Landers-Morrison-Christenson Co. v. Ambassador Holding Co.

Taylor, C.

The Ambassador Holding Company, hereafter called holding company for brevity, was a corporation operated and managed by William A. Walters who held all the stock except the necessary qualifying shares issued to the two other officers. In 1922 the holding company purchased a tract of land at the intersection of Franklin avenue and Third avenue south in the city of Minneapolis upon which it erected a large apartment building at a cost of about $500,000. To finance its building project the holding company entered into a contract with the Federal Bond & Mortgage Company, a corporation located at Detroit, Michigan, and hereafter called the mortgage company for brevity, whereby the mortgage company agreed to procure a loan for the holding company of $400,000 to be evidenced by the coupon bonds of tbe holding company secured by a trust deed of tbe property. Tbe trust deed, running to tbe mortgage company as .trustee and Nathan M. Gross as cotrustee, was executed and placed on record on October 11, 1922. Tbe bonds were executed and ■delivered to tbe mortgage company, wbicb certified them as trustee and thereafter sold them and applied tbe proceeds in financing tbe project. A large number of mechanics’ liens were filed against tbe property. In this suit tbe lien claimants seek to foreclose their liens and ask to have them adjudged prior and superior to tbe trust deed. Tbe trustees interposed an answer and cross-bill in wbicb they set forth tbe trust deed and ask that it be adjudged prior and superior to tbe liens and be foreclosed.

Tbe court made extended findings and among other things found that tbe trust deed was prior and superior to tbe Kens. Judgment was entered upon tbe findings, and certain of tbe lienholders appealed therefrom. Tbe sole question presented is whether tbe trust deed is prior and superior to tbe Kens.

AppeKants claim that certain material bad been placed on tbe ground before tbe recording of tbe mortgage and that tbe Kens are entitled to priority for that reason. There is evidence to that effect and also evidence to tbe contrary, and tbe finding of tbe trial court that tbe mortgage was recorded before any material or labor bad been furnished for tbe improvement is final upon that question.

Section 8494, G. S. 1923, provides:

“AK such Kens, as against tbe owner of tbe land, shall attach and take effect from tbe time tbe first item of material or labor is furnished upon tbe premises for tbe beginning of tbe improvement, and shall be preferred to any mortgage or other incumbrance not then of record, unless tbe lienholder bad actual notice thereof. As against a bona fide purchaser, mortgagee or incumbrancer without notice, however, no Ken shaK attach prior to tbe actual and visible beginning of tbe improvement on tbe ground, but a person having a contract for tbe furnishing of labor, skill, material or machinery for such improvement, may file for record with tbe register of deeds of tbe county within wbicb tbe premises are situated, * * * a brief statement of the nature of such contract, which statement shall be notice of his lien for the contract price or value of all contributions to such improvement thereafter made by him or at his instance.”

All liens attach from the time the first item of material or labor is furnished on the premises for the beginning of the improvement. As against the owner a lien may attach although no material or labor has been furnished on the ground. Lamoreaux v. Andersch, 128 Minn. 261, 150 N. W. 908, L. R. A. 1915D, 204.

“As against a bona fide purchaser, mortgagee or incumbrancer without notice, however, no lien shall attach prior to the actual and visible beginning of the improvement on the ground.”

Appellants contend that the words “without notice” in this provision of the statute mean without notice of a contemplated improvement; and that where a mortgagee takes his mortgage with knowledge that the construction of an improvement on the property is contemplated, the mortgage is subject to any liens that may thereafter accrue by reason of the construction of such contemplated improvement. They concede that the case of Erickson v. Ireland, 134 Minn. 156, 158 N. W. 918, decided this point contrary to their contention, but insist that the rule as announced in that case is erroneous. We cannot sustain appellants’ contention. To give the words such a meaning would not accord with the purpose of the statute to fix the relative rights and priorities of purchasers, incumbrancers and lienholders with definiteness and certainty. We think that the words “without notice” as there used mean without notice of an existing lien. As held in Lamoreaux v. Andersch, 128 Minn. 261, 150 N. W. 908, L. R. A. 1915D, 204, liens may attach, at least as against the owner, although no item of material or labor has been furnished on the ground. We adhere to the rule as announced in the Erickson case.

Appellants further contend that the liens are prior and superior to the mortgage for the reason that the mortgage was not given to secure a present indebtedness, but to secure future advances; and that these advances, or the greater part of them, were voluntarily made after the work was begun and tbe liens bad .attacked. It is well settled tkat a mortgage may be given to secure future advances; and tkat suck advances, at least if made pursuant to an agreement to make tkem, kave priority over mechanics’ liens which attacked after tke recording of tke mortgage but before tke making of tke advances. Erickson v. Ireland, 134 Minn. 156, 158 N. W. 918, and citations.

