City of Toledov.Brown

Supreme Court of OhioMar 18, 1936
130 Ohio St. 513 (Ohio 1936)
130 Ohio St. 513200 N.E. 750

No. 25398

Decided March 18, 1936.

Mortgages — Mortgagee may maintain action for impairment of security, when — Pleading — Allegation connotes implication that condition broken, when — Property right in street passes to mortgage owner — Compensation payable when property appropriated for public use — Filing mortgage constructive notice to those instituting condemnation proceedings — Grade crossing elimination — Insufficient published notice to non-resident mortgagee — Joinder of causes of action — Section 11363, General Code — Foreclosure and damages.

1. A mortgagee, whether he is in possession or has the right of possession, may bring an action for the impairment of his mortgage security, and, since his action is based on the impairment of his mortgage security, he need not allege or prove the insolvency of the mortgagor.

2. Where the mortgagee's petition in such suit alleges that "there was due and owing him" a certain sum secured by the mortgage, such allegation connotes the implication that a condition of the mortgage was broken; and, where the defendant goes to trial without objection or without interposing a motion to make such allegation definite and certain, the defendant will be deemed to have waived the objection.

3. An owner of lots abutting a street has a property right in the street in the nature of an incorporeal hereditament; and that property right passes to the owner of the mortgage, is included within the mortgage security, and cannot be taken by public authorities without compensation.

4. A mortgage, from the date of its filing, is constructive notice to everyone who deals with the mortgaged premises. Those who thereafter institute condemnation proceedings or who settle the damages resulting from the appropriation of part of the premises are charged with such notice.

5. Under the facts pleaded in the petition herein, the mortgagee was entitled to relief unless he was forestalled by the defense that he, being a non-resident of the state, was legally served with notice by publication as required by state law and the city charter, each of which required him to present his claim for damages within two weeks after such publication. The published notice recited that the city and railroad company had initiated proceedings for "the abolition of the grade crossing, by the construction of a subway in Monroe Street in said city." Such notice was too vague and indefinite and was wholly inadequate to inform the mortgagee that his property was to be taken for public uses.

6. Under the liberal provisions of Section 11363, General Code, amendments embracing a cause of action for the foreclosure of a mortgage and another for damages are permitted, if service be had, especially where such amendments are sought before trial.

ERROR to the Court of Appeals of Lucas county.

For convenience, the parties will be alluded to as they stood in the trial court, where Claude Brown was plaintiff and the city of Toledo and The New York Central Railroad Company were defendants.

Brown instituted suit in the Common Pleas Court of Lucas county, seeking judgment in the sum of $15,352 and accrued interest on a claim based upon the impairment of his mortgage security. In his petition Brown alleged, inter alia, that on March 1, 1923, Allen E. and Clark E. Wells, who were owners of lots Nos. 14 and 15 in an addition to the city of Toledo, executed and delivered to him their mortgage deed, conveying the lots as security for a promissory note in the sum of $17,500; that the mortgage deed was duly filed for record on April 12, 1923, and recorded on April 17, 1923. Brown alleged that, at the time of filing his petition, there was "due and owing him" the sum of $15,352 and accrued interest, which sum he averred to be a valid lien upon the mortgaged property; that the mortgaged lots abutted upon Monroe street in the city and also upon the railroad right of way at its intersection with that street, and that the entire frontage of the lots on Monroe street, prior to the crossing elimination, was accessible at grade. His petition further alleges that in the year 1930, by ordinance and resolution of the city council, plans for the elimination of the grade crossing of the railroad at Monroe street were adopted, whereby the city and the railroad were to jointly proceed with such elimination. The prosecution of the work was to be under the joint control of the city and the railroad company, who were to divide expenses and the compensation to be paid for real estate or property rights used for the construction of the improvement. The plans were accepted by the railroad company in writing. This improvement was consummated in the spring of 1931. The petition alleges that the completion of the work resulted in a lowering of the street level fronting the mortgaged property from 17 to 20 feet below its former level, "and rendered practically impossible ingress and egress thereto, and destroyed and greatly impaired the use of said premises for the purposes for which the same were suitable." The petition further stated that the mortgaged property "was of a value considerably in excess of the amount owing plaintiff on his promissory note secured by mortgage on said property, but upon completion of the work in said grade crossing elimination, and by reason thereof, said property is greatly depreciated in value and plaintiff's security is practically lost." The petition also stated that on March 31, 1933, Brown presented his claim for damages to the Director of Finance of the city for the sum of $15,352 and accrued interest, claiming such damages by reason of the grade elimination.

