Grether v. Nick

1 Motion for rehearing granted June 20, 1927, on questions to be framed and submitted. [1][2][3] The question presented is whether the firm of Nick Bros., having paid the rent in advance for a period of approximately*306 two years from May 1, 1925, must pay it again to the receiver appointed in the foreclosure proceedings. The mortgage involved in this action did not pledge the rents and profits arising from the premises covered by the mortgage. It pledged only the premises as security. In this jurisdiction the mortgagor of real estate retains not only the legal title to the premises mortgaged but the right to the possession thereof. The mortgagor is at liberty to sell, rent, or to further incumber the premises, and such interest in the premises as he may grant to others is subject only to the mortgage. In the instant case the firm of Nick Bros. was charged with the knowledge of the existence of plaintiffs mortgage, but it knew that that mortgage pledged only the real estate as security and did not pledge the rents and profits thereof. It knew that any interest which it might acquire in the premises was subject to the mortgage, and would be terminated when title to the property passed from the mortgagor upon a foreclosure of the mortgage. When it paid its rent in advance, the money so paid became the property of the mortgagor, free from any lien or incumbrance of any nature, and the payment of that rent amounted to the purchase of an interest in the real estate in the nature of a leasehold. True, this interest was subject and subordinate to the mortgage on the premises and would be terminated when the legal title to the premises passed from the mortgagor under foreclosure proceedings. Such foreclosure proceedings would effectually terminate its interest in the premises. But there is no principle of law which requires it to pay a second time for the interest so acquired to the mortgagee. The mortgagee certainly acquires no such right under the terms of the mortgage. Neither can we perceive how it arises as an incident to the power exercised by courts of equity under certain circumstances to appoint a receiver in foreclosure proceedings for the purpose of taking possession of the mortgaged premises, collecting the rents and profits, and applying the proceeds thereof upon the mortgage debt. [4] There is some confusion in the authorities concerning the circumstances under which a receiver may be so appointed. This is especially true in jurisdictions where the title to the property remains in the mortgagor, as in this state. At common law the title to mortgaged premises passed to the mortgagee, but as a second mortgagee was not entitled to the possession as against the first mortgagee, the practice grew up of appointing a receiver to impound the rents and profits of mortgaged property for the benefit of the second mortgagee. In 19 R.C.L. § 369, p. 560, it is said: "Originally, the practice of appointing a receiver to impound the rents and profits of mortgaged property seems to have grown out of the lack of a remedy at law on the part of persons having only equitable or second mortgages, who, in consequence, since they did not have the legal title, were not in a position to recover the possession of the mortgaged premises in an action at law. But, as equity would give effect to a mortgage only so far as to afford protection to the mortgagee, he could not enforce his right to the rents and profits in equity, unless he could show that the property itself was inadequate security. Out of this enforcement, on equitable grounds, of a right incident ot the mortgage itself, and out of the hybrid theory prevalent in some jurisdictions that the mortgagee is to be regarded as owner as far as is necessary to keep him secure, seems to have sprung the doctrine of so-called equitable lien on the rents and profits of mortgaged property, which courts of equity enforce by impounding them for the benefit of the owner of the mortgage when it appears that the property itself is inadequate to pay the debt and the mortgagor is insolvent. It is sometimes provided by statute that a receiver may be appointed to take charge of the mortgaged property where the security is inadequate. But irrespective of statute, it seems that the prevailing rule is that inadequacy of security and insolvency of the mortgagor are not in themselves regarded as sufficient grounds to justify the appointment of a receiver in foreclosure proceedings. There must be shown some additional, distinct, equitable ground, such as danger of loss, waste, destruction, or serious impairment of the property, to warrant the appointment." [5][6] Clearly upon principle, and, we believe, upon the weight of authority in jurisdictions where the legal title to the mortgaged premises remains in the mortgagor (note 7 L. R. A. [N. S.] 1001), there is no warrant or authority for the appointment of a receiver in foreclosure proceedings merely because the security is inadequate or the mortgagor irresponsible. The mortgagee has seen fit to loan money upon the security of the premises. The statutes relating to the foreclosure of mortgages provide the manner in which he may realize from the security upon which he was content to rely. There is no principle which in morals justifies a court in adding to the security which the mortgagee accepted at the time of making the loan. The mortgagee is, however, entitled to have that security preserved and protected from waste and dissipation. Where the premises become the subject of waste, the well-known jurisdiction of a court of equity to prevent waste is aroused, and under certain circumstances a court of equity may interfere to prevent waste, to the end that the security may be preserved in its original value. This a court of equity does by the well-established practice of the appointment of a receiver to take possession and manage the mortgaged premises. When the receiver so takes possession, whether there is any foundation for it in principle, it is well established that the rents and profits so collected by the receiver may be applied upon the mortgage indebtedness, even though such rents and profits have not been pledged *307 as security for the mortgage debt by the terms of the contract between the parties. We do not attempt to vindicate this practice, but simply accept it as a thoroughly established principle of equity jurisprudence. [7] But the appointment of the receiver in the first instance can be justified only for the purpose of preventing waste in the exercise of the well-established jurisdiction of courts of equity for that purpose. It may be that this requirement is occasionally overlooked by the courts and may be misunderstood by the bar. But a review of the cases in this court fails to reveal any case where a receiver has been appointed in foreclosure proceedings in the absence of circumstances amounting to waste. In this connection it should be noted that delinquent taxes and unpaid interest depreciates the value of the security and amounts to waste. Finch v. Houghton, 19 Wis. 149; Schreiber v. Carey, 48 Wis. 208, 4 N. W. 124; Morris v. Branchaud, 52 Wis. 187, 8 N. W. 883; Sales v. Lusk,60 Wis. 490, 19 N. W. 362; Winkler v. Magdeburg,100 Wis. 421, 76 N. W. 332. [8][9][10] This discussion leads to the conclusion that one may deal with a mortgagor, pay for and acquire any interest in the mortgaged premises, and that interest so acquired will be subject only to the lien of the mortgage. If the mortgage covers only the premises and does not pledge rents and profits, the mortgagee has no interest whatever in the proceeds arising from the purchase of a leasehold interest. The rights of a receiver appointed in foreclosure proceedings to the rents and profits arising from mortgaged premises are limited to those which become due after his appointment. One who acquires an interest in premises in the nature of a leasehold by paying his rent in advance cannot be required to pay it a second time to the receiver. Respondents rely upon the case of Gaynor v. Blewett,82 Wis. 313, 52 N. W. 313, 33 Am. St. Rep. 47. In that case rent was paid a year in advance, but it was not paid until after the foreclosure proceedings had been commenced and a lis pendens filed. It was held that the tenant stood in the position of a purchaser or lessee pendente lite, and that he took subject to whatever order or decree the court might lawfully make affecting either the title or possession. The decision in that case is carefully grounded upon that fact. "The doctrine of lis pendens as to persons and property within its operation is that the court, having jurisdiction of the suit or action, is entitled to proceed to the final exercise of that jurisdiction, and that it is beyond the power of any of the parties to the action to prevent its doing so by any transfer or other act made or done after the service of the writ or the happening of such other act as may be necessary to the commencement of lis pendens." 17 R.C.L. p. 1009. The Blewett Case is no authority for the order here under consideration, and we can discover no principle or moral consideration which justifies the extension of the doctrine of the Blewett Case to the facts here involved. It follows that the order must be reversed. So ordered.