Opinion ID: 1473139
Heading Depth: 1
Heading Rank: 11

Heading: White Bear Lake Branch.

Text: Under date of November 29, 1901, the Northern Pacific Railway Company took a deed from Minneapolis & St. Louis No. 4 for the so-called White Bear Lake line, approximately 15 miles in length, extending from Minneapolis to White Bear Lake Junction, subject to the following mortgages: (1) The mortgage of Minneapolis & Duluth Railroad Company, dated January 1, 1877, securing $280,000 principal amount of 7 per cent. bonds, which became due January 1, 1907; (2) the Merriam Junction mortgage; (3) the Minneapolis & St. Louis first consolidated mortgage; (4) the Minneapolis & St. Louis first and refunding mortgage. This branch of the railway was constructed by the Minneapolis & Duluth Railroad Company, and was afterwards included in a merger, thereby becoming Minneapolis & St. Louis No. 2. The Minneapolis & St. Louis No. 2 was sold under receivership and purchased by Minneapolis & St. Louis No. 3. Minneapolis & St. Louis Nos. 1 and 2 were personally liable on the White Bear Branch mortgage first above referred to, but Minneapolis & St. Louis No. 3 did not assume payment of that mortgage, nor in any way become liable for its payment. Minneapolis & St. Louis No. 3, by consolidation, as has been stated herein, became Minneapolis & St. Louis No. 4. It was with Minneapolis & St. Louis No. 4 that the Northern Pacific had the dealings which gave rise to this controversy. This branch was under lease to the St. Paul & Duluth Railroad Company from 1882 to 1900. In April, 1900, the Northern Pacific acquired the St. Paul & Duluth, and thereupon gave notice that it would surrender the lease. The rental was based upon a valuation of $280,000, the amount of the first mortgage. The Northern Pacific and the Minneapolis & St. Louis then devised a plan of purchase whereby the former was to pay the interest on the bonds and pay the bonds at maturity, taking the bonds into its possession, and keeping them and the mortgage alive for its protection. Contemporaneous with the taking of the deed these companies entered into the following written agreement: This agreement made the 29th day of November, 1901, by the Minneapolis & St. Louis Railroad Company, a corporation organized under the laws of Minnesota, party of the first part, and Northern Pacific Railway Company, a corporation organized under the laws of Wisconsin, party of the second part, witnesseth: Whereas, the Minneapolis & Duluth Railroad Company, the former owner of the Minneapolis & Duluth Railroad, extending from the city of Minneapolis to White Bear, in Ramsey and Hennepin counties, Minnesota, mortgaged the same to the Fidelity Insurance Trust & Safety Deposit Company of Philadelphia, trustee, by an instrument bearing date May 1, 1877, and there are outstanding, secured by said mortgage, bonds to the amount of $280,000 maturing May 1, 1907, and bearing seven per cent. interest; and Whereas, the said railroad now belongs to the Minneapolis & St. Louis Railroad Company and is incumbered by mortgages subordinate to the first mortgage, which said subordinate mortgages cover also other railways and property; and Whereas, the parties have agreed on a sale of said railroad by the said party of the first party to the party of the second part on terms expressed in a conveyance duly executed herewith and bearing the same date, the main consideration of said deed being the assumption by the grantee of said first mortgage, and it is found impracticable to presently clear the title to said railroad from said subordinate mortgages, and it is desired so far as possible to protect the title of the grantee under said deed: Therefore and in consideration of the premises the parties agree: 1. The Northern Pacific Company agrees to pay the interest as it falls due upon said first mortgage bonds, and to pay the principal sum of said bonds ($280,000) when it matures. When the said bonds are paid they shall be placed in possession of the Northern Pacific Company and held by it for the purpose only of protecting its title as hereinafter provided. They shall not be exchanged for or converted into first and refunding mortgage bonds of the Minneapolis & St. Louis Company under mortgage dated March 1, 1899. 2. The Northern Pacific Company agrees to keep an accurate account of all expenditures for additions, betterments and improvements upon or to said railway and property, but not including expense of mere repairs and maintenance. 