Soule v. Ludlow — 10 N.Y. Sup. Ct. 503

Majority

p. 503

LYMAN SOULE, Respondent, v. WILLIAM D. LUDLOW AND OTHERS, APPELLANTS.

Headnote

Mortgage—Worecloswre by advertisement—mortgagee regarded as trustee—bound to act in good faith—Sale—when opened— whore subsequent mortgage is collateral to another secu/Hty.

A mortgagee in the execution, by advertisement, of the power of sale contained in his mortgage, is regarded as a trustee executing a power in trust, and is bound to conduct the proceedings in a fair and just manner and in good faith. Relief will be granted setting aside such proceedings upon the same grounds upon which a court would set aside a sale had under foreclosure by action.

Where a subsequent mortgage is merely collateral to another security, the mortgagee must first exhaust the security he holds from the principal debtor before he will be allowed, upon equitable grounds, to set aside a sale of the mortgaged premises had under a prior mortgage.

Appeal by defendants from a judgment in favor of plaintiff, ordering a resale of premises sold under a mortgage foreclosure, and an appeal by plaintiff from an extra allowance of costs, granted on the ground that the case was difficult and extraordinary.

There were two mortgages upon the same land in Wilna, Jefferson county? The first was for $3,500; the plaintiff’s, a subsequent mortgage, was for $5,000. The prior mortgage was held by the Theological Seminary at Auburn, and the second mortgage by plaintiff, who held it by assignment from Mr. Goss, the mortgagee, which assignment was not recorded.

In the fall of 1871, Ludlow took an assignment of the prior mortgage to himself and went to Carthage, in Jefferson county, and conimenced and completed a statute foreclosure by advertisement. He swears he mailed a notice to Mr. Goss from New York (which Goss never received), but sent none to plaintiff, though he knew of the unrecorded assignment to plaintiff. Neither plaintiff nor Mr. Goss heard anything of the foreclosure until January, 1872.

Plaintiff commenced this action as soon as he learned the facts, asking for a resale, offering to protect defendants, and to bid enough, if the sale should be opened, to pay both mortgages.

The referee sustained the complaint and ordered a resale, hold

p. 504

ing that Ludlow’s conduct was inequitable. The defendants moved after this for an extra allowance of costs. The Special Term granted the motion and gave an extra allowance.

J. F. Sta/rbuok, for the appellants.

James JR. Gox, for the respondent.

The principles on which a sale is opened, are digested in 2 Hill, on Mort., 200; etc.; Brown v. Frost (10 Paige, 246 and cases cited); May v. May (11 id., 201); Jencks v. Alexander (id., 620); Howell v. Mills ( 53 N. Y., 322 ); Thompson v. Mount ( 1 Barb. Ch., 607 ); Goldsmith v. Osborne ( 1 Edw. Ch., 561 ); Hoppock v. Conklin ( 4 Sand. Ch., 585 ); Lansing v. McPherson (3 John. Ch., 424); Cole v. Moffitt ( 20 Barb., 19 ); Brown v. Frost (10 Paige, 248); Billington v. Forbes & Marsh (10 id., 487). As assignee of the prior mortgage of $3,600, and proceeding to foreclose and sell the property, with knowledge of the existence of subsequent liens, Ludlow was a trustee for the plaintiff. (Jencks v. Alexander, 11 Paige, 624, and cases cited; 1 Powell on Mort., 9 note; 1 Hill., 92 , 97.) As such trustee he was bound in good faith to sell the property for the highest price he could procure. (Pr. Ld. Eldoh, Hill on Trustees, 479.) It is the duty of the trustee to act impartially for the benefit of all the parties interested. ( 54 N. Y., 328 ; Hill on Trustees, 479, 480; Ord v. Noel, 5 Madd., 440;. 6 id., 10; Pechel v. Fowler, 2 Anstr., 550.) It follows that this trustee Ludlow, deliberately violated his duty as such. First. In overstating his debt; and second, in omitting notice to plaintiff. (Tuttle v. Jackson, 6 Wend., 226 ; Jackson v. Post, 15 id., 588.)

Upon the facts found by the referee, the plaintiff, as the assignee of a junior mortgage, is clearly entitled to relief in equity in respect to the foreclosure of the mortgage executed by Edwards, and assigned to the defendant Ludlow by the Auburn Theological Seminary, and by him foreclosed as stated in the pleadings and case. The decision of the referee that the plaintiff was entitled to redeem said premises, is, I think, correct, and in accordance “with equitable principles. The courts of equity regard a mortgagee in the execution by adver

p. 505

tisement of the power of sale contained in his mortgage, as a trustee, executing a power in trust, and bound to conduct the proceedings relating to the foreclosure and sale of the mortgaged premises, in a fair and just manner, and in good faith.^[1] Relief will be given by suit to set aside foreclosure proceedings by advertisement, whenever by any fraud, mistake, deceit, or unfair contrivance or practice or bad faith, in conducting the proceedings of the foreclosure or sale, the rights of the mortgagor or of subsequent incumbrances have been injuriously affected upon pretty much the same grounds as the court would recognize as sufficient for opening the sale if the foreclosure had been by action.

