This was a suit in equity brought by the petitioner in the
United States Circuit Court for the Western District of
Pennsylvania, commenced to foreclose a mortgage given January 1,
1891, by The Pennsylvania Plate Glass Company upon its property in
the County of Westmoreland and State of Pennsylvania, to The
Farmers' Loan and Trust Company, to secure the payment of $250,000
of bonds then to be issued by the mortgagor company. A decree was
entered by direction of the Circuit Court providing for the
foreclosure and sale of the property and for the application of the
insurance moneys as prayed for. Upon appeal to the circuit court of
appeals, the decree of the circuit court was reversed as to the
insurance moneys, and the court below was directed to enter a
decree that those moneys should be paid to the defendant, The Penn
Plate Glass Company. The material facts in the case are stated in
the opinion of the Court. The only question involved arose from the
provision made in the decree by the circuit court judge impressing
what is termed an equitable lien upon the insurance moneys
collected on the policies taken out by The Penn Company sufficient
to pay any balance which may remain unpaid on the bonds secured by
the mortgage to complainant, after the application of the proceeds
of the sale of the property mortgaged. The circuit court held that
the complainant had such equitable lien, while the circuit court of
appeals was of the contrary opinion.
Held that the
judgment of the circuit court of appeals was right.
Page 186 U. S. 435
This is a suit in equity brought by the petitioner in the United
States Circuit Court for the Western District of Pennsylvania, and
the case comes here on certiorari to the Circuit Court of Appeals
for the Third Circuit. The suit was commenced to foreclose a
mortgage given January 1, 1891, by the Pennsylvania Plate Glass
Company (hereinafter called the mortgagor company) upon its
property in the County of Westmoreland and State of Pennsylvania,
to complainant, the Farmers' Loan & Trust Company, a
corporation of New York, to secure the payment of $250,000 of bonds
then to be issued by the mortgagor company. A supplemental bill was
filed, by leave of the court, which averred a loss by fire of a
large portion of the premises mortgaged, and on the allegations
contained in the supplemental bill the complainant asked that a
decree should be entered granting to it a lien on the insurance
moneys to the extent necessary to pay the bondholders the balance
which might be due after applying to their payment the proceeds of
the sale of the property mortgaged. A decree was entered by
direction of the circuit court, providing for the foreclosure and
sale of the property and for the application of the insurance
moneys as prayed for. Upon appeal to the circuit court of appeals,
the decree of the circuit court was reversed as to the insurance
moneys, and the court below was directed to enter a decree that
those moneys should be paid to the defendant, the Penn Plate Glass
Company, Circuit Judge Acheson dissenting. The opinion of the judge
of the circuit court, as well as those delivered in the circuit
court of appeals, will be found reported in 103 F. 132.
The material facts in the case are as follows: the Farmers' Loan
& Trust Company is a corporation of the State of New York. The
defendant, the Pennsylvania Plate Glass Company (the mortgagor
company), is a corporation of the State of Pennsylvania, organized
for the purpose of constructing and operating plate glass works in
the City of Irwin in that state. The defendant, the Penn Plate
Glass Company, is also a corporation of the State of Pennsylvania,
and is also organized for the purpose of constructing and operating
plate glass works in the same city. The defendant William L. Kann
is a citizen of the state
Page 186 U. S. 436
of Pennsylvania. On January 1, 1891, the mortgagor company
executed to the complainant trust company a mortgage on its
property in Westmoreland County, Pennsylvania, to secure the
payment of $250,000 of bonds as therein stated. Among other things,
it was provided by article 1 of the mortgage that, until default
should be made in the payment of the principal or interest of the
bonds secured by the mortgage, or in the performance of some one or
more of the covenants, stipulations, or agreements required by the
mortgage to be kept, performed, or done by the mortgagor, it was to
be permitted to possess and operate the premises and glass works
with the appurtenances described in the mortgage.
By articles 2 and 3 it was provided that in case default should
be made in the payment of any installment of the interest on any of
the bonds or of any of the coupons accompanying the same, or in the
performance of any of the covenants, agreements, or stipulations
contained in the mortgage and thereby required to be kept and
performed by the mortgagor, and if such default continued for six
months after demand made in writing, the mortgagee might take
possession of the property, or foreclosure proceedings might be
taken.
By article 4, the mortgagor is exempted from all personal
liability for the mortgaged debt, and from the obligations of the
other covenants contained in the mortgage, the article providing as
follows:
"It being expressly understood and agreed by and between the
parties hereto, and by and between the said party of the first part
and the respective holders of the said several bonds, collectively,
that no other suit or proceeding for the collection of any part of
the principal or interest represented by the said bonds and coupons
shall ever be commenced or prosecuted, either against the party of
the first part, or any of its officers, directors, or shareholders,
either by the said holders of the said bonds or coupons or any of
them, or by any person or corporation to whom the same or any of
them may be assigned or transferred, except such suits or
proceedings as shall be necessary to recover the possession of the
said premises thereby conveyed or to subject the same to the
payment of the said debts
Page 186 U. S. 437
and that the sale of the said mortgaged premises, whether under
the power of sale hereby granted, or any other power of sale, or by
or under any judicial proceedings whatsoever, shall operate as a
full and complete satisfaction and discharge of the indebtedness of
the said party of the first part upon the said bonds and the
coupons accompanying the same, and of the obligation of the
covenants herein contained, whether the said premises shall be
bidden in for the whole amount of said indebtedness or for a less
price, anything in the said bonds and coupons or therein contained,
to the contrary thereof notwithstanding."
