Mercantile Trust Co. v. Sunset Road Oil Co.

This is an appeal from an order by the superior court of the county of Kern in the action of Mercantile Trust Co. of San Francisco v. Sunset Road Oil Co., vacating, annulling, and setting aside an execution sale of certain real property at which R. H. Cross, the appellant, was the purchaser; and permanently enjoining him from selling, mortgaging, pledging, hypothecating, or in any other way disposing of, or attempting to dispose of, the property, and from interfering or attempting to interfere with the possession of the receiver thereof. The proceeding which terminated in this order was a collateral proceeding in that action, and it is necessary to make a somewhat extended statement of the facts because of their complexity.

On the eleventh day of March, 1911, the Mercantile Trust Company of San Francisco commenced an action in the superior court of the county of Kern against the Sunset Road Oil Company and others, for the purpose of foreclosing a mortgage given by the Sunset Road Oil Company to the Mercantile Trust Company of San Francisco as security for a bonded indebtedness of $2,000,000. In that action, John Daniel was, on the thirteenth day of March, 1911, appointed receiver.

Upon the filing of this petition the court issued its order requiring appellant to appear before it on the thirtieth day of December, 1916, to show cause why he should not be adjudged guilty of contempt and permanently enjoined and restrained, as prayed for by the petitioner, and, without requiring any bond on the part of the petitioner, restrained appellant from interfering or attempting to interfere with his possession and from selling or otherwise disposing of the property. On January 22, 1917, to which date the hearing had been continued, appellant specially appearing for that purpose, moved that the petition and all proceedings on the receiver's application be dismissed on the ground that the court was without jurisdiction, and that any order made in conformity with the prayer of the petition would be in excess of the power of the court. Eeserving his rights under his motion to dismiss, appellant then filed a demurrer and answer to the petition. The motion to dismiss was taken under submission and was thereafter denied and the demurrer to the petition was overruled. The court, by its order, kept the restraining order in force until a final hearing should be had on the petition and order to show cause.

Upon the denial of his motion to dismiss, appellant petitioned the supreme court for a writ of prohibition to be directed to the lower court restraining It from further proceedings on the petition. An alternative writ was issued, but on the day before the writ was made returnable, the lower court, upon the eoo parte application of the receiver, vacated and set aside the order previously made, and entered a new order nunc pro tunc as of February 26, 1917, the date of the original order. By this last order, appellant’s motion to dismiss was in part granted and the proceeding, so far as it sought a judgment of contempt against him, dismissed. The order restraining him from interfering with the possession of the receiver and from selling or otherwise disposing of the property was kept in force, however, and he was required to show cause why a permanent injunction should not issue as prayed. Thereafter,' the judge of the lower court filed a return to appellant’s petition for a writ of

On June 21, 1917, appellant served and filed his affidavit and motion based thereon, for an order transferring the proceeding to another department of the court, or that another judge be called in to hear it on the ground that he could not have a fair and impartial trial because of the bias and prejudice of the judge before whom it was then, pending. The motion was noticed for the twenty-ninth day of June, 1917, to which date, by consent, the hearing had been continued. On that date, over the objection of appellant that they came too late, counter-affidavits were filed and the motion was denied.

Upon the denial of the said motion, petitioner, without having given any previous notice thereof to appellant, or to his attorney, and without having served his proposed amendments, moved the court for leave to file an amended petition and requested a new order to show cause and a continuance. Over appellant’s objection, this motion was granted. The amended petition was accordingly filed, in which all allegations bearing upon the charge of contempt were omitted. Anita M. Yeo (formerly Anita M. Dewey) and B. W. Hob-son were joined as parties and the proceeding converted from one of contempt to a proceeding to vacate and set aside the execution sale which had been had in the case of Dewey and Hobson v. Blodget et al. The restraining order which had been issued on the filing of the original petition was dissolved, and the court immediately issued a new restraining order in the same form. Appellant demanded the filing of a bond by the petitioner before the issuance of the restraining order, but such bond was not required by the court.

