National City Bank v. Gelfert , 284 N.Y. 13 ( 1940 )

The action is one to foreclose a real property mortgage. The estate of the deceased mortgagor is liable for any deficiency which the plaintiff is entitled to recover. Our moratory deficiency judgment act is inapplicable, for it does not affect mortgages or connected agreements dated on or after July 1, 1932, and the mortgage in suit was executed on December 29, 1932.

At the time of execution thereof, section 1083 of the Civil Practice Act provided that the measure of a deficiency judgment was the residue of the debt remaining unsatisfied after a sale of the mortgaged property and the application of the proceeds pursuant to the directions contained in the judgment of foreclosure and sale. So computed, the deficiency owing to the plaintiff-mortgagee, as shown by the report of the referee to sell, was $16,162.12. The plaintiff-mortgagee was the purchaser on foreclosure. It was noted in the court below that the sale price of $4,000 was not shockingly inadequate and that there was no showing of specific hope that much more would be obtained upon a resale. (257 App. Div. 465, at p. 467.) On February 2, 1939, Special Term confirmed the report of the referee and ordered that a judgment for the stated deficiency should be docketed in favor of the plaintiff-mortgagee against the estate of the deceased mortgagor.

The judgment of foreclosure and sale had been entered November 15, 1938, and the sale had taken place on December 16, 1938. Theretofore and as of April 7, 1938, section 1083 of the Civil Practice Act had been amended by chapter 510 of the Laws of 1938. The gist of the change thereby made is in the provision that the amount of a deficiency judgment is to be fixed by deducting from the debt the market value of the property as determined by the court or the sale price, whichever is higher. The 1938 amendment also provides: "If no motion for a deficiency judgment shall be made as herein prescribed the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist." This 1938 amendment we shall call the new section 1083.

On appeal by the estate of the deceased mortgagor, the Appellate Division ruled that the new section 1083 was applicable and that no motion for a deficiency judgment as therein prescribed had been made by the plaintiff-mortgagee. Accordingly the order of Special Term was modified by striking therefrom the direction for entry of a deficiency judgment and the judgment entered pursuant thereto was vacated. As appellant in this court, the plaintiff-mortgagee contends that the new section 1083, when so applied to mortgage contracts previously made, contravenes the command of the Constitution of the United States that "No State shall * * * pass any * * * Law impairing the Obligation of Contracts." (Art. I, § 10.)

(1) The measure of a deficiency judgment prescribed by the new section 1083 is in substance prescribed also by our moratory deficiency judgment act (Civ. Prac. Act, § 1083-a). But that act is addressed to a declared public emergency and, as we have indicated, does not apply to mortgages or connected agreements dated (as are the instruments in suit) on or after July 1, 1932. The new section 1083 does not invoke the general welfare and sets up no conditions pertinent to emergency relief. When it was enacted in 1938, the Legislature at the same session also extended the operation of our moratory deficiency judgment act until July 1, 1939. The function of that act has since been continued and is now to be effective to July 1, 1941. (See Laws of 1938, ch. 501; Laws of 1939, ch. 607; Laws of 1940, chs. 566, 567.) These circumstances make it clear to us that the new section 1083 concerns merely the private contract relationship of the parties to a real property mortgage and that as matter of fact the new section 1083 was not designed for the relief of urgent public needs. (Cf. Home Bldg. Loan Assn. v.Blaisdell, 290 U.S. 398; Worthen Co. v. Thomas,292 U.S. 426; Veix v. Sixth Ward Bldg. Loan Assn., 310 U.S. 32.)

(2) On that basis, the question to be determined is whether the new section 1083 transcends the scope of the normal control over judicial remedies which the contracts clause of the Federal Constitution has left to the States. "It is well settled that while, in a general sense, the laws in force at the time a contract is made enter into its obligation, parties have no vested right in the particular remedies or modes of procedure then existing. It is true that the Legislature may not withdraw all remedies, and thus, in effect, destroy the contract; nor may it impose such new restrictions or conditions as would materially delay or embarrass the enforcement of rights under the contract according to the usual course of justice as established when the contract was made. Neither could be done without impairing the obligation of the contract. But it is equally well settled that the Legislature may modify or change existing remedies or prescribe new modes of procedure, without impairing the obligation of contracts, provided a substantial or efficacious remedy remains or is given, by means of which a party can enforce his rights under the contract." (Oshkosh Waterworks Co. v.Oshkosh, 187 U.S. 437, 439. See the cases brought together inHome Bldg. Loan Assn. v. Blaisdell, supra, at p. 434.)

(3) It is in order, then, next to examine the law whereby fiability for a deficiency on foreclosure was regulated in this State before the new section 1083 became operative. At this point, we are pressed to give renewed consideration to the case of Monoghan v. May (242 App. Div. 64). The foreclosure sale there involved was held before our moratory mortgage legislation took effect. The court, however, judicially noticed an earlier existence of the emergency thereby declared. Upon findings that the true value of the property equalled the mortgage debt and that the mortgagee was the purchaser at a price so inadequate as to shock the conscience of the court, all liability for a deficiency was canceled, independently of statute and by dint of an avowal by the court of its "inherent power to place limitations upon the remedies available to a mortgagee in consonance with fundamental doctrines of equity." Acceptance of all that was so decided obviously would not answer the question now before us, since the new section 1083 is not emergency legislation, is not confined to cases where the sale price shocks the conscience, and is applicable whether a purchaser on foreclosure is the mortgagee or is a third party.

