160 Misc. 67 | N.Y. Sup. Ct. | 1936
This is a motion by the Superintendent of Insurance, as liquidator of New York Title and Mortgage Company, for an order approving and confirming his “ First Preliminary Report and Petition.” The report embodies the action taken by the liquidator upon four claims selected by him as “ test cases for adjudication,” two of them based on whole mortgage guaranty policies, one on a participation certificate in a single mortgage, and one on four participation certificates in a group series.
More than 40,000 proofs of claim have been filed in the liquidation proceeding, including a blanket proof of claim executed by the Mortgage Commission of the State of New York on behalf of all the certificate holders of the company, which the Superintendent regards as “ effective to protect the interests of many holders of guaranteed mortgage participation certificates * * * who shall not have filed individual proofs of claim with the Liquidator prior to December 31, 1935.” The Superintendent points out that “ the determination and adjudication of claims based upon whole mortgage guaranty policies and guaranteed mortgage participation certificates involve questions of law which are to a large degree novel ” and that “ there has been no authoritative interpretation of the provisions of Article XI of the Insurance Law, enacted in 1932, to guide the Liquidator in the determination and adjudication of such claims.” In the interest of economy and speed of liquidation, it was, therefore, thought advisable “ to select a group of cases, representative of the major portion of the claims filed, to make adjudications, and to submit them ” for the court’s consideration “ on notice to all who might be in a position to offer any suggestion.”
The first question which arises relates to the provability of the claims. Section 404 of the Insurance Law declares, in respect of a domestic insurer whose liquidation has been directed by order of the court, that “ the rights and liabilities of any such insurer and of its creditors, policy holders, stockholders, members and/or all other persons interested in its estate shall, unless otherwise directed by the court, be fixed as of the date of the entry of the order directing the liquidation of such insurer * * *. Provided, however, that the right of claimants holding contingent claims on said date to share in an insolvent estate shall be determined by section four hundred and twenty-five of this chapter.” Subdivision 3 of section 425 contains the following provision for contingent claims: “ No contingent claim shall share in a distribution of the assets of an insurer which has been adjudicated to be insolvent by an order made pursuant to section four hundred and twenty-four of this chapter except such claims shall be considered, if properly presented, and may be allowed to share where (a) such claim becomes absolute against the insurer on or before the last day fixed for the filing of proofs of claim against the assets of such insurer, or (b) there is a surplus and the liquidation is thereafter conducted upon the basis that such insurer is solvent.” The power of the court to specify a date as of which the liabilities of the insurer shall be fixed may be exercised only at the time of the entry of the order of liquidation. (Matter of Empire State Surety Co., 214 N. Y. 553, 567, 568.) Otherwise the focal date is the day of the entry of the order of liquidation. As the order of liquidation of the New York Title and Mortgage Company specified no time as of which claims should be determined, the provability of claims
The claim upon participation certificates in a group of bonds and mortgages (a so-called group series) was clearly absolute, and not contingent, on July 15, 1935. The provisions of the certificates and of the deposit agreement to which they are subject are substantially the same as those of the certificates and deposit agreement construed by the Court of Appeals in Matter of People (Tit. & Mtge. Guar. Co.) (264 N. Y. 69). Although the company’s obligations in that case were in form those of a guarantor of bonds and mortgages owned by the certificate holders, the court, in an opinion by Judge Lehman, declared that, in substance (pp. 88, 89): “ the guaranty company is a primary debtor, assigning the mortgages only as collateral security for the debt.” This interpretation of the character of the legal relationship between the certificate holders and the guaranty company answers the only argument which could be advanced in support of a contention that the claim is contingent, viz., that the company was a guarantor and, as such, liable only in the event of a default by its principals, the obligors, on the deposited bonds and mortgages.