The railroad company filed an amended answer containing two defenses. In the first, it admitted substantially all the allegations contained in the petition excepting execution and delivery of the note and mortgage, the amount due and the amount of damages. The second defense alleged that Brown was a non-resident of the state of Ohio and a resident of the state of Missouri. It further pleaded that in accordance with Sections 381.8 and 8865, General Code, legal notice of the action of the city in the improvement proceedings was given to Brown as non-resident by publication in the local newspapers in June, 1930. It further pleaded that Section 3823, General Code, and Section 201 of the City Charter required owners of lots abutting upon proposed improvements to present their claims for damages in writing within two weeks after publication of notice and that any owner who failed to do so should be deemed to have waived such damages and should be barred from filing a claim or receiving damages. The published legal notice of June, 1930, was addressed to "Fred A. Rakestraw, Mary R. Rounds, Henry Brand, and to all other non-resident and resident owners, of lots and lands affected by the improvement hereinafter mentioned." The notice recited that on May 5, 1930, the city council had adopted a resolution declaring the necessity and intent of the city of Toledo to join with the New York Central Railroad Company in the abolition of the grade crossing "by the construction of a subway in Monroe Street in said city, in accordance with the plans, specifications, estimates and profiles therefor now on file in the office of the Director of Public Service and open to public inspection." The notice recited that a change of grade would result from the improvement and required any lot owner or other person entitled to damages to present his claim therefor within two weeks after publication, and that, upon his failure so to do, the owner should be barred from receiving damages. The railroad company alleged that no claim for damages was filed by Brown until March 31, 1933, nearly three years after publication, and that therefore he waived damages and was barred from filing the claim or receiving damages.

The city also filed an amended answer setting forth substantially the same defenses as the railroad company, and, in addition, it pleaded a second defense, which alleged that on October 20, 1930, Clark E. and Allen E. Wells, in consideration of the payment of $23,500, signed a release to the city and the railroad company discharging them from "all damages, debts, claims, demands, action and causes of action whatsoever arising out of the separation of the grade of Mouroe Street in connection with the property" described in Brown's petition.

Brown filed replies admitting his non-residence and the publication of notice in a newspaper of general circulation, but denied that the notice had any effect in barring his claim for damages.

Thereupon the city and railroad company separately moved for judgment in its favor upon the pleadings. The trial court granted these separate motions and rendered judgment in favor of the railroad company and the city. Brown prosecuted error to the Court of Appeals, which reversed the judgment of the trial court and remanded the cause to the trial court for further proceedings according to law. Thereafter we allowed certification of the cause to this court for review.

Mr. Ralph W. Doty, director of law, and Mr. W.G. Christensen, for plaintiff in error, the city of Toledo.

Messrs. Doyle Lewis and Mr. Milo J. Warner, for plaintiff in error, The New York Central Railroad Company.

Messrs. Harry Stanley K. Levison and Messrs. Ryan Ryan, for defendant in error.

This cause presents two legal phases for consideration: (1) Whether Brown's petition states a good cause of action; and (2) if so, whether the defenses of the city and railroad company, pleaded in avoidance, constitute a legal bar to the action of plaintiff. The controlling facts are found in the statement of the case and will be alluded to in the course of this opinion.

It is contended by the defendants that the petition was insufficient in law because Brown, the mortgagee, did not allege that the mortgagor was insolvent. The decided weight of authority in this country in cases where the mortgagee seeks recovery for impairment of his security is stated in the following text: "When action is brought by a mortgagee for injury to the property mortgaged, the solvency or insolvency of the mortgagor is generally considered immaterial, recovery being allowed in either case, though there would seem to be authority to the contrary." 19 Ruling Case Law, 341; 41 Corpus Juris, 652. See also Kremer v. Crase, 209 Wis. 183, 188, 244 N.W. 596, 87 A. L. R., 1004; Scaling v. First National Bank, 39 Tex. Civ. App., 154, 159, 87 S.W. 715; Hummer v. R. C. Huffman Const. Co., 63 F.2d 372, 375; Jackson v. Turrell, 39 N.J.L. 329, 332.

