Barron v. Whiteside

This is an appeal from an order of Circuit Court No. 2, of Baltimore City, overruling exceptions to an auditor's account and report, and finally ratifying the account.

Two questions of law are presented:

1st. Where a trustee, under an assignment for the benefit of creditors, takes possession of mortgaged leasehold property, and collects rents therefrom, the mortgage being overdue at the date of the assignment — taxes, ground-rent, and interest being in arrear, and the mortgage security being insufficient, is he bound, on demand made, to apply rents so collected, to such taxes, ground-rent, and interest?

2nd. Where the mortgagee in such a case makes demand upon the trustee for possession of the property, and upon refusal thereof gives notice to the tenants not to pay rent to the trustee, is he entitled, upon application to the Court administering the trust, to the rents collected by the trustee — after the mortgagee's demand for possession?

Both these questions were by the Circuit Court determined in the negative.

The assignment was made by Wm. B. Whiteside to his brother, Geo. W. Whiteside, January 1st, 1898. Under it he took possession of three houses on Edmonson avenue, on each of which Mrs. Barron held an overdue mortgage for $1,000. There was also due on each of these houses

taxes for 1896 and 1897, amounting to ......   $108 51
Semi-annual ground-rent due Mch. 1st, '98 ..     37 75
Water-rent for 1897 ........................      7 18
_______
Total on each house ......................   $153 44
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Aggregating on the three houses ..........   $460 32

Mrs. Barron's demand for possession of the property was made February 21st, 1898, and between that date and June 30th, 1898, the trustee, as shown by his report, collected rents from these three houses amounting to $207.30. On refusal of possession, Mrs. Barron filed a petition in Circuit Court No. 2 in said trust estate, for a receiver to take possession of said houses, and collect the rents for her benefit as mortgagee, which application was refused without prejudice. The record does not disclose the ground of this refusal, but we presume the Court treated the trustee as a receiver, holding for the benefit of whomsoever in the end it should be found to concern, and liable to account accordingly. Mrs. Barron's notice to the tenants not to pay their rent to the trustee was given April 25th, 1898.

On February 23rd, 1898, she filed petitions under the consent-clause in her mortgages, and under decrees thus obtained, the three houses were sold June 3rd, 1898, the auditor's account showing a deficiency on each house of $417.64. On May 9th, 1898, she filed a petition in the trust estate, setting forth all the facts up to that date, and asking that the trustee be required to account to her for all rents collected from these three houses after her demand for possession, and to pay over to her the amount thereof (less a proper commission thereon) to be applied on said taxes, ground-rent and interest. The trustee answered this petition May 21st, 1898, not denying any of its averments, but setting up a negotiation between Mrs. Barron and himself for the conveyance to her of these three houses in settlement of her mortgages, which Mrs. Barron finally decided not to consummate, and also alleging that by reason of her delay in selling said houses under her decree, he was hindered and delayed in the execution of his trust, to the prejudice and loss of the general creditors; alleging that these three houses were worth as an investment to Mrs. Barron $1,400 each, and denying her right to demand possession of the property, or receipt of the rents thereof, except after foreclosure. The Court thereupon referred the matter to the auditor to state an account, and to award, or apply the rents as he deemed proper, subject to exception to his report. The auditor reported, without stating his reasons, that Mrs. Barron was not entitled as mortgagee to the rents, and he distributed the whole fund in the hands of the trustee, including the $207.30 collected as rents from these three houses, to the costs and commissions of the trustee, to interest on mortgages on two other houses on Fremont avenue, which he took as assignee, and to taxes, water-rent and ground-rent due thereon; to a judgment against Wm. B. Whiteside, and to a fee of $75.00 to the trustee's counsel for contesting Mrs. Barron's claim to these rents.

To this account of the auditor Mrs. Barron excepted, and the Court overruled the exceptions, and ratified the account; but as no opinion was filed we are not advised of the reasons which controlled the Court.

