Case ID: ad_149/html/0835-01.html
Source: Caselaw Access Project
Author: {"author": "Jenks, P. J.:", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

Continental Insurance Company, Appellant, Respondent, v. Julia B. Reeve and Others, Defendants, Impleaded with City Real Estate Company, Respondent, Appellant.
    Second Department,
    March 15, 1912.
    Mortgage —foreclosure — rents and profits in hands of receiver — marshaling assets—respective rights of purchaser and second mortgagee in rents and profits—lien of second mortgagee on surplus — interest earned by receiver—interest payable by purchaser on foreclosure.
    Rents and profits of mortgaged lands in the hands of a receiver are applicable to the payment of the mortgage debt and costs of foreclosure if the proceeds of the sale are insufficient.
    A surplus in the hands of a receiver after the satisfaction of a first mortgage represents the mortgaged estate, and that part of the surplus consisting of rents due after the purchaser on foreclosure makes demand for possession under his deed belongs absolutely to him.
    So, too, rents payable in advance and collected by the receiver, but extending beyond the date of the purchaser’s demand for possession, should be apportioned to him.
    A surplus existing after the foreclosure of a first mortgage should be applied to the satisfaction of a second mortgage, for as that lien is cut off by the foreclosure it is transferred equitably to the surplus.
    The purchaser on the foreclosure of a first mortgage and the holder of a second mortgage are not creditors of the same debtor. Hence, although the second mortgagee has other security for his debt, the purchaser on the foreclosure of the first mortgage cannot contend that the hen of the second mortgage does not attach to the surplus, for the equitable rule of marshaling securities applies only where two or more persons are creditors of the same debtor.
    Surplus rents and profits in the hands of a receiver after the foreclosure and satisfaction of a first mortgage represent the mortgaged premises and are subject to the lien of a second mortgage; they should not go to the first mortgagee, who bid in the lands on foreclosure. Especially is this so where the order appointing the receiver directed him to hold the surplus subject to the further order of the court,
    Where an order directed the receiver on foreclosure to deposit rents and profits with a certain depositary, he should pay to the purchaser only such interest as he actually received, not the legal rate.
    A purchaser on foreclosure must pay interest at the legal rate upon any part of the purchase money unpaid after it became due under the terms of sale, whether or no he takes possession.
    Cross-appeals by the plaintiff, the Continental Insurance Company, and the defendant, the City Real Estate Company, from, an order of the Supreme Court, made at the Kings County Special Term and entered in the office of the clerk of the county of Kings on the 23d day of December, 1910.
    
      William N. Dykman [Philip S. Dean with him on the brief], for the plaintiff.
    
      Lynn C. Norris [Edward M. Perry with him on the brief], for the defendant City Real Estate Company.
   Jenks, P. J.:

