Illinois Trust & Savings Bank v. Alexander Stewart Lumber Co.

The following opinion was filed May 8, 1903: Maeshall, J. Error is assigned because the trial court permitted the complaint to be amended, withdrawing the admission that the $6,428 paid Scott by appellant was on account of the mortgage indebtedness. In our view that is immaterial. We will say, however, that whether the amendment was proper or not admits of serious doubt. The admission stood upon the record for years. The attitude of Mr. Scott and his attorney during that time did not furnish any ground for even a suspicion that it would be claimed upon the trial that the payment was not made on account of the mortgage indebtedness or that it was not in fact so applied. In the meantime he and Ilathan were examined under oath, the latter twice. Of course they would have been interrogated — 64 — particularly on tie subject of sucl payment if it had been thought by respondent’s counsel that there was or would be any dispute about that matter. Such examinations not only did not suggest the existence or probability of such dispute,, but were well calculated to support the view that the truth of .the matter was as suggested in the complaint. At the .last moment, and upon the happening of the occurrence which rendered it impossible for appellant to know from the mouth of Kathan what occurred between him and Scott at the time the latter applied the $6,428 upon the unsecured debt, the latter was permitted to entirely change his attitude, — to* malee such change in face of the obvious situation that, since, when he received the money, he had yet a large amount of security for the $10,000 loan independently of any claim upon appellant, it was perfectly natural and competent for an arrangement to be made between him and Kathan to apply the payment upon the unsecured indebtedness, though made by appellant on account of the mortgage indebtedness,, and to at the same time recognize the latter’s right to have the same, as to it, regarded as at least a pro tanto discharge of the lien upon the fund produced by the sale of the mortgaged property, and that the death of Kathan rendered it impossible for appellant to meet the new situation presented by the amendment, was, to say the least, a great stretch of judicial discretion, notwithstanding the broad field within which such discretion is permitted to operate as held in the decisions of this court. Post v. Campbell, 110 Wis. 378, 85 N. W. 1032; Gates v. Paul, 117 Wis. 170, 94 N. W. 55. There appears to be some difference of opinion between the learned counsel who presented here respondent’s side of the case. On the one hand counsel take the position that appellant never acquired any interest whatever in the mortgaged lumber or logs or the proceeds thereof. The learned court adopted that view and held that the payment of the $6,428 left appellant still liable, since, as claimed by respondent, the — 65 — mortgaged dumber produced over $14,000, regardless of whether such payment was out of such proceeds or not; while other counsel freely admit that if such payment was in fact made out of such proceeds, so far as appellant was concerned, it could not have been properly applied without its consent to any unsecured indebtedness of Kathan to Scott. We will consider the case from both such aspects. It seems that the finding that appellant never obtained any interest whatever in the mortgaged property or the fund received therefrom is manifestly wrong. It is elementary that a mortgagee of chattel property holds the legal title thereto, but nevertheless, till default and actual possession of the property in himself, his interest, as against the mortgagor or any person claiming under him, is special. It is limited to the amount of the mortgage indebtedness. The general’ property and the equitable title being in the mortgagor or those claiming under him, the mortgagor may sell the mortgaged property and convey a good title thereto subject to the mortgage. Such title is equitable in character, to be sure, but it is of sufficient dignity to be regarded as a general property right, good as against the whole world except as to the special interest of the mortgagee, which, till it becomes absolute, may be extinguished by the owner of the general property by payment of the mortgage indebtedness. In ease of a conversion of the property as to the mortgagee, the measure of damages recoverable by him is limited to the value of his special interest therein, the amount due upon the mortgage. Smith v. Konst, 50 Wis. 360, 7 N. W. 293. The mortgagor may not only sell the property and convey a good title subject to the mortgage, but he may place a second mortgage thereon, and the subsequent vendee or mortgagee may pro tect his interest and clothe himself with a full legal title by paying off the first incumbrance. Smith v. Coolbaugh, 21 Wis. 427. It follows necessarily that the conduct of Kathan' in mixing the mortgaged lumber with appellant’s lumber and — 66 — •treating all of it substantially as products coming under bis contract with appellant, and the treatment by appellant, with knowledge of the facts, of the lumber so confused, substantially as legitimately under such contract, vested in it an interest therein and in the proceeds thereof good as against the whole world except S.cott under his mortgage. It was competent for it at any time to extinguish the mortgage by paying the amount due -thereon. If Scott had brought suit against appellant before receiving the $6,428, the limit of his recovery on account of the fund derived- from the mortgaged lumber would have been, necessarily, the amount received from such lumber upon the sale to Whitbeck. & Co., not exceeding the amount due upon the mortgage indebtedness. It follows that if the $6,428 was paid to Scott on account of such fund and by reason of Scott’s interest therein, his remaining interest was that much less than before.