As to the first question: In each of Mrs. Barron's mortgages there was a provision that until default was made, the mortgagor might hold and possess the premises, and receive the rents and profits thereof, upon paying in the meantime, the ground-rent and all taxes on the premises; and there was an express covenant by the mortgagor, for himself and his assigns, to pay the same when legally demandable. This covenant runs with the land, and binds the appellee. Mayhew v. Hardesty, 8 Md. 495; Worthington v.Cooke, 52 Md. 309.

At the time the appellee took possession of these houses, the taxes for 1896 and 1897 upon each house were legally due and demandable, amounting together to $325.53, or more than the $207.30 collected as rents. In addition to this, the ground-rent of $37.50 upon each house fell due March 1st, 1898, while the trustee was in possession and was collecting these rents. An assignee for the benefit of creditors succeeds only to the rights of his assignor, and takes the property subject to all existing liens and equities. As expressed in Wright v. Wigton, 84 Pa. St. 163: "The assignee is the mere representative of the debtor, enjoying his rights only, and bound where he should be bound. Nor are the creditors, for whom he holds the property in trust, purchasers for value.They have no title to the property assigned. They acquire only the right to have enforced the duty undertaken by the assignees." In Burrill on Assignments, p. 489, it is laid down that "Real estate in the hands of an assignee is not exempt from the payment of taxes, whether assessed thereon before or after the assignment was made." See also Amer. and Eng. Ency. of Law, vol. 3, 2nd ed., p. 116, and cases there cited. In Wolff's Appeal, 106 Pa. St. 545, where land had been assigned for the benefit of creditors subject to incumbrances, it was said "the mere rent of the land in the hands of the assignee, solely the product of the land itself, should be applied on those prior liens which would be entitled to the proceeds of the land if sold."

In the present case, if the tax-collector and the owner of the ground-rent had filed petitions in the case asking that the trustee be required to apply the rent in his hands to keep down the taxes and ground-rent, we cannot doubt he should have been required to do so.

It appears from the record that the trustee sold the two Fremont avenue houses, which he held, for $415 above the mortgages thereon, and that he paid out of the total assets in his hands, for taxes, ground-rent, water-rent, and interest on the mortgages on these two Fremont avenue houses, $628.92, or $213.92 more than he received from their sale. In other words, he applied the $207.30, which he collected as rents from the three Edmonson avenue houses, to aid in paying the charges above-mentioned on the Fremont avenue houses, while paying no taxes, ground-rent, water-rent, or interest on mortgages on the Edmonson avenue houses. Mrs. Barron having been forced to pay these charges out of the proceeds of their sale by her, notwithstanding it resulted in a large deficiency on her mortgages, she was entitled to be subrogated to the rights of the State and city, and the owner of the ground-rent, against the trustee, as was decided in Orem v. Wrightson, 51 Md. 34, in the case of the sureties of a tax-collector who had paid the amount due the State by the collector, and in the present case the auditor's account should have recognized and enforced this right of subrogation.

We think the Court was in error also in denying the mortgagee's rights to the rents claimed by her, and though not necessary to the decision of the case, since the taxes and ground-rent which we have said should be allowed, exceed the rents of the houses, we regard the matter as of sufficient future importance to warrant its determination now.

It is the settled law of this State that upon default the mortgagee is entitled to possession. It was so held in Jamieson v. Bruce, 6 G. J. 72, and in the recent case of Richardson v. Balt. and Del. Bay R.R., ante, p. 126, it was observed that this Court and its predecessors have followed more strictly the common law doctrine as to the rights of mortagor and mortagee, than most of the Courts of the country, though it was there held there was no reason why the right to possession cannot be continued in the mortgagor, even after default, by agreement ofthe parties. In State v. Brown, 73 Md. 512, the Court said: "By such default the mortgagees have the right to foreclose, to ask for the appointment of receivers, and to enter and take possession of the mortgaged property. These are remedies, to which, in the absence of covenants to the contrary, the mortgagee is entitled upon the default of the mortgagor." He may pursue all his remedies at once, and Acts of Assembly providing for sales under decrees or powers, are cumulative and concurrent remedies, and do not abrogate any pre-existing mode of relief. Andrews v.Scotton, 2 Bland, 666.

