No. 58 March Term, 1978, Appeal from Judgment entered in the Court of Common Pleas of Dauphin County to No. 1597 June Term, 1975, Civil Action - Law.
William F. Martson, Carlisle, for appellants.
Walter W. Wilt, Harrisburg, for appellee.
Cercone, President Judge, and Wieand and Hoffman, JJ.
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Does a mortgagee who goes into possession of an incomplete condominium development upon default in the terms of a mortgage by the mortgagor owe a duty to use undistributed mortgage funds to satisfy the mortgagor's unpaid debts? The lower court held that a mortgagee in possession becomes a quasi trustee with a responsibility to satisfy outstanding, job related claims against the mortgagor. We disagree and reverse.
M.L.W. Construction Corporation was the owner and developer of a series of condominiums on a nineteen acre tract in East Pennsboro Township, Cumberland County. HNC Mortgage and Realty Investors agreed to lend construction money in the amount of $5,850,000.00, which sum was secured by a construction mortgage. After $2,900,000.00 had been advanced, the developer defaulted. HNC thereupon exercised the right given by the terms of the mortgage to assume control of the project as a mortgagee in possession. Subsequently, HNC foreclosed on its mortgage and purchased the incomplete development at sheriff's sale. The project was completed by a contractor employed by HNC.
The appellee, Myers-Macomber Engineers, had performed site-preparation work pursuant to a contract with M.L.W., for which it is owed an unpaid balance of $11,298.98. In this action of assumpsit appellee alleged that M.L.W. had breached its contract to pay for services rendered. M.L.W. did not contest the claim. In a separate count against HNC, appellee contended that the lender was liable for the value of engineering services on theories of unjust enrichment. The trial court submitted this issue to a jury, which returned a verdict in favor of appellee and against HNC for $11,000.00. Motions for new trial and judgment n. o. v. were denied, and judgment was entered on the verdict. HNC appealed.
"Mortgagee in possession" is a term applied to the special status of a mortgagee who has obtained possession of property from the mortgagor with the consent of the latter. See generally: 55 Am.Jur.2d Mortgages §§ 184, 185, 193-196;
[ 271 Pa. Super. Page 489]
Osborne, Mortgages §§ 160-176 (2d ed., 1970). Such consent is usually contained, as here, in the mortgage agreement. This remedy avoids the drastic step of foreclosure, while enabling the mortgagee to protect and preserve its security interest. The mortgagee does not thereby limit its right to foreclose, and, upon foreclosure, the mortgagee may purchase the property at sheriff's sale. Girard Trust Company v. Dempsey, 129 Pa. Super. 471, 476, 196 A. 593, 595 (1938). Frequently, foreclosure becomes necessary despite the salvage efforts of a mortgagee in possession. If the mortgagor should avoid foreclosure by paying off the mortgage debt while the mortgagee is in control of the property, however, the mortgagee must surrender possession to the mortgagor, for the mortgagor has retained his title to the real estate throughout the mortgagee's occupancy. Elliot v. Moffett, 365 Pa. 247, 74 A.2d 164 (1950); Malamut v. Haines, 51 F.Supp. 837 (M.D.Pa.1943).
When a mortgagee goes into possession, he does not become the owner of the real estate. Provident Trust Co. of Philadelphia v. Judicial Building and Loan Asso., 112 Pa. Super. 352, 171 A. 287 (1934); Malamut v. Haines, supra. Rather, he becomes a quasi trustee, managing the property for the benefit of the mortgagor, but at the same time protecting his own interest. Zisman v. City of Duquesne, 143 Pa. Super. 263, 18 A.2d 95 (1941); McNicholas' Appeal, 137 Pa. Super. 415, 9 A.2d 200 (1939). As a mortgagee in possession, his duty is to comport with the same standard of conduct as a prudent owner, i. e., he must manage the property in a reasonably prudent and careful manner so as to keep it in a good state of preservation and productivity. Landau v. Western Pennsylvania National Bank, 445 Pa. 217, 282 A.2d 335 (1971); Integrity Trust Co. v. St. Rita Building & Loan Asso., 317 Pa. 518, 177 A. 5 (1935). See also: Osborne, Mortgages § 168 (2d ed., 1970). ...