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There was evidence upon the trial of this action to establish that the deed executed by the plaintiffs to Austin, the testator, was given as security for the payment of a loan of money advanced by Austin, for the purpose of aiding the firm of Bennett Avery in their business, and to relieve them from pecuniary embarrassments, under which they labored at
the time; and the finding of the court, to the effect that the conveyance was an equitable mortgage, was, we think, fully justified by the evidence and should not be disturbed.
We must, therefore, assume at the outset that the title acquired by Austin, by virtue of the quit-claim deed, was not an absolute right, but merely a mortgage security, from which the grantors had a right to redeem the property upon payment of the amount which Austin had advanced with interest, and all legitimate expenses. This brings us to a consideration of the question whether the subsequent acts of Austin, in procuring a deed under a foreclosure sale of the property under the Stewarts' mortgage and otherwise asserting his right to the rents or dividends, and in obtaining possession of the property under the circumstances disclosed by the evidence, were authorized and of such a character as to confer title upon Austin which cut off the right of the plaintiffs to redeem the property. We think that Austin obtained no such title as prevented a redemption by the owners who conveyed to Austin. The claim that Austin had a right to purchase under the foreclosure of the Stewarts' mortgage, and in support of the title acquired thereby and of his proceedings in obtaining possession, is based upon the theory that he was a mortgagee holding an instrument subject to all the accidents and containing all the powers of a mortgage with a debt due, and that he was entitled, like any other mortgagee, to hold possession, if he could peaceably obtain it, and all the rights which are incident to his position as such mortgagee. The right of a mortgagee to the rents of land, without the interposition of the equity power of the court before he has foreclosed the mortgage, depends upon the fact whether the possession is a lawful one, either by consent of the proper party, or by means of legal proceedings. (Van Duyne v. Thayre, 14 Wend. 236; Mad. Ave.Bap. Ch. v. Oliver St. Bap. Ch., 73 N.Y. 94.) The consent must be from the mortgagor or the party who has authority to give such consent. (Newton v. McKay, 30 Mich. 381; Russell v. Ely,
2 Black [U.S.], 575.) There is no authority for the doctrine that the mortgagee can go to the lessee and
deprive the lessor of his right to the rents without the consent of the lessor. The actual state of the case was, that the accruing rents or dividends, and the covenant to pay them for a fixed period, had been disposed of by Bennett Avery by an assignment to the Stewarts, as collateral security to their bond and mortgage, long prior to the period when the deed was executed to Austin; and under the transfer they were to be applied to the payment of the promissory notes indorsed by these parties for the assignors. What right, then, had Austin to rents or dividends which had been especially appropriated for a particular purpose? He took a deed subject to the prior mortgage and the transfer which had been made of the accruing rents and dividends, and had knowledge of this mortgage and of the assignment. The grantors could not, and their conveyance did not, convey any right or interest which had previously been conveyed, and they had no right to make any such conveyance or assignment. The taking of a new lease from Austin by the elevator association was, therefore, without any authority or right, and of itself without force as against the prior assignment. The evidence shows that Austin, on the day after the execution of the quit-claim deed to him, proceeded to the office of the elevating company, demanded the dividends which the elevators had earned under the combination arrangement which had been entered into, and his demand not being acceded to, for the reason stated by the officer in charge, that an order had been made by Bennett Avery to pay the dividends to the Stewarts; threatened to take the elevators out of the association if he could not have the dividends, and thus break it up. The demand was acceded to upon his executing a bond of indemnity to the company, and the dividends were paid to him, and a new lease or contract entered into between him and the association. The claim of ownership by Austin was unfounded and without any legal right. He was only a mortgagee, and as an assignment had been made of the lease or the dividends to the prior mortgagee, he had no right to demand and the company no right to pay him the dividends or to make a new contract. It follows that
the attornment by the company to Austin was unauthorized and invalid, and could have no effect whatever upon the rights of the prior mortgagees, or change the appropriation which had been previously made of the rents or dividends.