Upon the hearing of the amended petition of the receiver, appellant renewed his motion to dismiss and, subject to such motion, filed a demurrer and an answer. The rulings on the motion to dismiss and the demurrer were taken under advisement by the court and a hearing upon the amended petition was had. Appellant then formally requested and demanded of the court that in the event that the court

The matter was submitted, and the court later made its findings and entered the order from which this appeal is taken. By this order, the issuance of the writ of execution in the case of Dewey and Hobson v. Blodget, the sale thereunder and the certificate of sale and deed delivered to appellant were annulled, vacated, and set aside; he was permanently enjoined from selling, mortgaging, pledging, hypothecating, or in any other manner disposing of said property or attempting to dispose of it, and was permanently restrained from interfering or attempting to interfere with the possession of the receiver thereof.

The appellant has filed most learned and comprehensive briefs, in which he makes many objections to the action of the trial court. We think, however, it will be necessary to discuss only his main objection, which is that the court in which the foreclosure proceedings were pending could not, on the application of its receiver, appointed in the foreclosure suit, in a summary proceeding, annul and vacate all proceedings on execution taken in another and distinct action, without in any manner preserving or protecting appellant’s rights, and cannot strip the purchaser at said execution sale of every right and incident of ownership where no fraud has been charged or proven.

It seems necessary, at this point, to consider somewhat in detail the facts with relation to the partition suit, in which action the execution under .which sale was made to appellant was issued. The facts with reference to this matter are uneontradicted, and many of them appear in the amended petition of the receiver and have heretofore been

The referees appointed by the interlocutory decree in partition duly made partition and filed their report, which report was confirmed and final judgment entered. By this final decree, a designated thirty-six acres were partitioned and set aside to the plaintiffs, free and clear of all encumbrances, and the balance of said land was set aside to Sunset Boad Oil Company, subject to the mortgage of Mercantile Trust Company. The portion of the decree from which appellant’s right flows contains a provision for the recovery by plaintiffs of costs and attorneys’ fees, and the amount of such costs and fees is “adjudged to be a lien upon the respective interests of the parties hereto in the following proportions, to wit: That two twenty-fifths part thereof be a lien upon the said lands set apart to plaintiffs as aforesaid, and that twenty-three twenty-fifths part thereof

After the commencement of the partition suit and on March 11, 1911, the foreclosure action hereinbefore mentioned was commenced by Mercantile Trust Company. The plaintiffs in the partition suit were not made parties to this foreclosure action. The foreclosure action was assigned to department one of the superior court (the same department in which the partition suit had been tried), but was later transferred to another department. On March 13, 1911, John Daniel, the petitioner here, was appointed receiver in said foreclosure action. By the order appointing him, he was empowered and directed to demand, collect, and receive all personal property described in the deed of trust or mortgage, all rents due and unpaid or thereafter to become due, and all issues, income, and profits from the premises, and to keep the buildings and other personal property insured and to pay the rentals, taxes, and assessments which might accrue. The 480 acres, the subject matter of the partition suit (and which were then held in undivided ownership by Anita M. Dewey, D. W. Hobson, and Sunset Road Oil Company), was one of the pieces which were included in the mortgage to the Mercantile Trust Company, and was a portion of the subject matter of the foreclosure suit. Though the partition suit was then undetermined, the receiver did not intervene therein.

Mr. Cross, the appellant, was the attorney for Anita M. Dewey and D. W. Hobson in the partition suit. As such, during the pendency of the partition suit, he had considerable correspondence, which appears in the record, with the attorney for the receiver with reference to an amicable partition of the property and other matters in connection with such partition suit. Subsequent to the entry of the final decree in the partition suit, appellant, in the performance of his duty as attorney for the plaintiffs in that action, sought to effect collection of the judgment for costs which had been made a first lien upon the property involved in the partition suit. He called upon the trust officer of the Mercantile Trust Company and requested payment of the