It was provided by article 10, among other things, as
follows:
"The right of action under this indenture is vested exclusively
in the trustee, and under no circumstances shall any bondholder or
bondholders have any right to institute an action or other
proceeding on or under this indenture, for the purpose of enforcing
any remedy herein and hereby provided, or of foreclosing this
mortgage, except in case of refusal on the part of the trustee to
perform any duty imposed on it by this agreement, and all actions
and proceedings for the purpose of enforcing the provisions of this
indenture shall be instituted and conducted by the trustee,
according to its sound discretion; but the trustee shall be under
no obligation to institute any such suit or to take any proceedings
under this indenture, or to enter any appearances, or in any way
defend in any suit in which it may be made defendant, or to do
anything whatever as trustee until it shall be indemnified to its
satisfaction from any and all costs and expenses, outlays and
counsel fees, and other reasonable disbursements, and from all
possible claims for damages, for which it may become liable or
responsible on proceeding to carry out such request or demand. The
trustee may nevertheless begin suit, or appear in and defend suit,
or do anything else in its judgment proper to be done by it as such
trustee, without such indemnity, and in such case it shall be
compensated therefor from the trust fund."
"The trustee shall be under no obligation to recognize any
person as holder or owner of any bonds secured hereby, or to do or
refrain from doing any act pursuant to the request or demand
Page 186 U. S. 438
of any person, until such supposed holder or owner shall produce
said bonds and deposit the same with the trustee."
"It shall be no part of the duty of the party of the second part
to file or record this indenture as a mortgage or conveyance of
real estate, or as a chattel mortgage, or to renew such mortgage,
or to procure any further, other, or additional instrument of
further assurance, or to do any other act which may be suitable and
proper to be done for the continuance of the lien hereof, or for
giving notice of the existence of such lien, or for extending or
supplementing the same; nor shall it be any part of its duty to
effect insurance against fire or other damage on any portion of the
mortgaged property, or to renew any policies of insurance, or to
keep itself informed or advised as to the payment of any taxes or
assessments, or to require such payment to be made; but the trustee
may, in its discretion, do any or all of the matters and things in
this paragraph set forth, or require the same to be done. It shall
only be responsible for reasonable diligence in the performance of
the trust, and shall not be answerable in any case for the act or
default of any agent, attorney, or employee selected with
reasonable discretion; it shall be entitled to be reimbursed for
all proper outlays of every sort or nature by it incurred in the
discharge of its trust, and to receive a reasonable and proper
compensation for any services that it may at any time perform in
the discharge of the same, and all such fees, commissions,
compensations, and disbursements shall constitute a lien on the
mortgaged property and premises."
Many other provisions and conditions were contained in the
mortgage, which are not material to be mentioned.
Most of the moneys arising from the issuing of these bonds were
applied towards the construction of the plant of the mortgagor
company at its place of business in the City of Irwin,
Pennsylvania. The company soon got into financial difficulties, and
about January, 1894, the defendant Kann became a stockholder
therein and was elected its treasurer. By March 19, 1894, the
company had become involved in litigation, and was very greatly
embarrassed financially, and some of the other officers of the
company had disagreements with Kann in regard
Page 186 U. S. 439
to his advances of money, so that, on the day last named, a bill
in equity was filed against the company, in the name of some of its
creditors and directors, in the Court of Common Pleas of
Westmoreland County, Pennsylvania, praying, among other things, for
the appointment of a receiver of the property of the company, and
for a decree winding up its business. In that suit, Joseph W.
Stoner, the then secretary of the company, was appointed receiver,
and such proceedings were had therein that, on or about June 18,
1894, the court made an order for the sale of all the property of
the mortgagor company, and the same was sold at public auction to
defendant Kann for the sum of $37,500, he being the highest bidder
at the sale, which was open and public, and attended by others who
made bids on the property. The sale was made subject to the
mortgage to the complainant, and a deed was given by the receiver,
pursuant to the order of the court, to Kann, the deed bearing date
July 2, 1894, and reciting that the property was thereby
conveyed
"subject to a mortgage made by said Pennsylvania Plate Glass
Company to the Farmers' Loan & Trust Company of the State of
New York, dated 1st of January, 1891, recorded in Westmoreland
County in mortgage book No. 43, page 1,"
and being the mortgage or deed of trust made to complainant as
stated. Kann continued in possession as owner of the property under
this deed from the receiver until about July 1, 1895, when he
conveyed, by deed dated on that day, all of the mortgaged property,
together with the improvements made thereon by himself, to the
defendant, the Penn Plate Glass Company, for a consideration named
in the deed of $83,500. Kann in his evidence says the consideration
really amounted to $118,000. The deed from Kann to the company also
recited that the property therein conveyed was
"subject to a mortgage made by said Pennsylvania Plate Glass
Company to the Farmers' Loan & Trust Company of the State of
New York, dated 1st of January, 1891, recorded in Westmoreland
county, in mortgage book No. 43, page 1."
While Kann held the property, he paid the interest on the bonds,
but default was made in the payment of the coupons maturing on July
1, 1895, and no coupons have been paid since that time.