The claim that the Stewarts, having a prior mortgage, could yield their right to priority to the rents and profits to Austin, as a junior mortgagee, is without merit. The answer to this position is that the Stewarts never did surrender such right, and Austin obtained control over this fund, which had been specially appropriated for a specific purpose, without notice to them or any knowledge of his intention, and immediately afterward they commenced a foreclosure of their mortgage, making Austin a party, obtained an injunction, applied for a receiver, and sought to compel Austin to return the moneys which he had thus unlawfully obtained. They did not surrender in any form to Austin's claim, nor was there any connivance or collusion between the Stewarts and Austin in respect to the same. After a fruitless attempt to defend, on the ground of usury, Austin came to the terms which were demanded by the Stewarts and satisfied their demand. He was in receipt of the dividends — at that time very large — and as he held subject to their mortgage, he could not avoid paying the Stewarts' claim. There was no acquiescence of the Stewarts in Austin's claim, and the fact cannot be denied that Austin did not acquire any hold upon or right to this fund as mortgagee, and his act in obtaining and retaining the same was wrongful and without any lawful authority whatever. The position that whether the Stewarts consented or not was of no importance unless Bennett
Avery had some right to say whether the Stewarts should or should not consent, is not, we think, well founded; for unless the possession of the fund was held by Austin as mortgagee, it was without right, wrongful in itself, and Austin was liable to account for the same to Bennett Avery, and did not hold as a mortgagee in possession in any sense. Nor is it any answer to the position that Bennett Avery were the owners, that Austin was entitled to the possession as against the Stewarts; for as mortgagee he had no
right to such possession unless lawfully acquired, and no claim except as a mortgagee subject to the right of Bennett Avery to redeem upon payment of his claim.
The discussion thus far relates to the rights of a mortgagee to the rent of the land, and in this connection it may be remarked that the contract with the elevating association, or the lease as it is perhaps inaptly termed, constitutes but one agreement. By this contract the association received the grain delivered, and fixed and collected the charges. The occupancy continued in the owners, who performed the work required by the contract at a compensation agreed upon, and were entitled to the profits realized from the business. The association was merely an agency for the benefit of the owners, to conduct the business under a system which would produce uniformity of charges. The owners remained as occupants and operated the elevators, and could not be ejected or removed without a destruction of the entire agreement. They received or were entitled to the earnings or dividends not as rents, but as profits. The agreement was not a lease and the dividends were not rents. The rent of lands or buildings is such a sum as may be paid and realized from their occupation by tenants, and is fixed and certain, while profits are the result of trade, which is fluctuating and uncertain and dependent upon skill, care and the nature and amount of the business transacted. While then Austin might be liable to account for the profits of the business, which was carried on by himself on the premises and in part in connection with the association, for the reason that he took them unlawfully, he is not chargeable as mortgagee. He was not a mortgagee in possession in any legal aspect, if the principles laid down are sound, as we think is very clear.
The instrument under which the Stewarts claimed the dividends was executed simultaneously with the mortgage executed to them for the purpose of securing the mortgagees for the notes indorsed for the firm of Bennett Avery, and at the same time with a written order to the elevating association to pay over to the Stewarts the dividends. It was an assignment of these dividends under the contract or lease to secure the indorsements.
The clause which confers the rights of mortgagees in possession, and the right to receive the rents and profits, does not necessarily make them such mortgagees. It simply provides that they shall have the same rights as a mortgagee in possession would have to receive and apply the rents and profits of land to the payment of older liens, and that the dividends, although not rents, shall be, for the purposes named, so regarded. The Stewarts never took possession, and their right to the dividends was by virtue of the assignment, and not as mortgagees in possession. They only derived title to them under an express contract, and not otherwise. They had indorsed the notes of Bennett Avery for a large amount, and the mortgage was given as security and as collateral. An assignment of the receipts which were to accrue from the contract with the elevating company was executed. They were not to be let into possession, although, as we have seen, their rights were to be the same as to the dividends as if they were mortgagees in possession. They in fact never had possession. The assignment separated the rents or dividends from the reversion and the title, and they could have parted with them for a consideration. They were held in trust for the payment of the debt, and the Stewarts could have discharged the mortgage without the debt, retaining the assignment as security. The principle is well established that a lessor or owner of land may assign the rent and the covenant to pay rent without parting with the reversion, or with the reversion, reserving the rent and covenant to payment. (Demarest v.Willard, 8 Cow. 206; Willard v. Tillman, 2 Hill, 274;Moffatt v. Smith, 4 N.Y. 126.)
Bennett Avery, by the instrument of October 21, 1869, assigned "all moneys or dividends which shall accrue to and belong to said elevators or the owners thereof," as collateral security for the payment of the promissory notes to be indorsed by the Stewarts, but retained their title to the reversion, which they subsequently mortgaged by the quit-claim deed to Austin. He had knowledge of the precise situation, and he only acquired the reversion subject to the assignment to the Stewarts.
