Cargill v. Thompson ( 1894 )

Gilrillan, C. J.

Thompson being the owner of real estate on which was a water power, on Boot river, on April 27,1872, he and his wife executed a lease to E. Vining White and Cyrus A. White of the exclusive right to use from said water power, for twenty years from that date, 7,505 cubic feet of water per minute, at a six-foot head of water, at stipulated annual rent. On April 8, 1879, they executed to the same parties another lease, of the right to use for twenty years from the date of the first lease an additional quantity of water, sufficient to make, including the 7,505 feet, 10,000 cubic feet per minute under an eight-foot head, or its equivalent under such head as they may have; the head to be ascertained by measuring from the tail race of the mill, at its lowest stage of water, to the water in the canal immediately above the flume or flumes of the mill. As held when the case was here before 50 Minn. 211, (52 N. W. 644), the two are to be construed as one lease, the latter being supplementary to the former. The leases were assigned September 22, 1881, by the lessees to the plaintiffs. March 4, 1886, Thompson being still the owner of the property, and being indebted to the defendant Sprague in the sum of $16,840.26, there were executed three instruments,-— one a deed absolute in form, by Thompson and wife, conveying to Sprague several pieces of real estate, including the above-mentioned water power, and including “the right to receive, collect, and hold all rentals from any and all persons for the use of said property, or the water power thereon;” another, an instrument under seal, executed by Sprague, reciting the above conveyance, and also that the parties have executed another contract, of the same date, and that the conveyance was for the purpose of securing the performance on the part of Thompson of such other contract, and covenanting, upon its performance, to reconvey to said Thompson the said real estate and water power, or so much thereof as should not have been conveyed, with his written consent, prior to the performance of said contract. This instrument was recorded on the 15th, and the deed on the 14th, May, 1886. The third instrument was the contract referred to in the second, and was executed in duplicate by Thompson and Sprague. It contained a covenant by Sprague to reconvey to Thompson, on full performance of the conditions specified on his part, all the real estate, subject to any changes in the ownership which might result under the provisions of the contract; to convey any part of the premises, or to lease any part of the water power, pursuant to agreement to sell or lease, which Thompson might sell or lease, — any rent on a lease not to be below a specified rate, — with the condition that, if Sprague should deem the price in any such contract of sale inadequate, he might, at his option, take himself the tract agreed to he sold at such price, the amount of the price to he applied upon the principal of the debt secured; all proceeds of sales or leases to be paid to Sprague. Thompson also covenanted to pay the debt of $16,840.26 on or before ten years from the date, with interest at the rate of six per cent, per annum, payable annually; to pay all taxes; to keep the buildings insured, — the loss, if any, payable to Sprague, to the extent o'f his interest. On failure of Thompson to pay the taxes, or keep the buildings insured, Sprague was to have the right to do so. Thompson also covenanted to keep the premises and water power in good condition and repair, ordinary decay, wear, and tear, and injury from unavoidable accident, excepted. It was agreed that, Thompson performing the conditions of the contract, he should have the right to the possession and enjoyment of the premises, except the rental on any leases then or thereafter in force; and, as to those, Sprague was to receive and apply them — First, in payment of taxes, and repayment to Sprague of all sums paid by him for taxes and insurance, with interest from dates of payment; second, to payment of interest on the principal debt; third, any surplus remaining after the above to be held by Sprague as a reserve fund to be used in making repairs necessary from decay, wear, and tear, and unavoidable accident, to be made under the direction of Thompson; fourth, any sum remaining to be applied at the end of each second year in payment of the principal debt; Thompson to be allowed interest on any such surplus from the date of its receipt to the end of each second year at the rate of 6 per cent, per annum.

It was agreed that in case of failure by Thompson to pay the taxes or the interest on the debt within one year after due, or to perform the other conditions of the contract, or to pay the principal sum when due, Sprague might declare the contract closed, and sell the premises at public vendue, after a notice of sixty-days publication in one or more newspapers, and on such sale to convey the premises free from any right of redemption; the proceeds of sale to be applied in payment of costs of sale, of the debt, with interest, and all sums .advanced for taxes, insurance, or otherwise; the surplus, if any, to be paid to Thompson, his heirs or assigns.

