Moulton v. Cornish — 51 N.Y. St. Rep. 845

Majority

p. 845

Emily A. Moulton, Resp’t, v. Nehemiah N. Cornish, App’lt.^[1]

(Court of Appeals,

Filed April 18, 1893.)

Headnote

1. Mortgage — Strict foreclosure — Redemption.

Plaintiff was misled by a county clerk’s search in commencing a foreclosure action and omitted to make defendant, a subsequent mortgagee of the same property, a party to said action. Prior to the date fixed for the sale plaintiff discovered that defendant was a necessary party and procured the saleto be postponed, and on her motion an order was entered that she might, if she so elected, open the judgment in the foreclosure suit and amend all the papers by making defendant a party and that he be served and have the usual time to answer, but, she did not avail herself of this privilege and on the adjourned day sold the premises and bid off

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the farm in question, went into possession and brought this action in strict foreclosure, obtaining a judgment that defendant give n./tice that he would redeem within ten days or be forever barred and foreclosed, etc., as to any lien by reason of his mortgage. Held, error; as under such circumstances no case was made for a resort to the unusual, exceptional and severe remedy of a strict foreclosure.

.2. Same.

Plaintiff occupied no better position with respect to the defendant than it she had taken a deed from the mortgagor and an assignment of the other incumbrances and had gone into possession.

3. Same.

Plaintiff under the pleadings and proofs in this action was only entitled to obtain leave to amend by bringing in the necessary parties; foreclose her mortgage as against defendant, and sell and have the equities of the parties interested adjusted by the court.

4. Same — Appeal.

Such a judguient by the expiring of the time within which the notice could be given had become final and subject to review by this court.

Appeal from judgment of the supreme court, general term, fourth department, modifying and affirming judgment entered in Oneida county upon a decision made at a special term in that county, requiting defendant to redeem premises described in the complaint within a period of time, or be forever barred from the right to redeem.

E. J. Richardson and Samuel Keeler, for app’lt; C. M. & G. E. Dennison, for resp’t.

In 1886 the plaintiff was the owner of a mortgage, given to secure the payment of $8,650 and interest, upon three several lots of land in the town of Floyd, Oneida county, known as the Klock, Bells and Tavern farms, and the defendant was the owner of a subsequent mortgage upon the same property given to secure the payment ot' $2,500 and interest, which, with the assignments to him, were recorded in the Oneida county clerk’s office.

On May 16th, the plaintiff commenced an action in the supreme court for the foreclosure of her mortgage, but omitted to make the defendant a party thereto. This omission was not intentional, but the plaintiff was misled by an abstract of a search obtained from the clerk’s office, from which it might have been fairly inferred that the defendant’s assignment was one in a series of transfers, and that the title to his mortgage was in another, who was made a defendant, and who appeared from the abstract to be a subsequent assignee. If a full statement of the search, in the usual form, had been obtained by the plaintiff, the interest of the defendant in the mortgaged property would have correctly appeared. The action resulted in a judgment entered December 27, 1888, decreeing a foreclosure of the plaintiff’s mortgage, and a sale of the mortgaged premises by a referee, pursuant to the provisions of the Code and the practice of the court in such cases. The premises were first advertised by the referee to be sold on March 2, 1889. Before that time the plaintiff discovered that the defendant was a necessary party to the complete foreclosure of her mortgage, and she procured the sale to be postponed until March

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16th, and made a motion, at a special term held at Syracuse on that day, for an order granting her leave to amend the summons, complaint, Ms pendens and judgment in the action by inserting therein the name of this defendant, and adjudging and decreeing that he be forever barred and foreclosed of all right, title, interest and equity of redemption in the mortgaged premises, or for such further order or relief as the court might deem proper to grant.