Page 186 U. S. 440
There was some insurance on the property when it went into the
hands of the receiver in the suit which was commenced to wind up
the affairs of the company, a portion of which insurance had not
been paid for at the time of the appointment of the receiver, and
he thereupon secured directions from the court to maintain the
insurance, and for the purpose of paying the premiums thereon he
issued receiver's certificates under the order of the court. Some,
but not all, of this insurance was still in force when the receiver
turned the property over to Kann at the time of the deed, July 2,
1894. This insurance expired by the lapse of time, and afterwards,
and while Kann was in possession of the property under his deed
from the receiver, he procured insurance upon his own interest
therein and in his own name. These policies subsequently expired.
The Penn Company when organized, and after it had purchased the
property, took out insurance in its own name upon the same and for
its own benefit exclusively, the amounts running from $250,000 to
about $400,000, and the policies containing this provision:
"This property is subject to a bonded indebtedness of $250,000,
but it is distinctly understood and agreed that this insurance does
not cover the interest of the bondholders."
There was no insurance on the property during the time that the
Penn Company owned it, other than as just stated, but that
insurance was to an amount more than sufficient to secure the
bondholders under the mortgage if the moneys were to be so
applied.
While the property was in the hands of Kann and after the
insurance thereon had expired, which had been procured by the
mortgagor company or by its receiver, the mortgagee notified Kann
and required him to keep up or renew or take out other insurance
for the benefit of the bondholders under the mortgage, up to the
amount thereof, and the same notice and requirement were given to
and demanded of the mortgagor company. That company made default,
and Kann refused to take out any such insurance, and denied that he
was under any obligation so to do. After Kann sold and conveyed the
property to the Penn Company, the complainant notified that company
and required it to insure in a sum sufficient to afford security
for the bondholders under the mortgage to complainant. The Penn
Company refused
Page 186 U. S. 441
to so insure, and denied any obligation to do so, but, on the
contrary, did insure for its own benefit, the policies of insurance
containing the provision excluding the interest of the bondholders
under the mortgage.
As stated, the mortgagor company, and also Kann and the Penn
Company, defaulted in the payment of the coupons due July 1, 1895,
and upon those due January 1 and July 1, 1896, and thereupon
complainant commenced this suit by the filing of its bill July 8,
1896, asking for the foreclosure of the mortgage and making the
mortgagor company, Kann, and the Penn Company defendants. On the
same day, a motion for a receiver was noticed on the ground that
the mortgage was not good security for the debt. The mortgagor
company made default, and has not appeared in the suit. The other
defendants duly appeared and opposed the motion. It was heard on
July 20, 1896. Shortly after the motion had been argued, counsel
for the complainant received notice from the judge before whom the
motion had been made, stating that he had concluded to deny the
application for the appointment of a receiver. Upon a subsequent
day, the parties being in court (no formal order denying the motion
having as yet been filed), the counsel for the complainant said to
the court that, in the motion for a receiver, it occurred to him
that the court had not considered the fact that this property was
without insurance, that there was danger of fire, that the
plaintiff was a trustee without funds, and that that was a matter
that ought to be considered; that the trustee was entitled to
insurance. Counsel upon the other side denied that they were bound
to insure under the terms of the mortgage, and so the dispute
continued before the judge, counsel for the complainant insisting
that complainant should have insurance, and counsel for the other
side denying that complainant was entitled to it at the cost of the
defendants, and at the end the judge remarked that he could not
then decide that question, but intimated to counsel for defendants
that, if they were bound to insure, they ought to protect the
complainant as trustee and mortgagee. Finally it was suggested that
a bond should be given of the tenor now to be mentioned, but
counsel for complainant stated, in his evidence upon the subject
given in this
Page 186 U. S. 442
case, that he did not wish to be misunderstood, and that it must
be admitted that counsel for the defendants, upon the occasion
mentioned, expressly denied that they were bound to insure for the
benefit of the bondholders; the bond or agreement was given just as
its terms set forth, that, if defendants were bound to insure, the
insurance would stand for the benefit of the complainant, and if
not, the complainant would get nothing. The bond or agreement was
then given by Emanuel Wertheimer and defendant Kann. It was put in
evidence, and Wertheimer and Kann therein agreed
"that in the event of a loss by fire of the property described
in the said Pennsylvania Plate Glass Company mortgage, that then
there shall be paid out to the said Farmers' Loan & Trust
Company, trustee, in trust for the holders of valid bonds secured
by the said mortgage, a sum equal to the total amount of such valid
bonds, out of the policies of insurance existing in favor of the
Penn Plate Glass Company. Provided, that it shall have been finally
adjudicated that the Penn Plate Glass Company, the present owner of
said property, is bound or liable by anything contained in the said
mortgage, or the terms of its purchase of the described mortgaged
premises, to keep and maintain insurance for the benefit of the
holders of bonds secured by the said mortgage."
This agreement was given, as counsel for complainant stated, in
order to meet the views of the court "that, if I was entitled to
insurance, I should have a bond, and if I was not entitled to
insurance, I would get nothing."
By an interlocutory order, as mentioned in the decree
subsequently entered, and grounded upon this agreement, the court
appointed Emanuel Wertheimer as receiver for the purpose of
receiving the insurance moneys under the various policies of
insurance, and, pursuant to such appointment, Wertheimer was
directed to hold, as such receiver, $125,000 of the insurance
moneys so collected, and if it should be finally decreed that the
complainant had an equitable lien upon such insurance moneys, then
the receiver was to pay over to the complainant so much of that sum
as should be necessary to pay and discharge the $90,000 of the
bonds secured by the mortgage, not including the $160,000 of such
bonds belonging to Wertheimer, in regard
Page 186 U. S. 443
to which he released and waived all claim to an equitable lien
upon the said sum of $125,000 so collected and held by him, and he
was also to pay to the complainant and discharge the coupons upon
such $90,000 of bonds.
