Fidelity-Philadelphia Trust Co. v. West, 27507.

• Citation: 226 N.W. 406,178 Minn. 150
• Decision Date: 05 July 1929
• Docket Number: No. 27507.,27507.
• Parties: FIDELITY-PHILADELPHIA TRUST CO. v. WEST et al.
• Court: Supreme Court of Minnesota (US)

226 N.W. 406

178 Minn. 150

FIDELITY-PHILADELPHIA TRUST CO. v. WEST et al.

No. 27507.

Supreme Court of Minnesota.

July 5, 1929.

Appeal from District Court, Hennepin County; W. C. Leary, Judge.

Action by the Fidelity-Philadelphia Trust Company against H. J. West and another. From an order overruling his demurrer to the complaint, defendant West appeals. Affirmed.

Harris Richardson, of St. Paul, for appellant.

Kingman, Cross, Morley & Cant and Edwin D. Ford, Jr., all of Minneapolis, for respondent.

OLSEN, C.

Appeal by defendant H. J. West, hereinafter referred to as the defendant, from an order overruling his demurrer to the complaint, on the ground that the same fails to state facts sufficient to constitute a cause of action. The trial court certified the question as important and doubtful.

Harold P. Brown was the owner of the West Hotel property in Minneapolis. On May 10, 1927, he and his wife gave a first mortgage trust deed on the property to this plaintiff as trustee, to secure a bond issue of $750,000. The bonds were sold and are outstanding. The trust deed contains the usual provisions requiring the mortgagors, or their successors or assigns, to pay the principal and interest on the bonds as same come due, to pay the taxes and assessments on the property before penalties accrue, to keep the property insured against fire to the extent of $640,000 and pay the premiums for such insurance, to keep the property in repair, and other provisions not here important. It provides that, in case of default in payment of taxes, or in keeping the property insured in the amount stated, the trustee may pay such taxes and pay insurance premiums, and that payments so made shall bear interest until repaid. The trust deed, in terms, mortgages the real estate, "together with all the leases, rents, issues, and profits of said premises." The default provisions in the deed in substance are that, in case of any default, and if such default continues for a period of 60 days, then the trustee may declare the principal of all bonds then outstanding to be due, or, in the event of any such default without declaring the principal of said bonds due, the trustee shall be and is authorized to enter upon the mortgaged premises, without notice and receive the rents, issues, and profits thereof, and demise, lease, and let said mortgaged premises, or any part or portion thereof, and collect the rent therefrom and apply the same to the expenses and just compensation therefor, and for the repair of buildings thereon, and the payment of taxes, assessments, charges, and insurance premiums, due or to become due, and the removal of such default, and apply any surplus to the payment of interest and principal of the bonds. And the mortgagors assign and transfer to the trustee said rents, income, and profits for the purposes aforesaid.

Brown and his wife thereafter conveyed the property, subject to the trust deed, to the West Hotel corporation. That corporation became bankrupt, and the trustee in bankruptcy thereafter, on or about October 26, 1928, sold and conveyed the property, subject to the trust deed, to the defendant H. J West, who took possession thereof on November 1, 1928, and has since remained in possession.

The defendant New England Furniture & Carpet Company, under a lease or permit from the West Hotel corporation, given some time after the trust deed, but before that corporation became bankrupt, maintains an electric sign upon the West Hotel building, for which it is obligated to pay a rental of $50 per month. Plaintiff seeks to recover by this action rent due from the New England Furniture & Carpet Company under its lease. Defendant West claims he is entitled to these rents.

That default for a period of more than 60 days had occurred in the payment of interest on the bonds, and in the payment of taxes and insurance premiums, at the time the action was commenced, is shown by the complaint. Taxes to the amount of $32,736.70, due in 1928, and insurance premiums to the amount of $562.12, were in default and not paid. The trustee, in order to protect its mortgage, paid the first half of the taxes, due May 31, 1928, and the insurance premium. The last half of the taxes remain unpaid. The total rentals of the property are stated to be some $3,700 per month. Notice of default and demand for payment of the rents was served on defendants November 3, 1928. The plaintiff has not declared the principal of the bonds due, and has not entered upon or taken possession of the property, nor taken any steps to foreclose its trust deed, or to have a receiver appointed. By his able argument and brief in support of the demurrer, counsel for defendant presents the questions now to be considered.

1. It is urged that the provisions of the trust deed, attempting to mortgage the rents of the property and authorize the trustee to collect same, are attempts to deprive the mortgagors and their assigns of their statutory right to possession of mortgaged property until the expiration of the period for redemption, and that these provisions are contrary to public policy in this state and are void.

Section 9572, Gen. St. 1923, has been uniformly held by this court to deny to a mortgagee the right to the possession of mortgaged property until after foreclosure, and any provisions in a mortgage granting to the mortgagee the right to possession, or to collect or receive the rents or income from the property to apply upon the mortgage debt, before foreclosure, have been held invalid. Cullen v. Minnesota L. & T. Co., 60 Minn. 6, 61 N. W. 818; Orr v. Bennett, 135 Minn. 443, 161 N. W. 165, 4 A. L. R. 1396; Larson v. Orfield, 155 Minn. 282, 193 N. W. 453. A distinction has been made between applying rents or income from the property to the payment of taxes, insurance, interest on prior liens, and repairs necessitated by waste, and applying such rents upon the mortgage debt. Failure to pay taxes and insurance is considered a species of waste. Cullen v. Minnesota L. & T. Co., supra; Marshall & Ilsley Bank v. Cady, 76 Minn. 112, 78 N. W. 978; Nielsen v. Heald, 151 Minn. 181, 186 N. W. 299, 26 A. L. R. 29; Larson v. Orfield, supra; Windom National Bank v. Reno, 172 Minn. 193, 214 N. W. 886, and cases there cited.

In Nielsen v. Heald, it is said: "Failure to pay claims or charges which were not liens on the property when the mortgage was taken, but which, if not paid, will become liens thereon superior to the mortgage, is deemed waste within the rule. Failure to pay interest on prior mortgages or to pay taxes falls within this species of waste."

In Windom National Bank v. Reno, it is stated: "It is true that nonpayment of taxes and interest on prior encumbrances alone do not justify the appointment of a receiver. * * * Still, such omissions have been considered in this state in the nature of waste when taken in connection with insolvency of the owner of the premises and his refusal to devote the rents and profits to payment of such taxes and interest, and rightly so, for to the second mortgagee the nonpayment thereof is apt to result in more serious consequences than a mere physical deterioration or damage to the premises."

The duty to pay taxes rests upon the owners of property generally or upon the person who has such interest in the property as entitles him to enjoy the use thereof and to receive the rents and profits therefrom. The duty rests on life tenants and each tenant in common; on a mortgagor as...