Freedman's Saving Trust Company v. Shepherd/Opinion of the Court

by by John Marshall Harlan

United States Supreme Court

127 U.S. 494

Freedman's Saving Trust Company  v.  Shepherd

What rights did the trust company acquire, under Bradley's deed, in respect to the income or rents of the mortgaged property, accruing after the execution of that instrument? This is the principal question presented for our consideration, and will be first examined. In Gilman v. Telegraph Co., 91 U.S. 603, 616, the question was as to the disposition of certain earnings of a railroad, accruing after a decree of foreclosure and sale, and before the purchaser at the sale was let into possession. The first, in point of time, of the mortgages conveying the property to secure the company's bonds, provided, among other things, that it might remain in possession, and operate the road, enjoying the revenues thereof, until default occurred in paying the interest or the principal of its bonds at maturity; and if such default continued six months, or if the company failed to set apart, deposit, and apply certain moneys, as required by the mortgage, then the trustees might, and it should be their duty, to enter upon and take possession of, and, by agents, operate the mortgaged property. The second mortgage contained substantially the same provisions. After the decree of foreclosure and sale was passed, a judgment creditor of the company, proceeding under the local law, garnished, in the hands of the company's agents at its various stations, moneys received by them from the operation of the road, the company having been permitted to remain in possession up to the time of the sale under the decree. The trustees in the mortgage claimed that these moneys should be applied in payment of the balance remaining unpaid on their mortgage bonds. This claim was denied. The court, following the previous case of Railroad Co. v. Cowdrey, 11 Wall. 459, said: 'It would have been competent for the court in limine, upon a proper showing, to appoint a receiver, and clothe him with the duty of taking charge of the road, and receiving its earnings, within such limit of time as it might see fit to prescribe. It might have done the same thing subsequently, during the progress of the suit. When the final decree was made, a receiver might have been appointed, and required to receive all the income and earnings until the sale was made and confirmed, and possession delivered over to the vendee. Nothing of this kind was done. There was simply a decree of sale. The decree was wholly silent as to the possession and earnings in the mean time. It follows that neither during that period was in anywise affected by the action of the court.' Again: 'It is clearly implied in these mortgages that the railroad company should hold possession and receive the earnings until the mortgagees should take possession, or the proper judicial authority should interpose. Possession draws after it the right to receive and apply the income. Without this the road could not be operated, and no profit could be made. * * * If the mortgagees were not satisfied, they had the remedy in their own hands, and could, at any moment, invoke the aid of the law, or interpose themselves withouti t. They did neither.' In Bridge Co. v. Heidelbach, 94 U.S. 798, 800, the mortgage included the rents, issues, and profits of the mortgaged property, so far as it was necessary to keep it in repair, and pledged such rents, issues, and profits to the payment of the interest on the mortgage bonds as it matured, and to the creation of a sinking fund for the redemption and payment of the principal. In the event of a continuous default for six months in meeting the interest, the trustees, upon the written request of the holders of one-half of the outstanding bonds, were authorized to take possession of the mortgaged premises, and receive all rents and claims due and to become due to the company. In a contest between the trustees and a judgment creditor, as to which was entitled to certain moneys in the hands of the mortgagor, the decision was in favor of the creditor, the court saying: 'In this case, upon the default which occurred, the mortgagees had the option to take personal possession of the mortgaged premises, or to file a bill, have a receiver appointed, and possession delivered to him. In either case, the income would thereafter have been theirs. Until one or the other was done, the mortgagor, as Lord MANSFIELD said in Chinnery v. Blackman, 3 Doug. 391, was 'owner to all the world, and entitled to all the profit made." In Kountze v. Hotel Co., 107 U.S. 378, 392, 2 Sup. Ct. Rep. 911, it was held that a bond given on appeal with supersedeas, from a final decree of foreclosure and sale, did not cover rents and profits, or the use and detention of the property, pending the appeal. The court said that 'in the case of a mortgage, the land is in the nature of a pledge; and it is only the land itself-the specific thing-which is pledged. The rents and profits are not pledged; they belong to the tenant in possession, whether the mortgagor or a third person claiming under him. * * * The taking of the rents and profits prior to the sale does not injure the mortgagee, for the simple reason that they do not belong to him. * * * But perception of rents and profits is the mortgagor's right until a final determination of the right to sell, and a sale made accordingly.' It is, of course, competent for the parties to provide in the mortgage for the payment of rents and profits to the mortgagee, even while the mortgagor remains in possession. But when the mortgage contains no such provision, and even where the income is expressly pledged as security for the mortgage debt, with the right in the mortgagee to take possession upon failure of the mortgagor to perform the conditions of the mortgage, the general rule is that the mortgagee is not entitled to the rents and profits of the mortgaged premises until he takes actual possession, or until possession is taken in his behalf by a receiver, (Teal v. Walker, 111 U.S. 242, 4 Sup. Ct. Rep. 420; Grant v. Insurance Co., 121 U.S. 117, 7 Sup. Ct. Rep. 841;) or until, in proper form, he demands, and is refused, possession, (Dow v. Railroad Co., 124 U.S. 652, 654, ante, 673.) See, also, Sage v. Railroad Co., 125 U.S. 361, ante, 887. The principles announced in these cases are decisive against the claim of the trust company to the rents of the property represented by the two drafts delivered by the United States to Wilson. Bradley's deed pledged the property, not the rents accruing therefrom, as security for the payment of his notes. It is true, it provides, generally, that the mortgagor may remain in possession, and receive rents and profits, until there is default upon his part. But the only effect of that provision was to open the way to compel him to submit to a sale, and thereby lose possession. The deed did not give the mortgagee or the trustees the right, immediately upon such default, to take possession, and appropriate the rents of the property. It only gave the trustees authority, when such default occurred, to sell upon short notice, and, in that way, oust the mortgago, and suspend his right to further appropriate the income of the property. Even if the deed had expressly pledged the imcome as security for the debts named, the mortgagor, according to the doctrines of the cases cited, would have been entitled to the income, until, at least, possession was demanded under the deed; or until his possession was disturbed by a sale under the deed of trust; or, in advance of a sale, by having a receiver appointed for the benefit of the mortgagee. As was said in Kountze v. Hotel Co., 107 U.S. 395, 2 Sup. Ct. Rep. 911: 'Courts of equity allows have the power where the debtor is insolvent, and the mortgaged property is an insufficient security for the debt, and there is good cause to believe that it will be wasted or deteriorated in the hands of the mortgagor, as by cutting of timber, suffering dilapidation, etc., to take charge of the property, by means of a receiver, and preserve not only the corpus, but the rents and profits, for the satisfaction of the debt. When justice requires this course to be pursued, and it is resorted to by the mortgagee, it will give him ample protection.' In the present case, it appears that prior to the time fixed for the sale under Bradley's deed of trust, and before the trust company filed its cross-bill asking, among other things, for a receiver of the rents of the mortgaged property, Bradley and Shepherd, with the consent of Shepherd's trustees, had pledged the rents of the property as security for Thompson's debts. As Bradley's deed of trust did not pledge the rents as security for his notes to the trust company, the pledge of such rents by himself and Shepherd, his assignee, for Thompson's benefit, did not violate any right secured to it; for, as we have shown, until a sale was had pursuant to the deed of trust, and possession taken under such sale, it had no right, by the terms of the deed, to take the income of the trust property. So that, if a receiver had been appointed immediately upon the filing, October 25, 1877, of the cross-bill of the trust company, and if all the rents represented by the two drafts of $1,800 and $3,475 had been collected by the receiver, they would still, in virtue of the assignment of June 21, 1877, by Bradley and Shepherd, have belonged to Thompson, as between him and the trust company, unless, as contended, the transfer by Bradley to Shepherd of the lease to the United States, and their assignment for the benefit of Thompson, are absolutely void for every purpose, and as to everybody, under the provisions of the statutes relating to the transfer and assignment of contracts with, or claims against, the United States.

