#### Elias N. Mallouk, Respondent, *v.*The American Exchange National Bank, Appellant, Impleaded with Others, Defendants.

First Department,

July 10, 1913.

Bankruptcy—composition — suit for an accounting and to set aside as fraudulent a conveyance by bankrupt to representative of creditor as collateral security — duty of one holding property as collateral security to pay prior liens thereon.

A composition agreement was submitted by bankrupts to then1 creditors, including a bank, providing for a settlement upon the basis of twenty-five per cent—ten per cent cash and fifteen per cent in notes. Shortly thereafter the bankrupts conveyed certain real estate to one R, a representative of the bank, subject to a first and second mortgage, and at the same time gave to it the notes, together with other notes representing twenty-five per cent additional of its claim. JR. immediately thereafter executed and delivered to the bank a declaration of trust, stating that he held the conveyance merely as collateral security for payment of the notes. At the time of the composition agreement and of the conveyance, an action was pending to foreclose the first mortgage, which was subsequently discontinued. Thereafter an action was commenced to foreclose the second mortgage, a receiver of the rents appointed, a judgment entered and a sale of the property made to one M., subject to the first mortgage. After paying the amount due on the mortgage, together with costs and expenses of sale, there was a deficiency. The notes given to creditors not having been paid, some of them procured judgments against the bankrupts and assigned them to M., who thereupon brought suit solely for the benefit of himself, against the bank to set aside the conveyance to R, and for an accounting on the ground that the same was fraudulent as to him, since the giving of the additional notes and the conveyance were in pursuance of a secret arrangement with the bank to induce it to sign the composition agreement. It appeared that the bank never received anything by reason of the conveyance.

Held, that the conveyance although in the form of a deed, was in fact a mortgage given as collateral security for the payment of the notes, and *712that so far as the bank and all other parties were concerned it was a nullity, the prior liens having exhausted the value of the land;

That since the bank never took possession of the property, never did anything to depreciate its value and never received anything from it, and since the action was brought solely for the benefit of the plaintiff and not on behalf of himself and other composition creditors, a judgment against it for the value of the land at.the time of the conveyance together with interest thereon, and the rental value intermediate the conveyance and the appointment of the receiver in the suit for foreclosure should be reversed and the complaint dismissed.

One who holds property as collateral security for the payment of a debt is not obligated to pay prior liens thereon or in default thereof to be held liable for the difference between the value of the property at the time he takes it and what it subsequently brings to satisfy prior liens.

Appeal by the defendant, The American Exchange National Bank, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of New York on the 5th day of July, 1912, upon the decision of the court after a trial at the New York Special Term.

*Edgar J. Nathan,*for the appellant.

*David J. Gallert,*for the respondent.

McLaughlin, J.:

On the 11th of August, 1909, Alexander Yamin and Thomas Rahaim, composing the firm of Rahaim & Malhami, were adjudged bankrupts. Shortly thereafter a composition agreement was submitted to their creditors, including the appellant. The American Exchange National Bank. The agreement provided for a settlement upon a basis of twenty-five per cent — ten per cent in cash and fifteen per cent in notes — half of which were payable in six months and half in one year. The composition agreement was signed on the 28th or 29th of October, 1909, and shortly thereafter the bankrupts conveyed certain real estate" in the city of New York to one Rush, a representative of the bank, and at the same time gave to it the notes, together with other notes representing twenty-five per cent additional of its claim. Rush immediately thereafter executed and delivered to the bank a declaration of trust stating that he held the conveyance merely as collateral security for the payment of the notes, and that he had no personal *713interest in the same. The conveyance to Rush was subject to a first mortgage of $30,000 and to a second mortgage of $8,000, and at the time the composition agreement was signed and the conveyance delivered an action was pending to foreclose the first mortgage. On the 19th of March, 1910, an action was also commenced to foreclose the second mortgage, and a receiver of the rents was, on application of the plaintiff, appointed. On the 12th of May, 1910, the action to foreclose the first mortgage was discontinued. The action to foreclose the second mortgage was prosecuted to judgment, under which a sale was had on the 24th of October, 1910 — the plaintiff in said action purchasing the same subject to the first mortgage for $12,750. After paying the amount due on the mortgage, together with the costs and expenses of the sale, there was a deficiency of $352.50. The notes given to the creditors were not paid. Certain of the creditors brought actions upon them against the bankrupts, and having procured judgments assigned them to the plaintiff, who thereupon brought this action to set" aside the conveyance to Rush, and for an accounting, on the ground that the same was fraudulent as to him, since the giving of the additional notes and the conveyance were in pursuance of a secret arrangement or understanding with the bank to induce it to sign the composition agreement.