Upon the facts disclosed in the evidence in the case, the plaintiff was entitled in equity, I think, as the referee has substantially found, to the right to redeem or open the sale, to the same effect as if the foreclosure had been by action, and he had not been made a party to the suit. It is true that the assignment of the mortgage to him by Goss was not recorded, and perhaps in strictness at law, it was sufficient to serve notice upon Goss, the mortgagor; but it is quite apparent that such service in this case, with the omission to serve any notice upon the plaintiff, was a practical fraud upon him. Goss had no interest to protect, in respect to such foreclosure, and if he received said notice, which he denied on the trial, he probably paid, or would be likely to pay, no attention to it, presuming that a like notice would also be served upon the plaintiff. The defendant, Ludlow, who instituted and conducted said foreclosure proceedings, as the referee finds, well knew that the plaintiff was the assignee and owner of said mortgage, for he had paid to him, or to his attorney, several installments of interest thereon, and knew that Goss had no interest in said foreclosure.

It is true that Ludlow complied in form with the provisions of the statute, in serving, as he testified he did, the notice of sale upon Goss the mortgagor, the plaintiff’s assignment from Goss not being on record; but that was a mere compliance with the letter, and not with the spirit of the statute. The registry acts were not designed to facilitate or cover frauds, but to protect grantees or mortgagees of real estate who were subsequent purchasers in good faith and for a valuable consideration, of the same real estate.

* Jencks v. Alexander, 11 Paige, 624; Ellsworth v. Lockwood, 42 N. Y., 89 .

p. 506

The defendant Ludlow, is not within the equity of the statute. He was bound in good faith to have served notice of the foreclosure upon the plaintiff, and his omission to do so, under the circumstances of this case, as held by the referee, was a sufficient ground in equity to allow the plaintiff to come in and redeem said mortgaged premises from a sale thus inequitably had, procured and conducted. So far, therefore, as the decision of the referee asserts and allows the right of the plaintiff to redeem said premises, and to set aside said foreclosure and sale, it is right and should be affirmed. But as the application of the plaintiff is to the equitable power of the court, and relief can only be given upon equitable grounds, it is the right of the defendants also to have equity done them in the disposition of the cause. It is quite clear, from the facts found by the referee and the evidence in the cause, that the plaintiff’s mortgage was in fact nothing more than collateral to a mortgage given to Goss, by Tuttle and his wife, who were the principal debtors, and was given further to indemnify said Goss against his liability in the suit by Kennedy against said Goss, then pending to enforce a debt or liability of said Tuttle as against said Goss. The mortgage which Tuttle gave to Goss for his indemnity against said suit, was the primary fund for the payment of the amount of such recovery, and the defendants have a clear right to have the security given .by the principal debtors exhausted, before resort is had to the mortgaged property held by them.

The plaintiff testified on the trial that he held a bond and mortgage, assigned to him by said Goss, made by Harriet F. Tuttle to Goss, January 18, 1869, for $5,250, and that this mortgage was assigned to him at the same time when said Goss assigned the Edwards mortgage, and that the property covered by said mortgage he ascertained at the time to have been worth $8,000 or $10,000. It appears by Exhibit Ho. 2, in the case, being an agreement signed by C. H. Tuttle and H. F. Tuttle, by O. H. Tuttle, attorney, and by A. Sherman, that the said mortgage of Edwards to Goss was given for the sole benefit of said H. F. and C. H. Tuttle, and was to be paid by one of said parties without any claim or demand upon said Sherman. It is clearly equitable, therefore, that the plaintiff should first exhaust the security he holds from the principal debtors, before the court, for his benefit, should set aside or open the sale

p. 507

upon the foreclosure of the Edwards mortgage, or that he transfer such security to the defendants, in case they elect to discharge the amount of his claim under said mortgage upon the premises covered thereby. The referee declined to pass upon these equities, because said Tuttle and his wife were not parties to the action, and said bond and mortgage given by them to said Goss was not given in evidence. But the facts above stated appear in evidence, and I presume cannot be changed or disputed. In this view, I think the judgment may be modified and made interlocutory, affirming the views of the referee in respect to the plaintiff’s right to redeem said mortgage, and charge said mortgaged premises in the defendant’s hands with whatever sum shall remain or be justly chargeable thereon, to satisfy the plaintiff’s claim upon the said mortgage so held as collateral to Tuttle’s mortgage to said Goss, and as an indemnity against the said Kennedy suit and judgment, after the plaintiff shall have exhausted his security upon the said Tuttle mortgage, or accounted for the value thereof, and that it be referred back to the same referee, or to a new referee, to take proof in respect to the said Tuttle bond and mortgage, and to ascertain the value thereof, over and above all liens, claims or incumbrances on said property, either upon a foreclosure of the same, suspending said reference for that purpose, or by proof of its value, and to report what amount the plaintiff is entitled to receive from the Edwards mortgage in discharge of his debt, upon the principles herein stated, treating said Tuttles as the principal debtors, and bound to pay said debt before resort is had to the said Edwards mortgage, and that the said referee report to the court at Special Term; and that all other questions and equities, including the question of costs, be reserved till the coming in and confirmation of such report.

Present — Hullin', P. J., Smith and Dwight, JJ.

Ordered accordingly.