The formal order denying the motion for a receiver was filed
September 7, 1896. Considerable testimony was taken in the case
subsequently to that time upon the various issues made by the
pleadings, but the trial had not been concluded, when on April 12,
1898, a fire occurred, by reason of which as claimed on the part of
the mortgagee, the greater part of its security was destroyed. A
supplemental bill was then filed by complainant by leave of court,
and various insurance companies which had insured the property for
the Penn Company were brought in as parties to the suit, and the
complainant demanded, in addition to the relief which was prayed
for in the original bill, a decree providing that the complainant
should have a first lien on the insurance moneys paid or to be paid
under such policies for the purpose of paying the bondholders
holding the $90,000 of bonds as above mentioned, any balance which
might be due them after the sale of the mortgaged premises should
be made, if such sale should result in any deficiency in the
payment of those bonds.
Testimony was taken relative to the averments contained in the
supplemental bill. It was proved on behalf of the Penn Company
that, since Kann and the Penn Company had the title to, and
possession of, the property, there had been spent by them upon the
property, by way of repairs and improvements, between $180,000 and
$200,000.
The decree of the circuit court, after providing for the
foreclosure and sale of the mortgaged premises, made specific
provision for the application of the insurance moneys in the hands
of Wertheimer to the payment of any deficiency that might arise,
after applying the proceeds of the sale of the mortgaged property
to the payment of the bonds mentioned in the decree.
Page 186 U. S. 444
MR. JUSTICE PECKHAM, after making the foregoing statement of
facts, delivered the opinion of the Court.
The only question involved in this case arises from the
provision made in the decree by the circuit court judge, impressing
what is termed an equitable lien upon the insurance moneys
collected on the policies taken out by the Penn Company, sufficient
to pay any balance which may remain unpaid on the bonds secured by
the mortgage to complainant, after the application of the proceeds
of the sale of the property mortgaged. The circuit court held that
the complainant had such equitable lien, while the circuit court of
appeals, Judge Acheson dissenting, was of the contrary opinion, and
therefore reversed that portion of the decree which provided for
it.
The policies upon which the moneys were collected to pay the
loss happening by fire, were taken out by the Penn Company for the
purpose of covering its own interest in the property, and the
language of the policies covered such interest only. There was no
contract in the policies covering the interest of the complainant
as mortgagee, nor was the insurance, in fact effected for the
purpose of carrying out any agreement or obligation on the part of
the Penn Company with the complainant to effect insurance covering
the interest of the bondholders. On the contrary, this purpose was
disaffirmed and the obligation denied. The Penn Company had the
right to insure its own interest, and unless there were some
contractual obligation on its part on the subject, which bound it,
or some conduct on its part, or on the part of Kann, its immediate
grantor, which would estop it from setting up the fact that it had
procured the insurance for itself, the moneys arising out of the
contracts which it made with the various insurance companies cannot
be taken from it and bestowed on the complainant for the benefit of
the bondholders secured by the mortgage in suit. Some obligation of
the defendant of a contractual nature must exist, or some conduct
must be proved, estopping the defendant from denying such
obligation, before the court can be authorized to take such moneys
and bestow them upon the mortgagee for the benefit of the
bondholders.
Page 186 U. S. 445
The complainant asserts that, without regard to any provision in
the mortgage, it has an equitable lien upon the Penn Company's
insurance, and that, under the circumstances, such company must be
treated as in the position of a receiver appointed on complainant's
motion in this case. The peculiar circumstances upon which the
claim is based that defendants should be so treated, seem
principally to be the denial of complainant's motion for the
appointment of a receiver at the time of the commencement of this
suit to foreclose the mortgage, and the fact that the Penn Company
had insurance on the property. The denial of the motion for a
receiver, it is averred, was brought about by the opposition of the
defendants Kann and the Penn Company, and it is argued that they
ought not to have opposed the motion, and their opposition was
improper and in bad faith. But it must be remembered they were
parties to the suit, and in the legal protection of their rights it
was perfectly proper for them to oppose, before the court, the
appointment of a receiver, even though their opposition secured the
denial of the complainant's motion. We see nothing upon which to
base an accusation of bad faith in this conduct of defendants. The
complainant, however, regards the application for a receiver as the
same in substance as an application to take possession of the
premises in pursuance of the provisions of the mortgage, consequent
upon a default in the payment of the principal or interest of the
bonds, or because of a violation of any other of the covenants
contained in such mortgage. Even if that be so, we see nothing in
such fact to in any way alter the right of defendants to oppose by
argument before the court the appointment of a receiver. There is
no pretense that they made any allegations upon the hearing which
were untrue, or that their opposition was based upon anything other
than conceded facts. Possibly the circuit court ought to have
appointed a receiver upon the application of the complainant. That
was a matter resting a good deal in its sound discretion. The Penn
Company and Kann were, however, entirely within their legal rights
when they opposed such application, and we are unable to see that
their conduct in so doing in any manner altered those rights
Page 186 U. S. 446
or added to their own legal obligations. Very likely a receiver,
if he had been appointed, would on his own motion have taken out
insurance upon the property, or would have been directed by the
court to do so, in order to cover the interest of the bondholders.
But no receiver was appointed and no such insurance was taken out,
and we cannot see that the defendant, the Penn Company, has in any
manner made itself liable to pay to the complainant any of the
insurance moneys which it obtained to cover its own interest only,
in the property, because of the successful opposition made by it to
the appointment of a receiver.