Upon the hearing of that motion the court made an order, which was entered, and which has not been reversed or vacated, directing that, upon payment of ten dollars costs, the plaintiff might, if she so elected, open the judgment in the foreclosure suit, and amend the summons, complaint, Ms pendens and all subsequent proceedings, by making this defendant a defendant in that action, and inserting the necessary allegations for that purpose, and that the amended summons and complaint be served on him, and that he have the usual time to answer. The plaintiff did not avail herself of the privilege afforded by this order, and on March 16, 1889, the referee proceeded to sell the mortgaged premises. At the opening of the sale, and before selling, the referee announced and read the conditions of sale, which were in the usual form, except the last paragraph, which was in these words: “ 7. The property is sold free and clear of any and all rights of dower, charge or lien upon the same, except that it is claimed by one Behemiah B. Cornish (the defendant in this action), that he is the owner by assignment of a mortgage made by Ichabod C. McIntosh to Miriam M. Kellogg, covering the premises in question, dated February 1, 1818, to secure the payment of $2,500, which mortgage was recorded in Oneida county clerk’s office February 13, 1878, and is a second lien upon said mortgaged premises. Cornish has not been made a party defendant to this action.” The plaintiff bid off the .property known as the Tavern farm, and the referee on the same day executed to her a deed, and very soon thereafter she went into possession. The sale was confirmed on the 6th of April, and on April 9th this action for a strict foreclosure was brought. The other farms were bid off by other parties, who have not been made defendants in this action. The plaintiff has recovered a judgment which, as modified by the general term, decrees: First. That the defendant’s mortgage is an existing lien on the lands purchased by plaintiff upon the foreclosure-of her mortgage, and was not affected by such foreclosure because not made a party to the action; second, that if the defendant desires to redeem the land bid off by the plaintiff upon her mortgage he shall, within ten days from the service of a copy of the judgment, give the plaintiff notice of his desire and intent to do so.

If such notice is not given within the time specified, it is ordered and adjudged, that the defendant and all persons claiming under him do stand and be forever barred and foreclosed of and from all right, title, interest and equity of redemption of, in and to such premises, and all liens which he may have had thereon at the time of the commencement of the foreclosure action, by virtue of his mortgage or otherwise, are to be ad

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judged as cut off and foreclosed, and the plaintiff shall hold the title thereto free from such liens, and the defendant shall pay the costs of the action; third, if the defendant gives notice of his intention to redeem, within the time required, the plaintiff may apply on notice to the special term for the appointment of a referee to take and state the account of the plaintiff, and to determine her interest in the mortgage debt, as applicable to the lands bid off by her, and the referee’s report shall be made up according to certain directions contained in the judgment, and shall fix and determine the amount the defendant shall be required to pay upon such redemption, and the amount so found due by the referee, with the interest thereon, shall be paid by the defendant within six months from the service of a copy of the report, and if paid within such time the payment shall operate as a redemption of the premises from the plaintiff’s mortgage, and her title acquired at the sale shall become vested in him, and she shall, by a proper conveyance, convey the premises to him free and clear from the lien of her mortgage, and neither party shall have costs of the action ; but if the defendant fails to complete the redemption in the manner, and within the time specified, it is ordered and adjudged, that the lien of his mortgage is cut off and removed, and the plaintiff is deemed to hold the premises free 'and clear of such lien, and the defendant shall pay the costs of the action.

The material facts are not disputed, and we are of the opinion that upon the proofs submitted and the findings of the trial court, the plaintiff was not entitled to the relief granted to her in this judgment. The equitable remedy known as a strict foreclosure of a real property mortgage has never been recognized in this state, save .in a very limited class of cases.

In England it was the prevailing method of procedure, until the enactment of the statutes of 15 and 16 Victoria, chap. 86, § 48, known as the chancery improvement act. It had its root in the common law doctrine that, upon the execution of the mortgage, the mortgagee acquired the fee to the land, and upon default in payment a right to the possession, and the mortgagor had no estate or interest therein, and no right of possession, after default had been made in the payment of the mortgage debt. The mortgagee’s remedy was by ejectment, and in a court of law it was not an available defense for the mortgagor to plead that he was willing and ready to pay the debt, if he had once suffered a default to occur. In order to mitigate the hardships of this relation, equity permitted the mortgagor and his privies to redeem by discharging the mortgage debt, and by restoring to him the possession of the land if the mortgagee had taken possession. As it might be uncertain whether the mortgagor or subsequent lienors would ever avail themselves of the right of redemption, it was, while outstanding, a serious impediment to the alienation of the mortgaged property, and equity would, therefore, entertain an action to compel the parties entitled to this right to exercise it by paying, within a reasonable time, the amount of the mortgage debt, or be forever barred or foreclosed of the right of redemption; and in case of

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redemption, the decree provided that the mortgagee should reconvey the lands to the mortgagor, or other party redeeming.

