a technical standpoint, it is evident that in substance a failure to make prompt payment would cause a loss to the mortgagor and a gain to the mortgagee out of all proportion to the importance of the mortgagor's breach of contract. Situations identical in principle frequently arise in other contracts.

§ 770. What is meant by penalty.

A penalty as distinguished from a forfeiture involves the enforcement of an obligation to pay a sum fixed by law or agreement of the parties as a punishment for the failure to fulfill some primary obligation. A forfeiture deprives a man of what he previously possessed, or at least prevents him from acquiring what he has substantially paid for; a penalty subjects him to a liability beyond the actual damage caused by his breach of the primary obligation. As the type of forfeiture is a mortgage, so the type of penalty is a bond on condition. Transactions in substance identical with mortgages or penal bonds may be made in other forms. Though the law has been reluctant to formulate a universal principle on the subject based on the essential character of transactions as distinguished from their form, it is nevertheless desirable in order to understand the possible application to conditions of doctrines relating to forfeiture and penalty, to have in mind the better settled doctrines relating to the relief given in case of conveyances which involve a forfeiture, and in case of promises which provide for a penalty.

§ 771. Non-enforceability of provisions for forfeiture in mort

gages.

The old form of mortgage still in use in many jurisdictions in terms is an absolute deed of conveyance to the mortgagee with a condition subsequent, or separate deed of defeasance, providing that if a sum of money owing by the mortgagor is repaid on a certain day, the title to the property shall revest in the mortgagor. If literal effect were given to the instrument, failure to pay on the precise day when the debt falls due would involve the total loss of the mortgaged estate whatever might be its value. Courts of equity at an early date allowed the mortgagor to redeem his property after the day by paying

interest in addition to the debt; and to avoid the hardship on the mortgagee, which possible indefinite delay might cause, he was allowed at any time after the maturity of the debt to file a bill to foreclose the mortgagor's right of redemption. On such a bill the court decreed that unless the mortgagor should pay the mortgage with interest within a certain time specified by the decree, he should be forever foreclosed. In other respects courts of equity, and subsequently courts of law, defied the literal meaning of a mortgage, and treated the property as belonging to the mortgagor except so far as was necessary to protect the mortgagee's security for his debt.2 These results have not been reached by searching for the intention of parties either actual or expressed. At the present time doubtless the mortgagor and mortgagee understand the meaning of

The ultimate effect in the United States of this treatment has been summarized by a learned writer as follows: "A mortgage deed commonly professes to vest in the grantee real estate; it really vests in him, in this country, only a chattel interest in real estate. It declares that upon default the mortgagee shall at once, by the mere operation of the deed, have an absolute title, free from all right of the grantor; it really gives the grantee, from the time of default, a mere right to enforce payment or indemnity. It professes to leave in the grantor nothing but a right of re-entry upon certain terms; it really leaves in him, in this country, the absolute ownership, subject it is true, to a charge, but only as the ownership of land may always be subject to a charge,―for taxes, for an annuity, for a mechanic's lien, for debts of an owner deceased. It must have the word 'heirs,' (Sedgwick v. Laflin, 10 All. 430; Allendorff v. Gaugengigl, 146 Mass. 542, 1 Jones, Mortg., § 67) or the security dies with the mortgagee, even though the debt is unpaid; yet the interest granted is not realty; there is no dower or curtesy in it, because it is not real estate, and it goes to the cx

ecutor, and not to the heirs. In Massachusetts a mortgage on land is attachable as realty if owned by a State bank or a domestic insurance corporation; (Mass. Pub. Sts. c. 118, § 92; St. 1887, c. 214, § 27), otherwise not. We find it laid down, on the one hand, in the law reports and statutes of a given State, that a mortgage of land is a mere 'pledge' or 'hypothecation' of it, and creates only a 'lien'; (Jackson v. Mut. Fire Ins. Co., 23 Pick. 418, 424; Ewer v. Hobbs, 5 Met. 1, 3; Butler v. Page, 7 Met. 40, 43; Mass. Pub. Sts. c. 178, § 44), that a mortgagor by deed and defeasance may relinquish his title by simply cancelling his bond of defeasance; (Trull v. Skinner, 17 Pick. 213); and yet we find in the same reports the doctrine laid down that, unless the condition is performed on the day fixed, the mortgagor's ownership of the land is gone, at law, and the legal ownership is now in the mortgagee, (Currier v. Gale, 9 All. 522), subject only to a right of redemption in equity, a proposition maintainable only by viewing the mortgage deed as a deed on condition and not as a deed creating a lien." H. W. Chaplin, in 4 Harv. L. Rev. 3.