The rents or dividends being thus disposed of, separate from the reversion, the assignment or pledge to the Stewarts as collateral to their claim created a trust which they were bound to discharge. By the terms of the assignment they were obligated to apply the moneys received to the payment of the debt, or of the prior incumbrances upon the property. According to a well-settled principle they were also bound to exercise reasonable diligence and care in preserving the fund, and could not waste or dispose of it without being accountable, and if lost, at least by reason of their gross negligence, they encountered the hazard of losing their debt. (Brandt on Suretyship, § 384; Wakeman v. Gowdy,
10 Bosw. 208; Barrow v. Rhinelander, 3 Johns. Ch. 615;Sellers v. Jones, 22 Penn. St. 423; Lee v. Baldwin,10 Ga. 208; Slevin v. Morion, 4 Ind. 425.) The Stewarts were obligated then to hold the collateral faithfully for the purposes for which it was assigned. They could not dispose of it for any other purpose than to carry out the trust, and had no right to separate it from the debt, to secure which it was assigned. (Merritt v. Bartholick, 36 N.Y. 44.)
The Stewarts never assented to the appropriation of the fund by Austin, and they resisted the arrangement he had made with the elevating association to obtain control over it. He failed in his effort to defend the foreclosure of Stewarts' mortgage and thus get that prior incumbrance out of the way, and under an arrangement to pay the Stewarts, took control of the decree and acquired title in himself. We think he could not thus acquire a hostile title, and he took the dividends under the assignment to the Stewarts as a collateral for the protection of the indorsements and as a trust of which the Stewarts were the trustees. (Moses v. Murgatroyd, 1 Johns. Ch. 129.)
Austin having thus obtained possession, the inquiry arises whether he could take possession of the fund and pervert it from its original purpose, without incurring any liability, or without being made accountable or chargeable with any obligation or trust under which it was originally created and held by the pledgees. We cannot resist the conclusion, from the circumstances attending the appropriation of the fund by
Austin, and the extraordinary means he employed to obtain possession of the same, that it did not become separated from the pledge for which it was originally assigned, and that it passed impressed with the trust and charged with the payment of the debt. And although Austin had acquired title under the foreclosure on account of the debt, secured by the mortgage to the Stewarts, he was liable to account, and being in law a wrong-doer, the trust followed the property which he had thus acquired. Equity will not tolerate a separation of the pledge from the debt, and they must stand together, and will force upon a wrong-doer the character of a trustee, and thus compel him to do justice. The rule is laid down in Perry on Trusts that "a person may become a trustee by construction, by intermeddling with and assuming the management of property without authority. Such persons are trustees de son tort, as persons who assume to deal with a deceased person's estate without authority are administrators de son tort. * * * If one enters upon an infant's lands and takes the rents and profits, he may be charged as guardian or trustee, and so if one takes personal property. * * * During the possession and management by such constructive trustees, they are subject to the same rules and remedies as other trustees." (See § 245, and cases cited in notes.) By attempting to control the fund assigned to the Stewarts, and intermeddling with the same, Austin became a trustee de sontort, and as such is liable to the same rule which applies to other trustees.
In Van Epps v. Van Epps (9 Paige, 237) a person who held a junior mortgage for the benefit of others attempted to purchase for himself the land mortgaged at a sale under the foreclosure of a prior mortgage; and it was held that the act of purchasing was inconsistent with his duty as a trustee to have the sale made at the highest price, while his private interest was to buy as low as he could, and that he could not purchase to the prejudice of the cestui que trust. In Fulton v. Whitney (66 N.Y. 548) the same principle is asserted, and it is said by RAPALLO, J., citing from Chancellor WALWORTH, in Van Epps v. Van Epps,supra: "The rule is not confined to trustees or
others who hold the legal title to the property to be sold, but applies universally to all who come within its principle, which is that no party can be permitted to purchase an interest in property, and hold it for his own benefit, where he has a duty to perform in relation to such property, which is inconsistent with the character of a purchaser on his own account." Within the doctrine stated, Austin's purchase operated and was for the benefit of Bennett Avery. He employed all the means at his command to obtain control of the dividends, procured a new contract with the elevating association, and obtained possession in the manner which has been indicated without any lawful right, and thus rendered himself liable to account for the full value of the property. He forced the Stewarts to foreclose, as we have seen, in order to maintain their rights, endeavored to get rid of their mortgage of $50,000, subject to which he took the deed, by a defense which