Court Opinion

ID: 3604877
Source: CourtListenerOpinion
Date Created: 2016-07-05 23:50:40.27489+00
Date Added: 2024-06-11T12:53:28.282001
License: Public Domain

On September 15, 1927, Goldie Katz was the owner of certain property in the borough and county of Queens, New York city, consisting of a six-story brick apartment house, having a total of fifty-three apartments, and a rental income of about $30,000 per year. She conveyed the premises to the Sorice Operating Company, Inc., taking back a purchase-money mortgage in the sum of $20,000, to secure a bond in like amount. In August of 1928 Goldie Katz desired to sell this mortgage to Harry B. Mendelsohn, who refused to take it without further and additional security. The bond and mortgage were in and of themselves insufficient security in his opinion for $20,000. Thereupon, Goldie Katz and Hyman Katz executed their bond to the said Harry B. Mendelsohn as further and additional security, and transferred and assigned to him the bond and mortgage. Mendelsohn then held a bond and mortgage of the Sorice Operating Company, Inc., for $20,000, and the bond of Hyman Katz and Goldie Katz as additional security. This latter bond, dated the 2d day of August, 1928, recites the bond and mortgage of the Sorice Operating Company, Inc., for $20,000, and states:
"WHEREAS, the said Harry B. Mendelsohn has refused to accept an assignment of said lien and accept said bond and mortgage without further and additional security; and
"WHEREAS, as such additional security for the said sum of money, the undersigned, Goldie Katz and Hyman Katz, have agreed to execute a bond collateral to the bond above mentioned, *Page 442 
"Now, Therefore, We, Hyman Katz and Goldie Katz, * * * are held and firmly bound, jointly and severally unto the said Harry B. Mendelsohn in the sum of $20,000.00."
The condition of the bond is that the Sorice Operating Company, Inc., its successors or assigns, shall pay to Harry B. Mendelsohn the sum of $20,000, according to the terms of the bond and mortgage recited.
In January of 1929 the Sorice Operating Company, Inc., conveyed the mortgaged premises to the defendant Assunta Sorice by deed duly recorded. In September of the same year she, as owner of the equity of redemption, defaulted in the payment of an installment of principal of $10,000 and accrued interest, and the mortgagee, Harry B. Mendelsohn, commenced foreclosure action in the Supreme Court. By the terms of the mortgage the holder was entitled to the appointment of a receiver of the rents and profits in any action to foreclose said mortgage. Thereupon, on the application of Mendelsohn, the court appointed one Otto M. Gabler a receiver of these rents and profits in behalf of and for the benefit of the said mortgagee or holder of the mortgage. To this foreclosure action Hyman and Goldie Katz were parties as well as the mortgagor and its grantee, Assunta Sorice. The collection of rents, pending foreclosure, was an important part of the mortgage security, and the appointment of the receiver for this purpose was pursuant to the terms of the mortgage and for the benefit of the mortgagee therein, Harry B. Mendelsohn. (Ranney v.Peyser, 83 N.Y. 1; Kroehle v. Ravitch, 148 App. Div. 54;Stewart v. Fairchild-Baldwin Co., 91 N.J. Eq. 86.) The bond required of the receiver was $15,000. Shortly after the receiver's appointment the owner of the equity, Assunta Sorice, applied for his discharge, which meant in effect that she desired, as owner, to collect the rents until her ownership terminated by a sale of the property in foreclosure. Her application was granted upon condition that she give a bond to *Page 443 
the mortgagee, Mendelsohn, to secure him for any judgment he might recover in the foreclosure action. The amount of the bond was to be $12,000, or less than the bond required of the receiver for the collection of rents. It is perfectly evident that the application of the owner to supplant the receiver had reference solely to the collection of rents. The receiver was appointed for this purpose, and had given his bond in $15,000. By order of the court he was supplanted, and the owner was restored to her right to collect the rents, upon giving a $12,000 bond to account therefor. She gave the bond of the National Surety Company and no doubt thereafter collected the rents although the amount thereof does not appear in this record. Her bond, furnished by the National Surety Company, recites the appointment of Otto M. Gabler as receiver in the pending foreclosure action, brought by Harry B. Mendelsohn, and continues in this fashion:
"WHEREAS, on October 5th, 1929, an order to show cause was granted in said action staying the receiver from collecting any of the rents and profits arising out of the premises mentioned in said complaint, and
"WHEREAS, upon the return day of said order, to wit, October 9th, 1929, after due deliberation was had the Court ordered that said order dated September 28th, 1929 should be vacated upon the defendant Assunta Sorice filing a surety company bond in the sum of $12,000.00 to secure any judgment which may be entered in said action,
"Now Therefore, the condition of this obligation is such that in the event that a judgment is entered against any of the defendants in said action, then this obligation is to remain in full force and effect, otherwise it is to be considered void."
