National City Bank v. Gelfert

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

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: “ E 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 * * * pagg 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)

(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 in Home Bldg. & Loan Assn. v. Blaisdell, supra, at p. 434 .)

It may be worth while, however, to detail what actually was connoted by the broad statements made by the court in the Monoghan 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

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.J, p. 3.) In that view, the “ doctrine ” of Monoghan v. May was rejected by us when Guaranteed 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 it is, 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

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 fer 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. Van Bokkelen, 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 Ten Eyck v. Craig, 62 N. Y. 406 , 421; Louisville Joint Stock Land Bank 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

(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.

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,

(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.

(dissenting). Our problem is to determine whether section 1083 of the Civil Practice Act, as amended by chapter 510 of the Laws of 1938 (effective April 7, 1938), may be constitutionally applied to proceedings upon the foreclosure of a mortgage executed prior to April 7, 1938.

From time to time Hammond & Carpenter Corporation had secured commercial loans from the plaintiff-appellant, to which it will be convenient to refer as the bank. The payment of those loans was guaranteed by George U. Ham

Upon appeal to the Appellate Division the order at Special Term was modified by striking therefrom the provision granting a deficiency judgment to the bank and directing that such judgment be vacated. The Appellate Division ruled that section 1083 of the Civil Practice Act,

When the mortgage here in foreclosure was executed on December 29, 1932, and thereafter in the year 1937 when the moneys secured thereby were advanced by the bank, section 1083 of the Civil Practice Act read as follows:

“ § 1083. Judgment for deficiency. If a person who is liable to the plaintiff for the payment of the debt secured by the mortgage is made a defendant in the action, and has appeared or has been personally served with the summons, the final judgment may award payment by him of 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 therein.”

On April 7, 1938 — prior to the entry of the deficiency judgment herein — chapter 510 of the Laws of 1938 became effective, amending section 1083 by providing that upon any application for a deficiency judgment in a foreclosure action the mortgagee was required to credit on the mortgage debt either the price obtained for the mortgaged premises at the foreclosure sale, as formerly required by section 1083, or the amount which the court might determine, upon affidavits or otherwise, to be the fair and reasonable market value of the mortgaged premises, whichever is higher. The fact is also stressed that, unlike section 1083-a of the Civil Practice Act and kindred moratory legislation which is ■ limited to the period of emergency declared by the Legislature, the 1938 amendment to section 1083 is permanent in character.

The bank, as appellant before us, argues that under the contract provision of the Federal Constitution, the new provisions of section 1083 may not be applied to the mortgage here in foreclosure which was executed before the amendment became effective. In support of its position the bank

I have reached the conclusion that the statute thus challenged, when applied to the case at bar, does not impair the contract rights possessed by the bank when the mortgage here in foreclosure was executed. That conclusion has been influenced by an examination of the change in remedies for the collection of a mortgage debt made available to a mortgagee at common law and under statutes prior to the amendment here in question.

Prior to the enactment of the statute from which section 1083 was derived a deficiency judgment could not be had in a foreclosure action. If the proceeds from a foreclosure sale failed to extinguish the mortgage debt and the mortgagee desired to collect any balance due, his only recourse was to an action at law. Finding burdensome the necessity of bringing two actions to collect a mortgage debt, the

It is thus seen that the Legislature, while favoring and making provision for the collection of the mortgage debt by one action, did not see fit to abolish the action at common law which remains today as a remedy available to the mortgagee under certain conditions. I find nothing in the 1938 amendment to section 1083 which abolishes the separate common-law action where the mortgage was executed after July 1, 1932. The policy of the Legislature adopted in 1830 finds expression in the present statute, that a deficiency judgment shall be sought in the action for foreclosure. However, if a deficiency judgment is not sought in the foreclosure action “ 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 provision indicates that a “ right to recover any deficiency ” in some other action or proceeding still exists under some circumstances. One of those circumstances is present when the

