In re the Liquidation of New York Title & Mortgage Co.

Callahan, J.

The New York Title and Mortgage Company was placed in liquidation on July 15, 1935. The Superintendent of Insurance, as liquidator, desiring to ascertain the proper basis for fixing claims of persons holding the company’s contracts of guaranty, made a report allowing four typical claims. These he presented to the Supreme Court, asking for confirmation of the allowance thereof. Objection was made by the company and two of its stockholders, who appeal (1) from an order of confirmation allowing the claims, and (2) from an order denying a motion for an open hearing on certain issues.

The four typical cases are referred to as the “ Ryder,” “ Martin,” “ Schwer ” and “ Berlenbach ” claims.

The “ Ryder ” claim is made by the holder of a policy guaranteeing payment of principal and interest of a whole mortgage of $5,500.

The “ Martin ” claim is based on a guaranty of a one-half interest ($12,450) in a similar whole mortgage of $24,900.

The “ Schwer ” claim is based on a guaranteed mortgage participation certificate of the face amount of $5,000, in Series N-20, issued against a single mortgage of $350,000.

The “ Berlenbach ” claim is based on four guaranteed mortgage participation certificates aggregating $15,000 in Series BN, a group series issued against two mortgages on separate parcels of real estate, the mortgages aggregating $194,500.

The guaranties in all these cases are substantially the same. The “ Ryder ” agreement, which may be taken as typical, guarantees ‘ First : Payment of interest on the said bond and mortgage * * * when and as * * * due * * *; ” and, “ Second: Payment of the principal of the said bond and mortgage, and of every instalment thereof, as soon as collected, but in any event within eighteen months.”

Under the contracts of guaranty the claimants were bound to permit the company to collect all interest and to refrain from collecting interest or principal. The claimants agreed to look only to the company for payment. The company’s obligation to pay did not depend upon the mortgagor’s default. The obligation of the company to claimants was plainly primary and absolute.

The company defaulted in its obligation. This default revoked the agency granted the company and entitled the claimants to take over the mortgages (Matter of People [Title & Mortgage Guarantee Co. of Buffalo], 264 N. Y. 69, 86). In none of the cases, however, has the claimant reduced the underlying real estate to possession.

Subdivision 5 of section 425 of the Insurance Law, relating to claims of the kind involved herein, provides: “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.”

The present claimants have not surrendered their securities to the Superintendent.

On these appeals the parties agree, first, that the obligation of the company is primary; second, that these claimants are “ secured claimants ” within the contemplation of subdivision 5 of section 425 of the Insurance Law; third, that the loss sustained must be fixed as of July 15, 1935, with the necessary corollary that the securities are to be valued as of that date; and, fourth, that, in fixing the claimants’ losses, there must be allowance for such sums as might be realized on the mortgage bonds. The parties are in disagreement as to the following questions:

(a) Whether section 1083-b of the Civil Practice Act requires that the value of the underlying real estate be offset against the sum. guaranteed?

(b) Whether the present claimants were discharged by reason of the restrictions imposed on foreclosure actions under the Mortgage Moratorium Laws?

(c) Whether the “ security ” held by the claimants who retained mortgages is such mortgages or the underlying real estate?

(d) Whether the proper method of valuing the security is to take the value of the real estate, less cost of foreclosure, or the value of the mortgages as such on the date of liquidation?

(e) Whether any allowance" should be made to those holding participation certificates, or shares in mortgages because of the fractional nature of their interests?

These disputed questions may be divided into two groups: Questions (a) and (b), which concern the effect of the Moratorium Laws on the rights of the parties, and the remaining issues (c), (d) and (e), which concern the nature of the securities and the proper method of valuing the same.

Section 1083-b of the Civil Practice Act, which requires the set off of the value of real property mortgaged in arriving at any deficiency judgment, has been held to be available to a guarantor of a mortgage. (Klinke v. Samuels, 264 N. Y. 144, 149.) That case involved an action against a guarantor. The present proceeding does not come within the letter nor the spirit of the statute. It is not an action to foreclose a mortgage or to recover a judgment for an indebtedness secured by a mortgage, but an equitable proceeding for the distribution of the assets of an insolvent guarantor. Reflection on the history of the legislation and the purposes sought to be achieved thereby clearly indicates that the emergency statute for the relief of mortgagors has no application to this case. (See Weisel v. Hagdahl Realty Co., Inc., 241 App. Div. 314; City Bank Farmers Trust Co. v. Ardlea Incorporation, 267 N. Y. 224.)