3. In case the title of the Northern Pacific Company under said deed shall ever be set aside, invalidated or extinguished by foreclosure or otherwise (except in case of some default of the Northern Pacific Company in the performance of any of the terms or provisions of this agreement on its part to be performed) it shall have a lien on all of said railway and property for the principal sum of said first mortgage bonds, plus its expenditures, with six per cent. interest from their several dates for all additions, betterments and improvements, as defined in the last preceding paragraph. The deed executed simultaneously, and under which the Northern Pacific went into possession, contained, among others, the following: To have and to hold to the said grantee, its successors and assigns forever. The said property is subject to a first mortgage bearing date May 1, 1877, made by the Minneapolis & Duluth Railroad Company to the Fidelity Insurance Trust & Safe Deposit Company of Philadelphia, under which bonds are outstanding in the amount of $280,000, maturing May 1, 1907, and bearing 7 per cent. interest. This deed is made subject to said mortgage and said bonds which the grantee assumes and covenants to pay, together with interest thereon from July 1, 1901. Except as against said mortgage and bonds the grantor covenants to forever warrant and defend the title hereby conveyed against the lawful demands and claims of all persons whomsoever. These instruments were both duly acknowledged and recorded. The Northern Pacific Company entered into possession of the property under the agreement and deed, paid the interest on the mortgage as it fell due, and on its maturity took up the bonds, holding them uncanceled, and the mortgage has not been satisfied of record. The lower court held that, by virtue of the provisions of the agreement under which the Northern Pacific Company went into possession of this property and paid these bonds, it was entitled to protection and that a merger did not take place. This holding is the storm center of attack by various appellants, who contend that, by payment of this $280,000 mortgage, the mortgage became merged in the title, and that the White Bear Branch is therefore subject to foreclosure sale under the lien of other mortgages, free and clear from any lien on the part of the Northern Pacific Railway Company arising out of the $280,000 mortgage. It is said to be a general rule that the acquisition of the equity of redemption in mortgaged premises by the mortgagee results in a merger of the two estates, vesting the mortgagee with the complete title and putting an end to his right or title under the mortgage. But this general rule as to merger has so many exceptions and modifications that to call the rule a general one is almost a misnomer. Merger is dependent almost entirely upon the intent of the parties, particularly the intent of the mortgagee, and courts of equity are loath to declare a merger unless such result is the manifest intention of the parties to the transaction. Platte Valley C. Co. v. Bosserman-Gates Live Stock & Loan Co. (C. C. A. 8) 202 F. 692, 696; Barnes v. Cady (C. C. A.) 232 F. 318; Wilcox v. Davis, 4 Minn. 197 (Gil. 139); Horton v. Maffitt, 14 Minn. 289 (Gil. 216), 100 Am. Dec. 222; Hall v. Southwick, 27 Minn. 234, 6 N. W. 799; Factors Inc. Co. v. Murphy, 111 U. S. 738, 4 S. Ct. 679, 28 L. Ed. 582; Gray v. Nelson, 77 Iowa, 63, 41 N. W. 566, 568; McElhaney v. Shoemaker, 76 Iowa, 416, 41 N. W. 58; Harrington v. Feddersen (Iowa) 226 N. W. 110; 41 C. J. pp. 776-780; 19 R. C. L. pp. 488-489. The author of the article on mortgages in 41 C. J. at pages 776, 777, says: The question of whether a conveyance of the equity of redemption to the mortgagee results in a merger of the mortgage and fee is primarily one of the intention of the mortgagee. The mortgagee has an election in equity to prevent a merger and keep the mortgage alive, which he may do for his own protection as against other liens or incumbrances, even though he does not indicate his intention for a long time after the conveyance of the equity to him and not until another is about to acquire from him an interest in one of the estates; however, a mortgagee's expressed purpose against a merger will not operate to prevent it where it is restricted to a contingency which does not happen. Again this author at page 780 says: Where necessary to enable the mortgagee to defend his rights under his mortgage against intervening liens of third persons, a merger will not be held to have resulted if his intention to that effect is shown, or if there is nothing to rebut the presumption that his intention corresponded with his interest. The author of the article on mortgages, in 19 R. C. L. p. 489, supra, says: Unless an intention to merge with knowledge of a junior lien or liens clearly appears, no merger results from the acquirement, by the holder of the senior mortgage of the interests of the mortgagor, and the senior mortgage retains its priority as against all junior or intervening liens upon the mortgaged property; and this is true whether the interest of the mortgagor is the legal title to the land or the mere equity of redemption. It is only when the fee and the lien center in the same person, without any intervening claims, liens, or equities, that a merger of the title and the lien will take place. The doctrine is well stated by this court in an opinion by Judge Sanborn, in Platt Valley C. Co. v. Bosserman-Gates Live Stock & Loan Co., supra: But a third person, not a volunteer, who pays and procures a release of a first lien upon property under an agreement with the owner that as purchaser, or first lienor, he shall have the pecuniary benefit of such payment, becomes subrogated in equity, as against an inferior lienor whose burden is not increased by such subrogation, to the rights held by the first lienor before the payment was made.    