The court on hearing all sides and interests denied the
application. There was nothing which then prevented the complainant
from itself taking out insurance under the tenth article of the
mortgage. It could have taken out such insurance as a thing proper
to be done by it as trustee within the provisions of the mortgage,
and in such case it would have been entitled, by the specific
provisions in the tenth article, to reimbursement therefor and to
compensation from the trust fund. We do not say that it was its
duty to do so, for it had no cash of the mortgagor on hand, but it
had the power under the article to advance the insurance premiums
and the right to demand reimbursement and compensation for having
done so. The fact that it had no funds at its command at that time
is very likely an answer to the proposition that it was its duty to
have itself procured insurance; but if it had advanced the money
and thus procured the insurance, the amount which it advanced would
have been a lien on the trust fund and payable thereout before any
claim on the part of the bondholders could have been asserted. The
risk of loss to the complainant by making such advances would have
been nothing. We refer to the subject to show that the mere fact
that the trustee was without actual cash in hand to procure the
insurance is not material.
Nor can we see that the execution of the agreement soon after
the court had decided to deny the application for the receiver in
any way affects the liability of the defendants on this branch of
the case. From the time that Kann bought the premises on the
receiver's sale and took a deed therefor subject to
Page 186 U. S. 447
the mortgage, he denied any liability on his part to insure the
premises for the bondholders, and refused so to do, and the Penn
Company from the time it became the purchaser of the premises also
denied any liability to insure and refused to do it. The denial of
this obligation to insure and the refusal on the part of both Kann
and the Penn Company had been explicit, open, and continuous from
the time the property had first been acquired up to the hearing
upon the motion for a receiver. Whether the defendants or either of
them were bound to insure for the benefit of the bondholders was a
question which the circuit court said it could not decide at that
time. This was after the court had stated its determination to deny
the motion for a receiver. Finally it was agreed between counsel
who were then before the court that Kann and Wertheimer would sign
an agreement that in the event of a loss by fire there should be
paid to complainant out of the policies of insurance existing in
favor of the Penn Company a sum equal to the total amount of valid
bonds secured by the mortgage, provided it was finally adjudicated
that the company, the then owner of the property, was bound or
liable by anything contained in the mortgage or the terms of its
purchase of the described mortgaged premises, to keep and maintain
insurance for the benefit of the holders of bonds secured by the
mortgage.
We do not see that this agreement altered in any degree or added
to the rights or obligations of the defendants in regard to
insurance on the premises. The agreement simply was that, if the
defendants were bound to insure, then they would take moneys
arising from the insurance policies sufficient to pay the bonds.
Whether they were or were not so liable was not determined or in
any way intimated. If the court had then decided that they were
liable, they would have had the opportunity of placing the
necessary amount of insurance to cover the interest of the
bondholders in addition to that which the Penn Company then had
covering its own interest, but no such decision was arrived at, and
no such order was made, and no extra or other insurance taken out,
and all parties seemed to be content to rest upon their legal
rights, and to take the risk of an error as to what those rights
were. To make a decree after a
Page 186 U. S. 448
loss has happened, by which the moneys arising from policies
covering only the interest of the Penn Company and procured by it
as security for such interest against the loss of property by fire,
requires the existence of an obligation on the part of that company
founded upon considerations other than the fact that it had opposed
the appointment of a receiver, and that the agreement had been made
in the circumstances mentioned. In our view, there are no facts
disclosed by this record which authorize or justify the court in
regarding the defendants in the same light as if they were
receivers appointed upon the motion made by complainant in this
suit and as such had taken out these policies. The court, with all
the facts before it, refused to appoint such receiver, and the fact
that these defendants, Kann, and the Penn Company successfully
opposed the appointment furnishes no tenable ground to regard them
as receivers because of such successful opposition. This ground of
liability must therefore be rejected.
While it is true that, as a consequence of this voluntary
agreement entered into by Kann and Wertheimer, the latter was
appointed a receiver to collect and hold a sufficient amount of the
insurance moneys to pay these bonds, and in that way the moneys may
be described as being in court, yet the court did not obtain
jurisdiction to make any disposition of those moneys in behalf of
complainant except upon the conditions made in the agreement, by
virtue of which alone the moneys came under its immediate control.
Unless the court held that there was a liability, as expressed in
the agreement, it obtained no jurisdiction over these moneys to
make a disposition of them in accordance with general equitable
principles. There is no fund in court to be thus disposed of. We
must confine ourselves, therefore, strictly to the question of
whether there was a right on the part of the complainant to enforce
the application of these insurance moneys, in the hands of the
companies or of the defendants, to the payment of these bonds, and
a corresponding liability of defendants to apply these moneys for
the benefit of the bondholders, free from any assumed power of the
court to make a disposition of the funds on general equitable
principles because they are in its possession, and to that extent
subject to its immediate control.
Page 186 U. S. 449
In this view, we must ask was there any obligation resting upon
these defendants to insure by reason of the contents of the
mortgage and of the deeds under which the Penn Company now claims
title? In order to determine whether there was an obligation of
this nature, it must first be decided there was such obligation on
the part of the mortgagor company, because if that company was
never under any obligation to insure, it is clear that the grantees
subject to the mortgage were also free from any liability of that
nature.
