171 Misc. 854 | N.Y. Sup. Ct. | 1939
The plaintiff brings this action to recover under a policy of title insurance issued by the defendant, covering the interest of the plaintiff as mortgagee upon certain real property to the extent of $8,400. The defendant pleads various defenses and a counterclaim for the cancellation or reformation of the policy. Many of the important facts of the case are not disputed.
In September, 1935, Max Karnowsky and Abe Karnowsky were, and had been for some thirty years, copartners engaged in the plumbing and heating business under the name of Karnowsky Brothers. They were indebted to the bank upon firm notes, indorsed by the partners individually, to the extent of $4,575. These notes were overdue. Prior to that time the partners had been the owners of certain real property known as 358 Willett avenue, in the village of Port Chester. Some time in August, 1935, the Karnowskys transferred the Willett avenue property to one Ike Nathan, a relative by marriage. This transfer came to the attention of the officers of the bank. The notes were turned over to the attorneys for the bank and an action commenced thereon. Conferences developed between the bank and its attorneys and the Karnowskys and their attorney. The Willett avenue property was subject to a first mortgage of $2,800 held by a third party. After some negotiations the Karnowskys agreed with the bank that the Willett avenue property should be reconveyed by Nathan to the Karnowskys, that the bank would take an assignment of the existing first mortgage for $2,800, that the Karnowskys would give an additional mortgage for $5,600, and that such two mortgages would be consolidated as one, the time of payment extended, etc. Out of the new mortgage there was to be paid all pending taxes and interest on the property; the balance was to be used in payment of the notes held by the bank. The plaintiff, having in mind the consummation of this arrangement, applied to the defendant for a policy of title insurance upon its interest as proposed mortgagee. The title was examined by the defendant and approved subject to certain exceptions not now material and the defendant company indicated its willingness to insure the title of the plaintiff accordingly.
The transfer of the title was consummated on September 30, 1935. The closing took several hours. The preparation of the papers and the handling of the closing was attended to by an
In accordance with its arrangement the title company issued its policy of title insurance, dated September 30, 1935, whereby it insured the plaintiff against all loss or damage not exceeding $8,400 “ which the insured shall sustain by reason of any defect in the title of the insured to the estate or interest described in Schedule A hereto annexed, affecting the premises described in said schedule, or by reason of the unmarketability of the title of the insured described in said schedule to, or in said premises, or because of liens or incumbrances against the same at the date of this policy,” subject to certain exceptions mentioned in Schedule “ B,” or excepted by the conditions of the policy. By Schedule “ A,” subdivision 1, the estate or interest insured by the policy was stated to be “ Interest as mortgagee.” By Schedule “ A,” subdivision 2, the description of the property the title to, or .an interest in which was thereby insured, was the Willett avenue property. By Schedule “ A,” subdivision 3, the deed or other instrument by which the title or the interest thereby insured was vested in the insured was stated to be the assignment of the $2,800 mortgage, the new mortgage for $5,600 and the consolidation agreement. The excepted objections to title, etc., contained in Schedule “ B, did not include any specification of any possible invalidity of the mortgage because in violation of the Bankruptcy Act against preferences.