The plaintiffs insist these instruments evidence a conditional sale. and not a mortgage. There can, however, he no serious question that the transaction was a mortgage. Though a conveyance be on its face absolute and indefeasible, it is a mortgage, if made as security for performance of something by the grantor, as for the payment of an existing debt. The purpose of this conveyance, as shown by all the instruments, was to secure payment of the debt from Thompson to Sprague. All other covenants, conditions, and stipulations were manifestly only in aid of that purpose; so that had the debt and such sums as, for the purpose of the security, became part of it, been at any time paid, that would have defeated the conveyance, certainly so far as Sprague had not, under the power contained in the instruments, conveyed or leased on sales or leases agreed on by Thompson.

The plaintiffs basing their claim to recover against Sprague on the proposition that he is an assignee of Thompson, so as to be liable on his covenants running with the land, must take the entire transaction just as it was between the parties to it. That the conveyance was, and the instrument setting forth the conditions on performance of which it should be defeated was not, recorded, was no concern of respondents, because their rights in the property are antecedent to the conveyance. They claim no rights under or through or against it, and there can be no estoppel in their favor as to the character of the conveyance, for they have not rightfully done anything in reliance on it as an absolute conveyance.

As mortgagee, merely, Sprague was not liable to the plaintiffs upon the covenants in their lease. The mortgage created no privity between him and them. It passed no estate in the land, but gave only a lien. This has been decided so frequently by this court that we need not cite the cases.

Respondents claim, however, it is different with a mortgagee in possession; that he has such an estate as makes him liable upon the covenants running with the land.

The contract between Thompson and Sprague reserves to the former the right to the possession and enjoyment of the premises, except the rental arising from any lease of the same. The assignment by way of mortgage of such rentals to Sprague, his collecting the same, and his entry upon the premises from time to time to attend to or make the repairs covenanted for in the contract, are the only things that could go to characterize him as a mortgagee in possession. But we will assume that he was such. ,

What will constitute a mortgagee in possession was fully considered in Rogers v. Benton, 39 Minn. 39, (38 N. W. 765,) in which it was said, “The mortgagee must be in possession by reason of the assent or agreement of the mortgagor or his assigns that he have the possession under the mortgage, and because of it.” But whether the mortgagee’s relations to the title are in any way changed by his being in possession is a question we have never had before us. Upon this question, in the states where the rule is, as in this state, that the mortgage is only a security, — notably, in New York and California, — the courts differ. The courts in New York hold that although, when out of possession, both before and after default, the mortgagee has only a lien, when he is. in possession he has an estate, and is liable on the covenants running with the land (Astor v. Hoyt, 5 Wend. 603; Moffatt v. Smith, 4 N. Y. 126), the court in the former case saying: “When the mortgagee takes possession, he then has all the right, title, and interest of the mortgagor. Then he acquires, and the mortgagor loses, an estate liable to be sold on execution.” The decisions in that state merely state that to. be the case, but contain no reasoning to show how the result is brought about.

In California it is held that the interest of a mortgagee in possession is the same as that of one out of possession {Johnson v. Sherman, 15 Cal. 287; Dutton v. Warschauer, 21 Cal. 609), the court in the former case saying: “Nor can possession under the mortgage affect the nature of the mortgagee’s interest. It does not abridge or enlarge his interest, or convert what was previously a security into a seisin of the freehold. It does not change the relation of creditor and debtor, or impair the estate of the mortgagor, but leaves the rights and interests of the parties exactly as they existed previously.”

We think the decisions of the California court in accordance with the better reason. We do not see how the mere act of the parties, of going into possession, and consenting to or acquiescing in it, can have the effect to pass the mortgagor’s estate to the mortgagee. The latter, being let into possession under and because of the mortgage, is in only for the purpose of it, to wit, for security. There can be no question but that he must account upon the mortgage debt for the net receipts because of the possession, nor but that, the debt being paid, his right to retain possession will, without any other act or ceremony, cease. The fact that the possession is added, as a further security, to the security which the mortgage of the title gives him, cannot change the lien of the mortgage into an estate. The right of the mortgagee remains a mere lien, though the power to enforce it against the profits issuing from the land is placed in his hands by letting him into possession. If an estate arises in the mortgagee, it is real estate, though the debt, of which it is only an incident, is personalty. Can the debt and the right of possession be severed? May the mortgagee assign the debt, as personalty, and retain the right of possession, as realty? In case of his death, will the estate go to the administrator, and the right of possession to the heirs? Or must both go to one, and to which of them?

