Case Name: Gertrude M. Kossoff, Appellant, v. Morris Wald and Others, Respondents
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1935-12-13
Citations: 245 A.D. 646
Docket Number: 
Parties: Gertrude M. Kossoff, Appellant, v. Morris Wald and Others, Respondents.
Judges: 
Reporter: Appellate Division Reports
Volume: 245
Pages: 646–657

Head Matter:
Gertrude M. Kossoff, Appellant, v. Morris Wald and Others, Respondents.
First Department,
December 13, 1935.
Jacob M. Zinaman, for the appellant.
Thomas L. Walsh of counsel [Norwood & Walsh, attorneys, for Carlisle Norwood; and Irving S. Finkston, attorney, for Morris Wald and Abraham Greenberg], for the respondents.

Opinion:
Untermyer, J.
This court has previously held (241 App. Div. 483) that the complaint states a sufficient cause of action in equity. Upon the trial at Special Term judgment was rendered for the defendants on the ground that no conspiracy or collusion on their part to eliminate the plaintiff's second mortgage had been shown. The only question upon this appeal is whether the facts sustain this conclusion of the Special Term.
In May, 1930, the plaintiff became the holder of a second mortgage for $6,500 on premises owned by Silberman Realty Co., Inc., in the borough of Bronx, subordinate to a first mortgage for $46,500 held by the defendant Norwood. Thereafter the defendant Green-berg became the owner of the property subject to these two mortgages, payment of which, however, he did not assume. By installment payments he reduced the principal of plaintiff's second mortgage to $4,250 and paid the interest thereon to November 20, 1932.
Interest amounting to $697.50 became due on the first mortgage on April 1, 1933. Greenberg tendered part payment only, which Norwood refused to accept stating that additional taxes would become due on May 1, 1933, and suggesting that Greenberg and his counsel confer with Norwood's counsel for the purpose of reaching some definite understanding not later than April 18, 1933. No satisfactory arrangement was, however, made within the time specified. Instead Greenberg asked Norwood for an extension of • time and a reduction in the rate of interest, which was refused. Conferences ensued, in the course of which Greenberg stated to Norwood that he could not continue to carry the property unless the second mortgage were ehminated. Eventually it was verbally agreed that Norwood, as first mortgagee, should institute foreclosure proceedings upon the understanding that if he should purchase the property at foreclosure sale he would resell it to Green-berg at a price, to be paid by the execution of a new purchase-money mortgage, sufficient to cover the amount due on the first mortgage together with the expenses of foreclosure, the accumulated interest, taxes and water rates to the time of resale, to be paid in cash.
The foreclosure action was commenced on May 2, 1933. On May third the earlier verbal agreement was reduced to writing. Previously, Norwood testified, he had agreed that, after foreclosure, he would transfer the property to Greenberg and that he (Norwood) " would take back a purchase money mortgage for everything above the taxes and interest and expenses of foreclosure." Greenberg's attorney, also called as a witness by the plaintiff, testified that on April 28, 1933, it had been arranged that after foreclosure Green-berg should repurchase the property from Norwood upon the terms subsequently incorporated in the written contract of May 3, 1933. This likewise is confirmed by the recital in that contract to the effect that " the party of the first part [Norwood].is now about to commence foreclosure proceedings on the said property," although the foreclosure action had already been commenced. Although the contract of May third was made by Norwood with Claire Weiner, Greenberg's daughter, as party of the second part, the conclusion is irresistible that she was acting throughout as her father's representative. This is established beyond the possibility of contradiction by facts to which Greenberg's attorney testified. Norwood also conceded that " I understood that."
The contract of May third, after reciting that Norwood is entitled to foreclose bis mortgage on the premises, provides that he " agrees to advance all the necessary expenses involved in the said foreclosure proceeding." It then provides that if Norwood shall be the purchaser at foreclosure he will sell to Claire Weiner, and Claire Weiner will purchase the property for the amount of Norwood's mortgage of $46,500 " plus all disbursements, costs, allowances and expenses involved in the foreclosure," exclusive of attorney's fees. These disbursements, costs, allowances and expenses are to be added to the amount of the then existing mortgage, and, together with payment in cash of interest in default, taxes, -unpaid water rates, mortgage tax, recording fees and stamps, constitute the consideration for the sale. It is not pretended that the plaintiff had knowledge of the agreement under which the owner and the holder of the first mortage were acting. On the contrary, the court expressly-found that neither Greenberg nor his attorney ever stated to the plaintiff that they intended to wipe out her mortgage by these means.