On January 20, 1936, a petition in involuntary bankruptcy was filed against Max Karnowsky and Abraham Karnowsky, individually and as copartners doing business as Karnowsky Brothers. On February 5,1936, they were duly adjudicated bankrupts accordingly by the District Court in the Southern District of New York. A trustee in bankruptcy was thereafter duly appointed. The trustee instituted an action in the District Court to set aside the $5,600 mortgage held by the bank on the ground that it was a preference. Issue was joined by the bank by the service of an answer containing a general denial. The bank gave notice to the title company of the institution of the action and demanded that
First. The defendant contends that the policy cannot, in any event, be construed to cover the hazard of a loss sustained by the plaintiff by reason of the fact that the mortgage of $5,600 was declared invalid under the Bankruptcy Law. With this contention the court cannot agree. The title company knew that a new mortgage of $5,600 was to be given. It knew that the proceeds of that loan were to be used to pay the notes. It was fully acquainted with the general nature of the proposed transaction. It never indicated in the negotiations any intention not to cover this risk. There was never any oral agreement between the bank and the title company that the risk should not be covered by the policy. The policy insured the bank as mortgagee. The $5,600 mortgage was specifically included under Schedule “ A.” This particular risk was not excluded under Schedule “ B.” The policy, by its terms, insured against any loss or damage by reason “ of any defect in the title of the insured to the estate or interest described.” On the face of the policy it includes this particular defect in the title to the $5,600 mortgage. In accordance with the general rule, doubts and ambiguities, if any, contained in a
Second. The defendant contends that if the policy be construed to cover such a risk, then the defendant had no authority to enter into any such agreement and that the policy is null and void with respect thereto. This contention cannot be sustained. The Insurance Law specifically authorized the defendant to “ guarantee or insure the owners of real property and chattels real and others interested therein against loss by reason of defective titles and incumbrances thereon.” (Insurance Law, § 170.) The quality of a title is a matter of opinion, as to which even men learned in the law of real estate may differ. A policy of title insurance means the opinion of the company which issues it, as to the validity of the title, backed by an agreement to make that opinion good, in case it should prove to be mistaken, and loss should result in consequence to the insured. (Foehrenbach v. German American T. & T. Co., 217 Penn. St. 331; 66 A. 561.) At common law and in the absence of statutory prohibition, an insolvent debtor has the right to prefer one creditor over others. A preference is malum prohibitum only to the extent that it is prohibited by the Bankruptcy Act. (8 C. J. S. 696, § 213; Lehrenkrauss v. Bonnell, 199 N. Y. 240; Van Iderstine v. Nat. Discount Co., 227 U, S. 575; Debtor and Creditor Law, § 23, and annotations in 12 McKinney’s Cons. Laws, pp, 76-84.) A preference within the provisions of the Bankruptcy Act is voidable only and not void, that is, the preference is valid until avoided, not void until validated. (8 C. J. S. 697, § 213, and cases cited.) The coverage of this particular risk by the policy was not in contravention either of law or of public policy. There
Third. The defendant argues that the insured has not sustained any loss or damage within the meaning of the policy. The reasoning seems to be that because the plaintiff held certain notes before the mortgage was given, the adjudication by a decree of the Federal court did nothing more than put the plaintiff where it had been previously. This contention also must be overruled. What the defendant insured was the validity of the mortgage. By the policy (Conditions, subd. 2) a claim for damages arose: “ (IV.) When the insurance is upon the interest of a mortgagee, and the mortgage has been adjudged by a final determination in a court of competent jurisdiction to be invalid, or ineffectual to charge the premises described in this policy.” That is exactly the situation which has arisen here. The policy insured a first lien to the extent of $8,400. By the decree of a competent court that lien was limited to the amount of $2,800. The word “ loss ” is a relative term. Failure to keep what a man has or thinks he has is a loss. To avoid a possible claim against him; to obviate the need and expense of professional advice, and the uncertainty that sometimes results even after it has been obtained, is the very purpose for which the owner seeks insurance. To say that when a defect subsequently develops he has lost nothing and, therefore, can recover nothing, is to misinterpret the intention both of the insured and the insurer. (Empire Development Co. v. Title G. & T. Co., 225 N. Y. 53, 59, 60.) Under such a policy the insurer is liable for the actual loss sustained. (Montemarano v. Home Title Ins. Co., 258 N. Y. 478.)
