Int'l Paper Co. v. Priscilla Co.

• Decision Date: 04 November 1932
• Citation: 281 Mass. 22,183 N.E. 58
• Parties: INTERNATIONAL PAPER CO. et al. v. PRISCILLA CO.
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

281 Mass. 22

183 N.E. 58

INTERNATIONAL PAPER CO. et al.

v.PRISCILLA CO.

Supreme Judicial Court of Massachusetts, Suffolk.

Nov. 4, 1932.

Report from Superior Court, Suffolk County; James H. Sisk, Judge.

Bill by the International Paper Company and others for the appointment of a receiver for the Priscilla Company. A receiver was appointed, Wayland M. Minot filed a claim which was referred to a master, who filed a report. An interlocutory decree was entered overruling exceptions of the receiver and claimant to the report, and confirming the report. On report.

Decree in accordance with opinion.R. S. Wilkins, of Boston, for receiver.

B. Corneau, of Boston, for Straus Nat. Bank & Trust Co. and another.

CROSBY, J.

The plaintiffs, as creditors of the defendant, on September 16, 1930, filed a bill in equity in the superior court alleging the inability of the defendant to pay its debts as they matured, and the danger of waste of its assets, and praying for the appointment of a receiver. On September 23, 1930, a receiver was appointed, and on November 7 following an order was entered by which all creditors were directed to present their claims to the receiver for allowance on or before February 7, 1931, or be forever barred from asserting the same, unless the court for good cause shown otherwise ordered.

A claim originally of F. L. Buswell and A. M. Stewart, later assigned to the claimant Wayland M. Minot, and a claim of Minot accruing subsequently to the appointment of the receiver, both seasonably filed, were referred to a master to hear the parties and their evidence and report his findings to the court, together with such facts and questions of law as either party might request. The master filed his report. Minot objected to the disallowance by the master of a certain claim as matter of law. The receiver objected to a ruling of law made on the contingency the first ruling was wrong. On December 4, 1931, an interlocutorydecree was entered overruling the exceptions and confirming the report. The decree also adjudged that the claim of Wayland M. Minot, trustee, amounted to $14,757.37 instead of $71,740.93, the amount claimed. Minot appealed from the decree. The judge reported his action to this court for decision before further proceedings.

The master recites the following findings: In 1925 a building, to be erected on Atlantic avenue, in Boston, and called the Harbor building, was contemplated. In connection with the contruction loan mortgages, contracts for space in the building were arranged. On July 27, 1925, and application by the Priscilla Company and the Southgate Press for a fifteen-year lease of four floors and certain other space in the building to begin July 1, 1926, was accepted by the Harbor Trust, Incorporated, the owner of the land. By such acceptance it bound itself by the terms of the application to give a lease in accordance with the form of lease annexed to the application, and further agreed to proceed to complete the proposed building. On July 29, 1925, a first mortgage on the land and buildings to be erected was given to Charles Ridgely, trustee, in the sum of $1,250,000, and a second mortgage was given to the First National Bank of Boston, trustee, in the sum of $400,000. Concurrently with the giving of the first and second mortgages, the lessor's interest in the contract for the lease was assigned to the first mortgagee. Thereafter the building was constructed and possession was given, and taken by the applicants, Priscilla Company and the Southgate Press, on September 22, 1926. The original time for the completion of the building was extended to October 1, 1926, by mutual agreement.

