February Term, 1898.
George P. Decker, for the appellant.
William W. Mumford, for the respondents.
The Special Term made an order referring the matter to a referee to ascertain and report as to the rights of the parties to the surplus money, and the single question before him was, which of the parties to this controversy is entitled to it. Proof was taken by the referee, and upon the coming in of his report the court made the order appealed from. The investigation necessarily involves the validity of the claim of the appellant under the second mortgage, which had been assigned to him through the instrumentality of the receiver in the People's action, and the right of the appellant to enforce it as a lien upon the fund. We think that the court had ample power to make this investigation and determine the rights of the parties under this mortgage. ( Baker v. Baker, 70 Hun, 95; Bergen v. Carman, 79 N.Y. 146; Halsted v. Halsted, 55 id. 442; Mutual Life Ins. Co. v. Bowen, 47 Barb. 618.)
The respondents insist that the appellant did not acquire all the rights of the association in the bond and mortgage assigned to him. Without discussing that question, and assuming that the appellant stands in the place of the association as regards this bond and mortgage, it follows that he is subject to the same disabilities and conditions that the association would be under growing out of its insolvency and its failure to perform its contract with the respondents.
The second bond and mortgage grew out of the relation of the respondents as shareholders in the association and is so connected with the reciprocal duties and rights of the respondents and the association that we must construe the second bond and mortgage with relation to that situation.
The $1,000 mortgage to the Rochester bank was assumed by the association as a part of the contract creating the second mortgage.
The association having become insolvent and incapable of proceeding further as a corporation, and having committed a breach of its contract with the respondents, the situation changed, and the right of the respondents for damages for a breach of the contract by the association had accrued. Further payments by the respondents, as required by their bond and mortgage, was excused by the failure of the association. It was the implied contract, at least, of the association with its shareholders that it would continue its business, keep on hand the fund required by law for their security, and remain in a condition so long as its contract continued, which would enable it to perform its obligations. ( People v. Empire Mutual Life Ins. Co., 92 N.Y. 105; Matter of the Attorney-General v. The Guardian Mutual Life Ins. Co., 82 id. 336; Matter of Equitable Reserve Fund Life Assn., 131 id. 354, 376; Cook v. Kent, 105 Mass. 246; Swift v. Allegheny B. L. Assn., 82 Penn. St. 142; Second Amer. Building Assn. v. Platt, 5 Duer, 675; Brownlie v. Russell, 8 App. Cas. 235.)
The insolvency of the corporation and its ceasing to be a going institution left the association without power to perform its contracts and excused the respondents from further performance on their part; hence new conditions arise, and the rights of the parties must be adjusted upon the equitable principles upon which the Special Term proceeded when it credited the association with what it had paid and charged it with what it had received from the respondents. Of this the association cannot complain, as the situation arose from its own default and incapacity to perform its contract.
The second bond and mortgage, therefore, could not be enforced against the respondents, and consequently, as against them, the mortgage was not available as a lien upon the surplus money in view of the equities of the respondents, and over their superior rights as the owners of the equity of redemption in the mortgaged premises. Primarily, when a surplus is created upon a mortgage foreclosure, it retains the character of real estate and goes to the mortgagor. If any intervening right or lien exist in behalf of another person superior to the mortgagor's claim to the fund, the burden is upon the person asserting such lien to establish it. The appellant has failed to establish this lien under the circumstances of this case.
The learned counsel for the appellant, however, contends that the association was not in default with respect to the first mortgage because of the stipulation of September 1, 1894, that the respondents would not demand or require the payment of the first mortgage by the association until after the expiration of five years from the date thereof. If we concede that this stipulation was given upon sufficient consideration, it must be construed in connection with the agreement of the association contained in the second mortgage to pay the first mortgage with interest semi-annually and with the purpose and intent of the parties with relation to that mortgage. The stipulation does not waive the obligation of the association to pay the semi-annual interest, nor does it excuse the association from the duty of protecting the respondents from the foreclosure of that mortgage and the sale of their property. The most that can be claimed for that stipulation is that, as long as the bank would permit the first mortgage to remain without foreclosure and the association paid the interest thereon, the respondents would not insist upon its payment under five years from its date.
Considerable discussion arises upon the points of the learned counsel as to the rights of various shareholders in the association other than the parties to this controversy; and it is claimed by the appellant's counsel that it would be unjust to the non-borrowing shareholders to permit the respondents to be allowed their advances upon the bond and mortgage and the costs and interest that they have paid; while it is insisted by the respondents' counsel that, in the adjustment of the equities between the two classes of shareholders, the borrowers are the greatest sufferers under the scheme adopted by the association.
The record before us does not disclose the facts upon which we can intelligently pass upon the rights and equities of other shareholders, not parties to this controversy. Nor are we required to do so. The appellant has chosen to submit his claim to this fund to this proceeding, and not to test the rights of the parties by an appropriate action where all parties interested in the general funds of the association could be represented, with issues properly framed; and he must stand or fall upon the conditions which appear in this record.
The appellant's counsel also claims that the "dues" which have been paid by the respondents under their contract with the association have been lost and cannot be recovered back. These "dues" appear in the proceedings to be called "premiums" as well. The difficulty with this contention is that the association and its assignee cannot stand upon a contract which they have violated. The respondents are entitled to recover all that they have paid, whether it is called premiums, dues or payments and the interest on the same, because the contract is at an end, and, as we have said, the rights of the parties are to be adjusted upon equitable principles. As a result of the failure of the association to perform its contract to protect the respondents from the bank mortgage a foreclosure has occurred and the respondents have been compelled to pay a considerable bill of costs. There is no reason why they should not be allowed the amount of these costs in this proceeding, and the court at Special Term properly made the allowance.
These views lead to the conclusion that the order appealed from should be affirmed, with costs, which should be paid by the appellant personally.
All concurred, except FOLLETT, J., who concurred in the result.
Order affirmed, with costs.