It is claimed that the mortgagor company became liable to insure
by reason of the provision in article 10 of the mortgage, or at
least that it became thus liable to insure, when, under that
provision, it was required to do so by the mortgagee. That portion
of the article directly in question here, after providing that it
should be no part of the duty of the trustee to do certain things
therein named, continued:
"Nor shall it be any part of its duty to effect insurance
against fire or other damage on any portion of the mortgaged
property, or to renew any policies of insurance, or to keep itself
informed or advised as to the payment of any taxes or assessments,
or to require such payment to be made; but the trustee may, in its
discretion, do any or all of the matters and things in this
paragraph set forth, or require the same to be done."
It is argued that, by this language a covenant arose on the part
of the mortgagor, by which it covenanted to insure the property if
required to do so by the mortgagee. Reading the whole of that
article with the other provisions of the mortgage, we think there
is great force in the reasoning of Judge Gray in the circuit court
of appeals, by which he concludes that there was no original
obligation imposed by the mortgage on the mortgagor to insure for
the benefit of the mortgagee. But we do not ourselves decide that
no such obligation existed. The court of appeals did not place its
determination upon that ground alone, but, after discussing it and
coming to the conclusion which it did, it then proceeded to discuss
the question whether the defendant company was liable upon the
assumption that there rested upon the mortgagor an original
obligation imposed upon it by the mortgage to insure for the
benefit
Page 186 U. S. 450
of the bondholders. We will make the same assumption, and the
inquiry then arises as to the obligation of the defendants to
themselves insure for the benefit of the bondholders after they
respectively became the owners of the equity of redemption in the
premises.
Kann became the purchaser under a receiver's sale ordered by the
court and pursuant to its directions, and he received from the
officer conducting that sale a deed conveying to him the premises
subject to the mortgage of the complainant. He thus occupies the
position of a purchaser at a judicial sale which was ordered to be
made subject to the lien of an existing mortgage upon the premises
to be sold, and he made no agreement which in terms obligated him
to pay a dollar of the mortgage, or to comply with a single one of
the covenants of the mortgagor. Whatever his obligations may have
been in regard to the mortgage or to the covenants of the mortgagor
arising from the simple fact of his taking a deed subject to that
mortgage, the obligations of his grantee are no greater than his
own. The Penn Company took the title which he had subject to the
same mortgage as in his case, and with no promise on its part, in
terms, to pay the mortgage or to insure the premises for the
benefit of any other interest than its own.
Counsel for the complainant argue that the extent of the
obligation of grantees or purchasers subject to a mortgage in
Pennsylvania has always been at the least, that, by taking such a
deed the grantee impliedly agrees to indemnify the grantor against
his liability on the mortgage. Many cases are cited by the parties
on both sides in relation to this question.
In
Moore's Appeal, 88 Pa. 450, decided in 1879, Chief
Justice Sharswood delivering the opinion of the court, it was held
that such a clause was a covenant of indemnity only, as between the
grantor and the grantee, for the protection of the former. Or, in
other words, it was held that, on taking the land, the grantee will
indemnify the grantor to the extent of the mortgage, in the same
manner as if the consideration had been paid in cash and then
applied by the mortgagor at the time. It was also held that an
agreement to pay the encumbrance might be implied from the
circumstances of any particular
Page 186 U. S. 451
case. In the course of his opinion, the Chief Justice reviews
many prior cases in that state, and, in speaking of the words
"subject to the mortgage thereon," said:
"Why should a covenant be inferred from these words by the
vendee to the vendor to do more than protect the latter from loss?
If there is no existing personal liability in the vendor by reason
of his bond or promise under which he can be compelled to pay if
the mortgaged premises prove insufficient, what reason is there
that he should exact a covenant from his vendee for the benefit of
a stranger? If such personal liability does exist why should he
exact anything more than indemnity? Surely, then, something should
appear to create the inference of such a covenant. The words 'under
and subject' import no such thing. They import that the vendee
takes the land encumbered, and at most that so taking it at an
agreed consideration, which includes the encumbrance, he will
indemnify the vendor to the extent of that consideration, in the
same manner as if it had been paid in cash and so applied at the
time. It is unwise to give an arbitrary, artificial meaning to
words commonly used in contracts and conveyances, and thus entrap
parties into engagements into which they had no reason to suppose,
in the common use of language, they were entering. The Act of
Assembly of June 12, 1878, Pamph.L. 205, has very wisely provided
that the grantor shall not be personally liable unless he shall
expressly assume such liability by agreement in writing, or
condition in the conveyance."
In
Blood's Executors v. Crew Levick Co., 171 Pa. 328,
the import of the clause "under and subject to the lien of" a
mortgage was under consideration, and it was held that an implied
covenant to indemnify arose from that language. It was also held
that the vendor had no right of action against the vendee in such a
deed until he had been forced to pay the mortgage, either in whole
or in part. This was also held in a case between the same parties,
reported in the same volume, 171 Pa. at 339.
The Act of June 12, 1878, of the Pennsylvania Legislature (P.L.
p. 205), provides as follows:
"Grantees of real estate which is subject to ground rent or
Page 186 U. S. 452
bound by mortgage or other encumbrance shall not be personally
liable for the payment of such ground rent, mortgage, or other
encumbrance unless he shall, by an agreement in writing, have
expressly assumed a personal liability therefor, or there shall be
express words in the deed of conveyance stating that the grant is
made on condition of the grantee assuming such personal liability
therefor:
Provided, That the use of the words"
"under and subject to the payment of such ground rent, mortgage,
or other encumbrance shall not alone be construed so as to make
such grantee personally liable as aforesaid."