It may be worth while, however, to detail what actually was connoted by the broad statements made by the court in theMonoghan case. In Guaranteed Title Mortgage Co. v.Scheffres (246 App. Div. 532) the mortgage debt was $10,500, the sale price was $8,000, and the deficiency was $4,857.58. This inadequacy of price was found to have shocked the conscience of the court and the defendants were given leave to move retroactively for the entry of a judgment which would not finally award recovery of a deficiency (247 App. Div. 294). In Whorton v. Andretta (246 App. Div. 827) the mortgage debt was $14,000, the sale price was $7,000 and the deficiency was $8,507.23. A sale price can be inadequate only in its relation to the worth of the property sold. Yet in the Whorton case the same court in precisely the same period of economic stress reversed an order that the market value of the property be determined for the purpose of ascertaining the amount of a deficiency judgment, stating its reason as follows: "We are of opinion that under the circumstances disclosed here, the purchase price was not so inadequate as to shock the conscience of the court." Again, in Central National Bank v. Marks (243 App. Div. 526), the same court declared that the equitable relief considered inMonoghan v. May is not available to mortgagors "possessed of independent means."

As thus employed, the theory of Monoghan v. May seemed to us to go against the grain of settled ideas of the nature of equity. The "conscience" which is an element of the equitable jurisdiction is not the private opinion of an individual court, but is rather to be regarded "as a metaphorical term, designating the common standard of civil right and expediency combined, based upon general principles and limited by established doctrines, to which the court appeals, and by which it tests the conduct and rights of suitors — a judicial and not a personal conscience." (1 Pomeroy's Equity Jurisprudence [4th ed.], § 57. So, 1 Spence, Equitable Jurisdiction of the Court of Chancery, pp. 413, 414; Snell, Principles of Equity [22d ed.], p. 3.) In that view, the "doctrine" of Monoghan v. May was rejected by us whenGuaranteed Title Mortgage Co. v. Scheffres (supra) was reversed in this court. (275 N.Y. 30.) For our part, we thought better of the doctrine stated by that learned lawyer, DILLON, J., in these words: "Creditors have rights, as well as debtors. Courts stand between the two [and] administer the law just as itis, with even-handed impartiality * * *." (Sloan v. Waugh,18 Iowa, 224, 227.)

The law which the court called upon in Monoghan v. May was in that case stated as follows: "To obtain a deficiency judgment and determine the amount thereof, it is necessary to invoke equitable power to confirm the sale had under the judgment of foreclosure. * * * No rights vest, perforce the judgment of foreclosure, in plaintiff for a deficiency judgment in any amount until plaintiff satisfies a court of equity that it would be equitable and just, as a consequence of what has occurred on the sale, to authorize the entry of a deficiency judgment." (242 App. Div. at pp. 66, 67.) This statement did not accurately represent the New York law which (prior to the enactment of our moratory mortgage legislation) regulated the general right to recovery of a deficiency judgment in an action to foreclose a real property mortgage.

On the contrary, our previously existing statutory law of foreclosure had been interpreted in this manner: Liability for a deficiency was to be finally determined by the judgment of foreclosure and sale. The subsequent docketing of a deficiency judgment was a merely clerical act. Execution for a deficiency was issuable before confirmation of the report of the referee to sell or before a deficiency judgment was docketed, unless the court directed a resale in order to relieve a party from the consequences of unfairness, fraud, surprise or mistake. The deficiency was to be ascertained by a sale of the mortgaged premises and not by the estimates of witnesses or other less satisfactory evidence. (Civ. Prac. Act, former § 1083; Morris v. Morange, 38 N.Y. 172; Wager v. Link, 134 N.Y. 122;Frank v. Davis, 135 N.Y. 275; Feiber Realty Corp. v.Abel, 265 N.Y. 94; Emigrant Industrial Sav. Bank v. VanBokkelen, 269 N.Y. 110; Bondy v. Aronson List Realties,Inc., 227 App. Div. 136; Housman v. Wright, 50 App. Div. 606. See Thomas on The Law of Mortgages [2d ed.], § 832.) This procedure always meant that on foreclosure the mortgagor was entitled to credit only for the net proceeds of sale realized by the mortgagee after the deduction of liens for taxes, etc., with resultant liability to the mortgagor for the deficiency (Marshall v. Davies, 78 N.Y. 414, 422) — a rule that was in keeping with the generally accepted proposition that a mortgagee owed no duty to his mortgagor to protect the equity of redemption but might deal with the mortgagor in respect of the mortgaged premises upon the same footing as any other person. (See TenEyck v. Craig, 62 N.Y. 406, 421; Louisville Joint Stock LandBank v. Radford, 295 U.S. 555, 579, 580; Rules Civ. Prac. rule 259; Thomas on The Law of Mortgages [2d ed.], §§ 972, 988.) It was this system of foreclosure that entered into the engagement of the present parties and created and defined the legal and equitable obligations of their contract. (Bronson v. Kinzie, 1 How. [U.S.] 311.)