It is insisted by the trust company that the transfer by Bradley to Shepherd of the lease of June 6, 1873, was void under section 3737 of the Revised Statutes, which provides: 'No contract or order, or any interest therein, shall be transferred by the party to whom such contract or order is given to any other party, and any such transfer shall cause the annulment of the contract or order transferred so far as the United States are concerned. All rights of action, however, for any breach of such contract by the contracting parties are reserved to the United States.' This provision was brought forward from an act of congress, approved July 17, 1862, entitled 'An act to define the pay and emoluments of certain officers of the army, and for other purposes.' 12 St. 596. In the original act it immediately followed a section providing 'that all contracts made for, or orders given for, the purchase of goods or supplies by any department of the government, shall be promptly reported to congress by the proper head of such department, if congress shall at the time be in session, and if not in session, said reports shall be made at the commencement of the next ensuing session.' We are of opinion that, whatever may be the scope and effect of section 3737, it does not embrace a lease of real estate to be used for public purposes, under which the lessor is not required to perform any service for the government, and has nothing to do, in respect to the lease, except to receive from time to time the rent agreed to be paid. The assignment of such a lease is not within the mischief which congress intended to prevent. Although a lease such as Bradley made is a 'contract' in the broadest sense of that word, we are not prepared to hold that it is of the class of contracts the transfer of which, or of any interest therein, is prohibited by section 3737.