These are cross-appeals by the plaintiff and by the defendant City Beal Estate Company from an order of the Special Term in an action for foreclosure of a first mortgage on realty. The City Beal Estate Company is the owner and the holder of a second mortgage for $140,500, due, unpaid and next in priority to the said first mortgage, and the only other lien on the said realty. It owns and holds that mortgage as collateral security for a debt of $28,971.48, due from Pelletreau and Cooper, who were the real owners of the equity in the premises, or at least controlled it. On the day before plaintiff filed the lis pendens herein the record title of the realty was in the defendant the Lotus Bealty Company. The foreclosure search, continued thereafter, failed to disclose a recorded deed of the premises made to Lewis, a dummy, at the instance of Pelletreau, and so Lewis was not made a party to the action. Shortly before the foreclosure sale this omission was discovered, and thereupon the plaintiff, in consideration of Pelletreau’s procurance of a deed of the premises from Lewis to the defendant the Lotus Bealty Company, stipulated in writing that plaintiff would bid at the foreclosure sale “ at least the amount found due by the said judgment, together with its taxable costs and disbursements and allowance, with interest, less any sum in the hands of the Beceiver.” It is not contended that the said second mortgagee, the City Beal Estate Company, had any hand in the conveyances to the dummy Lewis, or was a party to the said arrangement for the said reconveyance by Lewis, or to any agreement or stipulation incident thereto. Upon motion of the plaintiff a receiver pendente lite of the rents and profits of the premises had been appointed by an order that directed him, after deduction of the proper charges and expenses, to apply the residue of the rents to the payment and satisfaction of the amount remaining unpaid on the plaintiff’s bond, and mortgage, to bring all rents into court by deposit with the Title Guarantee and Trust Company and not pay out, but to safely keep, subject to the further order of the court, all such moneys, •“ excepting so far as payments and disbursements are authorized by the terms of this order.” The plaintiff bid in the premises upon the foreclosure sale held on August 24,1909, for $365,000, the amount, by plaintiff’s estimate, required by its said stipulation (in addition to taxes, which the plaintiff considered within the spirit of its stipulation), less only the money in the hands of the receiver. But in casting up that amount the plaintiff included the tax of 1907, an item of $3,700 in round numbers, when in fact that tax had been paid. Pelletreau refused plaintiff’s application that he permit the bid to be reduced by that item, and the plaintiff thereupon moved at Special Term for reduction of its bid by such item. The Special Term granted the motion, but upon appeal, for the reasons stated in the opinion of the court per Burr, J., the order was reversed and the motion was denied, without prejudice to an application on the part of the plaintiff to rescind the sale if it be so advised. (Continental Insurance Co. v. Reeve, 135 App. Div. 737.) An appeal from our decision was dismissed by the Court of Appeals. (198 N. Y. 595.) The order now under review was made thereafter at the instance of the defendant, the said City Real Estate Company, which moved for a reduction of the deficiency, found by the report of the referee to sell under the judgment of foreclosure, by deducting therefrom $3,387.43, for direction that the deficiency judgment be for that reduced amount, for determination that the said City Real Estate Company is entitled to the balance in the receiver’s hands after deduction of the amount of the deficiency as so reduced, for direction that the receiver pay said balance to the said City Real Estate Company, and for such other and further relief as might be just. At the hearing of the motion, plaintiff read and filed a stipulation of the said City Real Estate Company to the effect that, in addition to the bond and mortgage covering the premises in suit and in addition to any claim on the fund in the hands of the receiver, it has securities collateral to the note of Pelletreau and Cooper amply sufficient to pay thé note or any balance due thereon in full with interest. The stipulation, however, was made expressly “without prejudice to the contention of said • defendant City Real Estate Company that the fact of its possession of such collateral securities is immaterial upon this motion.” The Special Term granted the motion, amended the referee’s report of sale by insertion of the $365,000 as the amount of the bid instead of $361,612.55, directed that the difference between these sums be deducted from the deficiency as found by the report of sale, reduced the deficiency accordingly, ordered the receiver to pay to the plaintiff the reduced sum, with interest thereon at six per cent per annum from September 23, 1909, to the date of the entry of the order in satisfaction of the deficiency and to pay to the City Real Estate Company the balance of the funds in his hands as receiver. The plaintiff appeals generally, the said City Real Estate Company appeals “in so far as the said order fails and omits to provide for a further reduction of said deficiency by deducting therefrom interest on $3,387.45 from September 23rd, 1909, as prayed for in the said defendant’s notice of motion herein, and from so much and such part of said order as directs the receiver herein to pay to plaintiff or its attorney interest on the said deficiency as thus reduced at the rate of six per cent per annum from September 23rd, 1909, to the date of entry of said order.”

I shall consider first the appeal of the plaintiff, whose contention is that upon the said stipulation of the defendant, the City Real Estate Company, the doctrine of marshaling of assets should be applied in that the said City Real Estate Company, having two funds as security for its debt, should be relegated solely to the securities which it has in its hands.

