Case ID: misc_60/html/0363-01.html
Source: Caselaw Access Project
Author: {"author": "Bischoff, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

The Freehold Construction Company, Plaintiff, v. Benjamin F. Bernstein et al., Defendants.
    (Supreme Court, New York Special Term,
    August, 1908.)
    Bankruptcy; Receivers in bankruptcy — Title and authority: Actions affecting assigned estate — Making receiver party in foreclosure proceedings.
    Foreclosure of mortgages on land — Foreclosure by action and sale — Sale — Setting aside sale — Laches.
    A receiver in bankruptcy does not succeed to the title of the bankrupt but is a mere custodian, and to join a receiver of a bankrupt owner of mortgaged premises in a suit to foreclose the mortgage would only lie effective to cut off such temporary right of possession as he might have acquired.
    Where one is joined as defendant in a foreclosure suit for the purpose of enforcing his alleged guaranty of the mortgage and during the pendency of the suit and before judgment such defendant is adjudged a bankrupt and trustees in bankruptcy are appointed and have knowledge of the condition of the proceeding six days before the sale under the judgment which resulted in a deficiency, the court will not six months thereafter open the judgment and permit the trustees to come in and defend against the guaranty when such relief could not be granted without great prejudice to the rights of necessary parties which have intervened since the appointment of the trustees and during this period of their inaction and where no excuse for their inaction, nor any irregularity in plaintiff’s proceedings, is shown.
    Motion by trustees in bankruptcy of defendant Atlantic Cement Company for an order vacating judgment of sale and deficiency judgment in foreclosure, and substituting said trustees, in place of said defendant, as defendants herein with the right to interpose an answer upon the merits.
    Robert R. Howard, for motion.
    Middleton S. Borland and Charles H. Edwards, opposed.
   Bischoff, J.

The Atlantic Cement Company, joined as a party because of its guaranty of the mortgage, was served with the summons and complaint on October 3, 1907. Bankruptcy proceedings were instituted against this defendant on September 27, 1907; and on September twenty-eighth a receiver in bankruptcy was appointed. The action went to judgment of foreclosure and sale on October thirtieth (after an adjudication in bankruptcy on October twenty-third), and on ¡November seventh trustees in bankruptcy were elected and appointed.

A sale under the judgment on ¡November twenty-first resulted in a deficiency, for which deficiency judgment was docketed against the Atlantic Cement Company on ¡November twenty-third. The trustees in bankruptcy, asserting the existence of a defense to the guaranty, now move to open the judgment in the action, to set aside the sale and for leave to come in and litigate the question of the bankrupt’s obligation by virtue of the guaranty. The foreclosure proceedings were, in no sense, irregular. Indeed, it would appear that the question of regularity is not raised; and the motion is based upon the alleged necessity for protection to the creditors of the bankrupt and upon the merits of the defense. The receiver in bankruptcy did not succeed to the title of the bankrupt and was a mere custodian (Guaranty & Trust Co. v. Pearlman, 144 Fed. Rep. 550) ; and, if the receiver were joined as a party to the foreclosure, the sole purpose and effect would be to cut off such temporary right of possession as he had acquired. By the appointment of trustees, who succeeded to the title which theretofore rested in the bankrupt, the receiver’s right of possession necessarily came to an end; and that possession was not sought to be affected by the proceedings taken in the action until it had, in fact, been terminated, after judgment but before the sale, by the appointment of the trustees in bankruptcy. Prior to the commencement of the action and before bankruptcy, this defendant had conveyed the premises in suit; and, assuming that the conveyance might have been the subject of attack by the trustees because made within the four months’ period, had these trustees made seasonable application to come in for the purpose, the fact remains that, at the time when the action was commenced, all necessary parties were joined and the title of the purchaser at a sale under the judgment was not affected with any irregularity. See Eyster v. Gaff, 91 U. S. 521. There is no suggestion in the moving papers that an attack upon the conveyance of the bankrupt is contemplated. A defense to the guaranty is indicated, and the proceedings are sought to be opened simply for the purpose of litigating that defense, to the end that the deficiency judgment against the bankrupt may be avoided; but. as the facts appear, this relief cannot be granted without great prejudice to the rights of necessary parties which have intervened since the appointment of trustees and during the latter’s inaction. It appears that these trustees had notice of the condition of the proceedings and of the time of the sale, some six days before the sale took place, which was several months prior to the making of the present motion. Seasonable diligence would have required the trustees to have applied for relief at that time; but they apparently took no steps whatever during the succeeding six months, and their papers contain no word of excuse for the delay.

The plaintiff took title at the sale, and some two or three months later mortgaged the premises, and then sold them, the mortgagee and the grantee both having parted with value upon the faith of the record title, acquired while the present moving parties silently stood by. Hnder the circumstances, I conclude that, while the trustees may have a defense to the guaranty, they have lost their right to assert it through laches; and the motion to open the proceedings, as prayed, is, therefore, denied, with ten dollars costs.

Motion denied, with ten dollars costs.