bookkeeping loss:
Original total of both mortgages..................... $8,400 00
Less payments through amortization................. 426 88
Unpaid principal of mortgages at date of decree.....$7,973 12
Credits chargeable against bank:
Balance in escrow account................ $29 20
Due from trustee on accounting as per decree. 106 37
Received from agent’s rent account........ 153 47
By mortgage validated by decree.......... 2,800 00
- 3,089 04
Loss or damage to date of decree................ $4,884 08
Less bankruptcy dividend on claim of $4,884.08 ....... 577 43
Net loss and damage............................ $4,306 65
The foregoing figure would not necessarily be the amount of a recovery to which the plaintiff would be entitled. The title company did not guarantee the payment of the debt. It did not insure the adequacy of the security. We must, therefore, consider the value of the property which stood as security for the $8,400 mortgages. That property after recovery by the trustee in bankruptcy was sold for $5,900. That, however, was obviously a
Fourth. The defendant contends that the decision of the Federal court is res judicata against the plaintiff here to such an extent that the plaintiff has absolutely no right of any recovery under any circumstances. As stated, the plaintiff gave the title company notice of the institution of the action in the Federal court against it. The title company disclaimed responsibility under the policy but defended without prejudice to the disclaimer through the attorneys for the bank. Under the circumstances the judgment of the Federal court is res judicata both for and against both parties to this action to the extent of its effect as a final judgment. It is res judicata here against the title company to the extent that it adjudged the invalidity of the $5,600 mortgage. (Foehrenbach v. German American T. & T. Co., supra; Alabama Title & Trust Co. v. Millsap, 71 F. [2d] 518.) In the Alabama Title & Trust Co. case (supra) the court said that both the title company and the insured were mutually bound by the judgment and that its mutual estoppel extended fully to all that it found as its basis. In Fulton Co. G. & E. Co. v. Hudson River T. Co. (200 N. Y. 287) it was held that sound public policy requires that different judicial decisions shall not be made on the same state of facts, and that a judgment rendered
Fifth. The defendant pleads as a defense that provision of the policy which reads as follows (Conditions, subd. 5): “ Any untrue statement made by the insured, or the agent of the insured, with respect to any material fact; any suppression of or failure to disclose any material fact; any untrue answer, by the insured, or the agent of the insured, to material inquiries before the issuing of this policy, shall void this policy.”
It is upon the facts of the case, in the light of these provisions of the policy, that the litigation must be finally determined. The general principles applicable to such a subject-matter are substantially well settled. A title policy is one of insurance, so that it is governed for purposes of construction by the rules applicable to other insurance contracts. (62 C. J. 1056, § 14; De Carli v. O’Brien, 150 Ore. 35; 41 P. [2d] 411.) In accordance with the general rule, an innocent misrepresentation of a fact material to the risk will avoid a policy of title insurance. (62 C. J. 1058, § 25; Union Trust Co. v. Real Estate T. Co., 27 Pa. Co. Ct. 187.) Where a title insurance policy so provides, the suppression of a material fact will void the policy. (62 C. J. 1058, § 27; Rosenblatt v. Louisville Title Co., 218 Ky. 714; 292 S. W. 333.) A failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the option of the company. (Stipeich v. Metropolitan Life Ins. Co., 277 U. S. 311.) Concealment of material facts by the insured is a defense. (Vaughan v. United States T. G. & I. Co., 137 App. Div. 623.) The same rule is laid down in other cases. (Phillips v. U. S. F. & G. Co., 200 App. Div. 208; affd., 234 N. Y. 618; Town of Hamden v. American Surety Co., 93 F. [2d] 482; Raebeck v. Title Guarantee & T. Co., 229 App. Div. 727; Sebring v. Fidelity-Phenix Fire Ins. Co., 255 N. Y. 382.) What is material under such circumstances has been the subject of judicial consideration. In Geer v. Union M. L. Ins. Co. (273 N. Y. 261) the court said (p. 266) that the question in such case is not whether the insurance company might perhaps have decided to issue the policy even if it had been apprised of the truth; the question is whether failure to state the truth where there was duty to speak
