Opinion ID: 1926039
Heading Depth: 2
Heading Rank: 2

Heading: Duty to Rent

Text: We first address Watergate's argument that the trial court erred in holding that it owed Barclays a fiduciary duty to rent Unit 602 at fair market value until its eventual sale, for Barclays' sole benefit. [14] The court reasoned that because Watergate retained possession of the apartment, and because Barclays [was] literally in the same position with Watergate that the Tsakos had been in with the Watergate... Watergate had a duty to protect Barclays' interest in the property. [15] Continuing, the court concluded that Watergate breached these duties when it failed to rent Unit 602 for the majority of the relevant time period [and] when it rented the apartment below fair market value to Esfandiarys for three years.... In light of the evidence presented and this Court's findings, the Court awards Barclays damages based on Watergate's breach of fiduciary duty in failing to rent Unit 602, in the amount of $173,100. Even assuming Barclays was fully subrogated to the Tsakos' rights as shareholder-tenants (as the court presumably did, without discussion), we are aware of no authority to support the broad proposition that a cooperative corporation has some illdefined common law fiduciary duty to rent an apartment for the sole benefit of a defaulting member prior to sale. It may well be that general principles of corporate-stockholder relationships impose some sort of duty vis-a-vis a member in good standing, see Wisconsin Ave. Assoc., supra, 441 A.2d at 963, but we do not think they translate well in determining the rights of the corporation vis-a-vis a member who has defaulted in payment of assessments. Given the provision dealing with a member's default here, we think that the operative principles are better found in examining the rights and duties of a mortgagee in possession (as we have likened Watergate), which are well-settled and somewhat contrary to the trial court's ruling that Barclays was entitled to the entire rents and profits. Generally, a mortgagee in possession does have a duty to seek to make the subject property productive, and a failure of that duty gives rise to liability. It is well settled that equity imposes the duty upon a mortgagee in possession or a trustee not only to account for the rents and profits actually received, but also those that could have been received had there been an exercise of reasonable care and diligence. Rogers v. Barton, 386 Ill. 244, 53 N.E.2d 862, 868 (1944); see also, e.g., Pollard v. American Freehold Land Mortgage Co. of London, 139 Ala. 183, 35 So. 767, 772 (1903); Johns v. Moore, 168 Cal. App.2d 709, 336 P.2d 579, 581 (1959); Conaway v. Thomas, 101 Okla. 227, 224 P. 965, 966 (1924). If [a mortgagee in possession] does not use reasonable diligence he is liable for the fair rental value. OSBORNE, supra, at § 167; see also In re Union Meeting Ptnrs., 165 B.R. 553, 563 (Bankr.E.D.Pa.1994) ([A] mortgagee in possession is held to a `prudent owner' standard, and must manage the property in a reasonable and careful manner so as to keep it in a good state of preservation and productivity.) (quotation marks omitted). However, along with the duty to rent is the mortgagee's right (indeed its obligation) to apply those proceeds first to the outstanding mortgage debt. A mortgagee in possession is ordinarily required to account for the rents and profits he or she receives from the premises. Thus, a mortgagee in possession and entitled to the rents and profits of the mortgaged premises does not receive them absolutely in his or her own right and for his or her own profit, but must apply all the net rents and profits which he or she receives to the discharge of the mortgage debt, first to interest then to principal, in the absence of an assent by the parties concerned to a different appropriation. Accordingly, a mortgagee in possession is sometimes deemed a trustee. Upon redemption,[ [16] ] he or she must account for the rents and profits accruing during his or her occupancy, for the purpose of determining how much, if anything, is required in order to discharge the mortgage debt, the difference between the sums with which he or she is charged and the amount of his or her credits being deducted from or added to the mortgage debt, dependent upon whether the charges exceed the credits or the credits exceed the charges. 54A AM. JUR.2d MORTGAGES § 210 (1999) (footnotes omitted); see, e.g., In re Dupell, 235 B.R. 783, 792 (Bankr.E.D.Pa.1999) (A mortgagee-in-possession becomes a quasi trustee to the mortgagor, operating the property not only to protect its own interest but also for the benefit of the mortgagor to pay off the debt.); see also Fields v. Crowley, 71 Or. 141, 142 P. 360, 361 (1914) (The controlling idea of the statutes regulating the rights of judgment debtors and purchasers in and to the rents, profits, and possession of land from its sale on execution until its redemption, or until the expiration of the period of redemption, is that judgment creditors are entitled to, and should receive, no more than their debts, with interest and proper charges. Any deviation from this idea must entail injustice upon one or the other of these classes.) (quotation marks omitted); POWELL, supra, at § 37.25 (it can be generally stated that the mortgagee in possession has a duty of conduct to the mortgaged property akin to that of a provident owner and to use the net yield from the property for no other purpose than to credit it to the mortgagee's claim by way of equitable setoff). Thus, although Watergate had a duty to rent Unit 602 at the fair market value until its sale, the rental proceeds were not Barclays' outright. Rather, Watergate had to apply those rents towards the balance of the fees and assessments due on the unit, including both those fees which the Tsakos had failed to pay during their membership, as well as those fees which accrued up until the final disposition of the apartment. [17] Barclays' right to the rental payments arose only after this outstanding balance was satisfied, and only to the extent those payments exceeded that amount. Therefore, the trial court was correct in holding that Watergate owed a duty to rent the unit, but erred in awarding Barclays the full fair market rental value of the same. Damages, could at most only have been for that portion of the potential fair market rental proceeds which would have exceeded the accrued fees, assessments and costs due. We turn to that determination.