The foreclosure action resulted in a deficiency judgment against the mortgagor Sorice Operating Company, Inc., and Hyman Katz and Goldie Katz on their bond to Mendelsohn, heretofore mentioned. The National Surety *Page 444 
Company paid Harry B. Mendelsohn the amount of this deficiency judgment and took an assignment thereof. The draft given in payment, dated July 15, 1930, says that it is in full payment of all liability of the National Surety Company upon its bond, executed in behalf of Assunta Sorice "and for an assignment of the deficiency judgment in the sum of $6,969.28 * * * entered in favor of Harry B. Mendelsohn and against Antonio Sorice, et al."
The National Surety Company or its assignee, Frances Jelinek, seeking to collect the amount of this deficiency judgment under the doctrine of subrogation, commenced proceedings against Hyman and Goldie Katz, which has resulted in the bringing of this action by the latter against all parties seeking to enjoin the surety company and Jelinek from taking any further proceedings and for a direction declaring the deficiency judgment satisfied as against them. In considering the respective rights of these parties, certain principles must be borne in mind.
In the first place, the receiver of the rents was appointed for the benefit of Mendelsohn, the plaintiff in the foreclosure action. He was not obliged to apply for a receiver and could permit the owner of the equity to collect the rents up until a judgment in foreclosure. The Katzes would have been liable for the deficiency. Whatever rights as guarantors they might have had for the appointment of a receiver for their benefit in order to reduce their liability as guarantors, were not exercised by them. They were parties to the action, but made no move. The rents collected by the receiver would have reduced the deficiency as they would have been applied upon the mortgage debt. In order to permit the owner to continue to collect the rents instead of the receiver, the National Surety Company gave a bond to Mendelsohn for his benefit agreeing to pay any judgment he might recover. This was not given for the benefit of Katz and was evidently given solely to secure the rents which might be collected or could be collected by the owner instead of the receiver. *Page 445 
Mendelsohn having as a primary security the bond and mortgage and also the bond of Hyman and Goldie Katz, could have proceeded to collect his deficiency judgment out of this bond given by the Katzes. No law compelled him to resort to the bond of the National Surety Company in the first instance. Its obligation was secondary. The National Surety Company stepped up and paid Mendelsohn the amount of the judgment and took an assignment. It is subrogated to all his rights, including the security of the Katz bond.
This does not mean that the National Surety Company can proceed to collect the full amount of the deficiency judgment. All the parties are in equity and, therefore, must do equity. The owner collected rents which would have gone to Mendelsohn to reduce the amount of the mortgage debt. If she had not interfered with the aid of the National Surety Company the deficiency judgment would have been much less. The bond of the National Surety Company in reality was intended to secure these rents, in other words, to make good to Mendelsohn the rents which he would have collected under the receivership. The owner, Assunta Sorice, being insolvent, the National Surety Company is liable to Mendelsohn and in equity to the two Katzes for the amount of rent collected by Assunta Sorice, or the amount she should have collected in the exercise of ordinary care and prudence. This is what the receiver would have been liable for, and his liability passes on to the surety company by substitution.
Therefore, the National Surety Company has no right to collect from Hyman Katz and Goldie Katz the full amount of the deficiency judgment. From that must be deducted the amount of rents collected or which should have been collected. The record in this case is barren of any evidence on this point. Nowhere does it appear what became of the rents, but when the parties are once in equity, the decree will adjust their rights according to the facts. The plaintiff seeks a judgment restraining the *Page 446 
defendants from collecting the full amount of the deficiency judgment and for its satisfaction. The court must determine the amount of the rents collected or which should have been collected less necessary expenses and deduct this from the deficiency judgment, that is, the plaintiff should have a judgment which satisfies the deficiency judgment to this extent and which enjoins the surety company from collecting more. However, if no amount of rents is due from the owner or surety company, then judgment must be given for the defendants, dismissing the complaint. The judgment of the Appellate Division should be reversed and a new trial granted, with costs to abide the event.
POUND, Ch. J., LEHMAN and O'BRIEN, JJ., concur with HUBBS, J.; CRANE, J., dissents in opinion, in which KELLOGG and CROUCH, JJ., concur.
Judgment affirmed.