Stated otherwise, the change in the law effected by the 1938 amendment does not deprive the mortgagee of the right to receive the full amount of the mortgage debt in the same medium of payment as was afforded to him prior to that amendment. It merely restricts the method-previously provided. Then he could demand a deficiency judgment in the foreclosure action or, failing so to demand, there remained for him the right to sue at law subject to leave of the court. (Rutherfurd Realty Co. v. Cook, supra, p. 33 .) There being no specific provision in section 1083 as amended extinguishing the action at law, the presumption is that such a right of action remains conditioned upon the provisions of section 1078 and provided the mortgagee has demanded a deficiency judgment in the foreclosure action. The separate action at law for a deficiency is a common-law right. The court must construe strictly a statute which is susceptible of an interpretation in derogation of the common law. I do not think the Legislature intended to destroy the common-law right of action to recover the full deficiency from the party hable who is joined as a defendant and served, and still preserve the right to recover the full deficiency against one who, either because he is without the State or for some other reason, is not joined as a party defendant and served. By the 1938 amendment to section 1083 the Legislature has said that, where a person hable for the mortgage debt is joined as a defendant and is personally served, the mortgagee must seek a deficiency judgment to avoid (1) an adjudication that the proceeds of the fore

The 1938 amendment to section 1083 does not accomplish as to mortgages executed after July 1, 1932, the result intended by section 1083-a as to mortgages executed prior to that date. Section 1083-a provides that as to mortgages executed prior to 1932: “No judgment shall be granted for any residue of the debt remaining unsatisfied * * * except as herein provided.” That provision can only mean, as was pointed out in Honeyman v. Hanan (supra, p. 392 ), that the statute was “ * * * intended to provide an exclusive procedure for the entry of a judgment for any residue of a debt secured by mortgage after sale of the mortgaged premises.” Its prohibition applied whether a deficiency was demanded in the foreclosure suit or sought to be recovered by a separate action at law. No such exclusive provision governs procedure under section 1083 in reference to mortgages executed after 1932, as was the mortgage now before us. True it is that the procedure outlined in the 1938 amendment to section 1083 for securing a judgment for any amount of the mortgage debt remaining unsatisfied after the sale of the mortgaged property, is not the same as that in effect at the time the mortgage here in suit was executed. But the mortgagee still retains the right to recover the full deficiency on a mortgage executed after

The difference in the scope and purpose of sections 1083 and 1083-a is indicated by the opening sentence of each. Section 1083 states that the procedure thereby provided for determining the amount of the deficiency shall apply only “ If a person who is liable to the plaintiff for the payment of the debt secured by the mortgage is made a defendant in the action, and has appeared or has been personally served with the summons * * *; ” whereas section 1083-a provides that “No judgment shall be granted for any residue of the debt remaining unsatisfied * * * ” except as therein provided. Admitting that section 1083-a provides an exclusive method of obtaining a deficiency judgment on the foreclosure of mortgages dated prior to July 1, 1932, it is apparent that section 1083 does not apply if the person hable to the plaintiff for the payment of the mortgage debt is not made a defendant in the action- or has not appeared or has not been personally served with the summons. In such circumstances section 1083 does not provide the exclusive method for obtaining a deficiency judgment. If the statute is not to be so interpreted but instead is to be understood as providing the exclusive method of obtaining a deficiency judgment where, as in the present case, the party hable is joined and has appeared, then the statute is unconstitutional because it provides for an unreasonable classification of parties defendant and unreasonably discriminates against a party plaintiff who chooses to join as a defendant the party who is liable for the payment of the mortgage debt.

Finally I am unable to agree with the decision of the Appellate Division that the bank’s motion for leave to enter a deficiency judgment was not a sufficient compliance with section 1083 as amended by chapter 510 of the Laws of 1938, to constitute an application thereunder for such a judgment.

I, therefore, dissent from the view of a majority of the court and favor a modification of the order of the Appellate Division by providing for the remission of the case to Special Term with directions to proceed in accord with the provisions of section 1083 of the Civil Practice Act, as amended by chapter 510 of the Laws of 1938, to determine the fair and reasonable market value of the mortgaged premises as a basis for- any deficiency judgment which the application of that statute may warrant, and as modified affirmed, without costs.

Lehman, Ch. J., Finch, Rippey, Sears and Conway, JJ., concur with Loughran, J.; Lewis, J., dissents in opinion.

Ordered accordingly.