An estate sufficient to have cast on it the burden of covenants running with the land will entitle the owner of it to the benefit of similar covenants, and e converso. In this state a mortgagee cannot, before foreclosure, maintain an action on the covenants in the deed to the mortgagor, though running with the land, because he is not the owner of the land with which such covenants run. We suspect the courts in New York would hesitate to hold that as soon as he gets possession he may sue upon or may release such covenants, which he certainly can do, if he has an estate that makes him the owner of them. We conclude that a mortgagee in possession is not subject to the burdens, nor entitled to the benefits, of covenants running with the land.

What was the effect of Thompson'vesting in Sprague, by way of security or mortgage, “the right to receive, collect, and hold all rentals” for the use of the property, including the rentals upon the lease assigned by White Bros, to plaintiffs?

We may assume that an absolute assignment of the rents for the entire term of the lease is in effect an assignment by the lessor of the lease itself, bringing the assignee in privity with the lessee; putting him, for the purposes and term of the lease, in the place of the lessor; subjecting him to the burdens of the covenants on the part of the lessor, and entitling him to the benefits of the covenants on the part of the lessee enforceable during the term. In such case the assignee is the owner of the rents, and he may do what he will with them, — collect them, accept something else in lieu of them, or release them; and he may, doubtless, accept a surrender of the lessee, except as to those covenants of the lease intended for the benefit of the estate after the term shall expire.

But an assignee of rents by way of mortgage can do none of those things, except to receive the rents, and apply them for the benefit of the lessor, towards satisfaction of his debt. His relation to them is the same as that of the mortgagee of the land towards the legal title, — that of one holding a lien; and, if he can maintain in his own name a suit to collect them, it must be as a trustee. He is not, therefore, an assignee, so as to be liable on the covenants in the lease.

There was no cause of action against Sprague. That, however, does not affect the defendant Thompson. There are various assignments of error which do affect him. There is one which is well founded. The plaintiffs called as a witness a hydraulic engineer, and were permitted to read to him extracts from the lease, — in one instance, as much as two folios, — and to ask him his judgment as to the proper meaning of the clauses; in other words, asked him to construe them. It was not for any witness, but was for the court, to construe them, in connection with the entire lease. If there were “words of art” used, it was proper for an expert witness to state the meaning of such words in the art. Such, for instance, is, in this lease, the term “head of water.” As that is a technical term in hydraulics, an expert might give its meaning. And as the clause in the lease, “head of not less than eight feet, measuring from the tail race of said mill, at its lowest stage of water,” suggests the question whether this means the lowest operating stage or stage when the water is being furnished to the mill, and it is being-operated, or means the stage when the mill is at rest, and but little water is running through the tail race, it was competent for an expert to state the rule, if there were any, for measuring to ascertain the head of water, — whether to measure from the surface of the water in the tail race when the mill is in operation, or to measure from the surface of the-water when the mill is at rest. And it was for the court, with such aids, to construe the clause.

Had the construction of the clauses given by the witness been die one which the court would have been bound to put on them.', admitting the witness' construction would have been error without prejudice. The construction of this witness required the measurement to .ascertain the head to be taken from the surface of the water in the tail race at its lowest stage when the mill was in operation, and the volume of water to be furnished was passing-through. Another witness — a hydraulic engineer — stated (and it ought not to have been permitted, had it been objected to) his understanding of the clause, “lowest stage of water,” to be the-lowest stage at which it is ever found. And he stated facts important and proper for the court to consider in construing the clauses, which were that measuring from the surface of the water at the lowest stage ever found would give a fixed, or nearly fixed, standard for measuring, while measuring from the surface when the mill is operating would give a variable or shifting standard. Whether the court considered and passed upon the testimony as to these facts, and other testimony bearing on the conditions and circumstances of flip subject-matter of the clause, or merely adopted the testimony of the first of these expert witnesses, as establishing its proper construction, we are unable to sa.y, and cannot, therefore, say that admitting his opinion, did not prejudice.

And, prima facie, construed by the words alone, the clause means-the lowest stage of water at any time, and without reference to whether the mill was running or not, though that apparent meaning might be modified by evidence of the character we have above indicated as proper.

There are many other matters presented by appellants, and, in view of a second trial, we will consider such of them as we think likely to arise on such trial.

