KINNISON v. GUARANTY LIQUIDATING CORPORATION (1940)

Guaranty Liquidating Corporation (hereinafter referred to as Guaranty Corporation), being the owner of a judgment in excess of some $26,000 against Bartlett Syndicate Building Corporation, Ltd. (hereinafter referred to as the Bartlett Company), caused a writ of execution to be levied upon all bank accounts, moneys, credits, etc., of said judgment debtor in the possession of or under the control of Farmers & Merchants National Bank of Los Angeles. The writ of execution was served on February 16, 1937. One week later the bank made its return, answering that at the time of the service of the writ and the levy it was indebted to Bartlett Company in the amount of $4,041.09. This last-named amount was thereupon remitted to the marshal of the municipal court of the city of Los Angeles, and he in turn delivered the same, less his charges, to the Guaranty Corporation. Thereafter the plaintiff herein, Ray H. Kinnison, as assignor of Pacific Mutual Life Insurance Company, brought this action to recover from the Guaranty Corporation $3,997.09, being the amount of money in the bank theretofore levied on by appellant, less the sum of $44 which was not claimed by plaintiff's assignor. Following trial, the court rendered judgment in the amount prayed for together with interest thereon. From such judgment this appeal is prosecuted.

Respondent predicates his right to judgment upon the following facts: In December, 1928, the Bartlett Company, being the owner of certain valuable real property, borrowed from Pacific Mutual Life Insurance Company the sum of $835,000 for the purpose of erecting a building on said real property, and executed a deed of trust upon such property as security for the payment of the loan. Contemporaneously with the execution of the deed of trust and in consideration of the making of said loan and as additional security therefor, the Bartlett Company assigned to the insurance company the rents due and to become due from the lease of the Pantages Theater which was located on said real property. This assignment was recorded January 17, 1929. On February 17, 1932, the Bartlett Company, being in default under the terms of the trust deed, made a payment upon the principal and a new note and trust deed were executed in the principal sum of $794,000 after release of the first-mentioned trust deed. As part of this second transaction and for the same reasons and purposes as in the first transaction, the Bartlett Company again assigned to the insurance company the rents from the theater located on the property, and this assignment was also recorded on July 25, 1932. Again in April, 1933, the Bartlett Company was in default under the last-mentioned trust deed, whereupon, on December 28, 1933, the Bartlett Company assigned to the insurance company all the rents, issues and profits accruing from all the real property described in the deed of trust, including the theater rents theretofore assigned, and also the office and store rents, as additional security for the performance of its obligations under the note and deed of trust. The last-named assignment of rents was recorded January 12, 1934. It appears that the lease upon the theater and some of the store and office leases contained recitals that such leases were assigned to the insurance company, and the latter notified the other tenants whose leases did not contain the above provision that their leases were in fact assigned to it, but that the tenants, until further notice, were to pay the rents thereunder to the Bartlett Company. During March, 1935, the Bartlett Company again defaulted in payment of its obligations under the last-named deed of trust, and said default continued until after the filing of the present action. Commencing about February, 1934, the Bartlett Company, pursuant to its assignment and under authority vested in it by the insurance company, collected all the rents, issues and profits accruing from the real property mentioned in the deed of trust and deposited such money in the Farmers & Merchants National Bank in the name of the Bartlett Company, and disbursed such money monthly to the Pacific Mutual Life Insurance Company in accordance with the agreement.

The trial court made a finding that of the money which was on deposit in the Bartlett Company's bank account at the time of the levy of the execution, the sum of $3,997 represented rents collected by the Bartlett Company for the use and benefit of plaintiff's assignor, the insurance company, and that said sum was therefore the property of plaintiff's assignor. Appellant contends that such finding is without foundation in the evidence.

As an affirmative defense in the trial court, appellant alleged that each of the assignments of leases and rents upon which respondent's assignor relies were made as a part of or in connection with the execution of the deed of trust from the Bartlett Company to respondent's assignor, and were in each case given as additional security for the trust deed indebtedness; that respondent's assignor never at any time prior to the execution levy on February 16, 1937, took possession of the real property, either in person or through a receiver, but on the contrary, with the full knowledge and consent of the respondent's assignor, the Bartlett Company remained in full possession, control and management of said real property, and did at all times collect and deposit in its own bank account and assert ownership of all the rents collected on said real property.

It is the established law of this state that although the rents, issues and profits of the mortgaged property are expressly pledged for the security of the mortgaged debt, coupled with the right of the mortgagee to take possession upon default, nevertheless such mortgagee is not entitled to such rents and profits until he takes actual possession, or until actual possession is taken in his behalf by a receiver. Bank of America Nat. Trust & Sav. Ass'n v. Bank of Amador County, 135 Cal.App. 714, 721, 28 P.2d 86, and cases therein cited. This rule also applies notwithstanding the fact that the assignment of rents to the mortgagee was done in a separate instrument and at a different time from the execution of the mortgage. Flower v. King, 189 Minn. 461, 250 N.W. 43. Where the mortgagor is allowed to remain in possession until foreclosure and sale, he is entitled to receive and apply to his own use the income and profits of the mortgaged property, except as against a creditor who is hindered, delayed or defrauded thereby. This for the reason that such creditor does not have the rights of the mortgagee, the latter of whom is secured in his rights by the mortgage. 17 Cal.Jur., p. 1013. We do not think that the assignment of rents in the instant case made respondent's assignor a “mortgagee in possession”. Section 2927 of our Civil Code recognizes the right of the parties to a mortgage to agree that the mortgagee, either before or after default, may take possession. As was said in Bank of America Nat. Trust & Sav. Ass'n v. Bank of Amador County, supra [135 Cal.App. 714, 28 P.2d 88], “In order to constitute a mortgagee or trustee in possession, there must be something more than a mere paper title. There must be an actual, open, visible possession.” The rule is the same in the case of trust deeds as of mortgages.

