HUGULEY MFG. CO. et al. v. GALETON COTTON MILLS et al., 94 F. 269

SHELBY, Circuit Judge. On January 1/1884, the Alabama & Georgia Manufacturing Company executed a mortgage or deed of trust to J. J. Robinson and two others to secure §>65,000 of bonds issued by it that day. Subsequently the property embraced in the mortgage was sold under a decree of a state court subject to the mortgage. Under this sale the Iiugulsy Manufacturing Company became the purchaser and owner of the property, subject to the in-cumbrance of the mortgage for §>(>5,000. It was placed in possession of the property.

A bill was filed in the circuit court of the United States for the Northern district of Georgia to foreclose the mortgage, a decree of foreclosure rendered, and on appeal to this court the decree was reversed. 13 U. S. App. 359, 6 C. C. A. 79, and 56 Fed. 690. The decree of foreclosure being vacated by reversal, the circuit court granted a petition on the part of the liuguley Manufacturing Company to restore it to the possession of the property, upon condition, however, that it pay into court $10,000, which had been paúl by the purchasers under the now vacated foreclosure sale.

This condition the Hugulev Manufacturing Company did not comply with, but resisted. It took another appeal to this court, and the decree of the circuit court was affirmed. 30 U. S. App. 683, 19 C. C. A. 152, and 72 Fed. 708. At the first foreclosure sale the property was purchased for the bondholders, who organized a corporation under the name of the Gale-ton Cotton Mills.

This corporation was placed in possession of the property under the first decree of foreclosure, and field tfie same pending tfie appeal, and after tfie reversal of tfie decree, and upon tfie second foreclosure became purchasers again, and have remained continuously in possession, operating tfie mills on tfie property. Tfie Galeton Cotton Mills were in possession of tfie property under tfie first decree of foreclosure for a period of three years and eight months. Tfie real controversy in tfie present litigation is about tfie rents of tfie property during this period.

Tfie net rents fiave been ascertained to be $28,334. At tfie last foreclosure sale a balance was. left due, after applying tfie net purchase money to tfie mortgage debt, of $33,414.21.

Tfie Huguley Manufacturing Company contends that tfie possession of tfie purchasers at tfie foreclosure sale, tfie decree afterwards being reversed, was illegal and wrongful, and that in stating tfie account of reference tfie company was not to be treated as a mortgagee in possession, but that a stricter rule should be applied on tfie accounting, and that tfie rents are tfie property of tfie Huguley Manufacturing Company, and' should be paid to it.

Tfie Galeton Mills, on tfie contrary, contends that its possession was not tortious, but legal, that it should be treated and charged only on tfie accounting as a mortgagee in possession, and that the net rents should not be paid to tfie Huguley Manufacturing Company, but should be applied to tfie payment of tfie amount left unpaid on tfie mortgage. These are tfie only substantial questions in the case. Tfie material assignments of error relate either to tfie statement of the account before tfie master, or tfie application of the rents to tfie payment of tfie mortgage debt.

We are relieved from stating these questions and tfie facts relating to them more minutely by tfie opinion of tfie learned judge who rendered the decrees appealed from in tfie circuit court.. 89 Fed. 218-231. 1.- Tfie possession of tfie purchasers at tfie first foreclosure sale-was not wrongful in the sense that such possession made them trespassers. The decree] was rendered by a court having jurisdiction of tfie case. The mortgage foreclosed was valid. Tfie decree was. binding, and not subject to collateral attack.

It was valid and effectual to place tfie purchasers in possession, and to protect them in possession till it was reversed. 2 Jones, Mortg. (5th Ed.) §§ 1587, 1588. It was reversed by this court, and tfie circuit court then granted an order of restitution, but upon condition that tfie Huguley Manufacturing Company would pay into court tfie sum of $10,000, which had been paid by the purchasers at tfie date of their purchase. This court, on appeal, affirmed this condition.

Tfie Huguley Manufacturing Company did not pay tfie $10,000, and so were not entitled to-tfie possession by tfie terms of tfie order made by the circuit court and affirmed by this court. From its inception tfie possession in question was sanctioned by a decree of tfie court having jurisdiction of tfie parties and tfie property. Tfie reversal of tfie decree does not make tfie purchasers under it trespassers.

