Central Hanover Bank v. Roslyn Estates, Inc.

Johnston, J. On March 25, 1932, defendant Roslyn Estates, Inc., executed and delivered its bond whereby it covenanted to pay to plaintiff on March 25, 1935, the principal sum of $15,000, with interest to be computed at five per centum per annum, to be paid semi-annually. The indebtedness originated simultaneously with a mortgage covering property owned by the obligor and is secured solely by the mortgage. The mortgage contains the usual covenants on the part of the mortgagor to pay the indebtedness and interest, and also to pay the taxes, water charges, etc., and provides that in default thereof the mortgagee may pay the same. The bond contains the usual provisions incorporating as part thereof all the covenants and agreements recited in the mortgage. Payment of the principal and interest and performance of the terms and conditions of the bond and mortgage were guaranteed by a collateral bond bearing the same date and delivered to plaintiff by defendant Union Mortgage Company. Subsequently, — 246 — one Seymour S. Jackson and Ms wife became the owners of the realty covered by the mortgage. Upon default in the payment of interest, taxes and water charges, plaintiff elected to declare the principal due and on May 3, 1942, commenced an action against the Jacksons, as owners of the property, and defendants, as obligors on the bonds, to foreclose the mortgage, and prayed for a deficiency judgment. During the pendency of the action and on July 2, 1942, the Jacksons, for a nominal consideration of $100, conveyed the realty to plaintiff “ subject, however, to the continuing lien ” of the mortgage. The deed further provides, “ it being the intention of the parties hereto that the lien of said mortgage shall not merge with the fee.” Thereafter the court, upon plaintiff’s motion, discontinued the action against the Jacksons and plaintiff served an amended complaint containing three causes of action: The first to recover the unpaid interest; the second to recover the accrued taxes and water charges paid by plaintiff; and the third to recover the principal. The interest, taxes and water charges sought to be recovered are the items constituting the defaults upon wMch the foreclosure action was predicated. Defendants, in identical amended answers and as a second separate and complete defense to the three causes of action, pleaded the conveyance by the Jacksons to plaintiff and alleged that the fair and reasonable market value of the realty, less any amounts owing on prior liens and encumbrances, is in excess of the indebtedness alleged in the complaint. Upon plaintiff’s motion the court struck out this defense insofar as it relates to the first and second causes of action and directed partial summary judgment for $598.40 on the first and second causes of action, and severed the action. Defendants appeal. Defendants also appealed from that part of the same order which struck out the first separate and complete defense pleading merger, but that part of the appeal has been abandoned. Respondent contends that under the moratory statutes a mortgagee may sue in one action — pleading separate causes of action — for interest, taxes, water charges and principal, and the defense of set-off of market value is available only as against a cause of action for the principal. In support of this contention respondent cites Rochester Trust & Safe Deposit Co. v. Hatch (273 N. Y. 507); Johnson v. Meyer (242 App. Div. 798, affd. 268 N. Y. 701); Weinstein v. Empire Title & Guar — 247 — antee 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); Union Trust Co. of Rochester v. Kaplan (249 App. Div. 280). In White v. Wielandt (259 App. Div. 676, affd. 286 N. Y. 609) we had occasion to consider the cases upon which respondent relies and, concerning them, said: “ The rationale behind all these cases is that interest and taxes are not affected by the moratorium statutes, which suspend actions on bonds for default in the payment of principal only, and which allow the fair value of the property to be offset when an action is brought to recover the indebtedness secured by a mortgage and which originated simultaneously therewith; that interest and taxes are not affected because they did not originate simultaneously with the indebtedness and, hence, they are not part of such indebtedness within the purview of these statutes, and an action is maintainable for their recovery without prejudice to the mortgagee’s right to maintain a subsequent action to recover the debt. To allow this to be done, it was held, would not result in the splitting of a cause of action because the moratorium statutes created an anomalous situation. They prevented the mortgagee from maintaining an action for the principal only; but a default in the payment of interest and taxes was beyond the protection afforded by such moratorium statutes. The statutes thus effected a legal severance to the extent that if interest and taxes are paid, the principal need not be paid. In other words, payment of the interest and taxes suspends the payment of principal. Hence, it was concluded that for a failure to pay the interest and taxes the anomalous situation created by the emergency statutes sanctioned, if it did not authorize, an independent action for the recovery of the interest and taxes. (Union Trust Co. of Rochester v. Kaplan, supra; Westchester Trust Co. v. Estate of Underhill, Inc., supra.) “ The emergency statutes were thus construed and these cases were thus decided primarily for the purpose of preventing the owner from keeping the property while, at the same time, evading his responsibility to pay not only the principal but also the interest and taxes — an abuse which necessarily would result from any other interpretation of the moratorium statutes. Therefore, interest and taxes must be deemed sever-able from and not a part of the mortgage debt only in determining the scope of moratorium statutes.” — 248 — In Union Trust Co. of Rochester v. Kaplan (supra) Judge Edgcomb, relying upon eases in other jurisdictions, stated that where the parties contemplated that the mortgage was to continue after its due date, interest and. taxes, etc., are not to be considered as part of the mortgage debt. There is, however, no case in this State which expressly so holds, except under the moratory statutes, and then only for the reasons stated in White v. Wielandt (supra). It should be noted that in Union Trust Co. of Rochester v. Kaplan (supra, p. 284) Judge Edgcomb also stated: “It is quite apparent that the Legislature, by the adoption of the moratorium statute, intended to separate, if the law had not already done so, a cause of action to recover the principal of a mortgage indebtedness and the interest thereon, even though both were due at the time collection of one or the other was attempted.” Indeed, as pointed out in the White case (supra), the usual bond and mortgage — as in the' instant case — clearly show that the indebtedness consists of the total of the principal, interest, and such other sums which the mortgagee has advanced to protect his security. This is also the statutory construction of the mortgagor’s covenant to pay. (Real Property Law, § 254, subds. 