Terre Haute & L. Ry. Co. v. Harrison

96 F. 907, 37 C.C.A. 615, 1899 U.S. App. LEXIS 2552

• Court: Court of Appeals for the Seventh Circuit
• Decided: October 6, 1899
• Docket: No. 577
• Status: Published

Opinion

SEAMAN, District Judge,

after the foregoing statement, delivered the opinion of the court.

The general doctrine is well settled that there is no warranty in judicial sales; that the maxim caveat emptor applies, and the purchaser takes the property without recourse for tax liens or other in-cumbrances or defects in the title. The Monte Allegre, 9 Wheat. 616, 648; Osterberg v. Trust Co., 93 U. S. 424, 428; U. S. v. Duncan, 4 McLean, 607, Fed. Cas. No. 15,003; Fidelity Insurance, Trust & Safe-Deposit Co. v. Roanoke Iron Co., 84 Fed. 744; Ror. Jud. Sales, §§ 458, 459. In the argument oí counsel on behalf of the appellant this rule is recognized, but with the assertion that it operates only to forbid the purchaser “from asking that prior liens be paid out of the proceeds of the property sold.” Ho authority is cited for so limiting its effect, and we are of opinion that the rule applies with equal force 1:o any fu.nd which is in the registry of the court or in the hands of the receiver as the earnings or other production of the property involved. Exception to this general rule undoubtedly arises in equity' in the following instances: First, where the decree or order for the sale expressly provides for discharging liens or other claims against the property out of the proceeds or other funds coming into court, or where the proceedings or provisions are otherwise inconsistent with such rule; and, second, where there is frand, concealment , or unfair dealing in the proceedings , which entitle the purchaser to equitable relief.

The claims in controversy are: (1) For current interest accruing on the prior mortgage, to which the sale was subjected; and (2) for taxes assessed against tbe property sold for the year 1898, concurrent with the sale. Heither interest installment nor taxes was due and payable when the sale was perfected and possession passed to the purchaser, and both claims are clearly barred by tbe rule stated, unless circumstances are shown which create an exception, either on one of the grounds above mentioned or within well-recognized principles of equity. Are sufficient grounds presented in this case to exempt the purchaser front such rule through the several orders of court, receivership, or pre-existing leases? The contention is, on behalf of the appellant, that the Logansport fund stands in the registry of the court as a special fund which was set apart and dedicated for the payment primarily of the charges in question, both by the leases made by the mortgagor company and by tbe orders of the court entered in the course of the proceedings; and that the order of September 26, 1898, made pending the sale, not only reserved the fund from passing to the purchaser, but was, in effect, an assurance to him. that it should be applied in liquida-lion of these charges. Manifestly, the last-mentioned order bears no such interprefation when considered alone. It recites “that a question has arisen whether the fund in the hands of the receiver, known as the ‘Logansport Fund,’ would pass to the purchaser at the foreclosure sale under the decree,” and then provides:

“Now, therefore, to avoid- any such question, it is by the court ordered that said fund shall not so pass, but shall be reserved and held by the receiver for disposition under the orders of the court, first, to discharge any liabilities against the samo which may he adjudged prior in equity to the bonds and interest; the balance (o go, in case of deficiency in the proceeds of the- sale, to pay the bonds and interest in full, to liquidate such deficiency, or, if there is no such deficiency, then said fund, or so much thereof as may remain, to be paid to the parly next in equity under the order of the court. And the master is directed to read this order in connection with the notice of sale before receiving any bids at the foreclosure sale.”

Tliat liens were accruing for current taxes and for interest on the prior mortgage were patent facts, presumably within the knowledge of all parties in interest; but neither item is so referred to in the petition for the order, nor named in the order. No claim is made that payment'of either out of the fund was suggested or otherwise assured at the sale or in negotiations leading up to it; and respecting the interest the notice of sale informs the purchaser that it will he made subject to the first mortgage, “with the unpaid interest thereon at six per cent, per annum since July 1, 1898.”. The ground for equitable relief must appear, therefore, in the previous orders of transactions, and the appellant’s' claim in that regard is thus stated in the argument of counsel: The purchaser “was distinctly advised by the order of September 26, 1898, that there was a fund in court which would be applied to discharge any liabilities against the same which might be adjudged prior in equity to the extension mortgage bonds; and he was also advised by the former orders of the court that taxes and interest on the first mortgage bonds had always been recognized and enforced as claims on that fund ‘prior in equity’ to the extension mortgage bonds.” It is true that the primary order of the court appointing the receiver of the several lines of railroad distinctly provided that separate accounts should be kept by him “of the gross earnings derived from the operation” of each, and that the specified percentages of such earnings be “set apart and held -by the receiver as a separate and distinct fund,” to be paid out or applied only on special orders of the court; and that the earnings derived from the.lines of the mortgagor company in question were so separated, and 25 per cent, thereof set apart as directed by said order, and constitutes the Lo-gansport fund. And it is equally true that taxes hnd interest on the first mortgage were paid out of such fund from'time to time as each accrued, upon further orders of the court. On these premises, however, no equity can be founded in favor of the purchaser at the sale to' reimburse him for the payment of such liens which accrued against the property after the sale. The fund was thus set apart by the primary order from the gross earnings of the road, on the assumption that it represented their net product after meeting the expenses of operation, and its status as earnings was distinctly preserved to enable the court to make final disposition when the rights of the parties were ascertained. For the purposes of the order, the ratio adopted was the same fixed in the operating leases, but there was clearly no ratification or adoption of the leases or any of their covenants. The Logansport fund, therefore, was exclusively net earnings derived from the operation of the property by the receiver, and the general rule in such cases required its application to pay both taxes and interest on the prior mortgage as they accrued in the course of the receivership. The subsequent orders so directing payments to be made were usual in character, and have no bearing beyond the general rule referred to; and no order or course of action which appears in the record in terms or in purpose supports either view for which the appellant contends, namely, that they import (1) an adoption of the leases, or (2). an assurance to> the purchaser that liens not accrued would finally be paid out of the fund, or declare (8) such liens to be “prior in equity” to the second mortgage. Nor can the claim be founded oh tbe provision in tbe pre-existing leases for payment of taxes and interest by tbe lessee dining tbe term of tbe lessor’s share of tbe gross earnings. Aside from the view above indicated that these leases were not adopted by the action of the court, and were, in effect, displaced by tbe receivership, tbe appellant obtained no interest in such leases through the purchase at foreclosure sale to authorize their enforcement for its benefit; and, however effective the covenants may be, either between the parties, or in favor of mortgagees for interest, or of the public for taxes, they cannot operate* to relieve the appellant from a burden which is imposed by la w upon the purchaser at judicial sale.