This proceeding has been termed a strict foreclosure, but it is apparent that it has no appropriate place in a system of laws and jurisprudence where it has been declared that the mortgage does not operate as a conveyance of the legal title, but is only a chose in action constituting a lien upon the land as security for the debt or other obligation of the mortgagor. The courts of this state have refused to adopt it as an authorized remedy in ordinary cases, and in this respect have followed the practice of the civil, rather than of the common law. In the Am. & Eng. Encyclopaedia of Law, vol. 8, 186-7, tit. Foreclosure, it is stated that strict foreclosure is very rarely resorted to in the American courts; that in a large majority of the states it is not recognized; that in two it is the usual mode of procedure; and that in six of the states, including New York, it is permitted in exceptional cases.

The plaintiff here rests her right to this remedy principally upon the fact that she was the owner of a prior mortgage, which she had foreclosed, and that she became the purchaser of á part of the mortgaged property at the foreclosure sale, and that the defendant's subsequent mortgage was not cut off or affected by the foreclosure, because she did not make him a party to the foreclosure action. Before the sale occurred she had full knowledge that the defendant was the owner of the second mortgage, and leave was given her by the court to make him a party to the action, and so conclude him by the judgment, which she declined to accept, but caused the sale to proceed, and purchased the property upon such terms that, both expressly and in legal effect, her purchase was subject to the lien of the defendant’s mortgage.

Under such circumstances, no case was made for a resort to this unusual, exceptional and severe remedy. It is insisted that, under the provisions of the Civil Code relating to foreclosure actions, such a judgment as the one entered herein cannot be rendered in any case; but it is unnecessary to determine that question upon this appeal. We may assume that, in a proper case, jurisdiction still exists to relieve a purchaser at a foreclosure sale who finds that, by reason of some defect in the proceedings, the lien of a subsequent incumbrance has not been extinguished; but the facts here shown are not suficient to authorize the exercise of that jurisdiction. We think that in such cases the purchaser must show that he purchased in good faith, relying, upon the regularity and sufficiency of the foreclosure proceedings, and that the subsequent lienor had knowledge of the sale, and permitted the purchaser to make the purchase without disclosing the existence of his incumbrance, or calling attention to the defect in the proceedings. In 2 Jones on Mort., § 1540, p. 421, it is stated that a strict forclosure is proper “ where a mortgagee or purchaser is in possession under a legal title from the mortgagor, for the purpose of cutting off subsequent' liens or incumbrances, as in case one has purchased'in good faith at a mortgage sale which not conclusive against some incumbrancer not made a party to the

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suit, and the purchaser has gone into possession.” The cases have been very rare in this state where the remedy has been invoked, but we fail to ñnd a case where it has been applied to relieve a party who buys with full knowledge of the outstanding incumbrance and subject to it. In Kendall v. Treadwell, 5 Abb. Pr., 26 , the practice in strict foreclosure cases received an exhaustive examination by Judge Birdseye, and the prominent feature of the case was the good faith of the plaintiff in making the purchase, and the acquiescence of the subsequent incgmbrancers in the validity of the proceedings under which the plaintiff acquired his title. The action to foreclose the mortgage had been prosecuted in the county court, and, after judgment and sale, the supreme court, in another case, had held that the act conferring jurisdiction upon county courts in foreclosure suits was unconstitutional, and its judgments were, therefore, void. The subsequent lienors were all parties to the action in the county court, and did not question its jurisdiction. The learned judge, in summarizing the grounds upon which the plaintiff’s right to equitable relief rested, said (p. 22): “ He was in possession, claiming to be owner under a title apparently good. He took his original title, and has made all his subsequent advances and payments • upon the faith of the act of the legislative authority of the state, and of judicial tribunals established by the state. No objection was then made to the jurisdiction of the court.”