The contention that the moratorium statutes discharge the guarantor’s obligations likewise is without merit. There is involved no voluntary act of the holder of the guaranty but a legislative fiat which suspends the enforcement of rights. While there are other reasons which may be advanced to show the appellants’ contention in this regard is without force, at least as to mortgages in default as to interest or taxes and as to certificated issues, the reason stated is sufficient and answers the point made as to all mortgages involved.

The remaining questions concern the nature and proper method of valuing the security. The appellants contend that the security held by the claimants is the underlying real estate and not the mortgages thereon. They contend that the proper method of valuing the claimants’ security is to value the real estate, deducting the cost of forelosure of the mortgages.

While the real estate may accurately be described as the security as between mortgagor and mortgagee, the claimants herein bought guaranteed mortgages, not land or buildings. The defaults of the company on its contracts of guaranty have revoked the exclusive agency of the company and have given the claimants the right to control of the mortgages, but none of the present claimants hold real property. They hold mortgages or fractional interests in mortgages. Their right to reduce the real property to possession would depend, first, on whether there was default under the mortgages held, and, second, the nature of the default. The Mortgage Moratorium Laws, in effect July 15, 1935, limited the right to foreclose mortgages to default for non-payment of interest or taxes. Even such defaults could be cured by payments made before foreclosure actions had progressed to a specified stage. The mortgagees might prefer to accept a smaller rate of interest, or otherwise lessen the burdens imposed by the mortgages, in order to better their chances to secure full payment of the principal. This should not prevent them from claiming the protection of their guaranties. Therefore, not only was there no actual possession by these claimants of real property, but it was impossible on the date of liquidation to foretell when in the future such possession might occur, if it occurred at all.

In addition, claimants holding divided interests in mortgages might meet with difficulties in foreclosure, if and when such right became available. Their ownership of the mortgages being fractional, resulting control became more difficult.

It is admitted that there are many other claimants holding contracts of guaranties issued by this company, who have reduced to possession the real estate covered by their mortgages, or some of it. Undoubtedly these claimants must measure the value of their security by the value of the real property, less the sums expended to obtain possession thereof. These claimants have real estate, not mortgages, as their security. Those whose claims are now before the court are not in the same position. The ideal method of fixing the value of all claims would result in no inequalities as between those claimants holding mortgages and those holding real estate. We know of no formula for proving claims which will result in exact justice for all claimants. All that can be expected is the application of the most equitable rule to the greatest number.

The Superintendent in his report recognized several possible methods of fixing the value of the security held by the present claimants. One of such methods was that the, amounts of the claims be fixed at the difference between the face amount of the guaranties and the value of the underlying real estate, less suitable allowance for foreclosure and ■ necessary incidental expenses. He further recognized, however, that this method of fixing the value of the claims might be unfair to the large number of certificate holders (such as present claimants) who did not have possession of the real estate. He recommended in these cases the adoption of the method approved by Special Term, that is, fixing the amount of the loss of such guaranty holder at the difference between the full amount of the guaranty, plus interest, and the fair value of the mortgage as a mortgage. This we deem proper where an equitable valuation of the mortgages as such may.be and is made. The Superintendent also stated in his report that, in applying this rule of valuing mortgages as such, care should be taken not to apply a technical rule of market value alone. This for the reason that, if the value of the certificates were fixed at market value alone, such value would reflect distressed market conditions existing on the date of liquidation. He recommended that the mortgages should be fairly valued on the basis of a consideration of the broader elements of equity and the realization that the mortgage market was still abnormal and did not reflect the real intrinsic value of mortgages.