It is, of course, well settled that in a foreclosure proceeding the court cannot try the question of the title of one claiming adversely to both the mortgagor and mortgagee. (Murray v. Etchepare, 129 Cal. 318 , [ 61 Pac. 930 ]; Cady v. Purser, 131 Cal. 552 , [ 82 Am. St. Rep. 391 , 63 Pac. 844 ].) This question is one to be settled in another action after the adjustment of the relative rights of the mortgagor and mortgagee in the foreclosure proceeding. (Murray v. Etchepare, supra.) The order in the present case annulling the deed to appellant cannot be justified, therefore, upon the ground of an adjudication of title as between the appellant and the mortgagor and those claiming under it, because the lower court was powerless to make such an adjudication. But, in reality, the present case does not present a situation where the court attempted to try title as between the mortgagor and one claiming adversely. The action of the lower court'here prevented the appellant from acquiring any title to the property, regardless of the force and effect of such title against either or both the mortgagor or mortgagee. The court in the foreclosure proceeding did not inquire into the merits of appellant’s title as against the mortgagor or mortgagee; it did not try the question of title, but simply set aside whatever title or evidence of title

However, respondent does not maintain that the trial court could in a foreclosure proceeding settle adverse claims to the property, but seeks to sustain this order upon the theory that regardless of the ultimate rights of the appellant or the value of the title which he had acquired at the execution sale, he could not sell under execution property in the hands of the receiver for the reason that such a sale would be an interference with the possession of said-receiver which the appointing court would enjoin unless effected with the consent of said court. It is contended that this action would be taken by the court regardless of what might be the rights of the execution debtor after the foreclosure proceedings had been terminated; that regardless of the general rule limiting the power of courts in foreclosure actions, any court appointing a receiver has power to do any and everything that is required to protect the possession of its receiver of the property consigned to his care, and that the action of the court in annulling the deed in the present case was the exercise of a power necessarily incident to the protection of the possession of its receiver; that the possession of the receiver was interfered with by the execution sale and the vacating of the deed was a necessary and proper means to prevent such interference.

Appellant contends that the court in the foreclosure proceeding was without power or jurisdiction to annul the deed to him as a general proposition of law; that if such power was necessarily incident to its larger power to protect the

There is, of course, no dispute between the parties as to the general principles of law applicable in cases of receiver-ships—such as the nature of a receiver, his relation to the parties, and the power of the court over him, or the fact that he is entitled to be protected in his possession of the property entrusted to his management and control. There is, as we shall discuss later, no substantial evidence in the present case of any actual interference with the possession of the receiver, and the first question presented, therefore, is whether or not a sale under execution, by a prior lienor, without the permission of the court appointing the receiver, is, of itself, such an interference with the possession of a receiver in a foreclosure proceeding as to warrant the making of the order appealed from.

In an action for the foreclosure of a mortgage, the holders of paramount liens are neither necessary nor proper parties, the action being designed merely to cut off subsequent liens, and no portion of the proceeds of the foreclosure suit can be applied to the payment of such prior liens. (1 Wiltsie on Mortgage Foreclosure, sec. 188, p. 266; 2 Jones on Mortgages, sec. 1439; Beronio v. Ventura Lumber Co., 129 Cal. 237 , [ 79 Am. St. Rep. 118 , 61 Pac. 958 ].) The purpose of the appointment of a receiver in such an action is that he may take charge of the mortgaged property during the pendency of the action where it appears that the property is in danger of being lost or materially injured, and the property is probably insufficient to discharge the mortgage debt. (Sec. 564, Code Civ. Proc.; Title Ins. Co. v. California Dev. Co., 164 Cal. 58 , [ 127 Pac. 502 ].) From the nature of a foreclosure proceeding, and the duties of the receiver appointed therein, it is apparent that a transfer of the legal title does not interfere with the possession of the receiver. “A receiver has no title to the property, and that is all that is affected or changed by a sale.” (High on Receivers, sec. 5; Hickox v. Holladay, 29 Fed. 226 , 234.) A mere conveyance of the legal title to the property can have no effect upon the possession of the receiver nor embarrass him in carrying out