The question of whether the claims upon guaranties of whole mortgages and upon guaranteed participation certificates in single mortgages are absolute or contingent, is a more difficult one. The legal nature of the company’s obligations in these instances has not been determined by the Court of Appeals. This court, sitting in the Additional Special Term for Rehabilitation, has uniformly held (1) that the holder of a whole mortgage covered by the company’s policy is the owner, not merely the pledgee, of the mortgage, and that the guaranty company is a guarantor rather than the primary debtor; and (2) that the holder of a guaranteed participation certificate in a single mortgage is the owner of an undivided interest in the mortgage, the company’s obligation being that of guarantor. (Matter of Lawyers T. & G. Co., 157 Misc. 516, 519; Matter of Lawyers Mortgage Company [345 West End Ave.], Id. 813, 815.) The basis of these decisions has been the court’s belief that in construing the company’s obligation upon certificates in group series as that of a primary debtor in Matter of People (Tit. & Mtge. Guar. Co.) (supra), the Court of Appeals relied upon peculiar provisions of those certificates which are absent from the certificates
Our own Court of Appeals has itself intimated that holders of certificates in a single mortgage may be owners rather than pledgees of undivided interests in the mortgage, thus limiting its analysis of the relationship between the company and certificate holders, in Matter of People (Title & Mtge. Guar. Co.) (supra), to certificates in group series. In Matter of People (Westchester Tit. & T. Co.) (268 N. Y. 432) the mortgage investments consisted of certificates in a single mortgage. Judge Lehman, writing for the court, said (pp. 439, 440): “ In Matter of People (Title & Mortgage Guarantee Co.) (264 N. Y. 69) this court sustained the validity of the earlier statute (Laws of 1933, ch. 745) which conferred similar authority and powers upon the Superintendent of Insurance. True, in that case, the mortgage investment was evidenced by certificates of different form, and the interest of the holders of the certificates in the mortgage investment 7nay, perhaps, have been less direct than the interest of the petitioner, here, in the 7nortgage investrnent over which the Mortgage Co7mnission is now asserting right of control. Then, too, the provisions in regard to the depository of the mortgage are not the same.
As to guaranteed whole mortgages, there is likewise language of the Court of Appeals tending to indicate that their holders are owners rather than pledgees of the mortgages, and that the guaranty company’s legal status is that of guarantor rather than that of a primary debtor. Thus, in Matter of People (Lawyers Title & Guar. Co.) (265 N. Y. 20) the opinion of the court, written by Judge (now Chief Judge) Crane, repeatedly refers to the holder of the mortgage as “ the mortgagee,” to the company’s obligation as “ the contract of guaranty ” and “ the guarantee contract,” and to the company as “ the guarantor.” Although the court’s actual decision may, possibly, have been the same even if the holder of the company’s policy were regarded as the pledgee, and not the owner of the mortgage, it is difficult to read the opinion without arriving at the conclusion that the company was thought to be the guarantor of a bond and mortgage owned by the holder of its policy.
In this connection it is well to bear in mind that the determination of the legal relationship existing between the company and the holders of its guaranties may have an important bearing upon their legality as investments for trust funds. This is pointed out in the article above referred to (34 Columbia Law Review, 683): “ But in evaluating the construction adopted by the Court of Appeals (Matter of People [Title & Mtge. Guar. Co. of Buffalo], 264 N. Y. 69), it must be recognized that cogent policy considerations influenced the decision. Yet it cannot he disregarded that such interpretation casts some douht on the certificates’ compliance with the statutory definition of ‘ legáis ’ and strips the companies of their chief characteristics as insurers.” (Italics the court's.)
In the very recent case of Matter of People [Title & Mort. Guar. Co.] (270 N. Y. 629) the Court of Appeals expressly refrained from passing upon the question of the nature and legality of participation certificates in a group series (p. 630): “ We express no opinion upon the question as to whether the participation certificates constituted legal investments for trustees or whether they constituted shares or parts of mortgages.” If holders of guaranteed whole mortgages and guaranteed certificates in single mortgages are held to he pledgees rather than owners of the mortgages or of undivided interests therein, as the case may he, the status of the mortgages and certificates as legal investments is seriously impugned.