Under the various cases cited, and the statute above quoted, we
may assume that, by the law of Pennsylvania the grantee who simply
takes a deed subject to the lien of a mortgage is at most nothing
more than an indemnitor of his grantor against the payment of the
mortgage or any part of it by such grantor. There is no liability
on the part of the grantee to the mortgagee so that the latter has
any cause of action against him for the payment of the mortgage. If
the mortgagor be not liable to pay at all there is no liability
resting on the grantee to pay.
It then becomes necessary to determine what liability, if any,
rested upon the mortgagor. By reference to the fourth article of
the mortgage, already set forth in the statement of facts, it will
be seen that there is no personal liability on the part of the
mortgagor. There is no obligation, therefore, on the part of the
Penn Company to indemnify the mortgagor company for any personal
liability to pay the mortgage or any part thereof, for no such
liability exists. However much below the amount of the mortgage the
land should sell for is, so far as this question is concerned, a
matter of no legal interest to the mortgagor company, and the fact
in no way creates any liability on its part. As there was no
liability on the part of the mortgagor to pay any portion of the
debt secured by the mortgage, and the liability, if any, to
indemnify the mortgagor on its covenant to insure is, as stated by
the judge delivering the opinion of the circuit court of appeals,
incidental and subordinate to its liability to indemnify the
mortgagor regarding the mortgage debt, no such liability to
indemnify upon the insurance covenant would seem to rest upon the
defendant company
Page 186 U. S. 453
or upon Kann, because there is none such existing in relation to
the mortgage debt itself.
The covenant to insure does not run with the land, so that one
taking a conveyance comes under a primary obligation to insure,
over and above that of a mere indemnitor.
Columbia
Ins. Co. v.Lawrence, 10 Pet. 507,
35 U. S. 513;
The City of Norwich, 118 U. S. 468,
118 U. S.
494.
But, assuming the law of Pennsylvania to be that there is an
obligation on the part of these defendants, by reason of their
taking the deeds subject to the mortgage, to indemnify the
mortgagor on its covenant to insure, contained in the mortgage,
what is the extent and character of that obligation thus assumed?
The covenant on the part of the mortgagor, which we assume exists
by reason of the language contained in the mortgage, was a personal
obligation or covenant. The question then arises what consequences
would follow upon a breach of the covenant by the mortgagor?
Suppose it had not conveyed the property and still remained the
owner and in possession, and yet refused or omitted to insure, as
it had covenanted to do in the mortgage, what remedy under this
mortgage existed because of this violation by the mortgagor? The
complainant might have taken out insurance and claimed
reimbursement, or added the premiums paid to the amount of the
mortgage debt. It did not do so. What other remedy it had for a
violation of any covenant by the mortgagor is stated in the
mortgage. It is therein expressly understood and agreed between the
parties
"that no other suit or proceeding for the collection of the
bonds shall be commenced, except such suits or proceedings as shall
be necessary to recover the possession of the premises mortgaged,
or to subject the same to the payment of the debts, and that the
sale of the mortgaged premises, whether under the power of sale
granted or any other power of sale, or by or under any judicial
proceeding whatsoever,
shall operate as a full and complete
satisfaction and discharge of the indebtedness of the mortgage and
of the obligation of the covenants therein contained, whether
the premises should be bidden in for the whole amount of the
indebtedness or for a less price, anything in the bonds or coupons
to the contrary
Page 186 U. S. 454
thereof notwithstanding."
The sale of the mortgaged premises is by the specific terms of
the mortgage to operate as satisfaction of all the covenants
contained in the mortgage. And in asking for the sale of the
property, by the commencement of this suit, complainant cannot add
to the relief it is entitled to by a sale, any other or different
relief than that. By the express provisions of the mortgage there
was not only an exemption of personal liability for the payment of
the bonds and coupons, or any part of them, but there was also an
exemption of all personal liability on account of the obligation of
any other covenant contained in the mortgage; such exemption
covering, not only the obligation to pay the debt, but also any
other covenant. Hence, the obligation to indemnify the mortgagor on
account of any failure by it to insure does not exist, because
there is no liability on the part of the mortgagor to answer for
its breach of covenant in any other way than by complainant taking
possession of the premises, or by a foreclosure of the mortgage and
sale thereunder. The mortgagor, having conveyed the premises, has
no further interest in them, and hence their sale under the
mortgage would be no damage to the mortgagor, and no case for
indemnity to it would be made out.
The alleged contractual obligation to indemnify, as well
regarding the covenant to insure as that regarding the payment of
the bonds and coupons, does not help the complainant in this case,
because of the affirmative provisions of the mortgage. Whether the
sale, under the foreclosure prayed for in this case, has taken
place or not, there is no other or personal liability of the
mortgagor to respond for its breach of covenant to insure than that
which it has provided for in the mortgage. If it be under none
other, then the indemnitor has nothing to indemnify.