Throughout the foreclosure no receiver was appointed nor was any assignment of rents made. Greenberg remained in possession of the premises and collected the rents precisely as before. When the premises were sold under the judgment of foreclosure Norwood was the purchaser. Promptly thereupon he assigned his bid at auction, and later transferred the title, to one Morris Wald, a relative of Greenberg, who concededly holds the title for him. At the time of the transfer a new mortgage was executed by Wald to Norwood in accordance with the provisions of the contract of May 3, 1933, and other payments made in cash. Greenberg is now, as before, the owner of the property and Norwood, as before, holds the mortgage thereon. Only the plaintiff's second mortgage has been extinguished if the conclusion of the Special Term is correct.
The only purpose of the foreclosure and sale was the ehmination of the plaintiff's mortgage while preserving to Greenberg his subordinate interest in the property. There could have been no other purpose, because after the foreclosure Norwood and Greenberg occupied in every other respect the same position as before. Under the agreement of May third Greenberg never parted with real ownership, since Norwood acquired the title merely for the purpose of reconveyance to him. Similarly, Norwood never relinquished his first mortgage, since that mortgage was extinguished only to be revived when the property was reconveyed. The legal effect of the transaction was that Greenberg sold the premises to himself, even though this was accomplished by means of the form of a judicial sale. So far as Norwood and Greenberg were concerned there was no sale, for Greenberg remained the equitable owner from the beginning to the end, Norwood merely acting for him in the acquisition of the property. Although upon the record these parties appeared as plaintiff and defendant, they were in fact united in interest, conducting the proceeding not as adversaries but as coadjutors. (Compare Mendenhall v. Hall, 134 U. S. 559; Fleischer v. Terker, 259 N. Y. 60.) In principle, the situation was the same as if Greenberg had purchased a superior incumbrance such as Norwood's mortgage or a tax lien by the foreclosure of which he had then proceeded to acquire the property for himself. That he could not have done.
The principle was applied in Otter v. Lord Vaux (6 DeGex, M. & G. 642), where it was said by Lord Ckanworth to be incontrovertible that a " mortgagor cannot set up against his own incumbrancer any other incumbrance created by himself." Therefore, it was held, the interest of a second mortgagee could not be defeated by the foreclosure of a first mortgage which had been acquired by the mortgagor. To the same effect is Duer v. Jaeger (113 Misc. 743). The controlling equity is one which it is not easy to classify. It finds frequent application, however, in cases where the enforcement of a tax lien has been refused or rights thereunder limited when it was acquired by an owner for the purpose of cutting off incumbrances. (Oliphant v. Burns, 146 N. Y. 218; Pines v. Novick, No. 2, 168 App. Div. 155; Waring v. National Savings & Trust Co., 138 Md. 367; 114 A. 57; Boyd v. Jensen, 122 Me. 31; 118 A. 718; Jordan v. Sayre, 29 Fla. 100; 10 So. 823; Cooper v. Jackson, 99 Ind. 566; American Baptist Missionary Union v. Hastings, 67 Minn. 303; 69 N. W. 1078; Ryan v. Martin, 103 N. C. 282; 9 S. E. 197; 2 Jones Mortgages [8th ed.], § 841, citing many authorities.) Sometimes it has been said that because " the land is a common fund " there is created a relation which renders it inequitable for a junior interest to acquire a superior title in order to destroy the claims of prior mortgagees. (Fair v. Brown, 40 Iowa, 209; Carpenter v. Carpenter, 131 N. Y. 101.) The relation of the parties towards one another arising out of their interest in that common fund as against the holder of a superior lien is held to be sufficiently fiduciary to prevent the acquisition and use by the owner of a title " by which the entire common interest would be swept away." (Woodbury v. Swan, 59 N. H. 22. Compare, also, Knolls v. Barnhart, 71 N. Y. 474, and Thayer v. Leggett, 229 id. 152.) Again, it is said that there is a duty upon the owner which is engendered by " necessity and interest " (Middletown Savings Bank v. Bacharach, 46 Conn. 513) to pay such charges, even where there is no legal obligation upon the owner to do so, which precludes him from availing himself of a foreclosure resulting from his own non-performance to acquire rights antagonistic to incumbrancers, for whose benefit the duty was to be performed. Consequently it has been held that even the holder of a second mortgage under no obligation to pay taxes, who acquires a tax title for the protection of his own mortgage, may not assert that title to defeat a prior lien. (Cooley, J., in Connecticut Mutual Life Ins. Co. v. Bulte, 45 Mich. 113; 7 N. W. 707; Renshaw v. Stafford, 30 La. Ann. 853; Fair v. Brown, supra.)