The lease, in the form attached to the application, was executed by both parties on January 12, 1927, and delivered and accepted as a performance of the former contract; it bound the lessees to joint and several obligations. The lease was expressed to be subject to the first and second mortgages, but made no reference to a third mortgage covering the premises and given by the Harbor Trust, Incorporated, to the First National Bank of Boston on November 26, 1926. The First National Bank had actual notice of the contract for the lease at the time it was executed, and had actual notice of the extension of time to complete the building, and of the taking possession by the lessees under the contract when these events occurred and before it took the third mortgage. On February 28, 1928, and assignee of the third mortgage made an entry for the purpose of foreclosing the same. On April 28, 1928, an assignee of the third mortgage, a ‘straw’ for the First National Bank, sold the premises to another ‘straw’ for that bank. From April 28, 1928, until August 6, 1930, the rents due from tenants so far as paid were collected by this bank as agents for the owners of the equity in the building, who were found to be Buswell and Stewart, ‘straw men’ for the bank. The master found that on August 6, 1930, Minot and the Straus National Bank and Trust Company of New York successors of Charles Ridgely as trustee under the first mortgage, made an entry for the purpose of foreclosing the same for breach of condition thereof, and since then have been and now are in possession as such mortgagees. But it does not appear that they took possession of the premises held under the lease here involved. The next day they notified the tenants by a notice signed by them as trustees, and setting forth that they as mortgagees had taken possession of the building, and that rent then due or thereafter becoming due was payable to Robert A. Nordblom as agent of Minot, described as resident trustee and one of the mortgagees. In this connection it is important to notice that on February 1, 1927, the lessor's interest in the lease was assigned to the trustee of the first mortgage as security, it being provided, however, that until default all rentals should be paid to the lessor. The Priscilla Company and the Southgate Press indorsed on this assignment an acknowledgment of notice and a consent to be bound thereby. Minot and his then co-trustee asserted the right to collect rents from tenants, but no rent was paid by either lessee between August 6 and December 20, 1930. On the latter date the claimant entered on the leased premises for the purpose of terminating the lease for breach of covenant thereof. He seasonably filed with the receiver a claim for rents, electricity and water from May 1, 1930, to December 20, 1930, plus $34,000 damages for the termination of the lease, altogether amounting after being reduced by certain credits to the sum of $71,740.93. A proof of claim covering certain items in Minot's proof of claim was filed by Buswell and Stewart, but it appears that this claim has been assigned to Minot.

The master further found that prior to March 1, 1930, the rent for all the premises was paid to the landlord by the Priscilla Company and after April 1, 1930, the Southgate Press paid rent at the rate of $2,793.52 directly to the landlord for and during the period ending June 30, 1930. It also appears that in certain litigation between the claimant, the First National Bank of Boston, Stewart, and the Southgate Press, the claimant asserted against the Southgate Press the same items specified in its proof of claim in these proceedings. In pursuance of a compromise made April 2, 1931, the Southgate Press obtained a covenant not to sue upon a payment of $28,000 to the claimant, $3,500 to the First National Bank and $3,500 to Stewart.

By agreement of the parties and with the consent of the court the master made the following rulings of law: (1) The foreclosure of the third mortgage on February 28, 1928, terminated the lease; (2) if not the lease was terminated August 6, 1930, by the foreclosure of the first mortgage; (3) if the lease was not terminated, claims arising subsequently to the appointment of a receiver might be proved; (4) if the lease was not terminated, the item of $34,000 for liquidated damages was not penal and might be proved; and (5) the payment by the Southgate Press must be deducted from the trustee's claim against the Priscilla Company.

The claimant objects to rulings numbered one, two and five, and the receiver objects to rulings numbered three and four.

1. The first contention of the receiver is that the foreclosure by sale of the third mortgage terminated the lease. This contention cannot be sustained because of the fact that the bank at the time it took that mortgage had notice that the lessees had entered upon and were in possession of the premises under a contract giving them the right to a lease of a part of the premises. It is a general rule that when the holder of a mortgage given prior to a lease enters to foreclose and demands rent to fall due from a tenant of the mortgagor, the tenant is not liable to the latter for rent. Cook v. Johnson, 121 Mass. 326;Adams v. Bigelow, 128 Mass. 365;Winnisimmet Trust, Inc., v. Libby, 247 Mass. 560, 564, 142 N. E. 772. The reason for the rule is that there has been an eviction of the tenant by a paramount title. But mere foreclosure of the mortgagor's interests by sale under power does not terminate the tenant's liability in his covenants with the mortgagor. It was said in Winnisimmet Trust, Inc., v. Libby, 234 Mass. 407, at page 410, 125 N. E. 599, 600, 14 A. L. R. 638: ‘The tenants cannot avoid paying rent to the assignee of their original landlord unless and until the mortgagee in possession notifies them to pay rent to her, or threatens to evict them, or they have agreed to attorn to her in recognition of her paramount title.’ If the mortgagee under a subsequent mortgage had entered and taken possession it would have been the assignee of the reversion and entitled to the rents. Burden v. Thayer, 3 Metc. 76,37 Am. Dec. 117. Since there has been no eviction, actual or constructive, the tenant is receiving all he is entitled to from the lessor, namely, the use and...