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

13 N.E.2d 41, 277 N.Y. 66, 115 A.L.R. 614, 1938 N.Y. LEXIS 954

• Court: New York Court of Appeals
• Decided: January 25, 1938
• Status: Published

Opinions

Lotjghran, J.

In this proceeding for the liquidation of New York Title and Mortgage Company under article XI of the Insurance Law (Cons. Laws, ch. 28), the Additional Special Term for the county of New York confirmed the allowance by the Superintendent of Insurance, as liquidator, of the claims of four holders of the company’s so-called mortgage guaranties. The Appellate Division affirmed and permitted this appeal by certain stockholders of the company. The issue certified to us for review is whether, upon the record, any of the claims were properly allowed in the sum found by the Superintendent to be the amount of the claimant’s loss.

It is in order first to notice large elements of the case as to which there is no controversy. The stockholders concede that the undertakings of the company “ were absolute obligations, as distinguished from contingent obligations, and were therefore provable under the statute.” (See Insurance Law, § 425, subd. 3; Matter of People [Bond & Mortgage Guarantee Co.], 267 N. Y. 419.) The respective rights and obligations of the several parties in interest are to be fixed as of July 15, 1935, the date of the entry of the order of liquidation. (Insurance Law, § 404, subd. 2; Matter of Empire State Surety Co., 214 N. Y. 553.) “ The fundamental basis underlying the standard or method for the determination of claims on guaranties is [the words are the liquidator’s] that the creditor-claimant shall receive such allowance as will measure his actual loss.” This loss is to be determined in accordance with the following provision of the statute: “ 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.” (Insurance Law, § 425, subd. 5.) Each of the present claimants holds a mortgage or an interest in a mortgage. In no instance has the underlying real estate been acquired by any claimant through foreclosure or otherwise. From this statement of matters upon which the parties are in agreement we pass to the questions upon which our decision is sought.

(1) What is the meaning of the word “ security ” as used in subdivision 5 of section 425 of the statute? The Superintendent and the claimants contend that the security for a claim is the claimant’s mortgage — as a mortgage — and that the value of the mortgage qua mortgage should be deducted from or set off against the face amount of the claim. The stockholders stand upon the position that the mortgaged real estate (and not the mortgage as such) is the security of the claimant and that the value of the real estate should be so set off or deducted. This question of construction has been decided against the stockholders by the courts below. In our opinion that ruling was right and effectuates the aim of the statute.

We quote again the words to be interpreted, stressing this time the phrases which to our minds make clear the idea of the Legislature. “ 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.” These words plainly contemplate that “ the security ” of which they speak is in any case to be an interest that can be surrendered by a claimant to the Superintendent. Surrender thereof is in so many words made the prime condition of full allowance of a secured claim. A claimant, of course, can surrender only the thing that he has in his possession. So far, then, as the statute in itself is our guide, it must follow that the value to be credited on a claim is the value of the mortgage (or share therein) or is the value of the realty if acquired, accordingly as the one asset or the other is in the possession of the claimant or claimants. Inasmuch as no interest in land is held by any of these claimants there is now no occasion to consider under what circumstances or within what limits realty reduced to a claimant’s possession may be surrendered to the Superintendent.

(2) Next in appropriate sequence is our commentary on arguments addressed to us by the stockholders as reasons why we should not thus take the foregoing provision of the statute as we find it.

They say that there is not, and that there never has been, a mortgage market in this community; that the liquidator cannot value a mortgage qua mortgage without inventing such a market; and that the Legislature could never have intended to set up so fictitious a process for the determination of secured claims against the assets of the company. We suppose it is true that there never has been any market place for mortgages in the sense of a counter over which they could be exchanged for cash or its equivalent at prices publicly quoted currently. But everybody knows (and this record demonstrates the fact) that heretofore in times of good business there was a truly enormous trade in mortgages. Purchasers in that market had to determine whether to buy or not to buy the security and so must have had resort to some general tests of value. Indeed fractional shares in mortgages were in fact bought and sold for a price even in situations where (as in the case of a group series of mortgages) there could have been no definite identification of land that might ultimately be involved in the transaction. (See Matter of Stupack, 274 N. Y. 198.)

It is general knowledge, too, that a landowner as often as not will protect his equity by keeping a mortgage good, even when he believes that the land on forced sale would produce less than the face amount of the lien. Again, the financial responsibility of the obligor on the mortgage bond affects the question of the value of the security.

In short, it will not do to say that the mere value of the underlying land (though a factor of major weight) is the sole index of the worth of a mortgage.

Nor is the contrary proved for the purpose of this case by the fact that sale of a mortgage on July 15, 1935, would have been so much a sacrifice that any sales price now deemed to have been then obtainable must be so theoretical as to be irrelevant to the issue of value. We have held that it is not necessarily impossible to determine the value of mortgaged premises as of the date of a foreclosure sale held when there was no market for real estate such as exists under ordinary conditions. (Heiman v. Bishop, 272 N. Y. 83.) It must be no less a possibility that the value of a mortgage as such can be ascertained as of a time when the ordinary trade in mortgages had stopped.

