Court Opinion

ID: 5374815
Source: CourtListenerOpinion
Date Created: 2022-01-08 08:30:27.711598+00
Date Added: 2024-06-11T08:30:03.352261
License: Public Domain

Carswell, J.
(dissenting). The corporate defendants on March 25, 1932, executed respectively an ordinary bond and a collateral bond for $15,000, due March 25, 1935, secured by *253a mortgage of the same date on certain real property in Roslyn, L. I. The engagements in the mortgage relating to payment of interest and taxes were incorporated by reference in the bonds. These bonds and the mortgage were delivered to the plaintiff. The property thus encumbered was later conveyed to Seymour Jackson and his wife.
The interest and taxes were seasonably paid and the due date of the principal indebtedness was extended perforce the moratory statutes for the period during which no default occurred in either of these particulars. The Jacksons defaulted in the interest payment due on March 1, 1942, and in the payment of certain taxes and water charges for the years 1941 and 1942. The principal indebtedness thus became due and payment enforceable.
i In an action at law on the bonds the plaintiff obligee sued ,the corporate obligors upon a complaint which sets out three causes of action — the first for the interest in default, the second for the taxes and water charges in default and paid by plaintiff, and the third for the principal in default.
The corporate defendants interposed answers which set out two identical affirmative defenses to each of the three causes of action. The first defense was that there had been a union of title to the fee and the mortgage and an extinguishment of the indebtedness as a result of a conveyance of the mortgaged property by the Jacksons to plaintiff on July 2, 1942. The second defense was that the fair and reasonable value of the mortgaged premises was in excess of the indebtedness alleged in each of the three causes of action.
Plaintiff obligee moved under rule 114, Rules of Civil Practice, to sever the first and second causes of action in relation to the interest and taxes respectively; to strike out the two defenses thereto as being insufficient in law, and, in addition, to strike out the first defense to the third cause of action, and for partial summary judgment. The Special Term granted the motion and from the order and judgment entered the corporate defendants appeal.
On the argument the appellants conceded that the first defense was properly stricken out. Their brief in consonance therewith only challenges the propriety of striking out the second defense. The inquiry on this appeal, therefore, is limited to the second defense. Its sufficiency as a defense raising a triable issue of fact was recognized by plaintiff, so far as the third cause of *254action relating to principal was concerned. The severed action relating to it is still pending and is not here involved.
The history of the litigation and whether parts thereof have or have not legal significance have engendered disagreement. The controlling facts are not in dispute. Likewise certain irrelevant facts invoked are undisputed.
On May 3, 1942, plaintiff obligee began an action to foreclose the mortgage and for a deficiency judgment. It joined as defendants the two corporate obligors, and the Jacksons, the owners of the property. Neither of the latter had assumed personally the payment of the principal indebtedness. While the action was at issue the Jacksons conveyed the property to plaintiff for a nominal consideration of $100. The deed specifically provided that there was to be no merger of the fee and the mortgage and that the lien of the mortgage was to continue unimpaired. Plaintiff then moved, on notice to the corporate obligors, for an order to discontinue the action except as to the corporate obligors; to cancel the Us pendens, and for leave to serve an amended complaint in an action at law setting forth three causes of action against the corporate obligors for interest, taxes and the principal of the bonds. This motion was granted and an order thereon was entered and served. No appeal was taken therefrom. The amended complaint here involved was accordingly served.
Thus by the process of discontinuance, amendment and severance all that concerns us on this record is a complaint, with two counts, in an action at law seeking the payment by the corporate obligors of interest and taxes, and two defenses thereto which were stricken out. One, concededly, was properly stricken out; and only the propriety of striking out the second defense is challenged, such defense being that the value of the property may be invoked as an offset or defense.
, The record in this posture is a counterpart or twin of the record in Johnson v. Meyer (242 App. Div. 798, affd. 268 N. Y. 701). That action was at law, as in the instant case, for accrued interest and taxes. The defense, as here, invoked the value of the property as an offset. It was held insufficient and plaintiffs had summary judgment. The theory of the holding was that there arose from defaults in obligations under the bond, for the payment of interest, of taxes and principal indebtedness, separate and distinct causes of action at law and that there was no limitation upon the right to separate judgments in full there*255for, except such limitations as are imposed by statute; that the only limitations so imposed are contained in section 1083-b, Civil Practice Act, so far as concerns actions on bonds, and in its counterpart, section 1077-a, so far as concerns actions for the foreclosure of mortgages; and that, as to an action on a bond, the limitation is that the value of such property may be invoked as an offset or defense only as to the principal thereof. This conclusion evolved from the view that the indebtedness, which in the language of section 1083-b originated or was originally contracted for “ simultaneously with such mortgage and which is secured solely by such mortgage ” referred to the principal indebtedness of the bond, note or other collateral instrument for which the mortgage was given as security and not to interest or taxes; that this contract obligation as to principal, fixed as to amount and time when due, came into existence at the instant the bond was given; that the interest and taxes which subsequently accrued were new debts, variable in amount, which did not exist simultaneously with the giving of the mortgage. Hence as these new debts were not mentioned in section 1083-b as claims against which the value of the property might be offset, the latter may not be invoked for that purpose.