Tke contract between tke mortgage company and tke bolding company covers 11 printed pages of tke record. It begins with a statement tkat tke mortgage, company kas agreed to arrange for tke holding company, and tke bolding company kas agreed to take, a loan of $400,000 to be evidenced by coupon bonds and secured by a trust deed. It sets forth tke terms and provisions to be incorporated in tke bonds and trust deed; also tkat tke bolding company is to erect a building on tke land costing not less than $500,000; and also tkat tke mortgage company is to bold tke amount of tke loan, less its commission and tke necessary expenses, and pay it out direct to contractors, subcontractors and materialmen as tke work progresses on orders of tke bolding company and receipt of waivers of mechanics’ liens, suck payments to begin when tke construction of tke building kas progressed to suck an extent and payments therefor kave been made to suck an extent tkat tke money remaining in tke bands of tke mortgage company will be sufficient to complete tke building. Tke bonds were delivered to tke mortgage company, and tkat company sold tkem to investors and received tke proceeds for tke purpose of bolding and applying tkem as provided in tke contract. All except tke stipulated commission and tke authorized expenses were paid out toward tke construction of tke building and tke removal of incumbrances on tke property. Tke trust deed or mortgage having been .recorded before tke liens attacked, the advances made thereunder, if made pursuant to an obligation to make tkem, are prior and superior to tke liens. Several courts bold tkatj suck advances, even if made voluntarily, are prior and superior to] all incumbrances arising after tke recording of tke mortgage.

Tke contract imposed upon tke mortgage company tke duty to procure tke necessary funds and make tke stipulated advances as |the building progressed. It cannot reasonably be construed as creating a mere option to make them. It created an obligation to Snake them; and tbe advances having been made pursuant to that /obligation they take priority over the mechanics’ liens. Whelan v. Exchange Tr. Co. 214 Mass. 121, 100 N. E. 1095; Kuhn v. Southern Ohio L. & T. Co. 101 Ohio St. 34, 126 N. E. 820; Moroney’s Appeal, 24 Pa. St. 372; Blackmar v. Sharp, 23 R. I. 412, 50 Atl. 852; Erickson v. Ireland, 134 Minn. 156, 158 N. W. 918.

The contract provided that the mortgage company should begin making payments when the holding company had proceeded with the construction of the building to such an extent and had made payments thereon to such an amount that the funds to be furnished by the mortgage company would be sufficient to complete the building. The appellants urge that the evidence shows that the holding company failed to maket payments in the specified amount, or in any considerable amount; that the failure of the holding company to make these payments released the mortgage company from the obligation to carry out the contract on its part; and that the payments made by the mortgage company should be deemed to have been made voluntarily and to be subordinate to the mechanics’ liens for that reason. Although the evidence produced at the trial shows that the holding company had in fact failed to make the agreed payments, it does not follow that the mortgage company was not justified in carrying out the contract on its part, nor that the payments made in carrying it out lost their right of priority.

The trial court found that the holding company induced the mortgage company to “open up said loan,” as it is termed by falsely representing that it had made payments toward the construction of the building in such amounts that the proceeds of the loan available for the completion of the building would be sufficient to complete it; that certain of the lien claimants, to aid the holding company in making these false representations, had executed fictitious contracts in which the prices stated were largely in excess of the true prices and in connection therewith had furnished receipts for payments and statements waiving all claims above the amounts named in such-statements, from wbicb it appeared that large sums had been paid on tbe contracts wben in fact nothing bad been paid thereon and tbe amounts represented as unpaid balances were in truth tbe full contract prices; and that tbe mortgage company, in reliance upon tbe false representations of tbe bolding company and believing them true, made tbe, advances in good faith. There is no assignment of error attacking these findings as not sustained by tbe evidence. Tbe appellants argue, however, that tbe facts wbicb tbe mortgage company knew or ought to have known were sufficient to charge it with notice that tbe building could not be completed out of tbe proceeds of tbe loan. While it might suffice to say that tbe court not only found to tbe contrary but found that tbe mortgage company acted in entire good faith throughout, other matters presented and argued also lead to tbe conclusion that tbe advances made have precedence over tbe mechanics’ liens. .

The appellants were not parties to tbe contract between tbe bolding company and tbe mortgage company and bad no interest in or claim against tbe property wben that contract was made. Tbe conditions imposed on tbe bolding company were not imposed for tbe benefit of tbe appellants, but for tbe benefit of tbe mortgage company and tbe purchasers of tbe bonds. Conditions may be waived by tbe parties for whose benefit they were imposed, and those who are strangers to such parties and to tbe transaction have no ground to complain because of such waiver.

Moreover tbe undertaking of a mortgagee to make future advances is not deemed optional within tbe rule wbicb gives subsequent incumbrances priority over optional advances thereafter made, unless it appears from bis contract, without resorting to extrinsic evidence, that be has tbe right to decline to make them. Where tbe right to refuse to make them depends upon a breach of tbe contract, by tbe other party, tbe mortgagee is not required to take tbe chance of establishing such breach to tbe satisfaction of a court or jury, but may disregard it and make tbe stipulated advances in reliance on bis security. Hyman v. Hauff, 138 N. Y. 48, 33 N. E. 735.