No authority, satisfactory to this Court, can be produced for the unqualified proposition of the appellee, "that the mortagor can sell or lease the property and dispose of the rents and profits thereof, until after foreclosure and sale," and that, "it is only after a sale under a decree, that the mortgagor is wholly divested of title, and consequently of the rights ofpossession." This is only true where the mortgagee relies exclusively upon decree for sale or foreclosure, and has not resorted, in addition, to the pre-existing remedies to obtain possession and to receive the rents. CHANCELLOR KENT accurately stated the doctrine as follows: "The mortgagor has a right to lease, sell, and in every respect to deal with the mortgaged premises as owner, so long as he is permitted to remain inpossession." It is not merely actual possession which controls the perception by the mortgagor of the rents and profits, after default, but the right to the possession, and hence this Court said in Chelton v. Green, 65 Md. 277: "The rents and profits were not pledged, so long as the mortgagor was entitled to the possession." And with like careful discrimination the Supreme Court of the U.S. said in Dow v. Memphis and Little RockR.R., 124 U.S. 652, that "the mortagor is not bound to account to the mortgagee for earnings, while the property is in his possession, until a demand made therefor or for a surrender ofpossession under the mortgage." And in Freedman Co. v.Shepherd, 127 U.S. 502, the rule was said to be that, "the mortgagee was not entitled to the rents and profits of the mortgaged premises, until he takes actual possession, or until possession is taken in his behalf by a receiver, or until inproper form he demands, and is refused, possession." Here demand was duly made for possession upon the trustee, and was refused, application was made for a receiver, and the petition was dismissed without prejudice, evidently, only because, as was said by CHIEF JUSTICE WAITE in a similar case (In re Bennett, 12 Natl. Bankruptcy Register, 265), there was no necessity for the appointment of a receiver, because in legal effect the assignees already occupied that position. They were acting for the benefit of whom it might concern. In order to put an end to the authority of a mortagor to collect the rents, it is only necessary for the mortgagee to manifest his intention to do so. For this purpose slight acts will be deemed sufficient, and in Boyce v. Boyce, 6 Rich. 302, where, as here, the mortaged property was in Court, a claim for the rents made to the Court by a party to the suit in the progress of the cause, was all that was required. As the Court has the property and the parties within its jurisdiction, it has the power to adjudicate upon all conflicting claims." In Teal v. Walker,111 U.S. 249, the Court said: "The American cases sustain the rule that so long as the mortgagor is allowed to remain in possession, he is entitled to receive and apply to his own use the income and profits of the mortgaged estate; and although the mortagee may have the right to take possession upon condition broken, if he does not exercise the right, he cannot claim the rents. If he wishes to receive the rents, he must take means to obtain the possession." This is the doctrine held in Jones onMortgages, secs. 670 and 771, relied on by the appellee to sustain his proposition, to which we have referred; and it is the doctrine declared in Howell v. Ripley, 10 Paige, 43, andAstor v. Turner, 11 Paige, 337, also relied on by the appellee for the same purpose. Nor is there anything in Lannay'scase, 30 Md. 550, cited by him, on which he can sustain his contention.

In the case at bar, Mrs. Barron took every means in her power to obtain these rents. She demanded possession of the premises, and it was refused by the trustee; she demanded payment of the rents by the tenants to her, and her notice and demand was ignored; she asked for the appointment of a receiver, and this was refused without prejudice, because, as we have seen, the trustee already in legal effect occupied that position.