Whatever may be the underlying principle, it is manifest that the relation of the parties to the property is such that a mortgagee is justified in relying on the owner, who is in possession of the premises and collecting the rents, to satisfy those charges upon which the interest of both depends. That expectation is almost certain to be defeated if the owner may acquire hostile and inconsistent rights for the purpose of destroying the common property. (Bennett v. Austin, 81 N. Y. 309, 333; Van Epps v. Van Epps, 9 Paige, 237.) The owner would be placed under direct temptation to default in the payment of taxes, or in the payment of interest on a prior mortgage, in order to wipe out intervening rights under such an agreement as existed here and that temptation would continue even after the institution of foreclosure, as the case at hand abundantly proves. Here the record does not indicate that any attempt was made by Greenberg after the foreclosure action was begun to pay the interest on the first mortgage or the taxes which were in default. In view of his agreement with the first mortgagee, it would be strange indeed if he had done so. But immediately after the property had been sold at foreclosure and the plaintiff was thought to be divested of her interest, he found it possible to pay these accumulated charges in full.
Such being the nature of the relationship of the parties it is no answer to say that any outsider could with propriety have made the contract with the holder of the first mortgage which the owner might not make, or that the plaintiff, as a party, might have protected her interest against the consequences of the owner's inequitable conduct by interposing whatever defenses were available in the foreclosure action and by bidding at the sale. Nor is it any answer that Norwood, not acting pursuant to any agreement with Green-berg, might have foreclosed his mortgage and thereafter transferred the title to Greenberg upon whatever terms he saw fit. (Huzzey v. Heffernan, 143 Mass. 232; 9 N. E. 570; Rauch v. Dech, 116 Penn. St. 157; 9 A. 180.) The invalidity here proceeds from the nature of the contract under which Greenberg at all times retained an interest in the property. (Louisville Trust Co. v. Louisville, etc., R. Co., 174 U. S. 674; Northern Pacific R. Co. v. Boyd, 228 id. 482.)
It is said, however, that the plaintiff's conduct has been inequitable to a degree which precludes her from seeking the interposition of a court of equity. That conduct consists in her refusal to extend her mortgage or to pay Greenberg $700 for a deed to the property. I fail to understand upon what theory it can be held that the plaintiff's unwillingness to forego rights which concededly she was entitled to enforce or to purchase Greenberg's interest at an excessive price, can be characterized as inequitable. Indeed, the very facts upon which the defendants rely in justification of their joint attempt to eliminate the second mortgagee serve merely to disclose the motive and to demonstrate the purpose of their secret understanding. If that written understanding does not constitute proof conclusive of a combination between the owner and the first mortgagee to wipe out the plaintiff's interest while preserving the owner's subordinate rights, then such a combination can never be susceptible of proof.
We have not considered, and do not decide, whether the plaintiff's proper remedy was by motion in the original action rather than by a plenary suit, because that question is not suggested by the respondents on this appeal and was not raised in the court below.
The judgment should be reversed, with costs, and judgment directed in favor of the plaintiff reinstating her mortgage to the extent of $4,250, with interest from November 20, 1932, as a second mortgage hen against the premises, subject only to a first mortgage of the defendant Norwood in the sum of $46,500 and any unpaid interest thereon, with costs.
O'Malley and Townley, JJ., concur; Maktin, P. J., and Glennon, J., dissent and vote for affirmance.