It then remains to ascertain whether an equity in the fund is otherwise-established in favor of the purchaser through the nature of the liens and their inception during the possession by the receiver. The sale was made November 18, 1898, was duly confirmed, and possession was delivered to the appellant, taking effect from midnight, November 8011i. The last installment of interest on the first mortgage bonds matured July 1, 1898, and was duly paid by the receiver; and the next installment — being the one in controversy— was not payable at the dale of sale, but fell due January 1, 1899, one month after title and possession were acquired by the purchaser. The taxes in question were assessed for the year 1898, and, although the statute of Indiana declared the taxes to constitute a lien against the property from April 1st, it further provided (section 8566, Burns’ Rev. St. 1894-; section 6415, Horner’s Rev. St. 1897) for delivery of (he tax roll or “duplicate” to the treasurer for collection “on or before the last day of December in each year”: and it is asserted, and not disputed, that the practice is uniform there-, under for collections to commence after the ensuing 1st of January and extend uniil March or April. No proof is offered as to the time of delivery for collection in this instance, and it cannot be presumed that delivery was before the sale, but rather that the taxes became actually payable a month later, as contemplated by the statute. On this state* of facts the ruling in Osterberg v. Trust Co., 93 U. & 424, 428, is controlling. There the purchaser applied for relief from the payment of taxes under the following circumstances: Railroad property in the state of Illinois was in the hands of a receiver, and sold on mortgage foreclosure August 16, 1875. By the statute of Illinois the taxes for the year 1875 attached as a lien from May 1, 1875, but the warrants for collection were not to he deli vered until “within the first ten days of December.” The amount of his hid was not entirely paid by the purchaser until April 1, 1876, and the sale was not completed and confirmed until May 27, 1876. Meantime, up to December 9th, when the purchaser was let into possession under a provisional order of the court, the receiver retained possession, and had the earnings of the road, as directed by the order of tin* court. But the fact that the judicial sale antedated the maturing of the tax claim was held to conclude the purchaser, and the postponement of final payment of the purchase money and of actual transfer of title and possession until after the taxes fell due. even in conjunction Avith retention by the receiver of all the ' earnings during the interim, — all being at the instance of the purchaser, — were ineffectual to relieve the purchaser from payment of the taxes so accruing after the bid was received. Of the tax lien it is there held:

“The taxes for 1875 were, at the date of the decree, a subsisting lien upon the mortgaged property, and he [the purchaser] had not only constructive, but actual, notice of its existence. It is true that the title of a purchaser at a .-judicial sale under a decree of foreclosure takes effect by relation to the date of the mortgage, and defeats any subsequent lien or incumbrance. A lien for taxes does not, however, stand upon the footing of an ordinary incumbrance, and is not displaced by a sale under a pre-existing judgment or decree, unless otherwise directed by statute. It attaches to the res without regard to the individual ownership, and when it is enforced by sale pursuant to the statute prescribing the mode of assessing and collecting them the purchaser takes a valid and unimpeachable title. But if the doctrine were otherwise, and if the doctrine of caveat emptor had no application to this case, we are not aware of any principle which would justify withholding from the mortgagee any of the moneys derived from the sale of the mortgaged property with a view to the application of them to satisfy such lien. This is not a controversy between incumbrancers.”

And in reference to tbe purchaser’s claim of an equity in the earnings thus coming to the hands of the receiver it is further said:

“He has no rightful claim to any part of the earnings of the road whilst it remained in the possession of the receiver, nor is he in a position to question the orders of the court as to the application of those earnings.”

That case distinctly rules against the appellant’s claim for the taxes of 1898, and the doctrine there stated is equally applicable to the lien for interest. We are of opinion that no equity appears for paying either claim out of the Logansport fund, and the decree accordingly is affirmed.