- Whether the $6,428. was in fact paid out of the proceeds of the mortgaged lumber we are not informed by any specific finding made by the trial court. The idea apparently embodied in the findings is that the payment was made out of profits due Nathan growing out of the execution of the contract between him and appellant of March 31, 1890, and that as such contract did not cover the mortgaged logs appellant cannot legitimately refer to such logs or the products manufactured therefrom as the origin of the fund out of which the payment was made. We are unable to find in the evidence legitimate support' for that view. The findings pretty clearly show, and the evidence leaves no reasonable doubt on the question, that Nathan, who had, as we have seen, the general property right to the mortgaged logs and lumber, treated such lumber, with appellant’s consent, as he treated all other logs owned by him which came into the Buttrick mill boom during the sawing season of 1890. No discrimination was made between the lumber from the different kinds of logs, except as to about 420,000 feet of lumber, which was piled by itself — 67 — And marked as Scott lumber in conformity -with tbe requirements of tbe mortgage. All tbe logs were manufactured together. Tbe lumber was all piled and treated as appellant’s. Tbe entire stock was so treated in tbe sale to Whitbeek & Oo. Tbe proceeds of tbe sale came to tbe bands of appellant as contemplated in tbe contract of March 31, 1890, and were accounted for to Kathan according to tbe evident understanding between tbe parties. Nevertheless, as we have seen, tbe learned trial court found that appellant never obtained any interest whatever in tbe mortgaged logs or lumber, and therefore never obtained any title or interest in tbe fund produced therefrom. Upon that theory tbe case passed to judgment, — ■ upon tbe theory that the entire proceeds of tbe mortgaged property, $14,082.15, was received by appellant to tbe use of Scott, regardless of what was in fact due upon tbe mortgage indebtedness; that bis interest in tbe mortgaged property and tbe fund derived therefrom was absolute, whereas it was only •special and limited, as we have seen. As stated before, substantially all the logs, in manufacturing the same into lumber and preparing tbe products for sale, •and tbe equivalent thereof in money after the sale, were treated as covered by tbe contract between appellant and Kathan. The lumber,-in the main, was piled in the Buttrick millyard so as to confuse beyond identification that produced from tbe mortgaged logs with that produced from the unmort-gaged logs, and specifically described in tbe contract of March 31, 1890. All payments made to Kathan, including the $6,428, were charged to him on appellant’s books. When the settlement was made between tbe parties the proceeds of tbe entire stock of lumber were treated as a single fund under tbe contract of March 31, 1890. It was all credited to Kathan and tbe profit going to appellant was charged to him. While there is some little confusion in the evidence of tbe witness who made .up the account between the parties for closing, as regards whether tbe terms of tbe contract were liter — 68 — ally followed or not, lie testified very clearly tliat it was-liis -understanding that tie lumber was to be all credited to Kathan at the price agreed upon in sucb contract, and tbe result slows clearly, in our judgment, .that it was so credited. The statement of the settlement under the contract, which was introduced in evidence, and the result transferred to appellant’s books, do not show with exactness that the profits of the lumber deal were worked out by taking account of all of the lumber as if it were included in the contract referred to; but from all the figures it seems that no rational conclusion can be arrived at other than that the property and the fund derived therefrom were so treated. It is not to be wondered at that after the lapse of some eight years the witness was unable to explain in all respects just how the result carried to-appellant’s books was arrived at. He said that another statement, in his judgment, was made than the one exhibited in evidence containing the final work. It seems quite plain that reductions of the profits first worked out were made for some reason, consistent with the theory that the entire fund was treated under the contract of March 31, 1890. We are unable to perceive in the evidence, even by conjecture, th&t it was not so