In 1932 section 63 of the Insurance Law was repealed by chapter 191 of the laws of that year, in effect March 15, 1932. A new article was added to the Insurance Law (Art. XI), containing, among others, the following provision (§ 425, subd. 5): “ No claim of any secured claimant shall be allowed at a sum greater than the difference between the value of the security and the amount for which the claim is allowed, unless the claimant shall surrender his security to the Superintendent in which event the claim shall be allowed for the full amount for which it is valued.” The language of this subdivision clearly covers the claim upon the certificates in the group series. The Court of Appeals has held that the holder of such certificates does not own undivided interests in the deposited bonds and mortgages, but is merely the pledgee of the interests, the guaranty company being “ a primary debtor, assigning the mortgages only as collateral security for the debt.” (Matter of People [Title & Mtge. Guar. Co.], supra, at pp. 88, 89.) A somewhat different problem is presented as to the remaining claims by the holders of the policies guaranteeing whole mortgages and of certificates in single mortgages. If the company is deemed the primary debtor and the holders of the policies and certificates are regarded as
A contention is made by counsel for the Westchester trustees, as amicus curise, that subdivision 5 of section 425 of the Insurance Law has no application to the rights of holders who acquired their certificates or policies of guaranty prior to March 15, 1932, the date said subdivision went into effect. If subdivision 5 worked a change in the law existing at the time of its passage, there might be considerable force to the argument that any attempt to apply it retroactively would be unconstitutional as impairing the obligation of contracts. In view, however, of the fact that the section merely restates, in somewhat different language, the provisions which had been part of section 63 of the Insurance Law since 1918, it must be evident that the position taken by counsel for the Westchester trustees is untenable, except, perhaps, as to certificates or guaranties issued prior to 1918. No such certificates or guaranties are involved here.
We turn now to the question of how the value of the mortgages, or undivided interests therein, held by the claimants shall be determined. Some urge that the mortgages should be appraised at the value of the underlying real estate, after deduction of prior liens and the cost of foreclosure. The Superintendent of Insurance, on the other hand, takes the position that the claimants hold mortgages, not real estate, and that the mortgages must, therefore, be valued as mortgages, and not as realty. In the court’s opinion, the Superintendent’s analysis is the correct one. It would be manifestly unjust to compel claimants to submit to a deduction from their claims of the value of the mortgaged real estate as of July 15, 1935, unless they were in a position on that day to sell the real estate and realize its then market value. None of the claimants owned any mortgaged realty on July fifteenth, and none could, therefore, convert its appraised value into cash or its equivalent. Let us take, for example, the case of a claimant holding a mortgage which he had an immediate right to foreclose on July 15, 1935, by reason of defaults in interest and/or taxes. If any set of facts can be said to call for the application of the “ value of the realty ” method of appraisal, advocated by those opposing the Superintendent’s view, this would seem to be the one. Yet a moment’s reflection will render it readily apparent that even in this type of situation it would be highly inequitable to charge the mortgagee with the value of the real estate. Assuming that he commenced a foreclosure action on July 15, 1935, and that no obstacles of any kind were placed in the way of the prompt prosecution of the action,
The court’s views in this respect find support in a recent decision of the Federal court (Matter of Bankers Mortgage Co. of Topeka, Kansas, decided Dec. 23, 1935).
It is urged that a recent decision of the Appellate Division in the Second Department, Young, J., dissenting (Matter of Bond & Mortgage Guarantee Co. [City Bank-Farmers Trust Co.; New York Polyclinic Medical School & Hospital], 247 App. Div. 911) is authority for charging claimants with the value of the realty underlying the mortgages held by them. To the extent that the views there expressed may be regarded as applicable to the valuation of security held by claimants in a liquidation proceeding against an insurance or guaranty company, this court finds itself unable to agree with them.
In this connection, it is well to take up the contention made by certain stockholders of the guaranty company that the claims against the liquidator are subject to the set-off provided for in section 1083-b of the Civil Practice Act. That section provides that: “ In any action * * *, other than an action to foreclose a mortgage, to recover a judgment for any indebtedness secured by a mortgage on real property * * *, against any person or corporation directly or indirectly or contingently liable therefor, any party against whom a money judgment is demanded, shall be entitled to set off the fair and reasonable market value of the mortgaged property less the amounts owing on prior liens and encumbrances.” This provision is, however, inapplicable here for several reasons. The section, by its terms, refers only to “ any action * * * to recover a judgment upon any indebtedness secured by a mortgage on real property.” (Italics the court’s.) A claim filed in a liquidation proceeding is not an “ action * * * to recover a judgment.” That the statute is restricted to actions has been recently held by the Appellate Division in the Fourth Department. (Kress v. Central Trust Co., 246 App. Div. 76.) In that case a depositor sued to recover the amount of his deposit. The bank pleaded a set-off for the amount due it on a bond and mortgage which the plaintiff had delivered to it as security for a loan. The latter urged that he was entitled to a credit for the fair value of the real estate underlying the mortgage. The court overruled this contention in the following language (pp. 79-80): “ These