In Clarke v. Abbott, 1 Md. Ch 478, following Lord Mansfield (Moss v. Gallimore, 1 Douglas, 279), it was held, that a mortgagee, after notice to tenants in possession under leases made either before or after the mortgage, is entitled to the rents in arrear at the time of the notice, as well as to those which accrue afterwards. In Pope v. Biggs, 9 Barb. C. 252, where such rents, after notice given, were received by the agent of the mortgagor after his bankruptcy, and were not actually paid over, he was declared to hold them for the persons entitled by law to receive them, and the mortgagees were declared thus entitled; and this case was followed in Crosby v.Harlow, 21 Maine, 500. In Bennett's case, supra, there had been no demand previous to the filing of the petition in the case, and the mortgagee was therefore held entitled only to such rents as thereafter accrued. But here, demand for possession was made on the trustee February 21st, 1898, and the mortgagee would be entitled to rents accruing after that date. It appears from the record that $40 was collected from the tenants by the trustee prior to that date, and as to that sum "his possession was in no sense that of the mortgagee. It was that of a mortgagor with the assent of the mortgagee;" but this is not material to the result, because we have already said the trustee was bound to apply the whole of the rents in his hands, $207.30, to keep down taxes and ground-rent, which exceeded that sum.

In Ober Sons v. Keating, Trustee, 77 Md. 100, Miss Davis had in Sept., 1890, purchased of Ober Sons 20 tons of fertilizer, agreeing to secure payment by a chattel mortgage on the wheat upon which it was to be applied. Before executing any mortgage, in Dec., 1890, she made an assignment for the benefit of her creditors to Keating, who came into possession of the wheat crop, and it was held by this Court that the mortgage must be considered as made, that her assignee stood in no better position than she would stand, and that Ober Sons being entitled to a lien upon the crop in the hands of the assignee, they were entitled to so much of the proceeds of sale of the wheat as was necessary to pay their claim.

Mrs. Barron, by virtue of her demand for possession upon the trustee, had as valid a lien upon the rents of the mortgaged premises thereafter received by him, as she had by virtue of her mortgage upon the premises themselves. The right to this lien was an inherent part of the security taken when the mortgage was delivered, and an assignee cannot deprive a secured creditor of the benefit of his security.

In Duval v. Becker, 81 Md. 537, this Court held, that a mortgagor cannot before default, by his own act, and without consent of the mortgagee, abandon an easement appurtenant to the estate and expressly included in the mortgage, so as to bind the mortgagee, or prevent the easement from passing to the purchaser upon a foreclosure sale. In the course of the opinion CHIEF JUDGE McSHERRY said, in alluding to the equity doctrine that a mortgage is a mere security for the debt, and only a chattel interest: "But whatever his relation to the property may be as to third persons, the doctrine that he is regarded as the real owner of the mortgaged property, is subject to the express qualification that the mortgagee is not included. The doctrine applies exceptas against the mortgagee. * * * As between the mortgagor and mortgagee, therefore, the doctrine that the mortgagor is regarded as the real owner, does not, and in view of the quality ofestate conveyed by the mortgage, cannot obtain, to the extent of permitting the mortgagor, by his own act, to exempt from the lien and operation of the mortgage, any part of the mortgaged property, * * or to force the mortgagee to accept as security for payment of the debt, anything less than the entire estate originally granted." The principle thus laid down, though announced upon a different state of facts, is applicable here. The mortgagee can no more be shorn by the act of the mortgagor, of his right upon demand and notice to subject the rents of the mortgaged premises to the payment of his debt, than he can be deprived of an easement appurtenant to the estate, and comprising, it may be, a most valuable part of his security.

The negotiations for the surrender and conveyance of the mortgaged premises, to the mortgagee, were founded upon no new consideration, the terms were not even definitely ascertained, and the attempt resulted in no actual agreement. They can interpose no obstacle, therefore, to the right of the mortgagee to demand these rents.

Nor can her right be denied because she did not immediately proceed to sell the three houses under her decree of February 23rd, 1898. After making allowance for thirty days usually given in such decrees for bringing the money into Court and three weeks for advertisement, sale could not have been expected earlier than the middle of April. It was made June 3rd. This delay of five weeks cannot be laid hold of to defeat a clear legal right, especially as there is nothing to show that the other creditors have suffered thereby.

It follows from what we have said, that the order of the Court below must be reversed and the cause remanded for further proceedings in conformity with this opinion.

Order reversed with costs above and below, and causeremanded.

(Decided June 21st, 1899).