It is also contended that the assignment made on June 21, 1877, by Bradley and Shepherd is void under section 3477, Rev. St. which provides that 'all transfers and assignments made of any claim upon the United States, or of any part of it, or share thereof, or interest therein, whether absolute or conditional, and whatever may be the consideration therefor, and all powers of attorney, orders, or other autnorities for receiving payment of any such claim or any part or share thereof, shall be absolutely null and void, unless they are freely made and executed in the presence of at least two attesting witnesses, after the allowance of such a claim, the ascertainment of the amount due, and the issuing of a warrant for the payment thereof.' This court has frequently had occasion to construe this section. U.S. v. Gillis, 95 U.S. 407. Erwin v. U.S., 97 U.S. 392; Spofford v. Kirk, Id. 484; Goodman v. Niblack, 102 U.S. 556; Bailey v. U.S., 109 U.S. 432, 3 Sup. Ct. Rep. 272; Railroad Co. v. U.S., 112 U.S. 733, 5 Sup. Ct. Rep. 366; Hobbs v. McLean, 117 U.S. 567, 6 Sup. Ct. Rep. 870. Undoubtedly, the lease made by Bradley to the United States created in his favor what, in some sense, was a 'claim upon the United States' for each year's rent as it fell due. And, if the statute embraces a claim of such a character, there could not have been any valid transfer or assignment of it in advance of its allowance, which could have been made the basis of a suit by the assignee against the United States, or which would compel the government to recognize the transfer or assignment. It is, perhaps, also true that, under some circumstances, the assignor, before the allowance of the claim and the issuing of the warrant, may disregard such an assignment altogether. But when the government ascertained the amount of rent due under Bradley's lease, and, with his consent, allowed the same to him for the use of Shepherd, for the use of Taylor, Bacon, and Cross, trustees, we perceive nothing in the words or the policy of the statute preventing Thompson from asserting his rights either against the parties or any of them, named in the warrants issued by the government, or against the trust company, the mortgagee of the premises. The object of the statute, as was said in Bailey v. U.S., 109 U.S. 432, 3 Sup. Ct. Rep. 272, was to protect the government, and not the claimant, and to prevent frauds upon the treasury; and that 'an effectual means to that end was to authorize the officers of the government to disregard any assignment or transfer of the claim, or any power of attorney to collect it, unless made or executed after the allowance of the claim, the ascertainment of the amount due thereon, and the issuing of the warrant for the payment thereof.' Here, the officers of the government chose to recognize the assignment, and of their action neither Bradley nor Shepherd, nor Shepherd's trustees, can rightfully complain. The government is acquitted of any liability in respect to the claim for rent, for its officers have acted in conformity with the directions, not only of the original claimant, but of his assignee, Shepherd, and of Shepherd's trustees. The simple question is whether the money received from the government shall be diverted from the purpose to which Bradley, Shepherd, and Shepherd's trustees agreed in writing that it should be devoted, namely, to the payment of the debts Thompson holds against Shepherd. This question mustb e answered in the negative; and in so adjudging we do not contravene the letter or the spirit to the statute relating to the assignment of claims upon the United States.

It only remains to say a word in reference to that part of the decree giving to Shepherd's trustees the rent which Bradley, as receiver, collected. We have already shown that Bradley, not having pledged the income of the property to the trust company, could pledge it as security for debts held against him by other creditors. After executing the deed of 1873, he conveyed the premises to Shepherd, and also assigned to him the benefit of the lease made to the government. Shepherd included the premises in his deed to Taylor and others of November 15, 1876, and expressly agreed that the rents, issues, and profits therefrom should be applied in payment of the debts named in that deed. The right of those trustees to the rents, issues, and profits which accrued before any sale under Bradley's deed to the trust company, and prior to actual possession being taken under such sale, was, consequently, superior to any that company had. That right could not be defeated by anything the company did, whether by means of a receiver or otherwise. Whether the money in the hands of the receiver belonged to Thompson rather than to Shepherd's trustees is a question not before us, since Thompson has not appealed from the decree,

Upon the whole case, we are of opinion that there is no error in the decree to the prejudice of either of the appellants, and it is, in all respects, affirmed.

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