Taylor v. Brennan
| Decision Date | 23 September 1981 |
| Docket Number | No. C-38,C-38 |
| Citation | 621 S.W.2d 592 |
| Parties | James S. TAYLOR, Jr., Petitioner, v. T. C. BRENNAN, Jr., Respondent. |
| Court | Texas Supreme Court |
Donna M. Bobbitt, Houston, for petitioner.
Butler, Binion, Rice, Cook & Knapp, Roger A. Rider and Sharon E. Peebles, Houston, for respondent.
This is a suit for damages for waste of security involving the interpretation of an assignment of rentals instrument executed in connection with the purchase of realty. The trial court rendered judgment against the purchaser for waste of security and failure to refund security deposits, plus attorneys' fees. The court of civil appeals affirmed. 605 S.W.2d 657. We reverse that part of the judgment of the court of civil appeals which awarded damages against Taylor for waste of security. We affirm the remainder of the judgment of the court of civil appeals.
In January, 1974, T. C. Brennan, Jr., sold the Sagewood Apartments, located in Houston, to James S. Taylor, Jr. The conveyance was made subject to a first lien deed of trust and an assignment of rentals in favor of First Continental Mortgage Company. Taylor also executed a promissory note, a second lien deed of trust, an assignment of rentals, a U.C.C. security agreement and an assignment of lessor's interest in leases, all in favor of Brennan. The deed of trust and general warranty deed contained a promise by Taylor to make all payments and perform all obligations pursuant to the first lien note and the first lien in favor of First Continental. However, the parties expressly agreed that Taylor would not assume any personal liability on the obligation to First Continental.
In the latter part of September, 1974, First Continental notified Brennan that Taylor had defaulted on the August and September first lien payments. Taylor was current on all second lien payments to Brennan. Taylor collected rents from tenants for August and September but did not apply them to discharge the delinquency on the first lien. Brennan responded by foreclosing on his second lien and regaining possession of the property. The first lien was not foreclosed. Once in possession, Brennan collected $4,082.64 in rents, but was forced to pay First Continental, the first lienholder, $19,976.32 for the payments due on the first lien.
Brennan sued Taylor for damages for waste of security. He alleged that the various security agreements assigned the rents from the Sagewood Apartments, and the rents were to be used specifically for payment of the first lien and second lien mortgage notes. Consequently, while he was in default, Taylor's failure to apply the rents he collected to discharge the first lien payments constituted waste of security. The trial court filed findings of fact and conclusions of law. One of those conclusions of law reads as follows:
"(3) That the Assignment of Rents (Plaintiff's Exhibit No. 8) pledged the rents from the tenants' leases in the Sagewood Apartments as security against the debts between defendant Taylor and plaintiff." (Emphasis added).
The trial court awarded Brennan damages of $19,976.32 for waste. In affirming the trial court, the court of civil appeals held that the first assignment of rentals instrument, which Taylor took the property subject to, was an absolute assignment to the first lienholder, which upon default, gave rise to a cause of action for waste of security.
Texas follows the lien theory of mortgages. Under this theory the mortgagee is not the owner of the property and is not entitled to its possession, rentals or profits. Thus, it has become a common practice to include in the deed of trust, or in a separate instrument, terms assigning to the mortgagee the mortgagor's interest in all rents falling due after the date of the mortgage as additional security for payment of the mortgage debt.
The Texas cases addressing rentals assigned as security have followed the common law rule that an assignment of rentals does not become operative until the mortgagee obtains possession of the property, or impounds the rents, or secures the appointment of a receiver, or takes some other similar action. Simon v. State Mutual Life Assur. Co., 126 S.W.2d 682 (Tex.Civ.App. Dallas 1939, writ ref'd); McGeorge v. Henrie, 94 S.W.2d 761 (Tex.Civ.App. Texarkana 1936, no writ). Most jurisdictions are in accord. 59 C.J.S. Mortgages § 316 n. 71 at 411.
On the other hand, an absolute assignment of rentals operates to transfer the right to rentals automatically upon the happening of a specified condition, such as default. Kinnison v. Guaranty Liquidating Corporation, 18 Cal.2d 256, 115 P.2d 450, 453 (Cal.1941). The absolute assignment does not create a security interest but instead passes title to the rents. In Re Ventura Louise Properties, 490 F.2d 1141 (9th Cir. 1974).
Courts have been reluctant to construe assignment of rentals clauses to operate as absolute assignments. The public policy embracing the rule was...
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