The Superintendent submitted appraisals of the present mortgages, made by men of wide experience, who supported their opinions of value by proper affidavits. These were in nowise met by any counter appraisals submitted on behalf of the present appellants, nor was the credibility or capability of any appraiser attacked. Under such circumstances, it seems to us that the statements of valuation submitted by the Superintendent were sufficient to establish prima facie the value of the mortgages, and the court at Special Term was justified in confirming same. However, the meagre nature of the statements submitted by the appraisers rendered them of little value in laying down a rule to apply to the bulk of like claims, for the reason that they failed to show the methods followed in arriving at the valuations fixed. In two of the appraisals the percentage of sixty-six and two-thirds per centum of the value of the real estate was fixed as the fair value of the mortgage. In the other instances there were no statements from the appraisers as to how they fixed the valuations of the mortgages in comparison with the appraised value of the real estate. If we compute it on a percentage basis, we find one of the mortgage valuations fifty-five per centum of the real estate. In addition, allowances were made up to fifteen per centum for mortgages in divided ownership. We are not told that there is a common and accepted method of valuing existing mortgages by taking a percentage of the value of the land. We know that such a formula is sometimes applied in determining the maximum amount that can be safely loaned on mortgages on real property in the city of New York. The question here is not what would be loaned on a new mortgage. Unless that figure approximates the present value of the existing mortgages, it should not have been used. We have a sworn statement that it does represent the fair value of the mortgage lien. We have nothing to show whether the appraisers, in fixing their valuations, considered such elements as the present condition of the mortgage with respect to payment of interest and taxes, or the past record with respect to such payments, the interest rate being paid, the effects of the Moratorium Law, the due date of the mortgages, the expense of reducing mortgaged property to possession in the event foreclosure is necessary, and other elements that would be material in fixing the value of existing mortgages as of a certain date. In other words, while we have definite allegations of values based on a percentage of the land values, the appraisers fail to disclose what relation there is between the sum fixed by them as the worth of the mortgages, and their appraisals of the underlying real estate. We know they have allowed a margin or “ cushion ” between the value of the land and the value of the mortgage but are not told why the particular margin was fixed in each case. The same criticism may be made of deductions fixed by the appraisers as a proper allowance because of divided ownership in the case of certificated issues. There is no information to show that percentages so fixed reflected the actual diminution in value because of such ownership.

In addition, the appraisals fail to show whether the appraisers considered whether the various mortgages were in the hands of trustees, the State Mortgage Commission, or some other united group, which facts might affect the degree of control afforded claimants. No allowance for divided ownership should be made unless it reflects a probable monetary loss because of such circumstances.

Therefore, while we approve of the confirmation of the amounts awarded, we do so solely because they were opinions under oath as to valuations which were sufficient prima facie to justify the court in fixing the value of the mortgages, and because such appraisals, although meagre as to evidence of methods used, were in nowise contradicted.

In fixing the value of mortgages as to the bulk of the claims, the appraisers should state in detail the basis of their valuation and method of appraisal. If it is indicated that such methods would result in an allowance that would increase the award which might be made to any claimant beyond his probable loss, such method should be disapproved.

The Superintendent’s recommendations as to values are ordinarily entitled to great weight. (See Matter of National Surety Co., 248 App. Div. 111, 117; affd., 272 N. Y. 613.) The court should be reluctant to substitute its judgment for that of the Superintendent, unless it appears that the methods pursued or the valuations arrived at were improper. We find no such impropriety here. The fundamental question raised on this appeal is whether it was proper to value the security held by claimants by appraising the mortgages rather than the underlying real estate. We deem that it is proper to value the mortgages as such in those cases where the real estate has not been reduced to possession. We, therefore, aifirm the order on Appeal No. 1.

As to Appeal No. 2, from the order denying the motion for open hearings on the question of valuation, we feel that the court at Special Term was correct in denying same on the record before it. No issue of fact was raised below. The expense that would ensue from the taking of testimony, either before the court or a referee, concerning values of the nearly 40,000 mortgages still to be appraised, should be avoided if unnecessary. The submission of detailed appraisals and affidavits, with the opportunity on the part of the appellants or other creditors to contradict same, should be sufficient to permit the court to determine whether the values fixed by the Superintendent were justified and equitable. If contradictory affidavits are submitted raising issues of fact in these cases, the Special Term may direct the examination of witnesses, either before the court or a referee, for the determination of those issues.

The orders appealed from should be affirmed, with costs.

Untermyer and Cohn, JJ., concur; Martin, P. J., and Townley, J., dissent and vote to reverse.