In regard to the contractual obligation to insure on the part of
defendants, which complainant avers exists as one of the
foundations for the equitable lien claimed by it, the judge,
delivering the opinion of the circuit court of appeals, 103 F. 151,
said:
"But apart from cases of fraud, it is only when there is
such
Page 186 U. S. 455
a contract or promise, which can be so enforced, that courts of
equity will recognize for that purpose the existence of an
equitable lien. In such case, the lien is impressed upon funds or
property which, belonging to the promisor, were the very funds or
property which constituted the subject matter of the contract, or
to which the contract or promise related. It is essential,
therefore, that the funds or other property which are to be charged
with the lien should have, either at the time of the contract or
afterwards, and while it was still unperformed, belonged to the
party against whom the contract is to be so enforced, and be so
identified, even though at the time of suit the said funds or
property have come into the hands of volunteers, or of others who
may be affected with notice. There must therefore exist a contract
by the party owning, either
in praesenti or in expectancy,
the property sought to be charged which directly or by necessary
implication expresses the intention to charge such property with
the lien in favor of the other party to the contract. . . . It is
not pretended that there was any contract between Kann or the
appellant company and complainant to insure for its benefit, or any
promise or declaration of intention, upon any or no consideration,
that they, or either of them, would so insure, or that policies or
fund arising therefrom should be assigned or charged with a lien in
its favor. The first essential requisite to an equitable lien, as
above described, is therefore entirely wanting. There is no
contractual relation of any kind between the mortgagee and the
appellant [respondent in this Court] in whose name, and for whose
sole benefit, these policies of insurance were taken out. If such a
lien therefore exists on these insurance funds in favor of the
complainant, it must be on other grounds than these ordinary and
well understood ones. This is not the case of a mortgagee claiming
an insurance taken out by the mortgagor, who had covenanted to
insure for the benefit of the mortgagee; nor is it the case of such
mortgagee claiming such insurance funds when they had come into the
hands of third persons 'who are either volunteers or who take the
estate [the insurance funds] on which the lien is agreed to be
given with notice of the stipulation.' The complainant does not
claim that the funds due on policies taken out
Page 186 U. S. 456
by the mortgagor, and which the mortgagor is held to have
promised that he would assign to the mortgagee, have come into the
possession of the appellant [respondent], with notice, and are
therefore charged with a lien in favor of the mortgagee. Its claim
is that the grantee of the equity of redemption, having taken the
property expressly subject to the mortgage, which contained a
covenant on the part of the mortgagor to insure, on that ground
alone came either under a direct obligation to insure the premises
for the benefit of the mortgagee or under an obligation to
indemnify the mortgagor for his liability under said covenant. But
the property or 'estate' which came to the hands of the appellant,
as grantee of the equity of redemption, was the mortgaged premises,
subject to the mortgage. There is no difficulty in determining what
that estate is to be charged with. The court here, however, is
asked to impress a lien in favor of the mortgagee, not on this
estate, but upon funds which were never in any sense the property
of the mortgagor and could never have been the subject matter of a
promise on its part. It is the first branch of the claim above
stated (
i.e., the alleged direct obligation) that we are
now considering."
We fail to see any contractual obligation on the part of the
defendants to insure for the benefit of the bondholders further
than we have stated, as indemnitors of the mortgagor for its
breach, if any, of its covenants.
The case of
Wheeler v. Insurance Company, 101 U.
S. 439, is founded upon the existence of the obligation
of the mortgagor to insure, and it is said that, under such
circumstances, the mortgagee will have an equitable lien upon the
money due upon a policy of insurance taken out by the mortgagor to
the extent of the mortgagee's interest in the property destroyed,
and that such equitable lien exists, although the contract provided
that in case of the mortgagor's failure to procure and assign that
insurance, the mortgagee might procure it at the mortgagor's
expense.
If the insurance had been taken out by this mortgagor company,
even in its own name, we would have the same principle as decided
in the last-cited case, and the complainant herein
Page 186 U. S. 457
might, as its counsel claim, have had an equitable lien upon the
moneys arising from such insurance to the extent of the loss under
the mortgage. But here is no such case. The mortgagor did not
insure after it lost title to the property under the conveyance by
its receiver to Kann, and the insurance that was procured was for
the interest of the defendants in the property to the exclusion in
terms of the interest of the complainant. Although the defendant
bought subject to the mortgage and with full knowledge of the
insurance covenant, yet it held the property subject only to an
obligation on its part, at most, to indemnify the mortgagor on
account of the mortgage debt or on account of its covenant to
insure, and we have seen that that obligation, under the terms of
this mortgage, was of no materiality because, by its terms, the
mortgagor was under no personal liability, and there was therefore
no subject upon which indemnity could rest.
If there is no contractual obligation arising from the terms of
the mortgage and the taking of the deeds with an "under and
subject" clause, as above referred to, then there must have been
some conduct on the part of the person to be charged which would
estop him from setting up as a defense the lack of such obligation.
The complainant urges that the defendants have been guilty of
conduct which does estop them from denying their liability. This is
a different claim from that first remarked upon as to the treatment
of defendants as receivers. This claim is based upon a survey of
the whole conduct of defendants in connection with the mortgagor
company and the insurance upon the property. The record in this
case, in our opinion, discloses no conduct on the part of the
defendants which estops them or either of them from showing the
lack of any obligation on their part to apply any portion of the
insurance moneys to the payment of the bondholders. There has been
no wrecking of the mortgagor company by either or both defendants,
and neither has done anything depriving himself or itself of any
defense he or it might otherwise have. In other words, both
defendants have, so far as this record shows, full liberty to set
up as a defense the want of any contractual or other obligation to
insure. The opinion of the circuit court of
Page 186 U. S. 458
appeals is quite full in regard to this claim, and we feel there
is no necessity in ourselves going over this particular ground.
After a careful consideration of the whole case, we are of
opinion that the judgment of the circuit court of appeals was
right, and it is therefore
Affirmed.
MR. JUSTICE GRAY did not hear the argument, and took no part in
the decision of this case.
