Majority
In this proceeding for the liquidation of New York Title and Mortgage Company under article XI of the Insurance Law (Cons. Laws, ch. 28), the Additional Special Term for the county of New York
It is in order first to notice large elements of the case as to which there is no controversy. The stockholders concede that the undertakings of the company “ were absolute obligations, as distinguished from contingent obligations, and were therefore provable under the statute.” (See Insurance Law, § 425, subd. 3; Matter of People [Bond & Mortgage Guarantee Co.], 267 N. Y. 419 .) The respective rights and obligations of the several parties in interest are to be fixed as of July 15, 1935, the date of the entry of the order of liquidation. (Insurance Law, § 404, subd. 2; Matter of Empire State Surety Co., 214 N. Y. 553 .) “ The fundamental basis underlying the standard or method for the determination of claims on guaranties is [the words are the liquidator’s] that the creditor-claimant shall receive such allowance as will measure his actual loss.” This loss is to be determined in accordance with the following provision of the statute: “ 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 in the full amount for which it is valued.” (Insurance Law, § 425, subd. 5.) Each of the present claimants holds a mortgage or an interest in a mortgage. In no instance has the underlying real estate been acquired by any claimant through foreclosure or otherwise. From this statement of matters upon which the parties are in agreement we pass to the questions upon which our decision is sought.
We quote again the words to be interpreted, stressing this time the phrases which to our minds make clear the idea of the Legislature. “ 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 in the full amount for which it is valued.” These words plainly contemplate that “ the security ” of which they speak is in any case to be an interest that can be surrendered by a claimant to the Superintendent. Surrender thereof is in so many words made the prime condition of full allowance of a secured claim. A claimant, of course, can surrender only the thing that he has in his possession. So far, then, as the statute in itself is our guide, it must follow that the value to be credited on a claim is the value of the mortgage (or share therein) or is the value of the realty if acquired, accordingly as the one asset or the other is in the possession of the claimant or claimants. Inasmuch as no interest in land is held by any of these claimants there is now no occasion to consider under what circumstances or within what limits realty reduced to a claimant’s possession may be surrendered to the Superintendent.
They say that there is not, and that there never has been, a mortgage market in this community; that the liquidator cannot value a mortgage qua mortgage without inventing such a market; and that the Legislature could never have intended to set up so fictitious a process for the determination of secured claims against the assets of the company. We suppose it is true that there never has been any market place for mortgages in the sense of a counter over which they could be exchanged for cash or its equivalent at prices publicly quoted currently. But everybody knows (and this record demonstrates the fact) that heretofore in times of good business there was a truly enormous trade in mortgages. Purchasers in that market had to determine whether to buy or not to buy the security and so must have had resort to some general tests of value. Indeed fractional shares in mortgages were in fact bought and sold for a price even in situations where (as in the case of a group series of mortgages) there could have been no definite identification of land that might ultimately be involved in the transaction. (See Matter of Stupack, 274 N. Y. 198 .)
It is general knowledge, too, that a landowner as often as not will protect his equity by keeping a mortgage good, even when he believes that the land on forced sale would produce less than the face amount of the lien. Again, the financial responsibility of the obligor on the mortgage bond affects the question of the value of the security.
In short, it will not do to say that the mere value of the underlying land (though a factor of major weight) is the sole index of the worth of a mortgage.
Nor is the contrary proved for the purpose of this case by the fact that sale of a mortgage on July 15, 1935,
Arguendo, the stockholders also say that, even if the mortgage is to be valued as a mortgage, nevertheless the valuation as matter of law is determined by deducting from the value of the realty the cost of foreclosing it. For the reasons already stated, we think the ascertainment of the mortgage value is not to be confined to that or any other set form. The process is a factual affair — a a matter of the exercise of reasonable judgment after an intelligent and honest canvass of all factors relevant to the particular security.
(3) We turn now to the procedure whereby the Superintendent here determined the amount of a claimant’s loss. Four claims are disposed of by his report to the Additional Special Term. The first (that of the claimant Ryder) may be taken for the purposes of illustration. The Ryder claim is based upon a guaranty policy which the company issued to the claimant on his purchase of a whole mortgage. Ryder claims for the unpaid mortgage principal of $5,500, with interest accrued to July 15,1935, of $113.44, a total of $5,613.44. The Superintendent appraised the value of the underlying realty as of that date at $8,500 and the then value of the mortgage at $4,700. The loss was fixed at the difference between the sum claimed ($5,613.44) and the appraised value of the mortgage ($4,700) — that is to say, $913.44.