treated. The feature of the case last discussed shows the prejudicial character of allowing the complaint to be amended after the lapse of many years after the death of the only party to the transaction with Scott in respect to whether the payment of $6,128 was received as a payment out of the fund derived from the mortgaged property, entirely changing the situation, as both Scott and appellant- understood the same to be at the time the action was commenced. The following satisfactorily indicates that the mortgaged lumber was treated as we have suggested and that the payment to Scott came therefrom. The price of all the lumber to appellant as per contract, including lumber from the mortgaged logs, was $38,771.23. The net amount received there — 69 — from bj appellant was $49,026.83, indicating a profit of $10,249.60, or $5,124.80 to each party. The statement in the record of the settlement between appellant and Nathan is to that effect. The account upon the books as closed, evidently to the satisfaction of Nathan, does not contain any ■charge identical with such a division of profits. The ledger accounts show that the entire proceeds of the lumber were credited to Nathan. That necessarily, in effect, placed the ■entire profit of the lumber deal to his credit, consistent with the theory that the matter was by mutual understanding worked out under the contract of March 31, 1890. The proceeds of the lumber having been credited to Nathan, placing to his credit the entire profits, treating the contract mentioned as conveying all the lumber to appellant in order to transfer its portion of the profit to the credit of its profit and loss account, it became necessary, one would say, to charge Nathan with the amount of such profits and to give a proper credit. Nathan’s ledger account on appellant’s books shows that such a charge was made, and presumably such a credit was given. The item, however, is $4,595.60, or $529.20 short of one half the profits as per the statement before referred to. The figures may well have been arrived at by some treatment of interest items, or insurance items, or other matters in the statement which the bookkeeper testified he thought was made other than that put in evidence. We are unable to even conjecture any way in which the mortgaged lumber could have been treated in the new statement so as to reach such result. Thus we have seen, it appears, that the $6,428 paid Scott was not profits of the lumber deal between Nathan and appellant, for there was no such amount of profits. It represented his profits, undoubtedly, aside from overpayments theretofore made anticipating profits, and also all there was understood between the parties to be coming to him out of the proceeds of the entire stock of lumber sold out of the mill-yard. The amount is so charged to Nathan on the books. In — 70 — stead of tbe memorandum explaining sucb charge indicating that it was paid specifically as profits, it indicates that it was paid just as we have suggested. Here is the memorandum: “To check No. 7,179 for draft to W. A. Scott per J. E. N. order, being N.’s profits and sale of his own lumber to H. Whitbeck & Co. $6,428.” There can be no mistaking the meaning of that language. It voices this: The payment was made as a closing up of all claims of Nathan, both as to profits on the lumber deal between him and appellant and as to any lumber in the Whit-beck & Oo. deal not strictly within the terms of the contract of March 31, 1890. It was made out of the general fund derived from all the lumber, and to close out Nathan’s entire interest in the fund. That is in harmony with his evidence and all the evidence in the case. lie said that the lumber from the Scott logs was not treated separately from the logs specifically mentioned in the contract of March 31, 1890; and that he was authorized by Scott to let it go in with'the rest. The latter’admitted that in his evidence, but said he consented to the sale relying on information from Nathan which was false; that only 420,000 feet were in the millyard. But let that be as it may, there is no escaping the conclusion that the $6,428 was paid as a closing with other payments, for moneys in appellant’s hands, whether representing profits on lumber or proceeds of the lumber belonging to Nathan, sold to Whitbeek & Co. The payment, in the state of the account as it existed when it was made, after ’crediting the proceeds of the lumber, brought such account substantially to a balance. Two debit items of small amounts, with the charge for appellant’s profits, balanced the account. Since Nathan’s one-half of the actual profits of the lumber deal was but $4,596.60, and the proceeds of the mortgaged lumber, according to the findings of the court, were $14,082.15, it must be that Nathan received all his profits on the logs specifically covered by the contract of March 31, 1890, in advance. Here — 71 — is the account as it was closed, putting all tbe debit items up to tbe date of tbe charge on account of tbe check in question into one sum: We have a debit balance against Nathan of $7,654.15. Can there be any mistaking that tbe comprehensive memorandum of the charge respecting tbe $6,428 was m'ade to indicate that it