This is a just and reasonable rule. It effects the intention of the parties, preserves to the payor the benefit of his payment, leaves the inferior lienor in his former position, inflicts no injury upon him, prevents injury to the payor through mistake or ignorance of the inferior lien, and works exact justice to all. In this connection it should be noted, as pointed out by the lower court, that this property was not conveyed to the Northern Pacific Railway Company by a mortgagor. The Minneapolis & St. Louis No. 4 was not the maker of the mortgage which was assumed by the Northern Pacific Railway Company, nor had the Minneapolis & St. Louis No. 4, nor the Minneapolis & St. Louis No. 3 ever assumed or agreed to pay the mortgage. In the instant case nothing is left to inference or presumption, because the intention of the paries is made a matter of written agreement, and it conclusively appears therefrom that neither the grantor nor the grantee intended that a merger should result. In fact, the only purpose of the written agreement was to prevent a merger, and to protect the grantee, the Northern Pacific Railway Company, in the payment of this mortgage. The agreement provides that, if the title of the Northern Pacific Company shall ever be set aside, invalidated, or extinguished by foreclosure or otherwise, it shall have a lien on all said railway property for the principal sum of the mortgage, plus its expenditures. This was not a fraud upon any of the other mortgagees. The payment of the mortgage under the agreement simply amounted to a conditional purchase of it by the Northern Pacific. The contingency has arisen which was contemplated by the parties, and that company is asking a court of equity to protect it against the subordinate mortgages. It is argued that subrogation cannot result from the payment of this mortgage by the Northern Pacific Railway Company, because the company was obligated to make this payment. This might be true if the payment were made without any agreement or reservation, but where, as in the instant case, such payment was made pursuant to a specific agreement that under certain contingencies subrogation should result, then the rule invoked is not applicable. The agreement amounted to an equitable assignment of the mortgage upon payment of the bonds, and a preservation of the lien of the mortgage so as to protect against the junior liens. Under such circumstances, on payment of the bonds, the Northern Pacific Company was subrogated to the rights of the mortgagee. Capitol Natl. Bank v. Holmes, 43 Colo. 154, 95 P. 314, 16 L. R. A. (N. S.) 470, 127 Am. St. Rep. 108; Kellogg v. Ames, 41 N. Y. 259; Coles v. Appleby, 87 N. Y. 114. Any other conclusion would work a manifest injustice to the Northern Pacific Company. There is no claim that the property was worth more than the Northern Pacific paid for it. It parted with its money, which it would lose to the junior lienholders, if they can now come in and assert priority of their liens. In the words of Judge Sanborn in Platte Valley C. Co. v. Bosserman-Gates Live Stock Co., supra: This is a just and reasonable rule. The decree of the lower court should not be disturbed, in so far as it protects against merger of the lien of the $280,000 mortgage, and it remains to consider the provisions of the decree awarding a lien to the Northern Pacific Railway Company on account of betterments superior to the lien of the Merriam Junction-Albert Lea first consolidated and the first and refunding mortgages. The court made an allowance for advancements and betterments placed on this branch since 1901 of $164,492.74. The Northern Pacific was in effect a mortgagee in possession, and as such it could incur only such expenses as were reasonably essential to the preservation of the railroad as a going concern. If it desired to make betterments for the purpose of making the property more serviceable in connection with its other lines, that burden must be borne by itself. The item involved in the change of location in the highway, known as the White Bear yards, was an expenditure for the convenience or improvement of the Northern Pacific Railroad as a system. It was allowed $42,589.83 for this expenditure as a lien ahead of other mortgages. This item should be disallowed. The expenditure made for grade separation, amounting to $53,763.32, which is strenuously objected to by appellants, was necessitated because of the character of the property, and was ordered by the public authorities. This was therefore a necessary expenditure, and should be allowed, as should the other items of expenditures allowed by the lower court. It follows that the judgment and decree of the lower court should be modified on the record already made, in accordance with the views expressed herein, and the cause is remanded to the lower court for that purpose, and, as so modified, the decree should be and is affirmed. No costs will be taxed on these appeals for or against either or any of the parties thereto.