This limitation upon the use of the value of the property in an action upon a bond thus specifically given effect in Johnson v. Meyer (supra) was reiterated in answers to certified questions in Rochester Trust & Safe Deposit Co. v. Hatch (273 N. Y. 507) and has been enforced in innumerable cases. (Weinstein v. Empire Title & Guarantee Co., 257 App. Div. 867; Erie County Savings Bank v. Levi, 255 App. Div. 438; Westchester Trust Co. v. Estate of Underhill, Inc., 255 App. Div. 1013; Buell v. Sullivan, 250 App. Div. 780; Werbelovsky v. Rosen Bros. News Agency, Inc., 249 App. Div. 758; Union Trust Co. of Rochester v. Kaplan, 249 App. Div. 280.) These recent announcements and reiterations of doctrine are authoritative and controlling. They impel agreement with the decision of the Special Term that this defense is without validity.
At Special Term appellants conceded in their answering affidavit that if plaintiff had brought an action at law for interest and taxes before instituting the foreclosure action, its right to recover could not be challenged and that the defenses invoked would not be efficacious. They, however, made a reservation that such an action could not be maintained because of the insti*256tution of the foreclosure action. This reservation to a correct concession is without validity. The amended complaint, served under an order of the court, superseded the prior foreclosure complaint and the action became one at law. It1 ‘ proceeds as if the original pleading had never been served.” (3 Carmody’s New York Practice, § 1141, p. 2518 and cases cited.) Therefore, plaintiff was in the same position as if a complaint in foreclosure had never been served, so far as these corporate obligors are concerned. Consideration of this appeal might well stop-here.
However, as the argument has taken on an irrelevant scope which disregards the present nature of this action, and the fact that the claims for principal, interest and taxes are as-separate and distinct as if they arose out of wholly unrelated transactions, it will conduce to understanding if certain basic principles are stated. They have been long settled by adjudications, some of which were made before the moratory statutes' were enacted.
Interest required to be paid under a contract or an obligation accruing prior tó the enforceable due date of the principal constitutes a separate cause of action from that of the principal, enforceable as such at the option of the obligee. This because it arises from a separate engagement resting in contract. It is an integral but separable part of the general indebtedness. (Davison v. Klaess, 280 N. Y. 252, 261; Matter of Crane v. Craig, 230 N. Y. 452, 461; Fake v. Eddy, 15 Wend. 76; Southern Central R. R. Co. v. Town of Moravia, 61 Barb. 180; Watts v. Garcia, 40 Barb. 656; Smith v. City of Buffalo, 39 N. Y. S. 881; Froment v. Oltarsh, 60 Misc. 89.) Interest which accrues after the enforceable due date of the principal indebtedness becomes an incident to that principal, is not separable therefrom, and may not be the subject of a separate cause of action. This because such interest as thus accrued is not a contract obligation and is recoverable only by operation of law as damages as an' incident to the recovery of the principal indebtedness. (Davison v. Klaess, supra; Matter of Crane v. Craig, supra.)
This distinction is emphasized in situations where the principal indebtedness has been paid and a subsequent action sustained for interest which accrued prior to the enforceable due date of the principal indebtedness. Likewise, where the principal had not been paid a separate action for such interest has been sustained. Contrariwise, a separate recovery in respect *257of interest accruing after the enforceable date of the principal obligation was denied as not separable from the principal indebtedness to which it is an incident. (Southern Central R. R. Co. v. Town of Moravia, supra; 33 C. J., Interest, § 179; 30 Am. Jur,, Interest, § 12.) In the instant case the enforcement of the payment of the principal indebtedness could not be had under the moratory statutes until there had been a breach in the form of a failure to pay interest and taxes. The causes of action here in suit which relate to interest and taxes arose from contract obligations and accrued prior to the enforceable due date of the principal indebtedness precisely as in Johnson v. Meyer (supra). Hence they are separable from the principal indebtedness and properly the subject of separate causes of action and enforcement without regard to whether the principal has been paid or not. The separateness of these causes of action for such interest and taxes existed under the adjudicated cases prior to the enactment of the moratory statutes. These latter statutes did not create the separate character of causes of action for principal, Interest and taxes. Hence, in an action at law particularly, it is error to assume that all of these items were consolidated with principal and enforceable only as a single indebtedness.
