#### WASHINGTON FURNITURE COMPANY v. BENJAMIN POTTER et al.

(Filed 10 September, 1924.)

1. Mortgages — Title—Merger—Presumptions—Intention of Parties.

While ordinarily when tbe mortgagee of lands afterwards acquires tbe mortgagor’s equity of redemption, tbe lesser interest merges into tbe greater, and be becomes the owner of the full title, this result will not follow when tbe merger would be inimical to tbe interest of the owner, or would prevent his setting up the mortgage to defeat an intermediate title, such as a subsequent lien or a second mortgage, unless tbe parties otherwise intended, which will not be presumed contrary to the apparent interest of the parties.

2. Same — Instructions—Evidence—Appeal and Error.

Where the mortgagee of lands has later acquired the mortgagor’s equity of redemption, and there is evidence that it was not the intention of the parties to effect a merger to defeat his rights against a junior mortgage it is reversible error for the trial judge to instruct the jury to the contrary.

Appeal by defendants from Devin, J., at February Term, 1924, of Beaufort.

Civil action, by assignee of junior mortgage on lands, to enjoin the-foreclosure of a senior mortgage on tbe same lands, upon tbe ground tbat said senior mortgage bas been extinguished by merger, tbe assignee thereof having purchased tbe equity of redemption in tbe mortgaged premises.

From a verdict and judgment in favor of plaintiff tbe defendants appeal, assigning errors.

Ward & Grimes for defendants.

Stacy, J.

Tbe essential facts are as follows:

1. On 4 March, 1920, <T. R. Rowe and wife, being the owners of certain real estate, mortgaged the same to Benjamin Potter to secure the payment of $150.00, evidenced by three promissory notes. This mortgage was duly registered on 22 March, 1920, and in September of that year it was assigned to J. E. Overton by endorsement, as-follows: “I hereby transfer the within mortgage, and notes thereto, to J. E. Over-ton, without recourse to Benjamin Potter.” (Williams v. Teachey, 85 N. C., 402; Morton v. Lumber Co., 154 N. C., 336.)

2. On 28 June, 1920, a second mortgage, covering tbe same premises, was executed by J. R. Rowe and wife to Gorham & Bonner to secure *146the payment of $475.00. This mortgage was duly registered 2 July, 1920, and thereafter assigned and transferred _to the plaintiff for a valuable consideration.

3. On 4 October, 1920, J. R. Rowe and wife, by deed, containing full covenants of warranty, conveyed said mortgaged premises to J. E. Overton.

4. J. E. Overton, through his assignor, having advertised the property for sale under the first mortgage, the plaintiff, assignee of the second mortgage, brings this action to enjoin the sale, alleging that the first mortgage has been extinguished by merger, the assignee thereof having purchased the equity of redemption in the mortgaged premises. It is admitted that the value of the land is less than the balance due on the debts secured by the two mortgages.

5. There was allegation to the effect that the defendant J. E. Overton agreed to relinquish his rights under the first mortgage, and that this was taken into consideration in adjusting the purchase price of the land, or the amount he was to pay for the mortgagors’ equity of redemption. But this was denied by Overton. He testified that no extinguishment of the first mortgage was intended, because such would work a forfeiture of his interests thereunder.

6. The trial court instructed the jury peremptorily that, upon the record evidence, the second mortgage — the one held by plaintiff — had become a first lien upon the property, because the senior mortgage had been extinguished by merger. To this instruction the defendants excepted, and the same is assigned as error.

It is undoubtedly the general rule of law that where one who holds a mortgage on real estate becomes the owner of the fee, and the two estates are thus united in the same person, ordinarily the former estate merges in the latter. Hutchins v. Carleton, 19 N. H., 487. The equitable or lesser estate is said to be swallowed up, or “drowned out,” by the legal or greater interest. But this rule does not apply where such merger would be inimical to the interests of the owner, as, for example, where it would prevent his setting up the mortgage to defeat an intermediate title — such as a subsequent lien or a second mortgage, as in the instant case — unless the parties intended otherwise; and this intention will not be presumed contrary to the apparent interests of the owner. Hines v. Ward, 121 Cal., 115; Jones on Mortgages, sec. 870; 19 R. C. L., 484; Note: 39 L. R. A. (N. S.), 834, et seq. As to whether such was intended by the parties is a question of fact; and the courts will “permit or prevent the application of the doctrine as the same may accord with the intent of the parties and the right and justice of the matter.” Odom v. Morgan, 177 N. C., p. 369.

*147Tbe following statement of tbe law, taken from 27 Cyc., 1379, we apprehend, is applicable, in substance at least, to tbe facts of tbe present case:

> “Tbe technical doctrine of merger will not be applied contrary to tbe agreement or tbe express or implied intention of tbe parties; and, therefore, in equity, there will be no merger of estates when a mortgagee receives a conveyance of tbe equity of redemption, when such a result would be contrary to bis real intention in tbe transaction, or to tbe bargain made by tbe parties at tbe time. This is tbe case where tbe mortgagee means to keep tbe security alive for bis own protection as against other liens or encumbrances, and also where tbe conveyance is not intended by tbe parties to be in satisfaction of tbe mortgage debt, but only as. additional security for it. Tbe question whether or not tbe parties intended that a merger of estates should take place is a question of fáct. It is not settled by tbe mere recording of tbe deed. But tbe intention that there should be no merger may be shown by a stipulation in tbe deed or other express declaration of tbe parties, or tbe fact that tbe mortgage does not cancel or surrender tbe evidences of tbe debt or release tbe mortgage, but on tbe contrary, retains them, or that be assigns tbe mortgage to a bona fide purchaser, representing it as a good and valid security. On tbe other band, if be assumes to deal with tbe estate as absolute owner, and conveys it to another, it proves a merger. In tbe absence of any such proof, tbe question must be determined by a preponderance of tbe evidence presented.”

In tbe face of defendant’s testimony that no merger or extinguishment of tbe senior mortgage was intended, tbe court’s peremptory instruction to tbe contrary was erroneous. Tbe cause will be remanded, to tbe end that it may be submitted to another jury under instructions not inconsistent with tbe principles announced herein.

New trial.