covered tbe balance going to Nathan, whether of profits or for any lumber of his own included in the credit of the proceeds received from the Whitbeck Company; that with the mortgaged lumber out of the deal, Nathan received all his profits under the contract of March 31, 1890, in advance; that he had, before the sale to Whitbeck & Co., received all the proceeds of the logs specifically mentioned in such contract at the rates therein mentioned for the manufactured products, and the profits finally obtained out of the deal as well. If not, then the payment of $6,428 cannot be legiti — 72 — mately referred to any other source than the fund produced from tbe mortgaged logs, — not referred to anything else either in fact or from any indication upon appellant’s books. But it is said that when the check was sent to Scott it was accompanied by a letter from appellant to the effect that it represented the amount due Nathan under the conditions of a certain contract, the same being directed to be turned over to Scott, and that he had a right, in view of such letter, to regard the payment as not coming out of the mortgaged logs, as they were not in the contract of March 31, 1890. This effectually answers that: The account was worked out between Nathan and appellant in the process of accounting between them by putting all of the proceeds of the lumber into a common fund. The letter was not intended to indicate that the money was paid out of the fund derived from the logs, other than the mortgaged logs. Scott, in view of all the facts, had no reason to otherwise understand it, because, so far as appears, he had no knowledge but that all the Nathan logs were covered by the contract of March 31, 1890. Again, he knew that all the lumber in the yard was to be sold for account of appellant, as between it and Nathan, that some 420,000 feet of the lumber at least came from his mortgaged logs, and with such knowledge he consented to have his interest therein sold with the rest and to rely upon an order from Nathan authorizing payment to him of whatever might be found due the latter from appellant, and that the draft was sent to him accordingly. Thus his conduct leaves no doubt that he knew some of the lumber in the Buttrick yard was produced from the mortgaged logs, that he expected the same to be handled, as between Nathan and appellant, as part of the general stock, that he expected his interests would be protected as the person primarily interested in the mortgaged lumber by a. payment upon the Nathan order, and that the payment was made accordingly. True, he testified that he consented to the lumber being handled that way, relying upon representations made by Nathan that there were only about 420,000 — 73 — feet in wbicb be was interested, expecting tbat tbe proceeds thereof would be paid to him. But be knew sucb proceeds were to go through the hands of appellant under its arrangement with Nathan, whatever such arrangement was, and were to come out on the order. He testified on the trial to this effect: “I knew before the sale that there was lumber in the But-trick yard that came from the mortgaged logs. I knew of the .sale and was satisfied with it. I knew that the purchase money was to be paid to the Alexander Stewart Lumber Company. I found no fault with that. I got an order from Nathan on the company. I got it before the lumber was sold. I got it to protect my right and delivered it to the company. When I got the order I did not Tcnow that Kaihan would sell the lumber. The Stewart Lumber Company sold the lumber.” That means this, if anything: Scott knew that some of the mortgaged lumber was piled in the Buttrick yard; that the sale thereof was to be controlled by appellant; that it was to ■be sold as part of its stock of lumber in the Buttrick yard; that he was willing to have the lumber so sold in view of the fact that the proceeds would come to the possession, for him, ■of a responsible party, the Alexander Stewart Lumber Company. and that he had an order on file with such company to protect his rights. So when he got the draft, obviously he understood it was sent pursuant to the order; that it was given in protection of his mghts. He had no property rights to be protected except by virtue of his mortgage. Scott’s conduct after he got the check is consistent with "the view above expressed. Soon thereafter he made complaint to appellant that the amount he had received was not in full for his proportion of the proceeds of the sale of the lumber; that the amount of the mortgaged lumber included in the sale was greater than had been represented to him. He testified on this as follows: “I objected to the division of the proceeds of the sale on ■the ground that it was represented to me that there were over 400,000 feet of logs sawed that were under the mortgage. — 74 — I bad not been allpwed that, and I asked tbe reason. He [meaning, an officer of appellant] claimed that the statement was all,,right and that I had all I could claim under the sale.” What statement was all right? Manifestly the statement-showing that the proceeds of all the lumber went into a common fund, introduced in evidence. There can be no mistaking the meaning of that testimony. Scott