As the action is one seeking damages for impairment of a mortgagee's security, counsel for defendants insist that a mortgagee out of possession cannot recover damages for impairment of his security without showing that the condition of his mortgage has been broken. The prevailing rule in this country is found in 19 Ruling Case Law, 340, where the text states: "Generally speaking, a mortgagee, whether or not he has the possession, or right of possession, is entitled by virtue of his interest in the property mortgaged to maintain an action in his own name for impairment to his security." It is generally held that if the action of the mortgagee is brought on the case for the impairment of his mortgage security, he has the right to recover. That principle was announced in the early case of Allison v. McCune, 15 Ohio, 726, 45 Am. Dec., 605, where the syllabus reads: "A special action on the case lies against one who lessens the mortgage security of another, and damages may be recovered to the extent of any actual injury sustained by such act." This case was later cited with approval in Smith v. Altick, 24 Ohio St. 369, 377.

The case of Hummer v. Huffman Const. Co., supra, decided by the Federal Court of Appeals, adheres to the rule announced in the Altick case, supra, and states that such rule is sustained by the greater weight of authority in the United States; and, relying upon Delano v. Smith, 206 Mass. 365, 92 N.E. 500, 30 L.R.A. (N.S.), 474, the federal court, in its opinion, holds that an action may be brought before there has been a breach in the conditions of the mortgage.

Counsel for defendants argue that the expressions contained in the opinions in the Altick and Hummer cases, supra, are obiter dicta, since both cases disclose that in neither was there a mortgage condition broken. However, we need not consider this phase of the case for reasons hereafter stated.

The general weight of authority in this country is as stated in the foregoing text in Ruling Case Law. Among many cases supporting the text may be cited the following: Matthews v. Silsby Brothers, 198 Iowa 1392, 201 N.W. 94, 37 A. L. R., 1116; Board of Levee Commissioners v. Wiborn, 74 Miss. 396, 20 So. 861; Arnold v. Broad, 15 Colo. App., 389, 62 P. 577; Moritz v. City of St. Paul, 52 Minn. 409, 54 N.W. 370; Sherwood, Admr., v. City of LaFayette, 109 Ind. 411, 10 N.E. 89, 58 Am.Rep., 414; Cole v. Stewart, 65 Mass. 181.

While Brown, in his petition, did not specifically aver that a condition of his mortgage was broken, he does allege that "there is due and owing him" the sum of $15,352 and accrued interest as a valid lien upon the property. That allegation connotes the implication that a condition of his mortgage was broken and, in the absence of a motion to make such allegation definite and certain, it will be presumed that there was an amount then due and unpaid on his mortgage debt and that, in that respect, there was a default in one of the conditions of his mortgage. The Court of Appeals took that view and, we think, properly so. O'Brien v. Miller, 117 F., 1000, 1001; George Adams Frederick Co. v. South Omaha National Bank, 123 F., 641, 644, 60 C.C.A., 579. Had the defendants believed the allegation to be vague or indefinite they should have filed a motion to make it definite and certain, thereby saving the hazard and expense of trial. Not having done so, defendants, having gone to trial without objection, will be deemed to have waived the objection on which they now rely. Pepper v. Sidwell, Admr., 36 Ohio St. 454, 458.