utterly failed, and, after this attempt proved unavailing, bought the property at the foreclosure sale at a very low price. He acquired title after he had unlawfully obtained control of the dividends assigned as security for the amount of the Stewarts' debt. By his own act, and his assumption in seizing and converting the collateral to the debt, he became chargeable with a trust to protect and sacredly guard what he had appropriated, that it might answer the purpose of the trust, and if any thing remained, after the payment of the demand, it might revert to the debtors who had created the fund. His purchase, if lawful, would terminate the contract of Bennett Avery with the elevating association and destroy the trust as to the dividends. He could not do this as trustee of such rights. In any reasonable view which may be indulged in regard to the attitude of Austin, it cannot be inferred that he purchased otherwise than as trustee of the parties whose interest he represented. He was clearly such when he became possessed, by means of his contract with the association, of the right to the dividends, and his position, in this respect, could not be changed by a purchase at a sale made to pay the debt for which the fund was assigned, in pursuance of an arrangement between himself and the Stewarts, which secured
the payment of their demand. This arrangement was entered into after his defense to the foreclosure suit had proved abortive, and the Stewarts were secured by the payment of a large sum of money ($40,000) in advance, Austin taking control of the sale. Austin then bid off the property and took the title in his own name. This bid was not personal for himself, but for the benefit of the trustee he represented. He could not be a trustee before the sale and immediately afterward a stranger to the trust. A trustee cannot thus get rid of his obligations, discharge the trust and reap the advantages of a sale for himself individually.
It is but just to remark that it does not necessarily follow that he purchased and took the conveyance for the purpose of defrauding Bennett Avery. As trustee it may have been consistent with his duty to clear up the title and get rid of junior incumbrances. He had a right to purchase in this form, but he could not buy for his own benefit. It is against all ordinary presumptions to suppose that Austin, who had professed to act for the benefit of Bennett Avery, with a view of relieving them from the pecuniary embarrassment under which they labored, and to save their credit and reputation, and especially that of his own son-in-law, would convert and appropriate this property, which was very valuable, producing large dividends and abundantly ample to pay all debts within a reasonable time, to his own use; entirely wipe out the rights of the grantors by a purchase after a sale upon the foreclosure of a prior mortgage, and after exhausting his remedy against Mrs. Bennett by a foreclosure and sale of her separate interest, hold Bennett Avery upon their personal obligation — as he had a lawful right to do if his proceedings were fair and lawful, and he did not act in a fiduciary capacity — for the full amount of any deficiency unpaid on the loan. His death prevents any explanation personally, but a liberal interpretation of his conduct, and his declared purpose as proved upon the trial, would indicate that his intention was to protect and preserve the estate after the payment of the incumbrances for the benefit of its owners. His avowed object in
taking the deed was to relieve the owners from the difficulties and troubles which surrounded them. He said to Sherwood, who held a prior mortgage on the elevator property, that he would repay the loan in three years; and the proof shows that he was right in this respect, as it appears that up to July, 1874, he had received large amounts from the dividends, and probably sufficient for this purpose. He kept an accurate account of the profits received, for the purpose, as he declared, of knowing how to make a final settlement. He often said he wanted Bennett to come forward to settle up and redeem. He also received notes from Bennett Avery, out of the avails of which he paid the taxes upon the property. In view of these acts and declarations, with no avowal to the contrary, it is not unreasonable to suppose that he may have bid in the property to control it more completely and with no object of converting the same to his own use. The court found that he had received $35,000 for rents, income and profits during the season of 1870. This was applicable on the Stewarts' mortgage and the assignment of dividends made to secure the same, thus leaving but a small amount due thereon. And it may well be that he paid it in pursuance of the trust which was created by his assuming control over the dividends, and with the intention that it should be so regarded. Equity will infer a good rather than a bad intention, and that he used the fund which he received for a proper instead of a wrong purpose. and that he acquired title with no improper intention or object in view. But whether the acts of Austin may be regarded as wrongful in taking possession and converting the dividends, or as intended to preserve the fund for the benefit of those entitled to the same, he should be compelled to account for his proceedings as a trustee and to pay to the plaintiffs whatever remains after his debt is liquidated.