Tested by these rules, the disposition of this case seems clear. Without considering controverted matters, the undisputed proof with respect to certain of the subject-matter shows both an affirms,tive misrepresentation and a misrepresentation through nondisclosure on the part of the plaintiff. There was a specific misrepresentation with respect to one material fact. It is undisputed that the financial condition of Karnowsky Brothers was substantially the same at the time of the adjudication in bankruptcy as at the time when the mortgage was given. The officers of the plaintiff, upon the trial, claimed a thorough understanding on their part of the -underlying facts with reference to the financial situation of the debtors. The claims allowed in bankruptcy aggregated $13,313.86. Of this total $4,884.08 was the claim of the plaintiff arising through the invalidity of the mortgage; $3,341.44 wa= the claim of Mutual Trust Company, concerning which both the plaintiff and the defendant were informed at or before the time of the closing, $1,490 was a claim on a second mortgage which covered certain real property of the bankrupts at 26-28 Rollhaus place, such mortgagees having disclaimed the security and having elected to stand as general creditors. This item was not considered as an unsecured claim by either plaintiff or defendant. Technically it was not an unsecured claim at that time. These three items aggregate $9,715.52. The balance of $3,598.34 represented unsecured claims of general creditors. It appears that the attorney for Karnowsky Brothers in the discussion with an officer of the bank stated that the merchandise creditors totaled about $3,000. The attorney for the bank in his conference with the attorney for the title company does not appear to have stated the figures on such claims. He told them about the plaintiff bank and Mutual Trust Company claims and testified that with these exceptions he told the attorney for the title company “ the general creditors were very small, very
There was a non-disclosure of various material matters. The bank failed to disclose the fact that it had in its files two credit statements from Karnowsky Brothers, one under date of October 18, 1933, and one under date of October 2, 1934. Referring, for a moment, to the second one, it appears that this statement was returned to Karnowsky Brothers when originally received by the bank “ due to the irregularity appearing on the face of the same.” The Karnowskys sent it back without correction. Neither the fact of the existence of the statement or its return by the bank with the expression quoted were made known to the title company. That there was at least one irregularity appearing on the face of the statement is certain. Under notes payable to banks the debtors listed $3,800. The claims of the bank itself, without considering the Mutual Trust Company, were in excess of that amount. The statement also discloses a gross overvaluation, among others, of the Willett avenue property. It was estimated at $25,000, when not even the officers, who claimed to be familiar with real estate values, have suggested any value in excess of $9,000. In connection with other circumstances, this statement had additional importance. By the statement certain premises at 407 North Main street were given an estimated value of $35,000, with mortgages of $10,850. In March, 1935, there came to the attention of the bank the fact that this property had been conveyed to one Markel. An estimated equity of some $24,000 thereby disappeared from the assets of the debtors. The fact of the conveyance known to the bank was not disclosed to the defendant. At the time of the mortgage the four months’ period in which to attack the conveyance of March had expired under the Bankruptcy Law. The bank officers were fully familiar with the fact that the debtors were crowded for lack of cash. There was no disclosure to the defendant that a $24,000 unexplained departure of assets had occurred. If the explanation be that the value as estimated was grossly overstated, then the fact that the debtors had overstated was material to the defendant. If the explanation be that the property was conveyed without consideration, then it indicated a willingness on the part of the debtors to dispose of their property in such fashion and such willingness was a material matter from the standpoint of the defendant. If the explanation be that an additional consideration was paid and devoted to other purposes, then the disposition thereof was -unknown. That also was material. If there be no explanation.
Sixth. The defendant pleads also a counterclaim for cancellation or reformation of the policy. This amounts to nothing more than a repetition of the various matters pleaded as a defense, and to which a reference has been made. The policy has an independent status so far as it applies to the $2,800 mortgage still in existence. The defendant is not entitled to rescission on the theory of a material misrepresentation, etc. It has neither repaid, tendered or offered to return the premium paid for the policy. Nor is there any basis for a reformation. There is nothing to indicate that by mutual mistake of both parties, or by a mistake of the defendant and fraud of the plaintiff, etc., the policy was drawn to cover a risk which the defendant did not intend to insure. So far as appears, the policy was drawn in the form that both parties intended it to be. There is nothing about it to be reformed. The counterclaim is dismissed upon the merits.
Settle findings and judgment upon two days’ notice. The testimony and all exhibits submitted have been forwarded to the clerk at Special Term, Part I, White Plains, where they may be withdrawn by the respective counsel entitled thereto.