Tuttle v. Harris

Background

A mortgage lender sued Granada Hotel Corporation in Illinois to foreclose a second mortgage, and a receiver was first appointed to collect rents. A prior lender, the trustee under a deed of trust for earlier bonds, then sued to foreclose the first mortgage and claimed the property as owner after the mortgage condition was broken. The state court discharged the receiver and gave the prior lender possession. While that lender remained in possession, other parties filed a federal proceeding under the corporate reorganization statute, saying the lender’s possession was the same as an equity receivership.

Reasoning

The central question was whether possession by a receiver for rent collection or by a lender after default counts as an "equity receivership" under the reorganization statute. The Court explained that appointing a receiver solely to collect rents in a mortgage foreclosure does not create an equity receivership under the statute. It also noted that, under Illinois law, a mortgagee after condition broken is the legal owner and therefore entitled to possession. In this case the grantee under the deed of trust was in possession as owner, not as an equity receiver. The Supreme Court reversed the lower courts’ decisions.

Real world impact

The ruling clarifies that a lender who takes possession after a mortgage default is treated as the property owner, not an equity receiver for purposes of the reorganization law. That means such possession will not by itself trigger the statute’s protections that apply to equity receiverships. Parties seeking reorganization relief cannot rely on ordinary foreclosure possession to show an equity receivership.