American Nat. Bank v. Northwestern Mut. Life Ins.

89 F. 610, 32 C.C.A. 275, 1898 U.S. App. LEXIS 2384

• Court: Court of Appeals for the Eighth Circuit
• Decided: October 3, 1898
• Docket: No. 1,064
• Status: Published

Opinion

SHIRAS, District Judge,

after stating the case as above, delivered the opinion of the court.

In support of the proposition that the circuit court committed reversible error in appointing a receiver, counsel for appellant cite the cases of Teal v. Walker, 111 U. S. 242, 4 Sup. Ct. 420; Hazeltine v. Granger, 44 Mich. 503, 7 N. W. 74; Union Mut. Life Ins. Co. v. Union Mills Plaster Co., 37 Fed. 286; and Couper v. Shirley, 21 C. C. A. 288, 75 Fed. 168, — which hold the doctrine that a mortgagee has not a legal right to the possession of the mortgaged property until a completed sale upon foreclosure has been had, nor has he a right to the rents and profits until his legal right to possession has been established. If the appointment of the receiver had been made solely on the ground that the mortgagee was entitled to the rents and profits, these authorities would be in point, but this is not the fact. The petition asking the appointment avers the inadequacy of the security, the insolvency of the mortgagors, the failure to pay the taxes, the failure to pay the water rents, which would result in a loss of tenants, the failure to keep the property insured, the failure to keep the premises in good repair, and the fact that the appellant was collecting the rents, but was not applying the same to the protection of the property, as it was required to do by contract. It thus appears that the appointment of the receiver was asked upon well-recognized equitable grounds, and was not based upon an asserted legal right to the rents and profits accruing before foreclosure. Thus in Kountze v. Hotel Co., 107 U. S. 378, 2 Sup. Ct. 911, it is said:

“Courts of equity always bave the power, where the debtor is insolvent, and the mortgaged property is an insufficient security for the debt, and there is good cause to believe that it will bo wasted or deteriorated in the hands of the mortgagor, as by cutting of timber, suffering dilapidation, etc., to hike charge of the property by means of a receiver, and preserve, not only the corpus, but the rents and profits, for 1lie satisfaction of the debt.”

It cannot, therefore, be successfully questioned that the circuit court had full jurisdiction to hear the petition for the appointment of a receiver, and, upon a proper showing, to grant the application, and, as we understand the record, the question whether the discretion of the court was rightly exercised in the premises is not before us far consideration..

The appellant had been made a party defendant in the foreclosure proceedings, had notice of the petition for the appointment of a receiver, filed an answer thereto, and was heard-upon the issues thus presented. As already stated, the order appointing the receiver was made February 27, 1897, and it does not appear that the appellant saved an exception to the ruling made, nor does the record show what evidence was submitted to the court upon the hearing of the petition for the appointment of the receiver. Furthermore, in the petition for the allowance of the appeal in this case, it is recited (hat “the defendant, the American Rational Bank of Denver, respectfully prays an appeal to the United States circuit court of appeals for the'Eighth circuit, from the decree entered in the above-entitled cause at the Rovember term of this court, A. D. 1897.”

The only questions, therefore, properly before us for consideration are those arising on the errors assigned upon the final decree of foreclosure, the first of which is that the court erred in ordering the receiver to pay to the defendant in error the balance of the funds in ius hands, and in refusing to decree that all the rentals collected by the receiver should be paid to the appellant. The contention of counsel for appellant is that under the provisions of the statute of Colorado (Civ. Code, § 261), which provide that “a mortgage of real property shall not be deemed a conveyance, whatever its terms, so as to enable the owner of the mortgage to .recover possession of the real properly without foreclosure and sale,” the rents and profits derived from i.he mortgaged property before the foreclosure sale cannot be applied to the payment of the mortgage debt.

Under the doctrine announced in Teal v. Walker, 111 U. S. 242, 4 Sup. Ct. 420, wherein the supreme court was called upon to consider ihis general question with reference to the provisions of the statutes of Oregon, which are similar in effect to those in force in Colorado, and wherein it was held that, as (he mortgagee liad no right to take possession before a sale, he had no claim to (he rents and profits accruing before he had acquired a right to possession through a foreclosure sale, it seems to be settled that, under the provisions of the Colo - rado statute, a mortgagee cannot maintain a right to have such rents and profits applied to the satisfaction of his mortgage debt, as the same belong to the mortgagor, and the mortgage is not a lien thereon, nor will (he appointment of a receiver, for the purpose of collecting rhe rents, create an equitable lien thereon, in favor of the mortgagee, which is the rule held in some jurisdictions. High, Rec. § 643; Post v. Dorr, 4 Edw. Ch. 412; U. S. Trust Co. v. New York, W. S. & B. R. Co., 101 N. Y. 478, 5 N. E. 316.