Arguendo, the stockholders also say that, even if the mortgage is to be valued as a mortgage, nevertheless the valuation as matter of law is determined by deducting from the value of the realty the cost of foreclosing it. For the reasons already stated, we think the ascertainment of the mortgage value is not to be confined to that or any other set form. The process is a factual affair — a a matter of the exercise of reasonable judgment after an intelligent and honest canvass of all factors relevant to the particular security.

(3) We turn now to the procedure whereby the Superintendent here determined the amount of a claimant’s loss. Four claims are disposed of by his report to the Additional Special Term. The first (that of the claimant Ryder) may be taken for the purposes of illustration. The Ryder claim is based upon a guaranty policy which the company issued to the claimant on his purchase of a whole mortgage. Ryder claims for the unpaid mortgage principal of $5,500, with interest accrued to July 15,1935, of $113.44, a total of $5,613.44. The Superintendent appraised the value of the underlying realty as of that date at $8,500 and the then value of the mortgage at $4,700. The loss was fixed at the difference between the sum claimed ($5,613.44) and the appraised value of the mortgage ($4,700) — that is to say, $913.44.

We cannot see why a $5,500 mortgage on property concededly worth $8,500 should itself be valued for no more than $4,700. No suggestion is made by the record in respect of any principle which leads to this result. The only explanation is supplied by the brief for the Superintendent. His counsel there say:

“ The security still held by Byder and other claimants is a species of property not identical with the underlying real estate, but representing a right in real property the value of which is measured by the presence or absence of value in the real estate over and above the face amount of the mortgage. This excess of value constitutes the cushion or margin of safety which gives,^this particular form of security its special character as a form of investment.

“ The very terms of the statutes fixing the cushion at a value of 50% over the face amount of the mortgage in the case of investments which might be made by insurance companies and other fiduciaries, was a legislative recognition of the necessity of the presence of an adequate cushion as an incident of a good mortgage. It was this requirement, too, that made the mortgages issued by the Company attractive as a form of security to the claimants here involved and others similarly situated who are holders of the Company’s guarantees.

“ It is submitted that the appraisers for the Superintendent, in fixing the value of the security held by each claimant at an amount less than the value of the underlying real estate, in each case, merely recognized that the inherent nature of the mortgage as security requires the presence of an adequate cushion or margin of safety as a necessary factor in the evaluation of a mortgage.”

This can mean nothing more than that the liquidator has here undertaken to give to the claimant the equivalent of a new mortgage investment with all the safeguards that an investor would insist upon while he was free to risk or not to risk his money. We think that is not the meaning of the so-called guaranty upon which the claim is based. The guaranty was a promise that pay- meat of the mortgage principal would at all events be made within eighteen months after demand therefor subsequently to the due date of the mortgage. The statutory mortgage loan standard obviously is not an admissible measure of any loss consequent upon default on such an undertaking. It is, therefore, quite impossible to sustain the orders entered below.

In stating that conclusion we do not mean to imply that the value of a mortgage must be appraised entirely upon the basis of the more tangible factors like the location of the property, the suitability of any improvement thereon and the rental income. We take it that the appraiser should envisage possible consequences of foreclosure, e, g., whether income would be diminished thereby with the result that new money would be required for carrying charges while the property was held thereafter, and whether additional financing would perhaps be an essential requisite of a resale. In a contingency of that sort, it might be advantageous that some other mortgage be placed and in that aspect appropriate consideration may properly be given by the appraiser to the amount for which a valid trust investment in the property could then probably be made.

(4) Two of the four claimants are holders of participation shares or certificates in mortgages guaranteed by the company. The courts below have adopted the recommendation of the Superintendent that an additional deduction of fifteen per cent in the valuation of the security for these two claims should be made, because of the fractional nature of the interests therein. The Additional Special Term said: “ The difficulties and expense involved in securing the co-operation of sufficient certificate holders (or co-owners) to enforce a mortgage, through a reorganization proceeding or otherwise, must be taken into account in estimating the value of an undivided interest in a mortgage.” (160 Misc. Rep. 67, 88.) We are of the same opinion.

It is said by the stockholders that the loss resulting from, the necessity for concerted action can be no more than the cost of reorganization plus the fees and administration expenses of the trustees appointed for that purpose. Doubtless this may be true in some cases. We cannot say that it will necessarily be true for all participation claimants. The larger the group the greater must be the difficulty in disposing of the security piece-meal. When the number is relatively large so is the hazard that some will be unable to bear their respective portions of the common load. Quite probably there are other substantial loss factors where group action must be had. In each case such variants can be weighed only by the trained good sense of administrative judgment. The Superintendent tells us that he has no purpose to adopt as a rule of thumb the requirement of a deduction of as much as fifteen per cent for all cases wherein control of the security is divided. Situations may be presented, he admits, where a lesser allowance (or none at all) will be called for by the fractional character of the security. It would not be helpful to set forth the circumstances upon which the size of this additional deduction was here defined. For all that we know fifteen per cent was not too much so far as the two claims in question are concerned.

(5) Lastly, we thinK it appropriate to suggest not only that the Superintendent should disclose in the first instance the fundamentals of the theory of his future action in fixing the losses of claimants, but that fair play requires also that an opportunity should be afforded to test by cross-examination the validity of any appraisal entering into the allowance of a claim.

The orders should be reversed, without costs, the matter remitted to the Additional Special Term for further proceedings in accordance with this opinion and the questions certified answered in the negative. The appeals taken as of right should be dismissed, without costs.