the transaction between them to be different from that which the mortgage expresses; but when courts of equity first established their doctrines in regard to the matter, the expressed intention was doubtless the real intention, yet the intention was disregarded; and it is still true to-day that an agreement, however clearly expressed, that the mortgaged property shall be forfeited if payment is not made when due, will be futile. The maxim, "Once a mortgage, always a mortgage," will be applied and redemption allowed. The mortgagor may indeed sell his equity of redemption to the mortgagee, but in considering the validity of such a sale "principles almost as stern are applied as those which govern where a sale by a cestui que trust to his trustee is drawn in question." Even though a conveyance made as security for a debt is in terms absolute, and there is no written agreement for a reconveyance or for revesting of title in the grantor, equity will allow redemption of the property if the transaction is clearly proved to be a mortgage, 5

3

Howard v. Harris, 1 Vern. 190; Seton v. Slade, 7 Ves. 264, 273; Cowdry v. Day, 1 Giff. 316; Noakes v. Rice, [1902] A. C. 24; Peugh v. Davis, 96 U. S. 332, 24 L. Ed. 775; Fields v. Helms, 82 Ala. 449, 3 So. 106; Pierce v. Robinson, 13 Cal. 116, 125; Walker v. Farmers' Bank, 6 Del. Ch. 81, 10 Atl. 94; Seymour v. Mackay, 126 Ill. 341, 18 N. E. 552; Reed v. Reed, 75 Me. 264, 272; Batty v. Snook, 5 Mich. 231; Marshall v. Thompson, 39 Minn. 137, 39 N. W. 309; Wilson v. Drumrite, 21 Mo. 325; Weathersly v. Weathersly, 40 Miss. 462, 90 Am. Dec. 344; Vanderhaize v. Hugues, 13 N. J. Eq. 244; Mooney v. Byrne, 163 N. Y. 86, 57 N. E. 163; Robinson v. Willoughby, 65 N. C. 520, 523, 524; Stover v. Bounds, 1 Ohio St. 107. Cf. De Martin v. Phelan, 47 Fed. 761, 115 Cal. 538, 47 Pac. 356, 56 Am. St. Rep. 115.

In Ball v. Milliken, 31 R. I. 36, 76 Atl. 789, 37 L. R. A. (N. S.) 623, the court said: "It is one of the principles of equity that it will not decree a for

4

feiture. 'It will never aid in the divestiture of an estate for a breach of a covenant on a condition subsequent, although it will often interfere to prevent the divestiture of an estate for a breach of a covenant or condition."" 2 Story, Equity, § 1319.

4 Villa v. Rodriguez, 12 Wall. 323, 339, 20 L. Ed. 406. See also Peugh v. Davis, 96 U. S. 332, 337, 24 L. Ed. 775; Savings Soc. v. Davidson, 97 Fed. 696, 38 C. C. A. 365; Oakley v. Shelley, 129 Ala. 467, 29 So. 385; West v. Reed, 55 Ill. 242; Hicks v. Hicks, 5 G. & J. 75; Trull v. Skinner, 17 Pick. 213; Falis v. Insurance Co., 7 Allen, 46; De Lancey v. Finnegan, 86 Minn. 255, 90 N. W. 387; Randall v. Sanders, 87 N. Y. 578; McLeod v. Bullard, 86 N. C. 210; Shaw v. Walbridge, 33 Oh. St. 1; Tripler v. Campbell, 22 R. I. 262, 47 Atl. 385; Hall v. Hall, 41 S. C. 163, 19 S. E. 305, 44 Am. St. Rep. 696; Swarm v. Boggs, 12 Wash. 246, 40 Pac. 941.

5 See supra, § 635.

§ 772. Conditional sales distinguished from mortgages.