In Benedict v. Gilman, 4 Paige, 58, the bill was filed against subsequent judgment creditors, and the principal question was whether the plaintiff was entitled to an allowance for permanent improvements, and the chancellor, in disposing of this question, says : “ It is charged in the bill in this case, and admitted by the answer, * * * that the complainant was ignorant of the existence of these judgments until after he had made permanent improvements upon the premises to a considerable extent. Under such circumstances it would be inequitable and unjust to give the defendants the benefit of those improvements without compelling them to pay an equivalent therefor. The case would have been different if the complainant had made the improvements with a full knowledge of the defendants’ equitable right to redeem.”

The right to a judicial sale of the mortgaged property to pay the mortgage debt is in this state one of the incidents of the mortgage contract; and if the mortgagor is in default, the mortgagee is entitled to the enjoyment of this right unimpaired. It can only be secured to him by a sale in an action or proceeding to which he is a party; for in all such cases the sale is made for the benefit of all the parties interested, and the proceeds are distributed among them in the order of the priority of their respective liens.

This was the view taken by the general term of the eighth district in Peabody v. Roberts, 47 Barb., 91 , where Judge Daniels, delivering the opinion of the court, said, p. 94: “ The second mortgagee possessed the right to maintain an action upon it for the foreclosure of so much of the equity of redemption as remained in the mortgagor at the time when it was recorded, and for a satisfaction

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of the debt secured by it, by a sale of the mortgaged premises. This right has, from the time of the civil law, been secured to the mortgagee, as an incident to, and growing out of the mortgage itself.” And again, at p. 95 : “ This right is so important in these cases that the holder of the mortgage cannot be deprived of it without at the same time very sensibly impairing and depreciating the security created by the mortgage. And as such it is an essential attribute of property, which positive legislation even cannot destroy without impairing the obligation of the contract out of which!t arises.” This is a just interpretation of the literal terms of the instrument, for the mortgage expressly authorizes the mortgagee in case of default to sell the mortgaged premises, and out of the proceeds satisfy the mortgage debt. Where it a second mortgage, and the mortgagee is made a party to the foreclosure of a prior mortgage, full effect is given to this power of sale, by means of the sale directed in the action or proceeding, which as we have seen is made for the benefit of all the parties served with process or notice. It is not necessary to hold that in no case can the right to sell be held in abeyance; but the right cannot be denied or suppressed unless some adverse dominating equity requires it. If in this case the plaintiff had purchased and taken possession in ignorance of the existence of defendant’s mortgage, and the defendant, having knowledge of the prosecution of the foreclosure action, had made no disclosure of his incumbrance upon the property, and the purchaser was thus misled to his prejudice, it might well have been held that it would be inequitable to permit the defendant to exercise the power of sale in his mortgage, and it might properly have been decreed that unless he reimbursed the plaintiff, his interest in the property should be deemed extinguished. Other cases might be suggested where such form of relief would be just. But in all cases equitable grounds for such a procedure must be shown. It is not a matter of discretion with the trial court whether a remedy of this kind shall be applied. The proofs must bring the case within the exceptional class in which it is permitted, and then the measure of the relief to be granted or the conditions upon which it will be allowed are, to a certain extent, discretionary.

As to this defendant, the plaintiff is only a mortgagee in possession. It is true_ she has also acquired the title of the mortgagor, and has extinguished the liens of all other incumbrancers who were made parties to the foreclosure action.

But she occupies no better position with respect to the defendant than if she had taken a deed from the mortgagor and an assignment of the other incumbrances and had gone into possession. As to the defendant, her mortgage is still unforeclosed, and the estate which the mortgagor had when he executed the defendant’s mortgage is still subject to its lien. The plaintiff may at anytime foreclose her mortgage, as against the defendant, notwithstanding the former defective foreclosure. Brainard v. Cooper, 10 N. Y., 356 ; Walsh v. Rutgers Fire Ins. Co., 13 Abb. Pr., 33 ; Franklyn v. Hayward, 61 How., 43 . It imposes no hardship to require her to pursue such course if she wishes to rid the title

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of the lien of defendant’s mortgage. She will be as fully protected upon such a foreclosure as she would have been upon the original foreclosure had she made him a party to it.

