Hyman v. Hauff — 51 N.Y. St. Rep. 731

Majority

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Henry Hyman, Pl'ff, v. Anna Hauff et al., Def’ts.^[1]

(Court of Appeals,

Filed April 11, 1893.)

Headnote

1. Mortgage — Advances made after notice of subsequent lien.

The rule that the lien of a mortgage to secure future advances will be postponed as to such advances as are made after knowledge of the existence of a subsequent mortgage, in favor of the holder of the latter, applies only against a security for future advances purely and plainly optional, the holder of which has actual notice of a subsequent mortgage for an existing debt or liability.

3. Same.

Where the obligation to advance exists, or where the right to decline depends upon facts dehors the instrument, and which may be the subject of dispute and contention, the holder of the first security is warranted in making the advances in reliance of his mortgage.

3. Same — Conditions.

A provision in such mortgage that if the owner fails to make his payments as they become due, the mortgagee is absolved from further performance, or that further advances should cease whenever the owner permitted any subsequent lien or incumbrance to be filed, is intended for the benefit of the mortgagee, and if it elects to waive such provision and go on and complete its contract, no subsequent mortgagee has any right to question the equity of its claim for payment.

4. Same — Surplus proceedings.

The court has power in surplus proceedings to impose costs upon any of the parties, payable either personally or out of the fund, and the exercise of such power is discretionary and not appealable to this court.

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Appeal from a judgment of the Mew York common pleas, general term, affirming order made at special term confirming report of referee directing the distribution of surplus moneys and charging appellant with the expenses of the reference.

George G. Munger, for James Rogers, app’lt; T. W. Foster and Thomas C. Ennever, for resp’t.

This was a controversy between subsequent lienors as to the right to surplus moneys arising upon foreclosure sale in the action. Two of the defendants owned seven lots in the city of Mew York, upon which they desired to construct seven dwellings. They first gave a mortgage to the plaintiff to secure the payment of money advanced or to be advanced during the progress of the work. They subsequently made contracts with various parties for materials and work to be delivered and performed in the future, as specified in the contracts, and executed bonds and mortgages, absolute on their face, but intended by the parties to secure the payment of the moneys stipulated in the contracts. The mortgages were delivered and recorded in the following order : The Lorillard Brick Works Co., $6,000, October 28, 1890, recorded Movember 8, 1890 ; Buffalo Co., $16,700, December 16, 1890, recorded December 22, 1890; Cassidy & Adler, $7,500, December 16, 1890, recorded December 23,1890 ; Michael McCormick, $3,000, December 19. 1890, recorded December 27, 1890. There was a surplus of $27,687.76 upon the sale after paying the plain tiff’s mortgage and the costs. The referee appointed to report upon the respective claims to this surplus made full findings of fact and law, in which he held that distribution should be made as follows : (1) The expenses and costs of the proceedings; (2) the receiver of the Lorillard Co. $6,000, with interest from October 25, 1891; (3) the Buffalo Co. $14.200, with interest from August 6, 1891; (4) Cassidy & Adler $7,500, with interest from June 19, 1890. Thiá exhausted the surplus and left a considerable sum upon the last-named claim unpaid. The mortgage of McCormick, the payment of which was postponed for the other claims, which were preferred, had been assigned to James Rogers, who insisted, in the proceedings, that his claim, though subsequent in point of time, was, nevertheless, entitled to preference over the Buffalo Company and Cassidy & Adler, on account of certain equities in his favor, which will be hereafter considered.

The referee decided against him claim, and the court confirmed the report and ordered the moneys to be distributed accordingly. The court also ordered that Rogers pay the sum of $503.62-to-Cassidy & Adler to reimburse them for a portion of the loss sustained by them in the depletion of the fund by the payment of costs caused by his unsuccesful contention. He is the only party who has appealed, and the questions are raised by his exceptions-to the report. It is only necessary to state generally the attitude of the appellant with respect to the claim of the Buffalo ComE, in order to present the main question raised by his appeal., mortgage, it will be remembered, was given by the owners;

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to secure their payments,as stipulated in the contract between them, and the company, for furnishing sash, doors and other trim for the seven houses. It bound the owners to make payments in cash to the company in different sums, at different times in the future, and as the materials were furnished. It was agreed that if the owners should fail to make the payments according to the terms of the contract, the company might, at its option, cease to deliver materials, and thereupon the mortgage should become due to the extent of the goods delivered. The payments were not made as provided. The instrument also contained the following provision : “ It is further agreed that in case any lien or incumbrance of any kind shall be filed or docketed against or placed upon the said premises, or any part thereof, during the performance of this contract, the parties of the first part may, at their option, cease to deliver materials hereunder, and unless such lien or incumbrance shall be discharged of record within ten days, the said bond and mortgage shall thereupon become due and payable to the extent of the materials which shall then have been delivered.”

There were liens and incumbrances subsequently placed upon the property by the owners, as we have seen. The appellant contends, upon substantially these facts, that the mortgage was to secure future advances which were optional merely,, and that as to all such advances made after notice of his mortgage he has the prior lien. If he is right in this position, sufficient of the claims which have been held superior to his would be postponed to enable him to realize upon his debt. The doctrine applicable to mortgages given to secure voluntary future advances, as affected by subsequent liens, has been much discussed in England, and seems to have been settled there in accordance with the contention of the appellant, though not without controversy and strong dissent. Gordon v. Graham, 2 Eq. Cas. Abr., 598; Hopkinson v. Rolt, 9 H. L. Cases, 514; London & C. Bkg. Co. v. Ratcliffe, L. R., 6 App. Cases, H. L., 722; Bradford Bkg. Co. v. Briggs, 12 id., 29.