Putting aside many of the legal contentions of counsel supporting or attacking the petition we think the instant case should be determined upon the peculiar facts which it presents. This court has frequently decided that, when public authorities acquire easements in streets abutting an owner's property the owner has a property right in the street in the nature of an incorporeal hereditament, and that such an interest is as much property as the lot itself; and that where such property is so taken the owner is entitled to compensation. Crawford v. Village of Delaware, 7 Ohio St. 459, 469; Cinn. Spring Grove Ave. St. Ry. Co. v. Village of Cumminsville, 14 Ohio St. 523, 524; Lawrence Rd. Co. v. Williams, 35 Ohio St. 168. This principle, so frequently announced by this court, is not controverted by counsel for defendants. Indeed, they could not well do so, since the record discloses that they instituted appropriation proceedings for the condemnation of part of the mortgagor's property, and later effected a settlement with the mortgagor for the damages resulting from the appropriation. This property right attaching to the abutting lots effectually passed to his mortgagee upon the execution of the mortgage. The mortgage on the premises was dated March 1, 1923, was filed April 12, 1923, and recorded in April of that year. Before the elimination proceedings were begun, as well as on October 20, 1930, when the mortgagor settled with the defendants for all claims or damages arising from the grade elimination, Brown's mortgage was on record and was constructive notice to everyone who dealt with the mortgaged property. Brown was a bona fide purchaser in the fullest sense and was entitled to be protected as such. While the title which the defendants secured by means of their settlement contract may have been valid as between the parties thereto, it was subject to the terms of the recorded mortgage, of which both city and railroad company had constructive notice. Varwig v. Cleveland, Cinn., Chicago St. Louis Rd. Co., 54 Ohio St. 455, 44 N.E. 92; Jackson v. Turrell, supra; Severin v. Cole, 38 Iowa 463; Sherwood, Admr., v. City of LaFayette, supra. Brown, the mortgagee, therefore, was entitled to relief unless forestalled by the defenses below asserting that the mortgagee had been legally served by publication as provided by state law and the city charter, requiring him to present his claim for damages within two weeks after publication; and that, upon failure to do so, he should be deemed to have waived any damages arising from the elimination proceedings, the defense alleging that no claim for damages had been filed by the mortgagee until nearly three years after such publication.

Counsel for defendants contend that since notice by publication was required to be given to an "owner" it was not necessary to serve notice on Brown, who was a mortgagee and not the owner of the property. A sufficient answer to that contention is that notice must be brought home to Brown before his property could be taken. Their chief contention, however, is that if notice was necessary, it was given him by a proper legal publication, advising him that a portion of the mortgaged property was to be taken for the grade elimination.

There is a wide divergence of authority in the reported cases upon the question whether a mortgagee should be considered an "owner" upon whom service by publication should be made. This divergence, however, usually arises from the peculiar language employed by statutes defining the persons for whom publication should be made. In this case, the Court of Appeals, following one line of authority, held that the mortgagee was an owner within the contemplation of our statutes and the Toledo charter; but the court further decided that the published notice was inadequate and legally insufficient to give notice to Brown that lots 14 and 15 described in his mortgage were to be taken by proceedings in eminent domain. Whether a mortgagee should be considered to be an "owner" or not, the published notice was wholly insufficient to bring home notice to Brown, either as owner or mortgagee, that his property was affected. Certainly if one's property is to be taken by public authorities, the notice should more definitely advise the owner of that fact than was done in the instant case. Here the published legal notice recited the names of three specified owners, but Brown's name was not among them. This in itself might not be decisive had the notice otherwise notified Brown that his mortgaged property was involved in the elimination proceedings. The published notice recited the fact that the city and railroad company had initiated proceedings for "the abolition of the grade crossing by the construction of a subway in Monroe Street, in said city." It did not state what specific property was to be taken or what lots abutting the improvement would be affected by the elimination proceedings; nor did it state at what point in Monroe street the construction was to be made. Had the notice effectually advised Brown that any of his property rights would be impinged he would then have been driven to the plans and specifications on file in order to ascertain the exact information as to the character of the improvement and the amount of damages he would sustain, so that he could more advantageously present his claim therefor; but the notice did not remotely suggest to the mortgagee, who was a resident of Missouri, that his property was to be taken, or that the elimination proceedings would so seriously impair his security. The notice was wholly inadequate and did not comply with the principle announced in Harbeck v. City of Toledo, 11 Ohio St. 219, where it was held that "the power conferred upon a municipal corporation to take private property for public use, must be strictly followed." In that case, Judge Peck cites with approval the following language employed in Dyckman v. Mayor of New York, 5 N.Y. (1 Seld.), 434, 439. "No prerogative of sovereign power should be watched with greater vigilance than that which takes private property for public use. It should never be exercised except when the public interests clearly demand it, and then cautiously; and the requirements of the statute authorizing its exercise must be strictly pursued." The second proposition of the syllabus in Farber v. City of Toledo, 104 Ohio St. 196, 135 N.E. 533, is apropos here: "But before a property owner may be held to have waived a claim for damages to or compensation for property affected or taken by a change of the grade of the street upon which his property abuts, it must appear that such property owner has had notice of such proposed change of grade." A mere recital in the published notice that there was to be an abolition of a grade crossing "by the construction of a subway in Monroe Street," without allusion to the lot numbers, and without stating the name of the owner or the point in Monroe street where the subway was to be constructed, was too vague and indefinite to inform the mortgagee that his property was to be taken for public uses, and did not conform to the principle announced in the Ohio cases.