Relying upon this construction of the Colorado statute, cotmsel for appellant claim that the final decree of foreclosure should have provided that all the rents collected by the receiver should have been ordered paid to appellant, as well as the sum of $282.62, which was in the hands of the receiver at the date of the decree. The record does not show that any part of the rents collected by the receiver was used in payment of the original mortgage debt due to the appellee, but, on the contrary, it shows that the money paid to the receiver as rental was expended in repairing the mortgaged premises, in keeping up the insurance, in paying the taxes, and in repaying to the appellee the money by it advanced to pay taxes on the property. In consideration of the loan made by the appellee to Susan M. and Daniel M. Mays, they agreed to keep the property insured to the amount of $45,000, and to pay annually all taxes and assessments levied on the property. When the receiver was appointed, the mortgagors could well claim that, as they had been thus prevented from receiving the rentals of the property, they would be excused in equity from any further personal liability to pay the taxes and insurance, and that the obligation to thus protect the property was assumed by the receiver, to the extent of the rentals by him received. The receiver was appointed by the court for the purpose of protecting the property in the interest of all who held a title thereto or a lien thereon, and the proper protection of the property required that it should be kept insured; that the taxes thereon should be j>aid; that the building should be kept in repair, and in condition to assure its occupancy; and, if the receiver was justified in making the outlay necessary to thus protect the property, he certainly must be protected in applying the rental in his hands to the payment of the cost thereof. The effect of the provisions of the decree to which exception is taken is to approve the action of the receiver in applying the rentals coming into his hands to the payment of the taxes, insurance, and the cost of needed repairs; and the fact that, under the provisions of the Colorado statute, a mortgagee is not entitled to the possession of the mortgaged property, nor to the rents and profits thereof, until a foreclosure is had, does not tend to show that this disposition of the rentals was not entirely right and legal.

The position taken on behalf of appellant is that by means of the purchase made by it at the sale under the trust deeds the bank became the owner of the title and equity of redemption held by Susan M. and Daniel M. Mays, and from that date became entitled to the rents coming from the property. Granting this to be true, it does not follow that the bank acquired, as against the Northwestern Insurance Company, any right or equity greater than that held by the mortgagors, Susan M. and Daniel M. Mays; and therefore the question is whether they have the right to insist that when the court took possession of the premises, through its receiver, it could not apply the rentals to the payment of taxes, insurance, and repairs, but must pay the- same to the mortgagor, and thus let- the property be destroyed, in whole or in part. This query is fairly answered in the language used by tlie supreme court in Shepherd v. Pepper, 133 U. S. 626-652, 10 Sup. Ct. 438, wherein it is said:

“As to the question oC tlie disposition of tlie rents in tlie hands of the receiver, we think the action of the court below was proper. The pecuniary condition of Shepherd, his failure to pay taxes, premiums of insurance, or interest, the inadequacy of the property to pay the claims of Pepper and iUrs. Gray, and the diversion of the income from rents, from making such payments, to the use of Shepherd, up to the time of the appointment of the receiver, were adequate grounds for the appointment of the receiver. Kountze v. Hotel Co., 107 U. S. 378, 395, 2 Sup. Ct. 911; Grant v. Insurance Co., 121 U. S. 105, 7 Sup. Ct. 841. The court, through its receiver, took possession of the rents in order to preserve them for that party to the suit who should ultimately he found to be equitably entitled to them. Hitz v. Jenks, 123 U. S. 297, 306, 8 Sup. Ct. 143. The various reports of the receiver contained in tlie record, as to liis payment of taxes, premiums of insurance, and the expenses of repairs on the building', show the necessity of his appointment. It would he grossly unjust, on the facts developed in this ca,se, to appropriate the rents in the hands of the receiver to the use of Shepherd.”

Certainly no further citation of authorities is needed to show that the court below rightly held that (.he rentals of the property collected by the receiver were properly applied in the payment of taxes, insurance, and repairs, and that the balance in his hands of $282.68 should be applied in the repayment to the appellee of the money by it advanced to pay taxes and insurance, which, in effect, is the meaning of the decree entered.