(4) This system of foreclosure has been markedly changed by the new section 1083. Under that section a mortgagee must on foreclosure bid in the property at a price that shall at least equal the market value as that value may thereafter be determined by the court or must go without any satisfaction of so much of the debt as equals the difference between the value as so determined and a lower price paid on a sale to a third party. These substantial alterations of the former statutory status of mortgagees are not to be temporary. They are not conditioned upon any equitable factor and leave no room for the play of any equitable consideration. They benefit every mortgagor irrespective of the character or amount of his investment and they burden every mortgagee no matter what his necessities. They reach indeed to all situations where for any reason whatever the price paid by any purchaser on a valid foreclosure sale falls short of the market value of the property as subsequently determined by the court.

In the face of all this, we do not see how a retroactive operation of the new section 1083 can be reconciled with the principle "that the laws which prescribe the mode of enforcing a contract, which are in existence when it is made, are so far a part of the contract that no changes in these laws which seriously interfere with that enforcement are valid, because they impair its obligation within the meaning of the Constitution of the United States." (Barnitz v. Beverly, 163 U.S. 118, 122.) Consequently we conclude that as to mortgage contracts previously made (as are the contracts in suit) the new section 1083 is void. (See Home Bldg. Loan Assn. v. Blaisdell, supra, at pp. 431-434; New York Life Ins. Co. v. Guttag Corp., 265 N.Y. 292,296.)

(5) The foregoing presupposed the absence of any remedy substantially coextensive with that afforded by the former section 1083. We believe no such remedy exists.

Apart from our moratory mortgage legislation, a mortgagee of real property may still recover judgment for the mortgage debt as if no mortgage secured it. This remedy of an action at law for the debt cannot, we think, be deemed to be a fair equivalent of the remedy afforded by the former section 1083, inasmuch as the judgment debtor's equity of redemption cannot be sold under an execution issued upon a judgment for the mortgage debt or any part thereof. (Civ. Prac. Act, § 710.)

From the beginning our statutory system of foreclosure has prohibited a second action to recover a deficiency resulting on a foreclosure sale. (Civ. Prac. Act, § 1078.) Though power to relax that prohibition was conferred upon the court, the general rule was against the exercise thereof and it was settled that the burden of such a second suit was not to be laid upon a party who could have been made a defendant in the foreclosure action unless special circumstances were shown which manifestly required that course. (Equitable Life Ins. Society v. Stevens, 63 N.Y. 341;Scofield v. Doscher, 72 N.Y. 491; Vanderbilt v. Schreyer,91 N.Y. 392; Morrison v. Slater, 128 App. Div. 467;Darmstadt v. Manson, 144 App. Div. 249; Stehl v. Uris,210 App. Div. 444.) Leave to bring so restricted a second suit is not to be granted in proceedings under our moratory deficiency judgment act. (Civ. Prac. Act, § 1083-a; Honeyman v. Hanan,275 N.Y. 382, 392.) Even if we assume that the new section 1083 has not likewise superseded section 1078 of the Civil Practice Act, in our judgment the limited judicial discretion permitted by section 1078 could not be made an effective instrumentality for the replenishment of the rights which section 1083 has now taken away from mortgagees.

(6) The new section 1083 was enacted upon the recommendation of a joint legislative committee whose report said: "The present emergency Deficiency Judgment Law can no doubt be made permanent if the Legislature so desires, under the authority of the decision of the United States Supreme Court in the case of Richmond Mortgage Loan Corporation v. Wachovia Bank Trust Co., et al., Executors, 300 U.S. 124." (N.Y. Leg. Doc. [1938] No. 58, p. 35.) In the case thus cited, the court upheld a North Carolina statute providing that when the holder of an obligation secured by real estate causes a trustee's sale of the property at which such holder becomes the purchaser for less than the amount of the debt and thereafter such holder brings an action for a deficiency, the defendant may show, by way of defense and setoff, that the property sold was fairly worth the amount of the debt or that the amount bid was substantially less than the true value of the property and thereby defeat any deficiency judgment against him in whole or in part. This North Carolina statute has no application if the purchaser at the trustee's sale be other than the mortgagee. It affects only foreclosures under powers of sale and does not apply to foreclosure sales made pursuant to an order or decree of the court. The new section 1083 contains no such limitations and, as we hold, cannot be sustained (as was this North Carolina statute) on the principle that the obligation of a contract is not impaired by a statute limiting the remedy, if a remedy adequate for enforcing the obligation remains or is substituted.

(7) In short, our conclusion is that section 1083 of the Civil Practice Act, as amended by chapter 510 of the Laws of 1938, cannot be constitutionally applied to mortgage contracts previously made and that as to such contracts the former section 1083 is in force and effect.

The order of the Appellate Division should, therefore, be reversed and that of the Special Term affirmed and its judgment reinstated, without costs.