Grether v. Nick

This case was decided on the assumption that the mortgage contained no clause pledging rents and profits. Upon motion for rehearing, our attention was called to the fact that the mortgage did pledge "all of the rents, issues, and profits which may arise or to be had therefrom." Our erroneous assumption arose from a misunderstanding that the absence of such clause was conceded upon the oral argument. It being apparent that what was said in the opinion was not in response to the true facts, a rehearing was granted, and counsel were requested to thoroughly brief the question of the effect of a clause pledging rents and profits in an ordinary real estate mortgage. Our labors have been greatly facilitated by the able briefs presented on rehearing.

[1][2] It seems to be universally recognized that the right to rents and profits follows the legal title and the right of possession. At common law, and in some jurisdictions in this country, a mortgage operates to convey the legal title to the mortgagee with the right of possession upon breach of the covenants of the mortgage. Originally this right of possession on the part of the mortgagee was enforced by ejectment, but this rule was changed by statute in England so that a mortgagee *572 might have a receiver appointed whenever a condition of the mortgage was breached for some definite period of time. Schreiber v. Carey,48 Wis. 208, 4 N.W. 124. Even at common law the mortgagee was not entitled to collect the rents and profits until possession was taken, and his right to collect the rents and profits followed as a matter of course from the possession, whether or not rents and profits were pledged by the mortgage, but the rents and profits were to be applied in the discharge of the debt, and the mortgagee was required to account to the mortgagor for the same.

[3][4][5][6] In jurisdictions where the mortgagor retains the legal title and right of possession, as here, it follows that the right to collect rents and profits remains in the mortgagor until he is deprived of possession in the manner provided by law, and this notwithstanding the fact that the mortgage may pledge the rents and profits. This must be true, unless the clause pledging rents and profits should be construed as sufficient to pass the legal title and right of possession to the mortgagee. This has never been held in any jurisdiction, and should not be, as it would afford an easy way of evading the policy of our Statutes which makes a mortgage a mere lien upon land, leaving the legal title and right of possession in the mortgagor. It is plain in this jurisdiction that, under a mortgage pledging rents and profits, the benefit of such rents and profits does not inure to the mortgagee until possession has passed from the mortgagor. Under the principles established here, the mortgagor may not be deprived of possession except under circumstances discussed in the former opinion. In order to accomplish such dispossession the mortgagee must invoke the aid of a court of equity. Upon the application of the mortgagee, the court may appoint a receiver to take possession of the premises to prevent waste and to collect rents and profits.

It is generally stated in the cases that the receiver may be empowered to collect such rents and profits as accrue after his appointment. Notwithstanding the fact that it must frequently happen that the receiver is appointed during a term for which rent has been paid, there are few cases dealing with a controversy between the tenant and the receiver as to whether the tenant must pay rent again to the receiver for the unexpired portion of the term for which he has paid it to the mortgagor. Two such cases are to be found in the Supreme Court of New York, arising under a mortgage pledging rents and profits. In those cases the tenants were required to pay the rent again to the receiver. Derby v. Brandt, 99 A.D. 257,90 N. Y. S. 980; Home Life Ins. Co. v. O'Sullivan,151 A.D. 535, 136 N. Y. S. 105. In First National Bank of Grand Meadow v. Security Trust Savings Bank of Charles City,191 Iowa, 842, 181 N.W. 402, and in Caldwell v. Alsop,48 Kan. 571, 29 P. 1150, 17 L. R. A. 782, a chattel mortgage on growing crops was given preference over a real estate mortgage which pledged the rents and profits, even though the chattel mortgage was subsequent to the real estate mortgage. All of the authorities agree that a pledge of rents and profits does not create any lien upon the rents and profits until the mortgagee acquires possession, and that all rents and profits paid to the mortgagor prior to taking possession by, or the appointment of, a receiver belong to the mortgagor. All authorities agree that a pledge of rents and profits vests in the mortgagee a right thereto which equity will recognize and enforce in a proper manner. As already stated, the only way in which it can be enforced in this state is by the appointment of a receiver under circumstances justifying such procedure.

[7][8][9][10] In view of the fact that the mortgagee must invoke the aid of a court of equity to enforce his right to rents and profits, it seems manifest that a controversy arising between a tenant, who has paid his rent in advance to the mortgagor, and a receiver, who is demanding a repayment of the rent for the unexpired portion of the term for which it has already been paid to the mortgagor, should be determined by the application of equitable principles. One of these principles is that the plaintiff should come into court with clean hands. Another is that a court of equity seeks to do justice, and not injustice. It is not disputed in this case that the mortgagor arranged with Nick Bros., a partnership of which he was a member, to advance moneys to be credited upon the rent of the partnership for the purpose of completing the building, making it tenantable, and to preserve it from the ravages of frost. As said in the brief for appellant:

"Without the material and labor and money furnished by the firm of Nick Bros. in payment for rent on lease of the bakery, the building could not have been finished and made to yield the very considerable income the receiver has collected from tenants of the flats. The building would have stood incomplete, damaged by frost, untenantable, and without income, during all the period until after foreclosure sale, had it not been for the advance of rent by the Nick Bros., who are appellants here."

The mortgagee now claiming the rent has already had the benefit thereof. It added to his security. By reason of this advancement the entire building has been placed in a tenantable condition, and the receiver is now collecting rents and profits from other portions of the building which are being applied to the plaintiffs mortgage. In the attempt to re-collect the rent from Nick Bros. so advanced by them, the mortgagee is seeking to enjoy the benefit of the rent again. This is not justice. It is not equity. It is oppression. If the rent had been paid, as it was in *573 Gaynor v. Blewett,82 Wis. 313, 52 N.W. 313, 33 Am. St. Rep. 47, to enable the mortgagor to circumvent the provisions of the mortgage and to appropriate it to his own use, a different situation would confront us. But where the mortgagee enjoys the full benefit of the advanced payment, and it was made in good faith and not for the purpose of working a fraud, a court of equity should not work oppression by requiring its payment a second time. We therefore hold that the order appealed from was unjust and inequitable, and should be reversed. Our former mandate will stand.