For if the sale is under a lien subsequent to the lien for the protection of which the receiver is in possession of the property, then the sale is made subject to the prior mortgage and the possession of the receiver. If the sale is under a lien which is paramount to that under which the receiver was appointed, then this paramount right is one which could not in any way be curtailed by the foreclosure proceedings under the subsequent lien or the appointment of a receiver therein. The legal title and the right to the possession of the property may, of course, exist simultaneously in different persons, and the purchaser at the execution sale would purchase subject to the temporary possession of the receiver just as he would purchase subject to the possession of a lessee were there one in possession of the property. It is to be observed that no injustice can be caused by the operation of such a, rule, for the subsequent lienor in whose interest the receiver is holding possession has the right, under the code, to redeem from any sale made in satisfaction of a prior lien. He is a redemptioner, and as such fully protected. Because he fails to avail himself of this right does not entitle him to curtail the rights of the prior lienor. The mortgagee may proceed with his remedy against the mortgagor, and the purchaser at the foreclosure sale would succeed to all rights of the mortgagor in the property. The question of title as between such purchaser and one in the position of the appellant here is, then, one which remains judicially undetermined. It is not a matter properly before the court in the foreclosure proceedings, nor before this court here, and it cannot be foreclosed and settled in advance against the appellant here by the court in the foreclosure proceedings in annulling the deed to appellant.

It is admitted by appellant that in a certain class of cases, such as creditors’ bills, insolvency proceedings, and the like, where a fund has been sequestered for the benefit of all creditors and is being administered by the court for all claimants who may come in, a levy and sale on execution against real • property, without leave of court, is of no effect. But it is maintained that this is not because such levy would interfere with the possession of the receiver, but because the whole estate is

Respondent contends that a receivership in a mortgage foreclosure action is analogous to a receivership in insolvency, and not to' a receivership in a divorce action. In so far as it is analogous to either, it appears to us, in its scope and purpose and legal effect, to be more nearly like the provisional remedy in a divorce action. It is not a sequestration of the assets of the defendant, but a mere administration of the assets covered by the mortgage for the sole and exclusive benefit of the mortgagor and mortgagee. It seeks not to protect other creditors and in a foreclosure suit the rights of prior lienors cannot be barred. The foreclosure suit is under the control of the mortgagor—the plaintiff— and may be dismissed by him at pleasure without reference to the rights of any other creditor. In a divorce proceeding, a receiver administers the assets of the defendant merely to conserve the same to satisfy a possible judgment for alimony, but the rights of those having prior claims cannot be barred or affected. Other creditors are not protected in such proceedings and cannot, therefore, be deprived of their legal rights by such proceedings.

We are, therefore, of the opinion that, both upon reason and authority, there is a clear distinction between a receivership in a liquidation proceeding, and one which is but a provisional remedy for the sole and exclusive benefit of the plaintiff; and we are also of the opinion that the receivership in the present case falls within the latter class. This being true, and a sale under execution not being an interference with the possession of the receiver in the foreclosure action, the order of the court in that action annulling the deed to appellant and enjoining him from selling, mortgaging, pledging, or hypothecating or in any other way disposing of, or attempting to dispose of, the said real property was erroneous.

However, in addition to said last-mentioned provisions of the decree, there was a provision permanently restraining and enjoining the appellant from interfering with the possession of the receiver in and to said real property. This portion of the decree was based upon the finding that the appellant was “interfering with the possession of the re

There are several other matters ably urged by appellant in his briefs which seem to us to have much merit, but in

The portion of the decree appealed from which declares the sale under execution to be null and void, and the portion thereof which restrains and enjoins appellant from selling, mortgaging, hypothecating, or in any other way disposing of, or attempting to dispose of, the property involved herein is reversed, the other portions of the order to stand affirmed.

While I concur in the decision reversing the order appealed from in so far as it declared the execution sale to be void and in so far as it restrained the appellant from hypothecating or disposing of the property involved, I cannot agree with the grounds stated in the opinion by Mr. Presiding Justice Langdon as those upon which the decision has been' reached. In my view of the law and of the duty of this court that opinion is objectionable in three particulars.