The fund which is in controversy is made up of the rents and profits of the realty collected by the receiver. If the amount received under the foreclosure sale did not suffice to satisfy the plaintiff’s claim as mortgagor (inclusive of the expenses incidental to its action for foreclosure [Bushwick Savings Bank v. Traum, 26 App. Div. 532; affd., 158 N. Y. 668]), then the rents and profits in the hands of the receiver are applicable to the extent of the full satisfaction of such claim. (Cincinnati National Bank v. Tilden 50 N. Y. St. Repr. 366; affd., 140 N. Y. 620; Thomas Mort. § 898 and cases cited.) The fund then is surplus,' namely, the amount that remains after the satisfaction of the plaintiff’s claim as first mortgagor. Such surplus represents the mortgaged estate. If the sum in the hands of the receiver consists in part of rents due after the purchaser at the foreclosure sale made demand for possession under his deed, they belong absolutely to that purchaser. And so any rents payable in advance and collected in advance by the receiver extending beyond the date of such demand may be apportioned to that purchaser. (Jones Mort. § 1659.) As the surplus for distribution only exists after the plaintiff’s claim as mortgagor has been fully satisfied, the plaintiff cannot be a claimant perforce of his mortgage. Concededly its only other relation thereto is that of purchaser at the foreclosure sale. The status of the City Real Estate Company is that of lienor next in priority perforce of its second mortgage which was due. The struggle, then, over this surplus is between the purchaser at the foreclosure sale and such lienor. The purchaser acquired the same estate and no other or greater than would have vested in the mortgagee if the equity of redemption had been foreclosed. (Thomas Mort. § 1013; Jones Mort. § 737.) The general rule is that such surplus would be applied to the satisfaction of this second mortgage, inasmuch as that lien, cut off by the foreclosure proceedings, is transferred equitably to that surplus. (Vogel v. Nachemson, 137 App. Div. 200; affd., 199 N. Y. 535; Quackenbush v. O’Hare, 129 id. 488. See, too, Burchell v. Osborne, 119 N. Y. 486; Bartlett v. Gale, 4 Paige, 503; Jones Mort. § 1688.) The question then presented by the plaintiff is whether it as purchaser is entitled to invoke the rule of the marshaling of assets against this second mortgagee. In Stevens v. Church (41 Conn. 369) the Supreme Court of Errors said: “The principles of equity in regard to the marshaling of securities are not applicable to the case of a mortgagee and á subsequent purchaser of the equity of redemption, but are confined to cases where two or more persons are-creditors of the same debtor, and have successive demands upon the same property, the one prior in right having other securities.” (See 1 Story Eq. Juris. [13th ed.] 639, note; Jones Mort. §§737, 1691a; Cherry v. Monro, 2 Barb. Ch. 618.) Such purchaser and this second mortgagee are not creditors of the same debtor. (4 Pom. Eq. Juris. [3d ed.] § 1414, note 4.) I think, then, that the plaintiff cannot prevail to the exclusion of the City Real Estate Company. (See, too, Quackenbush v. O’Hare, supra.)

Although the receiver was appointed at the instance of the plaintiff and directed to apply the rents and profits to the satisfaction of the plaintiff’s bond and mortgage, that fact presents no reason why the surplus (which exists after such application) should be diverted from application to the second mortgage for the benefit of the plaintiff as purchaser, but the court can and should direct the application sought by the second mortgagee, inasmuch as the fund represents the mortgaged premises as subject to the lien of such mortgage. (Keogh v. McManus, 34 Hun, 521; Vogel v. Nachemson, supra ; Jones Mort. § 1688.) Moreover, the order of appointment directs that any sum received after the application to the satisfaction of the plaintiff’s bond and mortgage shall be kept subject to the further order of the court.

I now consider the appeal of the City Real Estate Company. It contends that the order should not provide interest at six per cent per annum on the said sum which the receiver is to pay to the plaintiff “ in satisfaction of its said deficiency.” I think that this contention is sound. The order obtained by the plaintiff directed the receiver to deposit these rents and profits with a certain depositary, and the plaintiff is entitled to any interest that the receiver gained by such deposit, apportioned to the sum paid to the plaintiff, and not to interest at the legal rate. (Warren v. Banning, 140 N. Y. 227.) The City Real Estate Company further. insists that the plaintiff as purchaser is chargeable with interest upon the sum that remains unpaid upon the purchase price of the property. The confirmation of the sale by the court relates to the time of the delivery of the deed to the purchaser. (Thomas Mort. § 1021 and authorities cited.) From whatever time the purchase money was due under the terms of sale, the purchaser should be compelled to pay interest at the legal rate upon any part of the purchase money that remained thereafter unpaid. The purchase money is regarded as the property of the vendor when the vendee has the right of possession, and, therefore, interest is payable thereon whether the purchaser does or does not take possession. (Sug. Vend. [Am. notes by Perkins] 314.) It does not appear that this balance of the purchase money has been appropriated, or that the purchaser has received no benefit therefrom within the exception noted in Bostwick v. Beach (105 N. Y. 661), or that the plaintiff has been in any way excluded from the enjoyment of its purchase, to which it took conveyance on September 23, 1909. The delay in the termination of these proceedings was not attributable to the vendor. Presumably the plaintiff has been in the enjoyment of the rents and profits since that time.

The order is modified, and as modified affirmed, with ten dollars costs and disbursements to the appellant the City Real Estate Company.

Hirschberg, Burr, Thomas and Carr, JJ., concurred.

Order modified in accordance with opinion, and as modified affirmed, with ten dollars costs and disbursements to the appellant City Real Estate Company. Order to be settled before the presiding justice.