We cannot see why a $5,500 mortgage on property concededly worth $8,500 should itself be valued for no
“ The security still held by Byder and other claimants is a species of property not identical with the underlying real estate, but representing a right in real property the value of which is measured by the presence or absence of value in the real estate over and above the face amount of the mortgage. This excess of value constitutes the cushion or margin of safety which gives,^this particular form of security its special character as a form of investment.
“ The very terms of the statutes fixing the cushion at a value of 50% over the face amount of the mortgage in the case of investments which might be made by insurance companies and other fiduciaries, was a legislative recognition of the necessity of the presence of an adequate cushion as an incident of a good mortgage. It was this requirement, too, that made the mortgages issued by the Company attractive as a form of security to the claimants here involved and others similarly situated who are holders of the Company’s guarantees.
“ It is submitted that the appraisers for the Superintendent, in fixing the value of the security held by each claimant at an amount less than the value of the underlying real estate, in each case, merely recognized that the inherent nature of the mortgage as security requires the presence of an adequate cushion or margin of safety as a necessary factor in the evaluation of a mortgage.”
This can mean nothing more than that the liquidator has here undertaken to give to the claimant the equivalent of a new mortgage investment with all the safeguards that an investor would insist upon while he was free to risk or not to risk his money. We think that is not the meaning of the so-called guaranty upon which the claim is based. The guaranty was a promise that pay-
In stating that conclusion we do not mean to imply that the value of a mortgage must be appraised entirely upon the basis of the more tangible factors like the location of the property, the suitability of any improvement thereon and the rental income. We take it that the appraiser should envisage possible consequences of foreclosure, e, g., whether income would be diminished thereby with the result that new money would be required for carrying charges while the property was held thereafter, and whether additional financing would perhaps be an essential requisite of a resale. In a contingency of that sort, it might be advantageous that some other mortgage be placed and in that aspect appropriate consideration may properly be given by the appraiser to the amount for which a valid trust investment in the property could then probably be made.
(4) Two of the four claimants are holders of participation shares or certificates in mortgages guaranteed by the company. The courts below have adopted the recommendation of the Superintendent that an additional deduction of fifteen per cent in the valuation of the security for these two claims should be made, because of the fractional nature of the interests therein. The Additional Special Term said: “ 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 a mortgage.” ( 160 Misc. Rep. 67 , 88.) We are of the same opinion.
(5) Lastly, we thinK it appropriate to suggest not only that the Superintendent should disclose in the first instance the fundamentals of the theory of his future action in fixing the losses of claimants, but that fair play requires also that an opportunity should be afforded to test by cross-examination the validity of any appraisal entering into the allowance of a claim.
The orders should be reversed, without costs, the matter remitted to the Additional Special Term for further proceedings in accordance with this opinion and the questions certified answered in the negative.
Concurrence
(concurring). I concur in the decision that there should be a new trial upon which a full and complete hearing with ample opportunity for cross-examination must be accorded to all parties. I also agree that the “ security ” to be valued under the statute is the mortgage (including the bond which is secured by the mortgage).
This is a liquidation proceeding and to measure the actual loss to the claimant it is necessary to ascertain the true value of the mortgage. The value of the mortgage is what would be realized upon the enforcement of the mortgage in the usual manner and not what might be realized upon the sale of the mortgage as such. The authorities in this State hold that this is the proper basis for valuing such security. (See Wheeler v. Newbould, 16 N. Y. 392 ; Brightson v. Claflin, 225 N. Y. 469 ; Perillo v. Zunino, 259 N. Y. 21 .) If then the applicable rule of law is that the value of the mortgage is what would be realized upon enforcement thereof, it follows, when the obligor on the bond is hopelessly insolvent, that the value of the mortgage is the value of the realty as if foreclosed less what would be the cost of foreclosure and any loss or expense in so doing. This latter includes all legal and administrative expenses such as receivership maintenance and loss of income. Valuation as if foreclosed does not mean a purchase price which may be realized by a forced sale at the auction block. It means “ the amount which one desiring but not compelled to purchase will pay under ordinary conditions to a seller who desires but is not compelled to sell ” (Heiman v. Bishop, 272 N. Y. 83 , 86) and with such ordinary aids towards obtaining such reasonable value as the average holder of a mortgage would employ.