The trust deed was not given to secure a debt to tbe mortgage company, but to secure tbe payment of an issue.of coupon bonds which were intended to he sold and were sold to the public generally. The authorities are to the effect that advances made .under such a trust deed or mortgage, even if not obligatory, have priority over all incumbrances arising subsequent to the recording of the trust deed; and that the rule which applies where voluntary advances are made by the mortgagee to the mortgagor under an ordinary mortgage does not apply where the mortgage secures coupon bonds which are payable to bearer and pass by delivery and have been sold to bona fide purchasers. The federal courts give such bonds priority as of the date of the mortgage securing them, although other liens had attached before they were sold. Claflin v. S. C. R. Co. (C. C.) 8 F. 118; Central Tr. Co. v. L. St. L. & T. Ry. Co. (C. C.) 70 F. 282; Central Tr. Co. v. Bodwell W. P. Co. (C. C.) 181 F. 735; Allis-Chalmers Co. v. Central Tr. Co. (C. C. A.) 190 F. 700, 39 L. R. A. (N. S.) 84; P. C. C. & St. L. Ry. Co. v. Long Island L. & T. Co. 172 U. S. 493, 514, 19 Sup. Ct. 238, 246, 43 L. ed. 528, 535. In the case last cited the United States Supreme Court said:

“That lien had its origin in the execution and delivery of the Park-hurst mortgage and the authentication by the trustee of the bonds named in it, and when any of those bonds became the property of a bona fide holder, the lien given to secure them related back to the date of the mortgage.”

The rule is applied in state courts. Reed’s Appeal, 122 Pa. St. 565, 16 Atl. 100; Central Tr. Co. v. Continental Ir. Wks. 51 N. J. Eq. 605, 28 Atl. 595, 40 Am. St. 539; Central Tr. Co. v. Bartlett, 57 N. J. L. 206, 30 Atl. 583; Camden S. D. & Tr. Co. v. Burlington Carpet Co. (N. J. Ch.) 33 Atl. 479; Roberts v. W. H. Hughes Co. 86 Vt. 76, 83 Atl. 807; Nelson v. Iowa Eastern Ry. Co. (Iowa) 8 Am. Ry. Rep. 82. On reargument of this last case it was found that the mechanic’s lien had in fact attached before the recording of the mortgage and therefore had priority. Neilson v. Iowa Eastern Ry. Co. 44 Iowa, 71.

The doctrine stated seems to have originated in cases involving mortgages or trust deeds securing railroad bonds, but the cases make no distinction between bonds issued for railway purposes and those issued for other purposes, and no reason appears for restricting the application of the rule to cases where the bonds are issued by railway companies. Some of the cases refer to the fact that the bonds there in question were negotiable; but where they are payable to bearer and pass by delivery, whether they are technically negotiable instruments within the law defining commercial paper would seem to be unimportant in determining whether they are entitled to priority as of the date of the recording of the mortgage securing them.

Some of the reasons given for the rule above stated are, that in order to float large loans it is necessary to divide them into small parts represented by bonds which are sold in different, and frequently in distant, markets; that such bonds are purchased in reliance on the security; that purchasers of such bonds in the different markets cannot reasonably be required to ascertain at their peril what, if any, liens have attached to the property since the recording of the instrument securing the bonds; that if such bonds, whenever sold, did not take precedence over all liens arising subsequent to the recording of the mortgage, the status of the bonds would be so uncertain that investors would be afraid to buy them as articles of commerce; that all bondholders, as between themselves, stand on an equal footing and have equal rights in the security without reference to the time at which they acquired the bonds; and that subsequent incumbrancers give credit with notice that the property has been pledged as security for bonds put out to be sold to the general public and dealt with as articles of commerce.

The contract provided that the holding company should furnish an abstract showing a marketable title free from incumbrances, but also gave the mortgage company the right to pay and discharge all existing incumbrances out of the proceeds of the loan. The property was subject to a purchase money mortgage of $50,000 which was prior and superior to all other liens. The mortgage company subsequently paid and satisfied this mortgage pursuant to an understanding with the holding company that they should do so when' construction work to that amount had been done on the budding. The argument that the existence of this mortgage was such a breach of the contract that the mortgage company ought to have refused to carry it out is without force in view of the provision expressly authorizing the mortgage company to pay such incumbrances. The argument that the mortgage company knew, or ought to have known, that the funds remaining in its hands after paying this item would be insufficient to complete the building, and that the mechanics’ liens should have priority over the mortgage on the ground that the advances thereunder were made after the holding company had breached the contract, has already been considered. We mention the matter of this mortgage because the appellants lay, special stress upon it.

We find no other questions which require special mention in an opinion already too long.

We are satisfied that the learned trial court reached the correct conclusion and its judgment is affirmed.