First: In the opinion of the presiding justice it is stated that it is well settled that in a foreclosure proceeding the court cannot try the question of title of those claiming adversely to both the mortgagor and mortgagee. (Murray v. Etehepare, 129 Cal. 318 , [ 61 Pac. 930 ]; Cady v. Purser, 131 Cal. 552 , [ 82 Am. St. Rep. 391 , 63 Pac. 844 ].) This rule is correctly applied in the further statement that “the order in the present case annulling the deed to the appellant cannot be justified, therefore, upon the ground of an adjudication of title as between the appellant and the mortgagor and those claiming under it, because the lower court was powerless to make such an adjudication.” Based upon this statement and a review of cases, including the Petaluma Savings Bank case (Petaluma Sav. Bank v. Superior Court, 111 Cal. 488 , [ 44 Pac. 177 ]), in the opinion of the presiding justice, the conclusion is reached that a receivership in a mortgage foreclosure ease “is but a provisional remedy for the sole and exclusive benefit of the plaintiff, ’ ’ and for that reason, a sale under execution not being an interference with the possession of the receiver, the order of the court annulling the deed to the appellant and enjoining him from mortgaging or disposing of the property was erroneous. This amounts to a decision that the execution

A lengthy argument was made on behalf of the appellant to show that under the decision of the supreme court in the case of Petaluma Sav. Bank v. Superior Court, supra, a receivership in a foreclosure proceeding is differentiable from a general receivership. On the other hand, the respondent, in reliance upon the case of Grosscup v. German Sav. & Loan Soc., 162 Fed. 947 , maintains that the same rules apply to a receivership in a foreclosure proceeding as are generally recognized. It is wholly unnecessary and would be improper on this appeal to determine this question, because, even though the respondent’s broadest contentions should be upheld, and all the rules applicable to federal receiver-ships applied, the order purporting to vacate the execution sale could not be sustained.

The general rules to which reference has been made not only permit but require a court to protect the possession of its receiver. “No other court of co-ordinate jurisdiction has any power or authority to interfere or meddle with the property in the hands of a receiver. . . . This rule is essential to the orderly administration of justice and to prevent unseemly conflict between courts whose jurisdiction embraces the same subjects and persons, and has no reference to the superiority of one tribunal over the other, nor to the superiority in ranks of the several claims, in behalf of which the conflicting jurisdictions are invoked.” (23 R. G. L., Receivers, sec. 71.)

These general rules have been modified to some extent in this state in their application to receiverships granted in divorce cases. The Petaluma Savings Bank case, in my opinion, does not support the conclusion reached by the presiding justice in this case. It is differentiable from the present case in three particulars: First, the receiver appointed in the divorce ease was, not in possession of any of the lands, but was claiming to be in possession and was actually endeavoring to take possession at the time of the execution sale; secondly, as was pointed out in the opinion by Mr. Chief Justice Beatty, the sole authority for the appointment of a receiver in a divorce case is to

If the Petaluma Bank case is authority for the sale of property in the hands of the receiver in a divorce case under process issued out of a court of co-ordinate jurisdiction, it is an exception to the general rule, and the exception ought not to be extended" to other cases of receiverships. To extend this exception to foreclosure receiverships would amount to an invitation for collusive sales pending foreclosure by which a mortgagee entitled to satisfaction upon a defaulted mortgage debt might be held in litigation for years during the pendency of appeals involving the determination of whether or not buyers at such sales acquired title. The effect of the rule stated in the opinion of the presiding justice amounts to an adjudication that the appellant in the present case acquired title under the execution sale. If the trial court on this proceeding had no power to adjudicate that the appellant did acquire title by the sale, this court is without power to adjudicate that the sale was good. Such an adjudication amounts to a determination of the question of title.