Another proposition advanced by stockholders of the guaranty company is that “ contracts of guaranty of all mortgages, the time for the payment of any part of the principal of which, or the time for the foreclosure of which was extended by the mortgage moratorium laws, were by such laws released and invalidated.” The argument is made that the moratorium statutes materially modified the guaranteed obligations and that “ the provisions of said statutes purporting to preserve the liabilities of guarantors of mortgage obligations are not effective for that purpose ” because the surety “ must sit by and, it may be, see the property upon which he has relied for exoneration lose its value through the lapse of time — failure of repairs, change of character of neighborhood and the like ■— things which, had he control of the property, he might foresee and guard against.” It is to be noted that the claim that the company was discharged from liability on its guaranties does not apply to mortgages in default as to interest or taxes, for the right to foreclose such mortgages is not suspended by the emergency statutes, and the guaranty company’s rights as subrogee are, therefore, not interfered with. In addition, it is conceded that the
In the case of each of the four claims under consideration on the present motion, appraisers have properly valued the mortgages involved as mortgages, and not as real estate. The motion to confirm would, therefore, be granted, were it not for the failure of the Superintendent’s report to ■ disclose the financial condition of the obligors of the bonds and mortgages underlying the four claims. As the solvency of the obligors is to be presumed, in the absence of proof to the contrary (Thomas v. Zahka, 228 N. Y. 187), and as their financial condition is undoubtedly a factor to be considered in determining the value of the bonds and mortgages, the facts bearing upon the financial circumstances of the obligors should be disclosed to the court and it should also appear that the appraisers took these facts into consideration in valuing the mortgages.
As a supplemental report is, therefore, necessary, the court deems it appropriate to point out that the appraisers have followed an erroneous method of computing the value of an undivided interest in a mortgage, whether represented by certificates or otherwise. For example, one of the four claims is based upon a $5,000 certificate in a single mortgage of $350,000. The value of the mortgage has been appraised as of July 15, 1935, at $286,000. The value of the certificate has been fixed at 5,000/350,000 of $286,000 (with a minor adjustment in respect of a small balance in the assignment of rents account). No consideration appears to have been given to the practical difficulties confronting the owner of a fractional interest in a mortgage who wishes to obtain concerted action by his co-owners or fellow certificate holders. These difficulties are matters of which the court can take judicial notice. They have been recognized by the Legislature itself in enacting the Mortgage Commission Act (Laws of 1935, chap. 19), section 1 of which states: “ The holders of mortgage investments in many thousands of issues are numerous and it has been difficult to obtain concerted action by them.” The difficulties and expense involved in securing the co-operation of sufficient certificate holders (or co-owners) to enforce a mortgage, through a reorganization proceeding or otherwise, must be taken into account in estimating the value of an undivided interest in the mortgage. The language of
“ The appeal taken by the Comptroller is on the ground that by an erroneous method adopted by the appraiser in fixing the values of a certain fractional interest in real property the interest of the decedent therein had been undervalued.
“ There are several parcels of real estate to which the Comptroller’s appeal relates. As to each one the decedent was the owner of an undivided one-third interest. Certain of the parcels were covered by a general mortgage and in addition there was a mortgage upon the one-third interest of the decedent in the property. It is conceded that it is proper to make a deduction in valuing an undivided fractional interest in real property because of the diminution of value which results from the fact that it is an undivided fractional interest only. This deduction is due in part to cover the expenses incident to a partition action, but is chiefly due to the fact that the owner of such an undivided interest, particularly if, as in the case at bar, it be a minority interest only, cannot control it, but holds it practically at the mercy of the owners of the other interests. For such an interest there is only a limited market, the proof being that experience shows that the purchasers of undivided interests are usually speculators and operators. This restrictive market for such interests lowers their market value. The method adopted by the appraiser for computing the value of decedent’s undivided interest in such a parcel was to place a value on the parcel as a whole and then, taking one-third thereof, make a deduction of fifteen per cent of such one-third interest therefrom, and from this result deduct the amount due on the mortgage covering the decedent’s one-third interest and also one-third of the amount due on the mortgage covering the entire parcel, i. e., the three-thirds interest therein belonging to all the owners. The net result is the value of the decedent’s one-third interest in the real property.”
In view of the fact that the report does not touch upon the financial condition of the obligors of the bonds secured by the mortgages, and in view further of the method of valuing undivided interests in mortgages employed by the appraisers, the motion to confirm will be held in abeyance pending the submission of a supplemental report on notice to all who have appeared.
No opinion for publication. Affd., 83 F. [2d] 50.