These cases hold that the lien of a mortgage to secure voluntary future advances will be postponed, as to such advances as are made after knowledge of the existence of a subsequent mortgage, in favor of the holder of the latter. Substantially this rule seems to have been followed in several of our sister states. Bank of Montgomery Co.'s Appeal, 36 Penn. St., 170 ; Spader v. Lawler, 17 Ohio, 371 ; Ladue v. Detroit & Milwaukee R. R. Co., 13 Mich., 390 ; Collins v. Carlile, 13 Ill., 254 ; Boswell v. Goodwin, 31 Conn., 74 .

The general doctrine as announced in Hopkinson v. Bolt, supra, which is the leading case in England, has been somewhat considered by this court with approval, though it seems to me that the precise question was not decided. Ackerman v. Hunsicker, 85 N. Y., 43 ; Truscott v. King, 6 id., 147 .

Without attempting to discuss the equity of the rule or to point out its precise limits and application, it is quite clear that it can operate only against a security for further advances purely and plainly optional, the holder of which has actual notice of a

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subsequent mortgage for an existing debt or liability. The mortgage which the appellant holds was given to McCormick to secure to him the payment of certain sums of money for work to be performed in the future in the construction of the houses. It is not clear from the record that the contract which it was given to secure was any more obligatory upon him than was the other contract with the Buffalo company, and if it was not, then the appellant has no superior equity in his favor. But we think that the mortgage to the Buffalo company was not to secure future optional advances within the rule referred to. At its inception, and upon its face, both parties were bound to perform it at the peril of being subjected to damages. True, it contains a provision that if the owner fails to make his payments for the property furnished as they become due, then the other party is absolved from the obligation to make further performance. But that is the case with most executory contracts, and the clause expresses nothing more than what the law would imply ordinarily upon the same facts. The other provision was that the obligation to make further delivery of materials should cease whenever the owner permitted any subsequent lien or incumbrance to be filed. These provisions-were both for the benefit of the Buffalo company, and if it elected to waive them and go on and complete its contract according- toils terms, no subsequent mortgagee has any right to question the equity of its claim to payment. If the party in whose favor the the stipulation was made chooses to waive it, a stranger to the contract cannot complain or derive any advantage or raise any question based upon a fact that in no way concerned him. When it-appears as matter of law, from an inspection of the instrument, that the prior mortgagee may decline to make the advances at his pleasure, without taking the risk of subjecting himself to damages or loss, the rule can be defended upon equitable principles. But where the obligation to advance exists, or where the right to decline depends upon facts dehors the instrument, and which may be the subject of dispute or contention, the holder of the first security is warranted in making the advances in reliance upon his .mortgage.

In the present case, the Buffalo company had no right to refuse further delivery of goods unless it could establish a breach of some of the conditions of the contract upon which the right to refuse depended. This it could not do by a mere production and inspection of the writing, but would be obliged to resort to proof of extraneous facts which might be disputed, and, in some cases, it is quite conceivable that a party might fail in the attempt to-establish them to the satisfaction of a court or jury. It would be incorrect in fact, and unjust in practice, to hold that goods delivered under such a contract were subject to the rule applicable to mere optional advances. Moreover, this contract may have been, and we must assume was, a profitable one for the parties who-agreed to furnish the building materials. They could not decline to go on, when the subsequent mortgage was given, without sacrificing profits to be derived from a full performance. The company not only protected itself by conditions in the contract for

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its own benefit, but by mortgage security. It was entitled to all the fruits of the contract, and, though the other party did not perform in all respects, the company could waive the omission and still go on earning these fruits upon the faith of its security. To hold that, under such circumstances, a subsequent mortgagee and a stranger could arrest the performance of such a contract, against the will of the immediate parties, would be, practically, to impair its obligations. All the cases hold that the principle does not apply when a party subjects himself to damages by declining to perform or to make the advances, and, if not, why should it apply to a case where the loss of the profits or fruits of the contract must follow a failure or omission to perform.In many cases the profits which a party is to derive from full performance of his contract are much larger than any damages which the other party to it could recover against him for failure to perform.

It appears that the appellant’s mortgage was, upon its face, expressly subject to all prior mortgages, and, further, that McCormick, after the assignment of it to appellant as collateral security, executed an instrument to the Buffalo Company, in which he stipulated that, irrespective of the date of the delivery of the material, the prior mortgage should be and remain the superior security. Of course, the object of the stipulation was to avoid the very question we have been considering. What effect it had, and how far, if at all, it bound the appellant, and what significance is to be attached to this clause in the mortgage, expressly subordinating it to all mortgages of prior date and record, are questions of interest ably discussed upon the briefs of counsel, and which have received the attention of the courts below. But as the appellant’s claim of equitable priority, which, so far as he is concerned, is fundamental, cannot be sustained, it is unnecessary to consider the other questions.

In regard to the question of costs, it is sufficient to say that the court below had the power to impose costs upon any of the parties, payable either personally or out of the fund. It was, therefore, a matter resting in discretion, and that part of the order presents no question of law which this court has jurisdiction to review.

It follows that, the order appealed from must be affirmed, with costs.

All concur.