance money to make needed repairs to make the property again productive.
If doubt in this case exists, we believe it is not over the right of the parties to make an agreement respecting a merger, but as to the existence of an agreement in the face of the facts disclosed by the record. In other words, the more troublesome inquiry is as to the effect-of plaintiff’s action when it sold and conveyed, by warranty deed, this property to S. Did it not then nullify its written agreement that there was no merger? We think it did, but only in part. To the extent of the purchase price it received, there was a satisfaction of the debt, — a merger. No more. Its agreement against a merger was a conditional one. The condition was that the price received by the plaintiff on its sale of the property was to be applied on the debt. This was an essential part of the no merger agreement, but it defeated neither the existence nor the effect of the no merger agreement.
In conclusion we might observe that we have not passed on whether Indiana or Illinois law determines whether a merger occurred in this case.
The parties lived in Indiana. They were not dealing with title to Illinois real estate as such. Defendants had parted with all their interest in this real estate. They had sold their equity of redemption. The purchaser of this equity and the defendants —both Indiana residents — made this agreement in Indiana in reference to the effect of a deed given by the former to the latter. They agreed it was not to be construed as-a merger. It is debatable whether the law of Illinois governs as to the existence and validity of this agreement, although the real estate was in Illinois. We have not decided this question because we are satisfied that the law of both states gives to the parties the right to make a valid contract as to the merger effect of a conveyance by one to the other.
The decree is affirmed.