Though property cannot be conveyed by way of mortgage on such terms as will forfeit the mortgagor's right of redemption, a sale may be made with a right or option on the part of the seller to repurchase the property on or before a fixed day. A bargain of this sort will be enforced according to its terms, and if the right is not exercised by the agreed day, the property will become absolutely that of the purchaser. Such a trans

action is called a conditional sale. The legal relation of the parties in such a transaction, however, is entirely different from that in the bargain commonly called a conditional sale of personal property where goods are sold and delivered to the purchaser with a reservation of title in the seller until the price is paid. In the latter kind of case the transaction is in substance a mortgage; 7 in the former it is vitally distinguishable from a mortgage. General statements about "conditional sales" originally made in regard to one of these transactions are sometimes applied to the other or stated as applicable to both. The distinction between a bargain of the kind considered in this section and a mortgage is to be found in the existence of a debt where a mortgage relation exists. A primary reason for relief in equity from the strict terms of a mortgage is that the mortgagor must pay the debt in any event, even though the mortgaged property is insufficient to meet it. On the other hand, in the conditional sale, the parties are taking a business chance which may or may not turn out favorably to the purchaser. If the land diminishes in value, the seller will not exer

'Davis v. Thomas, 1 Russ. & M. 506; Williams v. Owen, 5 M. & Cr. 303, 306; Conway's Exrs. v. Alexander, 7 Cr. 218, 237; Wallace v. Johnstone, 129 U.S. 58, 32 L. Ed. 619, 9 Sup. Ct. 243; Beck v. Blue, 42 Ala. 32, 94 Am. Dec. 630; Stryker v. Hershy, 38 Ark. 264; Henley v. Hotaling, 41 Cal. 22; Vance . Anderson, 113 Cal. 532, 45 Pac. 816; Spence v. Steadman, 49 Ga. 133; Hanford v. Blessing, 80 Ill. 188; Bigler 1. Jack, 114 Ia. 667, 87 N. W. 700; Flagg v. Mann, 14 Pick. 467; Daniels v. Johnson, 24 Mich. 430; Buse v. Page, 32 Minn. 111, 19 N. W. 736, 20 N. W.

95; Magee v. Catching, 33 Miss. 672; Turner v. Kerr, 44 Mo. 429; Slutz v. Desenberg, 28 Oh. St. 371; Tripler v. Campbell, 22 R. I. 262, 47 Atl. 385; Ruffier v. Womack, 30 Tex. 332; Rich v. Doane, 35 Vt. 125; McComb v. Donald, 82 Va. 903, 5 S. E. 558; Swarm v. Boggs, 12 Wash. 246, 40 Pac. 941; Kunert v. Strong, 103 Wis. 70, 74, 79 N. W. 32.

cise his option to repurchase, and the purchaser must bear the loss. This it is conceived balances the chance that the purchaser may get an advantage if the land exceeds in value the price fixed for its repurchase, and the seller nevertheless fails by negligence or misfortune to exercise his option.

§ 773. Technicality of the distinction.

It is obvious, however, that as a practical matter this distinction amounts to nothing if the price paid for the granted property is much below its value. In such a case the grantee is amply protected without any right of action for the recovery of a debt. All that he can desire is to be left in undisturbed ownership of the property. It is commonly said in the cases that whether a transaction is a mortgage or a conditional sale depends upon the intention of the parties. But it is perfectly possible that the original owner, induced by his necessities, does intend to sell his property for a fraction of its value relying on the option to repurchase it, which he hopes to be able to exercise. If this intention is given effect and the transaction literally enforced, no relief being given the grantor if he fails to exercise the option at the stated day, a ready means is provided for nullifying the rules which equity has gradually built up in regard to mortgages. To be sure, in case of doubt a transaction is construed rather as a mortgage, than as a conditional sale, and inadequacy of the price is a strong circumstance tending to show that a conveyance was intended merely to secure a debt; 10 and in this way hard cases are generally taken care of; but unless it is observed that the ultimate distinction in principle depends not on the form of the transaction, whether that of a mortgage or a condition sale, but on gross inequality between the price and the value of the property, the law is likely to be confused and the chance of injustice unnecessarily great. It is true that equity does not prevent a man from contracting to sell his property for an inadequate Conway v. Alexander, 7 Cranch, 431, 60 N. E. 22; Hubby v. Harris, 68 218; Douglass v. Moody, 80 Ala. 61; Tex. 91, 3 S. W. 558. Hughes v. Sheaff, 19 Ia. 335; Niggeler v. Maurin, 34 Minn. 118, 24 N. W. 369; Matthews v. Sheehan, 69 N. Y. 585; Hughes v. Harlam, 166 N. Y. 427,

10 Parish v. Gates, 29 Ala. 254; Bigler v. Jack, 114 Ia. 667, 87 N. W.

700.