At the trial the foregoing facts appeared, and in addition thereto that the appellant never received anything by reason of the conveyance. Notwithstanding that fact the court found the value of the premises conveyed, at the time of the conveyance, was $6,500 over and above the two mortgages,' and the rental value intermediate the conveyance and the appointment of the receiver in the foreclosure action, $252.47; that the conveyance as to the plaintiff was fraudulent, and since Rush was not in a position to reconvey, by reason of the sale under the judgment of foreclosure, plaintiff was entitled to judgment against the bank for the above amounts, together with interest on $6,500 from the date of the conveyance. Judgment was thereafter entered for this amount, from which the bank appeals.

I am of the opinion the judgment appealed from should be reversed. The conveyance, though in the form of a deed, was in fact a mortgage given as collateral security for the pay*714ment of the notes. Such mortgage was subordinate to the two prior ones, and if it be assumed that it was in fact fraudulent as to the plaintiff, nevertheless it did him or his assignors no injury whatever. The bank never took possession of the property; never did anything to depreciate its value; and never received anything from it. The mortgage, so far as the bank and all the other parties were concerned, was a nullity, the prior liens entirely exhausting whatever value the land had. One who holds property, either real or personal, as collateral security for the payment of a debt, is not obligated to pay prior liens thereon, or in default thereof be held liable to respond in damages for the difference between the value of the property at the time he takes it and what it subsequently brings to satisfy such prior liens. It is true that in an action to set aside a fraudulent conveyance a court of equity may award a money judgment against a fraudulent grantee, provided he has, by some act of his own, depreciated the value or by sale put it out of his power to reconvey. In such case the judgment may be either for the value of the property at the time of the conveyance, or for the proceeds received by the grantee when he disposed of it. *(Valentine*v. *Richardt,*126 N. Y. 272; *Hamilton National Bank*v. *Holsted,*134 id. 520; *Decker*v. *Decker,*108 id. 128; *Skillin*v. *Maibrunn,*75 App. Div. 588; affd., 176 N. Y. 588.)

In the case before us the bank did nothing to depreciate the value of the property covered by the conveyance to Bush, nor was the sale under the mortgage foreclosure in any way attributable to it. Obviously, under such circumstances, a money judgment against it is improper. *(Wasey*v. *Holbrook,*141 App. Div. 336; affd., 206 N. Y. 708; *Hamilton National Bank*v. *Halsted, supra; Loos*v. *Wilkinson,*113 N. Y. 485; *Dunphy*v. *Kleinsmith,*78 U. S. [11 Wall.] 610; *Hosmer*v. *Tiffany,*124 App. Div. 287.) It got nothing by the conveyance and, therefore, there is nothing for which it can account.

I am also unable to see how the plaintiff is in a position to maintain the action, even if it he assumed that the bank did receive something of value. The action is brought not on behalf of the plaintiff and other composition creditors similarly situated, but solely for the benefit of the plaintiff. He seeks *715to set aside the conveyance on the ground that the bank received a preference over the other creditors who entered into the agreement, and yet he is endeavoring to do the same thing by a judgment of the court.

On both grounds, therefore, I am of the opinion the judgment appealed from should be reversed, with costs, and the complaint dismissed, with costs.

Ingraham, P. J., Dowling and Hotchkiss, JJ., concurred.

Judgment reversed, with costs, and complaint dismissed, with costs. Order to be settled on notice.