Amco Trust, Inc. v. Naylor

• Decision Date: 29 October 1958
• Docket Number: No. A-6824,A-6824
• Citation: 317 S.W.2d 47,73 A.L.R.2d 1109,159 Tex. 146
• Parties: , 73 A.L.R.2d 1109 AMCO TRUST, INC., Petitioner, v. P. C. NAYLOR, Respondent.
• Court: Texas Supreme Court

Page 47

317 S.W.2d 47

159 Tex. 146, 73 A.L.R.2d 1109

AMCO TRUST, INC., Petitioner, v. P. C. NAYLOR, Respondent.

No. A-6824.

Supreme Court of Texas.

Oct. 29, 1958.

Matthews, Nowlin, Macfarlane & Barrett, San Antonio, Lewis T. Tarver, Jr., San Antonio, for petitioner.

James C. Brady, San Antonio, for respondent.

WALKER, Justice.

On the principal question in this case, we hold that the owner of a security interest in a leasehold estate who takes possession of the leased premises does not thereby become an assignee and liable as such to the lessor for the payment of rent under the terms of the lease.

P. C. Naylor, respondent, leased a one story building in San Antonio to South Texas Kitchens, Inc., hereinafter referred to as Kitchens, and its president, C. P. Ernster, for a term of five years, beginning December 15, 1953, at a rental of $225 per month. Kitchens went into possession of the property and there engaged in the business of selling and installing kitchen cabinets on a contract basis. During the ensuing two years, Amco Trust, Inc., petitioner, made sundry loans to Kitchens, secured by pledges of the latter's kitchen installation contracts.

Early in 1956 the aggregate balance unpaid on such loans exceeded $37,000, and Kitchens was unable to meet these or its other obligations. Kitchens and its stockholders thereupon entered into a contract with petitioner, effective as of March 1, 1956, under the terms of which all assets and stock of Kitchens were assigned to petitioner as additional security for its loans and petitioner was authorized to take over, manage and operate the business until its indebtedness was satisfied. Petitioner was given the right to complete existing contracts, negotiate new contracts, collect and disburse money, and use the proceeds of the business to discharge Kitchens' debts. The instrument further provided that petitioner did not assume any of such obligations, and that the agreement would terminate upon the final payment and discharge of Kitchens' indebtedness to petitioner.

Petitioner went into possession of the leased premises and there operated the business for a period of some six months, paying the rent regularly during most of that period. On September 6, 1956, it vacated the property and removed and sold the office furniture and equipment and display kitchen units which Kitchens had placed therein. The building has not been occupied, and no rent has been paid, by either the original lessees or petitioner since that date.

This suit was brought by respondent against Kitchens, Ernster, and petitioner to recover the rent payable under the terms of the lease. He also sued for damages alleged to have been done to the building, but that aspect of the case will be discussed later in this opinion. The case was tried to the court without a jury and judgment was entered in favor of respondent and against Kitchens, Ernster and petitioner, jointly and severally, for the rent due and to become due for the remainder of the lease term. From this judgment petitioner alone appealed. The Court of Civil Appeals concluded that petitioner is liable as an assignee for the rent throughout the term, but since the lease contains no acceleration clause, the judgment of the trial court was reformed so as to allow respondent to recover only the unpaid installments accrued up to the date of trial. 311 S.W.2d 257.

The Court of Civil Appeals reasoned that the contract between Kitchens and petitioner gave the latter a security interest in the leasehold estate, and with this conclusion we agree. Its holding that petitioner upon entering into possession became liable as an assignee is undoubtedly a correct application of the rule adopted in Cockrell v. Houston Packing Co., 105 Tex. 283, 147 S.W. 1145, 1151, where it was said:

'The mortgagee of a lease, who takes possession of the leased premises, is in the attitude of an assignee of such lease, and is therefore liable to the landlord for the rent. It seems to be a well-settled rule, applicable to our law, that the mortgagee of a lease, not in possession of the leased property, cannot be considered as an assignee; but if he takes possession of the leased premises he becomes, in law, the assignee of the lease, and is liable for the rents to the landlord. * * *.'