The plaintiff may have the ordinary decree of foreclosuie against the defendant in this action if she so desires and all persons who are necessary parties defendant are brought in. It is not seen how any relief can be afforded without the presence of the purchasers of the other two parcels of the mortgaged premises. If it is sought to reforeclose plaintiff’s mortgage, they are unquestionably necessary parties, as the owners of separate portions of the property mortgaged, and by their purchases they have respectively acquired an interest in plaintiff’s mortgage. If the court is asked to apportion either the plaintiff’s or the defendant’s mortgage between the three farms, they are necessary parties to a determination of that question. They would not be bound by any judgment rendered in this action which adjudged" the extent of the lien of either mortgage upon their respective properties, and such adjudication would be necessarily involved in the ascertainment of the amount of either mortgage equitably chargeable upon the several parcels.

In such a case the objection of a defect of parties is available, although not raised by demurrer or answer. The plaintiff is not entitled to the equitable relief sought, if it appears that a complete determination of the controversy cannot be had without the presence of other parties, and the court must direct them to be brought in, Code, § 452 ; and where it appears upon appeal that this has not been done, the court will reverse the judgment, although the issue is not m'ade by the pleadings. Bear v. Am. Rapid Tel. Co., 86 Hun, 400 . If the plaintiff obtains leave to amend by bringing in all necessary parties, she may have a decree for a foreclosure of her mortgage as against the defendant, and a sale of the mortgaged premises, in which decree the equities of the different purchasers, as between themselves, can be properly adjusted, and the court can direct the application of the net rents and profits upon the mortgage debt, in ascertaining -the amount which the plaintiff and her co-owners of the mortgage are entitled to receive upon a sale of the property. In general terms, we think this is the extent of the relief to which she is entitled under the pleadings and proofs in this action.

The objection is urged that the judgment under review is not final, but interlocutory, and, therefore, not appealable. The judgment is peculiar in its structure, and an analysis of its provisions leads us to conclude that it finally determines all the substantial rights of the parties. It, in effect, adjudges that unless the defendant, within a prescribed time, gives the plaintiff notice of his desire and intention to redeem the lands purchased by plaintiff at the former foreclosure sale, he is forever barred and foreclosed of and from all right, title, interest and equity of redemption therein, and the lien of his mortgage thereon cut off and foreclosed, and that the plaintiff shall hold the title thereto free from such lien. If the notice is not given, no further judgment need be entered, but this decree, by the force of its own provisions, ef

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fectually destroys the lien of the defendant’s mortgage. As presumably the time has expired within which the notice could be given, the judgment has become final, and subject to review by this court. If the defendant has elected to proceed under the judgment, it would be a waiver of his right of appeal, and would be available upon a motion to dismiss the appeal. But the bringing of the appeal gives rise to the presumption that-he has not availed himself of its provisions, and, therefore, if it stands, it will be final and conclusive upon him, and will operate to extinguish his mortgage. Where a judgment-fully and completely disposes of the substantial rights of the parties at issue under the pleadings, and by the force of its own provisions may conclude the appellant without the entry of a further judgment, it must be deemed a final judgment within the purview of § 190 of the Code, although in a certain contingency, dependent upon the action of the appellant, it provides for the taking and stating of an account before a referee, and the payment of the amount found, due as a condition precedent to the enjoyment of certain rights accorded him therein.

In this respect the case of Prod. Bank v. Morton, 67 N. Y., 199 , is closely analagous. It was there held that a judgment in an action to set aside an assignment for the benefit of creditors adjudging the'assignment void, directing the assignor to account before a referee, and that a receiver be appointed to take charge of the assigned property, pay out of it the plaintiff’s j udgment, and hold the residue subject to the order of the court, is a final judgment reviewable by appeal.

The judgment must, therefore, be reversed, a new trial granted if plaintiff elects within sixty days after filing the remittitur in the court below to proceed with the action, and applies for leave to amend by bringing in the necessary parties. If such leave is not applied for or granted the complaint is dismissed, with costs in this court and in all courts; if leave to amend is granted, costs in this court to abide the determination of the supreme court as to the conditions upon which leave to amend may be granted.

All concur.