The record shows that the appellee had advanced, in payment of taxi's and insurance, a sum greater than all it had received, and which will not: be fully repaid if it receives the balance in the hands of ilie receiver. This money was advanced and used to protect the property for the benefit of all interested therein, and the appellee is clearly entitled to be reimbursed therefor, before any of the'rental is paid to the mortgagors, whose duty it was to pay the taxes and insurance' thus advanced by the appellee, and in this respect the rights of the appellant are not other or greater than those of the original mortgagors.

The only other error assigned is based on the fact that the court included in the amount, found due under the mortgage the sum of $2,266.95, which had been paid by the appellee to redeem the property from a sale thereof under an assessment for a paving tax; the contention of the appellant being that, through an omission in the charier of the city of Denver, in force when the assessment was made, the paving tax was not a lien on the realty, and that, in any event, .it was not assessed until after the execution of the mortgage to the appellee, and of the trust dol'd to the Hamilton Loan & Trusr Company, and therefore the lieu would be inferior to that of the bank, which holds title under this trust deed. The question is not whether the city charter in terms created a statutory lien for 'this assessment, but whether it comes within the lien created by the mortgage held by the appellee, to which mortgage the rights of the appellant are subject. The charter provided for making assessments against city lots for the paving in front thereof, and, if the same were not paid within (.lie time provided by ordinance, they were to be certified to the city clerk, to be by him placed upon the tax list as part of the city taxes for the current year, to be collected in the same manner as general city taxes, the city having the right to purchase at tax sale any lots sold for paving assessments. It is clear that these provisions of the charter made the paving assessment in question a charge upon the property, with authority to sell the same for the collection of the tax, and in substance this makes the assessment a lien. Thus, in Peck v. Jenness, 7 How. 611, it is said: “In courts of equity, the term ‘lien’ is used as synonymous with a charge or incumbrance upon a thing, where there is neither jus in re nor ad rem, nor possession of the thing.” In Bouvier’s Law Dictionary a “lien” is defined to be “a hold or claim which one has on the property of another as a security for some debt or charge.” But, waiving the question whether this assessment was technically a lien, there can be no doubt that it was an assessment against the property, which became a charge thereon, and for the collection of which the property could be sold.

By the express terms of the mortgage to appellant, the mortgagors bound themselves to pay all taxes and assessments on the mortgaged premises; it being further expressly provided that, in case of foreclosure of the mortgage, the decree entered “shall embrace, with said principal debt and interest, all sums so paid for or on account of insurance, taxes, assessments, or prior liens, with interest at the rate aforesaid.” Thus, the sums paid out by the mortgagee for insurance, taxes, and assessments are' made part of the. debt secured by the lien of the mortgage; and there is no more reason for excluding a sum paid to clear the property from a paving assessment from the protection of the mortgage than exists for excluding a sum paid for insurance, and no exception is taken to including in the decree the^sums paid by the appellee in keeping up the insurance. But it is further urged that, through a failure to observe some of the requirements .of the statute, the assessment for the paving is not a valid charge against the property, and therefore the amount paid by the appellee to redeem the property from the tax sale should not now be allowed it as part of the sums secured by the mortgage; and, further, that the sale of the property for such assessment was not authorized by any statute then in force, and the redemption from such sale was not an act necessary to protect the title to the property. It will be noticed that it is not claimed that the paving had not in fact been done, nor that an assessment had not in form been made against the property, nor that a sale had not been made of the property which might ripen into a title; and therefore it cannot be claimed that equitably a right to assess the expense of the paving against the property did not exist, but the contention is that, notwithstanding the fact that the paving had been done for the benefit of the property, payment therefor might be escaped by invoking legal objections. Courts of equity do not encourage, nor look with favor upon, efforts to escape obligations well founded in fact, though the same may not be enforceable at law. If it be true, as claimed by appellant, — a question we do not consider, — that the city of Denver could not enforce payment of the paving assessment by a sale of the property under the general tax law, yet that would not invalidate the assessment nor prevent its enforcement by a. proceeding in court; for, if there was no statutory mode provided for enforcing payment of the assessment, the city would have the right to invoke the aid of the court for that purpose. Savings Bank v. U. S., 19 Wall. 227.

The evidence shows that the assessment for the paving was in fact made; the property was sold therefor; the time for the redemption from such sale had nearly expired; neither the original mortgagors nor the appellant had taken any steps to question the validity of the assessment, or to relieve the property from the charge asserted against it. Under these circumstances, the appellee, in order to prevent the sale ripening into a title, paid the assessment, and the court below ruled (hat the sum thus paid should be allowed the appellee, under the provisions of the mortgage, and we see no reason for holding that there was error in such ruling. Finding no merit in the errors assigned, the decree ajipealed from is affirmed.