The appellants claim that as, by the terms of the leases, the water-was to be used in propelling the Crescent Mill, — a mill existing when they were executed, — and as at that time the capacity of that mill was such that it could be successfully operated at a head, say, of" six feet, plaintiffs cannot complain for a failure to furnish the excess above that. There is nothing in the claim. The covenant was not to furnish enough water to run the mill in its then capacity,, but was absolute, — to furnish 10,000 cubic feet per minute, at an eight-foot head, or its equivalent. Plaintiffs had an absolute right to that quantity of power, and had the right to enlarge the capacity of their mill till they could use all of it. Of course, if, at any time when the stipulated amount was not furnished, they could not have used it, had it been furnished, that would have gone to the measure of damages.

The question of the proper measure of damages is raised.

In the first place, the appellants contend that the rule of damages, or the redress of the lessees, in ease of failure to furnish the stipulated quantity of water, is fixed by the lease. The question on demurrer to the complaint, of which the leases are made a part, was passed on when the case was here before. 50 Minn. 211, (52 N. W. 644.) It was held that the clause in the lease limiting the lessees’ remedy to an abatement of rent in case there should not at any time, from any cause whatever, be a sufficient quantity of water to supply the stipulated amount, referred to a case of shortage of water when the dam was maintained at a proper height, and it and its adjuncts kept in the agreed state of repair, and free from obstructions. It follows from that construction of the lease that an action will lie for any damages caused by a failure to supply water through any neglect or omission of the lessor. The right to such damages would not depend on the good or bad faith of the lessor, but solely on his neglect or omission. Where a party to a contract is exposed lo injury by neglect of the other party to perform the covenants on his part, the injured party has no right to aggravate the damages, dther by affirmative acts, or by the neglect of ordinary care and reasonable precaution to avert or lessen the injury. We have found no case, however, which holds — and the proposition is unreasonable —that the duty of ordinary prudence to lessen the injury extends so far as to require of him to perform the covenants of the other party. Whether, in this particular case, ordinary prudence would have lessened the injury, and to what extent, and whether the party did what it required of him, are questions for the jury.

The principal question, however, on the matter of damages, arose on allowing profits that would have been made while the mill was, for want of water, unable to run. The court permitted the plaintiffs to prove that during that period they either had, or could have procured, wheat to keep the mill running to its full capacity, with 10,000 feet of water at an eight-foot head, or its equivalent; how many barrels of flour it could make at that capacity, and the profits on each barrel, — -and instructed the jury that they might allow such profits lost, as an item of damages.

Taking as the test of the right to recover such profits the second branch of the rule in Hadley v. Baxendale, 9 Exch. 341, that the injured party has the right to recover such damages “as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it,” now universally approved, the first question is, is it to be reasonably supposed that, when making these leases, both parties had it in contemplation that these profits would, in whole or in part, be lost to the lessees, as the probable result of a breach by the lessor of the covenant to furnish the stipulated quantity of power?

The lessees took the lease for the purpose of engaging in the business of manufacturing flour; the power was leased for that purpose; and both parties knew that if the power were not furnished the business would be suspended or interrupted, and the lessees would consequently be deprived of - such profits as might have been made in the business but for the suspension or interruption. And the loss of such profits must have been in contemplation of both, as the probable result of a breach of the covenant to furnish the power. To bring the case within the rule, it was not necessary they should have had in mind the amount of profits, or the extent of the loss from the breach. It was enough that they must have contemplated loss of profits as the result of a breach.

Within the rule stated, the damages sought to be recovered must not be remote, nor speculative, nor contingent, but direct, and shown with certainty to have been caused by the breach. An illustration of too remote damages would have been furnished, had plaintiffs claimed that, in consequence of not receiving the profits on their milling business, they lost profits of other enterprises, which they might have entered on with the profits of their milling business.

In respect to the profits of the business, their loss might appear to have been due to some other cause than failure to supply water to the mill. But, if not due to any other cause, their loss was sufficiently direct. Although the loss is direct, the amount must not be left to speculation or conjecture, but must be proved with reasonable certainty. Absolute certainty, however, is not required. Mississippi & Rum River Boom Co. v. Prince, 34 Minn. 71, (24 N. W. 344.)

But, profits lost being allowed as damages, no expenses of keeping and caring for the mill could be allowed, except sucli as were made necessary by the mill being idle, and as would not have accrued had the mill been running.

Order reversed.

Buck, J., absent, sick, took no part.