McGuckin v. . Milbank
46 N.E. 490, 6 E.H. Smith 297, 152 N.Y. 297 (1897)
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Rule of Law:
A grantee seeking damages for a breach of a covenant against incumbrances is generally limited to nominal damages unless they can prove an actual loss, such as paying to extinguish the incumbrance or demonstrating a direct diminution in property value due to its enforcement or the threat thereof.
Facts:
- Cauldwell conveyed land to the plaintiff via a deed that included a covenant against incumbrances.
- A mortgage, known as the Manchester mortgage, was an existing lien on the property subsequent to the mortgage under which Cauldwell originally acquired title, though Manchester was made a party to Cauldwell's foreclosure.
- The plaintiff subsequently mortgaged the property to the Metropolitan Life Insurance Company.
- The plaintiff later conveyed five of the six lots covered by the Manchester mortgage to other parties.
- At the time of these conveyances, both the plaintiff and his grantees assumed the Manchester mortgage was no longer a lien, having been extinguished by the prior foreclosure of the Cauldwell mortgages.
- The plaintiff did not pay the Manchester mortgage, nor was he disturbed in his possession or evicted under it.
- The remaining lot (and another) belonging to the plaintiff was sold during a foreclosure sale initiated by the Metropolitan Life Insurance Company.
- There was no evidence that the Manchester mortgage was a factor in the foreclosure sale or that purchasers contemplated its existence when bidding.
Procedural Posture:
- The plaintiff initiated an action against Cauldwell for breach of the covenant against incumbrances, arguing that the Manchester mortgage remained a valid lien.
- The defendants contended that the Manchester mortgage had been extinguished or, alternatively, that only nominal damages were recoverable if it was still an incumbrance.
- The trial court directed a verdict in favor of the plaintiff for a specific, substantial sum.
- The General Term of the Supreme Court reversed the trial court's decision and granted a new trial.
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Issue:
Is a grantee entitled to recover substantial damages for a breach of a covenant against incumbrances if they have neither paid the outstanding incumbrance nor suffered an actual, provable loss of property value directly attributable to the incumbrance's existence?
Opinions:
Majority - Andrews, Ch. J.
No, a grantee is not entitled to recover substantial damages for a breach of a covenant against incumbrances if they have neither paid the outstanding incumbrance nor suffered an actual, provable loss of property value directly attributable to its existence. The court reaffirmed the established rule, articulated in Delavergne v. Norris, that a covenant against incumbrances is a contract of indemnity, meaning recovery beyond nominal damages is confined to actual losses sustained. While such a covenant is broken upon its making if an incumbrance exists, substantial damages are only recoverable if the covenantee has extinguished the incumbrance by payment, or if their title has been divested by proceedings based on the incumbrance, proving a certain and final injury. In the present case, the plaintiff neither paid the Manchester mortgage nor was evicted under it. Regarding the five lots conveyed to others, no injury was shown as the plaintiff was not bound to indemnify his grantees, and all parties assumed the Manchester mortgage was divested. For the one lot retained by the plaintiff and subsequently sold under the Metropolitan Life Insurance Company mortgage, substantial damages could have been awarded if there was evidence that the sale price was reduced due to the Manchester mortgage. However, the evidence failed to show that the Manchester mortgage was a factor in the sale or contemplated by the purchasers. Thus, the plaintiff failed to establish an actual, quantifiable injury beyond nominal damages, making the trial court's directed verdict for a specific sum erroneous.
Analysis:
This case reinforces the indemnity nature of covenants against incumbrances, clearly distinguishing them from covenants that assure title, which are breached upon execution regardless of actual loss. It establishes a high bar for recovering substantial damages, requiring the covenantee to demonstrate either direct financial outlay to remove the incumbrance or a provable, direct diminution in property value caused by its existence or enforcement. This ruling places the burden on the plaintiff to provide specific evidence of actual loss, rather than relying on the mere presence of an incumbrance. Consequently, it limits potential liability for grantors to actual, rather than speculative, damages in future cases involving similar covenants.