An additional complaint by counsel for defendants is that under the present status of the pleadings there has been no showing of actual damage to the mortgagee and that it is impossible to ascertain from the petition either the amount of or the measure of damage sustained by him. The mortgagee still holds security on the balance of the property not taken. The mortgagor or owner of the premises has not been made a party to the action. The implication underlying the argument of counsel is that the mortgagee cannot recover if his security can be satisfied out of the mortgaged property unaffected by the condemnation proceedings. While the petition states that after the completion of the grade-crossing elimination the property depreciated in value and that his security was practically lost, those facts are not admitted by the defendants. The original mortgage debt, amounting to $17,500, has been reduced to $15,352). It may be that upon a sale of the property with the grade elimination completed, the mortgage debt will be fully satisfied, in which event it cannot be said that the security has been impaired. If that situation should develop the city and the railroad company should be relieved from liability to the mortgagee.

The many reported cases touching the impairment of a mortgage security evince the difficulty of adopting any rigid and abstract rule that will govern the remedy that should be employed in individual cases. We are content to announce the principle that should apply to the case at bar. The Court of Appeals has remanded this case to the trial court for further proceedings. In order to secure equal and exact justice, it appears to us that, upon the remand, the petition should be amended by adding new and necessary parties, obtaining appearances or proper service, and by adding an additional cause of action seeking the foreclosure of the mortgaged property. Such a course, we think, is permitted by our statute of amendments or jeofails (Section 11363, General Code), which has frequently been given liberal interpretation by our courts, especially where the amendments are sought before trial.

The change suggested in the action relates to the form of the remedy. The entire transaction involves various and necessary parties, including the mortgagor, the mortgagee and the defendants; and relief could more adequately be given in a single action containing separate causes, one for foreclosure and another for damages which the mortgagee would sustain by reason of the impairment of his security. Such amendments are permissible within the rule approved in the case of Smith v. Altick, supra, and in Ohio Electric Ry. Co. v. United States Express Co., 105 Ohio St. 331, 137 N.E. 1. In the course of the opinion in the latter case, Judge Robinson said that the amendment set forth "an additional and a different cause of action from that averred in the original petition, required service of summons, waiver of service, or an entry of appearance, before the court acquired jurisdiction of the person of the express company." Other cases reflecting upon the subject are the following: Durbin v. Fisk, 16 Ohio St. 533; Wm. T. Spice Son v. Steinruck, 14 Ohio St. 213, in which the language of the chief justice can well be applied to the instant case. He said: "The proposed amendment was clearly in furtherance of justice. It proffered a speedy and comparatively inexpensive trial on the merits. It sufficiently guarded the rights of the defendants, and enabled them to attain a final hearing at less cost than would otherwise ensue."

The Court of Appeals committed no error in reversing the judgment of the trial court and remanding the cause to that court for further proceedings. The equitable cause in foreclosure should proceed to the final determination by a sale of the entire mortgaged property subject to the improvement; and whatever deficiency, if any, may then be required for the satisfaction of the mortgage security can be paid out of the damages secured against the wrong-doing defendants. In the meantime, the law action should be held in abeyance until after foreclosure and sale. The judgment of the Court of Appeals is affirmed.

Judgment affirmed.