The record in the case at bar shows without contradiction that the trustor, Bartlett Company, continued in possession of the premises included in the trust deed, managed and controlled the same, collected rents, paid operating expenses, employed elevator operators, janitors and an engineer on the property, paid their salaries, and then remitted the balance remaining of the rents collected to the insurance company as beneficiary under the deed of trust. While it is true that respondent claims his assignor entered into an arrangement with the Bartlett Company whereby the latter acted as agent of the former in collecting rents, such agreement was not made of record and remained as an understanding between the parties themselves. The acts and conduct of the parties herein did not operate to effect a change of possession as such is contemplated by law. True, the instruments by which the rents were assigned were recorded, but this is not sufficient to defeat the rights of a third person, claiming as a judgment creditor, to satisfy his judgment out of the rents remaining in the custody of the maker of the trust deed while the latter is in actual possession of the property named in such instrument.

It is true in the case at bar we are confronted with a finding made by the trial court that appellant had both actual and constructive notice and knowledge of the assignment of rent prior to the date of the levy of execution, and had like notice and knowledge that the said sum of $3,997.09 on deposit with the Farmers & Merchants National Bank standing in the name of the Bartlett Company in fact belonged to respondent's assignor, Pacific Mutual Life Insurance Company, and that the Bartlett Company was collecting said money for the insurance company pursuant to said assignments of rent and the authority so to do given by said insurance company. Nevertheless, it seems to us that such notice or knowledge is not sufficient to defeat the right of a third party in his capacity as a creditor to levy execution upon the bank account of a mortgagee who is permitted to remain in possession of the mortgaged premises. We feel that this is particularly true where, as in the instant case, such collected rents were not earmarked in any way nor in any way isolated or segregated from the general funds of the mortgagor in possession, but were by it commingled with its general assets and deposited in its general bank account without any designation as to its specific purpose. To defeat a creditor in the circumstances present in this case, more is required than an assignment of rents and profits accruing from the mortgaged property. That is to say, more is required than is present in the instant case, viz., the right conferred upon respondent's assignor to collect the rents if such action became necessary on its part to protect its security. To exercise this right the mortgagee must take possession. In this connection it must be borne in mind that the instruments which authorized the Bartlett Company to collect the rents for the mortgagee were never recorded. This unrecorded authority to the Bartlett Company to collect rents for and on behalf of the insurance company did not create either a constructive or implied possession of the property sufficient to meet the requirements laid down by the decisions of this state of actual and notorious possession.

Respondent's contention that conversations had between appellant's counsel and representatives of the insurance company in which the latter advised the former that the monthly rental income from the property was being paid to the insurance company each month, constituted actual notice, cannot be sustained. Nowhere is it made to appear that appellants were informed or knew that any such rents were deposited in the account of the Bartlett Company at the bank upon which account the execution was levied. In fact, with reference to the question of knowledge on the part of the creditor that the money in the Bartlett Company's account at the bank was claimed to be owned by respondent's assignor, there is contained in a stipulation of certain facts agreed to be true a letter signed by the assistant secretary of respondent's assignor in which it is stated: “I am in charge of this Company's accounts in connection with this loan. I have no personal knowledge, nor, so far as I have been able to ascertain, has any other employee of this Company any personal knowledge, of any moneys on deposit by Bartlett Syndicate and Building Corporation, Ltd., in the Farmers and Merchants National Bank of Los Angeles on February 16, 1937.”

There is nothing in the record to show that respondent's assignor had any interest in or title to the money on deposit in the Farmers & Merchants National Bank. Such money was subject to disbursement upon order of the Bartlett Company, and neither the bank nor appellant knew or had any reason to know that the money or any part thereof belonged to any one other than the depositor, the Bartlett Company. Certainly the assignments of rent were insufficient to indicate or convey ownership of the money on deposit in the general account of the mortgagor at the bank, upon which deposit the creditor's writ of execution was levied. Further, the evidence clearly shows that the Bartlett Company's bank account was not composed solely of rental collections, but contained moneys received by the depositor from divers and sundry sources. Therefore the finding of the trial court that all of the money in the account at the time of the execution levy represented rents collected by the Bartlett Company for the benefit of plaintiff's assignor, and the finding that appellant had both actual and constructive notice that the money constituting such deposit belonged to Pacific Mutual Life Insurance Company, respondent's assignor, are not sustained by the evidence.

For the foregoing reasons, the judgment is reversed.

WHITE, Justice.

We concur: YORK, P.J.; DORAN, J.