Objection is made that the above method for the valuation of mortgages is not applicable because of the
Crane, Ch. J., Lehman, O’Brien and Rippey, JJ., concur with Loughran, J.; Finch, J., concurs in separate opinion; Hubbs, J., taking no part.
Ordered accordingly.
Cases cited
- Kortright v. Cady 21 N. Y. 343 p. 69, p. 71
- Prudence Co. v. 160 West Seventy-third Street Corp. 260 N. Y. 205 p. 69
- McCluskey v. Cromwell 11 N. Y. 593 p. 69
- Fletcher v. Derrickson 3 Bosw. 181 p. 69
- Benjamin v. Hillard 64 U. S. 149 p. 69
- Humphrey v. Hayes 94 N. Y. 594 p. 69
- Klinke v. Samuels 264 N. Y. 144 p. 69, p. 72, p. 74
- Wheeler v. Newbould 16 N. Y. 392 p. 69, p. 71, p. 82
- Brightson v. Claflin 225 N. Y. 469 p. 70, p. 71, p. 82
- Gutman v. Livingston 173 App. Div. 670 p. 70, p. 71
- Morse v. Kelsey 78 Misc. Rep. 99 p. 70, p. 71, p. 72
- Grossman v. Lindemann 67 Misc. Rep. 437 p. 70
- Perillo v. Zunino 259 N. Y. 21 p. 70, p. 82
- Industrial & General Trust, Ltd. v. Tod 180 N. Y. 215 p. 70
- Murray v. Marshall 94 N. Y. 611 p. 70
- Spencer v. Spencer 95 N. Y. 353 p. 70
- Antisdel v. Williamson 165 N. Y. 372 p. 70
- Heiman v. Bishop 272 N. Y. 83 at 86 p. 70, p. 72, p. 74, p. 78, p. 82
- In re People 264 N. Y. 69 p. 70, p. 71, p. 72, p. 73, p. 74
- Title Guarantee & Trust Co. v. Mortgage Commission 273 N. Y. 415 p. 70
- Sinclair Refining Co. v. Jenkins Petroleum Process Co. 289 U. S. 689 p. 70
- James v. Cowing 82 N. Y. 449 p. 70
- In re People ex rel. Van Schaick 268 N. Y. 432 p. 71
- Trimm v. Marsh 54 N. Y. 599 p. 71
- Merritt v. Bartholick 36 N. Y. 44 p. 71
- Packer v. Rochester & Syracuse Railroad 17 N. Y. 283 p. 71
- Prudence Co. v. Central Hanover Bank & Trust Co. 261 N. Y. 420 p. 71
- Kress v. Central Trust Co. 272 N. Y. 629 p. 72
- City Bank Farmers Trust Co. v. Ardlea Inc. 267 N. Y. 224 p. 72
- Honeyman v. Hanan 275 N. Y. 382 p. 72
- Herrington v. Davitt 220 N. Y. 162 p. 72
- Union Trust Co. v. Willsea 275 N. Y. 164 p. 72
- Home Building & Loan Ass'n v. Blaisdell 290 U. S. 398 p. 72
- In re Proctor 41 Misc. Rep. 79 p. 72
- In re the Rehabilitation of New York Title & Mortgage Co. 272 N. Y. 556 p. 72
- In re the People of New York 214 N. Y. 553 p. 73, p. 74, p. 75
- In re the Accounting of Stupack 274 N. Y. 198 p. 73, p. 77
- People ex rel. Frederick Loeser & Co. v. Goldfogle 249 N. Y. 284 p. 73
- Weil v. President & Directors of The Manhattan Co. 275 N. Y. 238 p. 74
- In re the People of New York 265 N. Y. 20 p. 74
- In re the People of New York 265 N. Y. 30 p. 74
- People v. Metropolitan Surety Co. 205 N. Y. 135 p. 74
- Blanding v. Cohen 101 App. Div. 442 p. 74
- Vanderbilt v. Schreyer 91 N. Y. 392 p. 74
- McMurray v. Noyes 72 N. Y. 523 p. 74
- Brown v. Curtiss 2 N. Y. 225 p. 74
- Helios-Upton Co. v. Thomas 96 App. Div. 401 p. 74
- In re The People 267 N. Y. 419 p. 75