Second: In the suit pending for the foreclosure of the mortgage, in which a receiver had been appointed, the receiver, who is the sole respondent on this appeal, procured an order of the superior court in a proceeding instituted by him against the appellant, who was never made a party to that suit, in terms purporting to vacate and

The final decree in the partition suit awarded specific property free from all liens to the plaintiffs in that suit and awarded to the Sunset Road Oil Company other specific property subject to the mortgage of the Mercantile Trust Company. The decree provided that the plaintiffs were entitled to $1,182.75 and costs, of which the sum of $1,000 was allowed as an attorney’s fee to the present appellant, who was the attorney for the plaintiffs in the partition suit. The decree further provided that two twenty-fifths of the amount so determined should be a lien on the land set apart to the plaintiffs, and that twenty-three twenty-fifths thereof should be a lien upon the land set apart to the defendant Sunset Road Oil Company “prior to the said mortgages and liens” theretofore mentioned in the decree.

None of the defendants in the partition suit appealed from the judgment establishing the priority of the lien so imposed. In legal effect, as between the parties, this was a consent judgment making the lien of the mortgage then in suit subordinate to the lien of the twenty-three twenty-fifths of the amount awarded in the partition • suit.

In the foreclosure suit the prior lienholders were not necessary parties. They might have been made parties by their own intervention, and had they been made parties by proper pleadings, their right as prior lienholders would necessarily have been protected in the foreclosure suit, either by preliminary order or in the final decree. [1] While it is generally the rule that claims adverse to both the mortgagor and mortgagee cannot be litigated in a foreclosure suit, if the adverse claimants subject themselves to the jurisdiction of the court in the foreclosure suit, it being before a court of equity, complete justice may be done. (Van Loben Sels v. Bunnell, 131 Cal. 489 , [ 63 Pac. 773 ]; Dobbins v. Economic Gas Co., 182 Cal. 616 , [ 189 Pac. 1073 ].) The undisputed evidence shows that instead of intervening in the foreclosure suit, the plaintiffs in the partition suit, through the appellant, as their attorney, sought to collect the amount of the lien upon the property involved in the foreclosure suit from the mortgagee and its attorneys, and that the appellant made no attempt to make such collection from the receiver, nor was any application made to the court in the foreclosure suit for leave to enforce the prior lien imposed on the mortgaged property by sale under execution issued on the judgment in the partition suit. Regardless of any reasons or excuses advanced for not applying to the court having jurisdiction of the receiver when payment was not made by or on behalf of the mortgagee, as a matter of fact execution was issued on the judgment in the partition suit and levy was made, followed by a sale under that judgment. The certificate of sale was duly recorded on February 18, 1914. In May, 1915, there having been no redemption nor offer of redemption, a sheriff’s deed issued on the certificate and was duly recorded on May 17, 1915, sale being made to the appellant' for $1,307.70.

Third: In addition to the facts stated in the opinion of the presiding justice the record shows that of the properties mortgaged to secure the payment of the issue of bonds of $2,000,000, of which there were outstanding bonds of the value of $1,190,000, the appellant as the attorney for the plaintiffs in the partition suit caused to be sold to satisfy the lien of about $1,200 over 400 acres of the land which was the original refining property of the Oil Company, on which there were a number of buildings and structures, pipe-lines, and all sorts of equipment necessary for a refinery. Under this sale the appellant bought all

[2] Solely on the ground that the trial court in this proceeding was without power to adjudicate on the question of title and in recognition of the fact that the appellant acquired at the sale something which eventually may or may not be determined to have' vested him» with title, I concur in the conclusion that the order appealed from, in so far as it purports to vacate the execution sale and in so far as it purports to restrain the appellant from selling or dealing with his justiciable, claim of title acquired while the property was siib judice, must be reversed. The order appealed from should be affirmed in so far as it restrains the appellant from interfering with the possession of the receiver.

I concur in the judgment for the reasons stated in the opinion of Justice Brittain.

A petition for a rehearing of this cause was denied by the district court of appeal on January 17, 1921, and a petition to have the cause heard in the supreme court,

All the Justices concurred, except Olney, J., who voted for granting of petition.