understood that' the $6,428 came out of the common fund, the proceeds of the-mortgaged and unmortgaged lumber. He believed that more-should be paid him because such sum was disproportionate* to the amount of mortgaged logs that had been manufactured.. Later, when this action was commenced, consistent with that theory, the admission was made in the complaint that the payment under discussion was on account of the mortgaged property, and that admission remained without an intimation, as before stated, that it was not in accordance with the facts, until Mr. Kathan died. Without stopping to discuss this phase of the case further, it is evident that when this action was commenced, and for some eight years thereafter, it, was Scott’s idea and that of his attorney, as well as the understanding of all parties concerned, that the $6,428 payment was made, so far at least as appellant was concerned, out of' the proceeds of the mortgaged lumber and to apply on the mortgage indebtedness, and that they were possessed of a written statement from appellant’s office in harmony with that view. The conclusion is that the $6,428 was paid out of the proceeds of the mortgaged lumber if the amount thereof was as-found by the trial court, and in respect to that we see no good' reason for disturbing the court’s findings. It was intended to be applied on account of the claim which Scott had on the-lumber sold to Whitbeck & Co., and it was so received by Scott. Now it is quite immaterial to this case what application was made of the money as between Scott and Kathan. The principle is elementary that the proceeds of mortgaged: — 75 — property must be applied to extinguish tbe mortgage indebtedness regardless of any agreement between mortgagor and mortgagee, so far as tbe rights of innocent third persons ■would otherwise be prejudicially affected. Jones, Chattel Mortgages, § 640. Scott’s interest in the fund received by appellant from Whitbeck & Co. cannot exceed the amount of such proceeds or the amount due upon the mortgage indebtedness left after deducting therefrom all -sums upon the mortgage security, being the $6,428 received from appellant February 10, 1891, $3,748.09 received from logs and lumber March 23, 1892, and $197.80 received August 2, 1892. The point is made on exceptions that Scott gave his agent,. Nathan, authority to sell the mortgaged lumber, and therefore that he cannot pursue appellant, who acted in good faith in joining with Nathan and selling the lumber and in disposing of the proceeds. The trouble with that position is that the court found that Scott consented only to a sale of the lumber which he was informed was piled separately in the mill-yard amounting to 420,000 feet; that appellant consented to Nathan’s wrongdoing in confusing about 1,200,000 feet of mortgaged lumber with lumber not affected by the mortgage; that it profited thereby, by joining, with knowledge of the-facts, in selling the stock as unaffected by the mortgage, except as to 420,000 feet, and receiving and appropriating the-proceeds thereof to his own use. There is evidence in the record to support that view, — evidence so strong that under the rales applicable to the subject we cannot properly overrule-the circuit judge’s conclusions. There is evidence tending to-show that, whereas 1,656,724 feet of lumber was manufactured from the mortgaged logs, appellant knew that all but 420,000 feet thereof was confused with its lumber, while Nathan was, by his conduct at least, giving out to Scott that, the lumber manufactured from the mortgaged logs was but the small amount of 420,000 feet piled separate and marked as such. Assuming, as we must, that the facts which such — 76 — evidence tends to prove exist as found by tbe trial court, it cannot be properly said tbat Scott consented to tbe sale of any mortgaged lumber except tbe 420,000 feet, or tbat appellant was an innocent party in joining in a sale of some 1,200,000 feet of other mortgaged lumber and receiving tbe proceeds thereof and treating tbe same regardless of tbe mortgagee’s rights. Since appellant was a guilty participant with' Nathan as above indicated, it became liable to Scott for •money bad and received to tbe extent necessary to satisfy plaintiff’s claim, subject to tbe rule heretofore stated, that such claim can be considered only as being tbe amount of tbe mortgage indebtedness according to tbe terms of tbe $10,000 note evidencing tbe same, after applying thereon all the sums received out of the mortgaged property as before indicated. There are many other questions discussed in tbe briefs of counsel, but it is believed tbat such of them as are material to tbe disposition of this case are included in tbe points tbat have been discussed and decided. The result is tbat tbe judgment appealed from must be reversed and the cause remanded to the trial court with directions to render judgment in favor of plaintiff in accordance with this opinion. Tbe $6,428, tbe $3,748.09 and tbe $197.80 must be applied on tbe mortgage indebtedness as received, and'judgment be rendered for tbe balance with costs as heretofore taxed and allowed. By the Oourt. — So ordered. A motion for a rehearing was denied September 29, 1903.