3, 6.) More- ■ over, that is plaintiff’s own interpretation of its mortgage, «for in its present amended complaint plaintiff pleads, as it must, the interest, taxes and water charges as part of the mortgage debt and alleges that they, as well as the principal, were due at the time the action was commenced. There is another cardinal distinction between this case nand Johnson v. Meyer (supra) and all the cases stemming from it and relied upon by respondent. In this case plaintiff is the owner of the fee as well as the mortgagee, whereas in each of the other cases the plaintiff had not acquired the fee but was only the mortgagee. Here appellants, in seeking to offset the value of the realty, assessed at $15,950 and acquired by the respondent for $100, do not rely upon the moratory statutes. They merely invoke the principle which compels every creditor to apply toward the satisfaction of the debt — which in this ease includes the principal, interest, taxes and water charges — the value of the security for the debt which the creditor has received and appropriated to his own use. It is a well-settled principle that where the mortgagee acquires the fee or equity of redemption by conveyance from the mortgagor or a subsequent oivner, it constitutes a satisfaction of the mortgage and also of the bond accompanying it if — 249 — the property, at the time of the conveyance, is equal in value to the debt for which it was mortgaged. If it be of less value than the debt, it is payment pro tanto. (Spencer v. Harford, 4 Wend. 381, 385; Herkimer M. and H. Co. v. Small, 21 Wend. 273, 276, affd. 2 Hill, 127, revd. on other grounds, 2 N. Y. 330.) The same principle applies to personal property where the mortgagee retains the chattels as his own. “ If they are worth the debt or'more, payment will result in full. If they are worth less than the debt, the result is payment on account.” (Harrison v. Hall, 239 N. Y. 51, 53, and cases cited.) Respondent should not be permitted to obtain a double recovery by appropriating the security and then enforcing the debt without regard to the value of the security. If it had acquired the property by foreclosure — and originally the action was for foreclosure — it would have been compelled, in order to maintain a subsequent action upon the bonds, to allow credit for the value of the property. (Cf. Civ. Prac. Act, § 1078; President $ Directors of Manhattan Co. v. Callister Bros., Inc., 256 App. Div. 1097, 175 Misc. 421, affd. 260 App. Div. 880.) There can and should be no difference where, as here, respondent has acquired the property by purchase from the owner. The effect of respondent’s acquisition of the fee, subject to the lien of the mortgage, was to constitute the property — as between respondent and appellants — the primary fund for the payment of the debt. It follows, therefore, that respondent must collect the total debt either by foreclosure of its surviving mortgage lien or bring suit on the bonds. Having elected to pursue the latter remedy, it must offset the value of the mortgaged property against the total indebtedness. (Eagan v. Engeman, 125 App. Div. 743.) In Eagan v. Engeman (supra) the mortgagor conveyed the mortgaged premises to the mortgagee under a deed providing that the mortgage was not to merge in the fee but continue as an existing and enforceable lien. The mortgagee sued on the bond. In affirming a judgment dismissing the complaint, the court held that plaintiff must first apply his interest in the premises to the payment of the debt secured by the mortgage by foreclosing the mortgage, and the fact that plaintiff held title to the premises was not an insuperable obstacle to his foreclosing the mortgage. In a concurring opinion, Mr. Justice Ingraham stated “that there was a good equitable defense to a suit upon the bond until the plaintiff had exhausted his remedy upon the land, the primary security, and that defense having been set up in the answer the court was justified in postponing the — 250 — enforcement of the bond until the mortgagee had exhausted his remedy as against the primary security for the payment of the mortgage.” It is true that in the Eagan case (supra) it was the mortgagor who conveyed the equity of redemption to the mortgagee, while here the conveyance was made by a subsequent owner. But that is unimportant. The controlling principle is that a mortgagee who also owns the fee may not recover the indebtedness represented by the bond unless he offsets the value of the mortgaged property against the indebtedness. “ Mortgagees are constitutionally entitled to no more than payment in fiill.” (Gelfert v. National City Bank, 313 U. S. 221, 233.) The mortgage was executed to secure payment of the total indebtedness. “ The contract contemplated that the mortgagee should make himself [itself] whole, if necessary, out of the security but not that he [it] should be enriched at the expense of the debtor or realize more than what would repay the debt with the costs and expenses of the suit. ’ ’ (Honeyman v. Jacobs, 306 U. S. 539, 542, 543.) It is suggested that as the fair value of the property may be offset against the principal, respondent would not be enriched at the expense of appellants. This may or may not be so, depending upon the value of the property. If respondent’s strategical procedure be sanctioned, the consequent injustice is patent, for it will have judgment for $598.40 plus interest, and also will have the mortgaged property, even if it prove to be worth more than the amount of the total indebtedness. Respondent may not circumvent the equitable rule designed to prevent a double recovery by resorting to the device of suing in separate causes of action for the several parts of a total debt under the pretense that it is permitted so to do by the moratory statutes. The primary purpose of the Legislature in enacting the moratory laws was to prevent such double recovery. (Hepworth v. Manetto Holding Corp., 262 App. Div. 877.) The order and judgment, so-called, should be modified on the law and the facts by striking therefrom everything following the words ‘ ‘ hereby is ” in the first ordering paragraph and in place thereof inserting the following:11 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, should be affirmed, with ten dollars costs and disbursements to appellants.