So far as Mrs. Bennett is concerned, the considerations presented apply with great force in her favor. She united in a mortgage of her separate estate to secure a debt of Bennett
Avery, for the payment of which she was not originally liable, and thus created a special fund which was placed in trust for
the payment of that debt. It is quite obvious that if Austin improperly appropriated that fund, he cannot use the debt which it was intended to secure to deprive her of her interest in the property. Had he allowed the accruing dividends to be applied on the Stewarts' mortgage, in accordance with the provision made for that purpose, and thus paid the same, as the testimony shows he agreed with them that he would do before he took possession, his rights, as well as those of the other parties, would have been cared for, Mrs. Bennett fully protected, and all would have been paid. By failing to carry out this arrangement, and by purchasing upon the foreclosure of the mortgage, and purchasing at the sale, he became liable to account for the fund. Austin, therefore, is not in a position to claim that he was not prevented from purchasing and holding under the foreclosure deed adversely to the obligations of a trustee created by his own act.
The fact that the debt was due is urged as a reason why Austin was entitled to possession as against every one but the Stewarts. Although it was nominally and strictly due, the testimony shows that it was intended to be paid out of the dividends, and three years were allowed for this. Austin gave as a reason to Sherwood, for asking a forbearance of three years to pay the mortgage of $34,000 held by him against the property, that in that time the business might pay so that they could repay the moneys advanced. As equity has converted the deed into a mortgage, the paroved evidence which leads to such a result will be considered in ascertaining the true meaning of the transaction. The contract being ascertained only by parol proof, equity will not permit it to be perverted by a false interpretation of its meaning. The whole matter is one of equitable cognizance, and the written deed which constitutes only a part of the entire transaction will not be permitted to be used in contravention of the real purposes of the parties and for the promotion of fraud and injustice. As such instrument, absolute on its face, is proved by parol to be only a security, equity will not allow it to be enforced except upon such conditions, as to time and circumstances, as are demanded
by good faith and as accord with the understanding and true intention of the parties.
The provision in the judgment of foreclosure, authorizing any party to bid at the sale, is relied upon by the appellant's counsel. Such a provision is common in all decrees in a foreclosure suit, and is usually inserted to enable the plaintiff more particularly to bid at the sale, or to avoid the effect of a supposed technical rule, that a party to the suit cannot be a purchaser under the decree therein without special permission. (Torrey v. Bank of Orleans, 9 Paige, 661.) It may very properly be inserted where a trustee is a party and it is desired that he should protect the estate, if necessary, from being sacrificed at a sale. It does not appear that this was not a proper provision in regard to the relationship which Austin occupied to the parties as trustee, although such relationship was not a subject of consideration. Be that as it may, the effect of such a provision was considered in Fulton v. Whitney
(66 N.Y. 548), and it was held that on a purchase at a foreclosure sale by one of the defendants who occupied trust relations where the decree contained the same provision, that the title acquired was subject to the trust and all its consequences. It follows, therefore, that Austin could obtain no advantage by reason of this provision in the judgment if, as we have seen, he was acting on behalf of Bennett Avery and was liable as trustee.
I think that there was no error in the decision of the court that there might be a redemption by the plaintiffs, or either of them, of the entire premises, which would include Avery's interest in the premises covered by the quit-claim deed. Avery refused to join the plaintiffs in seeking to redeem; and as he has not appeared in the case, the complaint must be taken against him as true. He paid nothing for the property, as is alleged in the complaint and admitted by his not interposing any answer, and equity demands that the plaintiffs should be entitled to redeem as against Avery.
It is insisted that it was error in the court to direct that in taking the account, Austin should be charged, and the plaintiffs, or one of them, credited, with the sum of $22,306.02 for
the balance unpaid of the purchase-money of one-third of the Bennett elevator. Without expressing any opinion as to the allowance of this claim, it is sufficient to say that since the argument of this case, the attorney for the respondents has sent a stipulation to be filed with the clerk, that so much of the decision of the court below as relates to this item may be vacated and reversed, without prejudice to the right of either party to have the same allowed or disallowed, as shall appear to be just in the accounting, and further proceedings to be had in the lower courts. There is no objection to a modification of the judgment in conformity with the stipulation, and it should be done accordingly.
Some other questions are presented which it is not necessary to discuss; and our conclusion is that the judgment of the General Term should be affirmed, with the modification contained in the stipulation referred to.
The views expressed in the opinion of RAPALLO, J., delivered since the foregoing opinion was read, in reference to the failure of the plaintiffs to defend the action brought by the Stewarts to foreclose their mortgage, meet with my full concurrence. As, however, the rights of the plaintiffs can be maintained upon the ground that Austin acted as trustee, in my opinion it is not important to consider that aspect of the case.
The judgment should be modified so that it be affirmed as to all thereof except the item of $22,306.02; and as to that item the judgment should be reversed and a trial as to the same ordered on the accounting, with costs to abide the event.