Tfie purchasers in this case, on tfie facts stated, are entitled to tfie benefit of tfie equitable rules governing mortgagees in possession, and tfie account should be stated and tfie rents applied by such rules. Dutcher v. Hobby, 86 Ga. 198, 12 S. E. 356; Brobst v. Brock, 10 Wall. 519; Lane v. Holmes, 55 Minn. 370, 57 N. W. 132; Townshend v. Thomson, 139 N. Y. 152, 34 N. E. 891. 2. Under the English law, which has been substantially adopted in. many of the states, a mortgage on real estate is of dual nature. In a court of law the mortgagee is regarded as the owner.

He possesses the legal title, and can recover the estate in ejectment. In a court of equity the mortgage is deemed only a security for the debt described in it. Welsh v. Phillips, 54 Ala. 309; 3 Pom. Eq. Jur. § 1184; 1 Jones, Mortg. (4th Ed.) § 11. In Georgia, as in several of the states, the English view does not prevail. The legal title does not pass to the mortgagee. The mortgage, both at law and in equity, is always deemed a mere security for debt. This was settled in Georgia many years ago by judicial decision. Davis v. Anderson, 1 Ga. 176; Vason v. Ball, 58 Ga. 269.

It is now confirmed by statute. “A mortgage in this state is only security for a debt, and passes no title.” Civ. Code Ga. § 2723. In the argument of this c.ase it was urged with much earnestness that these decisions and the statute are controlling in this case, and that their proper application to the case will give to the appellant the rents and profits of the property.

It must be conceded as established by authority, as a general principle, that a mortgagee in possession, whether in person, by trustee, or receiver, is in equity accountable for the rents and profits, “and must apply them to the reduction of the mortgage debt.” 2 Jones, Mortg. (5th Ed.) § 1114. This is a matter exclusively of equity jurisdiction, and is for the benefit of the mortgagor. By such application of the rents his debt is paid or reduced so as to lessen the burden of redemption. It is also nothing more than is due to the mortgagee. He is entitled to be paid.

In cases where the corpus of the property is not sufficient to pay the debt, and where the mortgagor is insolvent, the mortgagee has no other means of obtaining full jiayinent except to secure the rents. As between an insolvent mortgagor and the mortgagee who has collected rents, the property mortgaged being insufficient to pay the debt, the rents must be applied to extinguish the debt. The mortgagee would not, in equity, be permitted to retain the rents, and not apply them to the debt. In no jurisdiction would he be required to pay the rents to the mortgagor, his did)tor, and leave the debt unpaid.

As the mortgagor, under such circumstances, could not prevent the rents being applied to the payment of: his debt, he cannot, by selling his equity of redemption to another, invest him with a right he did not have himself. The purchaser of the mortgagor’s right of redemption can have no greater rights than the mortgagor. In cases like this the equitable right of the mortgagee to apply the rents to the payment of his claim seems undisputed by the general practice and principles of equity jurisprudence.

This, we understand, if not conceded by the appellant, is not denied, but the contention is that these principles are not applicable to a mortgage controlled by the laws of Georgia. Is there anything in the Georgia law in conflict with these principles? Does the statute which makes a mortgage only a security for debt, intend to make it any less a security, in equity, than other mortgages on real estate? Under the English rule, a mortgage on real estate is in equity always regarded, as a mere security for debt. It is only at law that the mortgagee is regarded as the owner of the legal title.

The Georgia statute changes the effect, in this regard, of a mortgage at law, but it is only a legislative recognition of the equitable rule, which views a mortgage as merely a security for debt. It is held in Hart v. Respess, 89 Ga. 87, 14 S.

E. 910, as stated in the syllabus: “While the mortgagee has no legal title to the rents and profits, he has an equitable claim upon the same in so far as they may be needed to discharge so much of the mortgage debt as cannot be realized out of the corpus of the property, the facts of the case indicating that the debtors are insolvent, and the creditors likely to sustain loss.” The decree of the circuit court is affirmed.