It is urged that failure to sustain this second defense effects an undue enrichment of the plaintiff obligee, because of the effect of the facts set out in the concededly insufficient first defense, to wit, that the plaintiff has become the owner of the property which was the security for the principal of each bond. Apart from the concession that transaction had no such effect. In the cause of action for the principal indebtedness on the bonds the defense of offset as to the fair value of the property under section 1083-b has been left untouched. In that action these corporate obligors are free to establish the extent to which the principal indebtedness has been extinguished. There is, therefore, no undue enrichment as the value of the security is available as to principal to the corporate obligors. There is nothing to prevent the payment of the principal indebtedness by the corporate obligors. They would thus be subrogated to ' the plaintiff’s rights in respect of the security and could take over the property, if it has a value in the amount they assert. .If it be deemed that the taking of this property was, in fact, 'payment, though there is no defense of payment pleaded, then plaintiff was in the position of one receiving a payment without *258any express - agreement as to the manner of application thereof either- to principal, or to interest that accrued prior to the enforceable due date thereof, and plaintiff was free to apply the payment, to wit, the property, either to principal or to interest (Davison v. Klaess, supra), and it has seen fit to apply it as a payment on account of principal, as is indicated by its separate action against the corporate obligors for the principal amount' of the.indebtedness. That it was a mere payment on account is probably, but not conclusively, indicated by the fact that the • owners of the equity of redemption yielded up the property, although not under the hazard of any deficiency judgment, on a payment to them of $100. Plaintiff was free to obtain possession from owners, not personally obligated, by way of such $100 payment rather than go to the greater expense of carrying through a foreclosure and bidding in the property on the sale. But the undisputed facts show that the property was not, in form, a payment of this indebtedness because the conveyance was taken by a deed which specifically precluded a> merger of the fee and the mortgage and explicitly preserved the lien of the mortgage so that it is.available, by subrogation, to the use of these corporate obligors.
Whether a merger has occurred is always a.question of intention, expressed or implied. Presumptions may not be invoked where the parties have by unequivocal language expressly agreed that there is to be no merger. If a presumption were to be invoked, here, the. presumption would be that there was no merger because the interest of the obligee is subserved by having no merger. (Townsend v. Provident Realty Co., 110 App. Div. 226 ; Huntley v. ReVoir, 66 Hun, 291; Hubbell v. Blakeslee, 71 N. Y. 63; Clift v. White, 12 N. Y. 519; Clements v. Griswold, 46 Hun, 377; 1 Wiltsie on Mortgage Foreclosure [5th ed.] § 247.)
In enforcing in an action at law its claims against the corporate obligors,, without regard to the security, plaintiff is asserting an absolute right. This is an action between an obligee or mortgagee and the original obligors on the bonds for debts which arose during the period of that relationship; it is not between a grantor and a grantee for debts arising during the period of such relationship. This distinction is important. As it is between a mortgagee or obligee and the original obligors, such an obligee is not subject to certain restrictions imposed by law upon a grantor. (Kmets v. De Ronde, 231 N. Y. 641.)
*259A mortgagee or obligee may sue upon a grantee’s covenant of assumption of payment without resort to the security although a grantor may not. (Burr v. Beers, 24 N. Y. 178; Thorp v. Keokuk Coal Co., 48 N. Y. 253; Kmetz v. De Ronde, supra.) An obligee a fortiori may sue the original obligors on a bond, without resort to the security (Calvo v. Davies, 73 N. Y. 211), especially where the obligee has possessed itself of the security in a transaction with one other than the obligors under the bond. Of course, where one reduces the security to possession, in an action for tbe principal of the bond, the value of the security may be offset. This opportunity has been made available to the corporate obligors in the undisturbed pending action for the principal. It is error, therefore, to assert that plaintiff is confined to enforcing its right in foreclosure or within limitations claimed to inhere in an action in foreclosure.
There is envisioned a possibility that the obligee, while holding the fee with the lien of the mortgage preserved, might claim interest on the bonds as against the corporate obligors. First, no such claim is here involved. Second, under the principle above stated, where interest accrues after the principal has become enforceably due, a separate cause of action for such interest may not be enforced as it becomes an incident to the principal in the form of damages and the value of the fee may be offset as against such principal in an action therefor. Third, under familiar doctrine — the rule obtaining between a grantor and grantee — the usufruct as well as the fee would be the primary fund in the hands of the obligee for the payment of such interest just as would be the case in respect of any fee owner who had acquired the property but has not personally assumed payment of the mortgage. In such a situation the plaintiff would be a grantee of the corporate obligors, because of the grant from the Jacksons, the immediate grantees of the corporate obligors; hence the security would become the primary fund for satisfaction of such a claim arising during such a relationship. (Matter of Wilbur v. Warren, 104 N. Y. 192; Slauson v. Watkins, 86 N. Y. 597; Kmetz v. De Ronde, supra.) Hence double satisfaction or unjust enrichment cannot ensue.
Unless the above principles and cited cases lack authority and stability, the conclusion is inescapable that they sustain the Special Term’s rulings and require that the order and judgment in this severed action at law should be affirmed. I therefore dissent and vote to affirm the order and judgment.
Close, P. J., concurs with Johnston, J.; Hagarty, J., concurs in separate opinion; Carswell, J., dissents in opinion, and votes to affirm the order and judgment; Taylor, J., concurs with Carswell, J.
*260Order and judgment (one paper) modified on the law and the facts by striking therefrom everything following the words “ hereby is ” in the first ordering paragraph and inserting in place thereof the following: “ granted to the extent of striking out the first separate and complete defense contained in appellants’ amended answers; and in all other respects the motion is denied.” As thus modified the order and judgment, insofar as appealed from, is affirmed, with ten dollars costs and disbursements to appellants.