Our investigation discloses that this rule is neither as well settled nor as well grounded as might be supposed from reading the Cockrell case. Liability to the original lessor for the payment of rent or the performance of other lease covenants may arise from either privity of contract or privity of estate. When the lessee voluntarily transfers part or all of his interest under the lease to another, the transaction is accordingly treated as either an assignment or a sublease for the purpose of determining the rights and liabilities of the parties. In order to constitute an assignment, the lessee must part with his entire interest in all or part of the demised premises without retaining any reversionary interest. One who thus acquires the entire leasehold estate becomes the tenant in place of the lessee and is in privity of estate with the lessor. An assignee is accordingly liable for the rent reserved in the lease and for the performance of covenants which run with the land. If, on the other hand, the lessee retains any reversionary interest, no matter how small it may be, his transferee is not in privity of estate with the lessor and is regarded as a sublessee. There is no privity of contract between the lessor and a sublessee, and the latter is not liable to the lessor on the covenants of the lease, unless he assumes or otherwise binds himself to perform the same. See Davis v. Vidal, 105 Tex. 444, 151 S.W. 290, 42 L.R.A.,N.S., 1084; 51 C.J.S. Landlord and Tenant, pp. 553, 566, 578; §§ 37, 44, 48, 32 Am.Jur. Landlord and Tenant, p. 289, § 313 et seq., p. 320, § 374, p. 342, § 423; Tiffany, Landlord and Tenant, Vol. I, p. 907, § 151, p. 968, § 158, p. 1000, § 162; 27 Tex.Jur. Landlord and Tenant, p. 359, § 214, p. 378, § 226 et seq.

The effect of a mortgage upon the title to the mortgaged property is thus an important consideration in determining the status of a mortgagee of the leasehold estate. England and other jurisdictions which adhere to the common law doctrine of mortgages hold that the mortgagee is an assignee and responsible as such for the payment of rent regardless of whether he takes possession of the property. Williams v. Bosanquet, 1 B. & B. 238, 5 ECL 72, 129 Reprint 714; Williams v. Safe Deposit & Trust Co., 167 Md. 499, 175 A. 331. In states where a mortgage is regarded as merely creating a lien, however, the lienholder does not become liable as an assignee, at least until he goes into possession of the property. Lansdell v. Woods, 127 Ark. 466, 192 S.W. 715; Detroit Trust Co. v. Mortensen, 273 Mich. 407, 263 N.W. 409; McKee v. Angelrodt, 16 Mo. 283; State ex rel. Johnson v. Commercial State Bank, 142 Neb. 752, 7 N.W.2d 654; I. Hausman & Sons v. Central Home Trust Co., 118 N.J.L. 104, 191 A. 301; Walton v. Cronly's Administrator, 14 Wend., N.Y., 63.

New York was apparently the first lientheory state to consider the liability of a mortgagee of the leasehold in possession. It was there recognized that the mortgagor is owner against all the world subject only to the lien of the mortgage, but the court reasoned that 'when the mortgagee takes possession he then has all the right, title and interest of the mortgagor' and accordingly held that the mortgagee in possession is an assignee and responsible to the original lessor for the payment of rent. Astor v. Hoyt, 5 Wend., N.Y., 603. See also Century Holding Co. v. Ebling Brewing Co., 185 App.Div. 292, 173 N.Y.S. 49. Similar reasoning led to the same result in Olcese v. Val Blatz Brewing Co., 144 Ill.App. 597, but only a few jurisdictions have squarely adopted the New York rule.

There is, on the other hand, respectable authority for the proposition that the liability of the mortgagee cannot be made to turn upon whether or not he goes into possession of the property. Johnson v Sherman, 15 Cal. 287, 76 Am.Dec. 481. See also Northwestern Mut. Life Ins. Co. v. Security Savings & Trust Co., 9 Cir., 261 F. 575; Cargill v. Thompson, 57 Minn. 534, 59 N.W. 638. After referring to the English and New York rules and pointing out that in the latter jurisdiction the mortgagee's possession in some way...