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The Mortgagee as Affected by Condemnation
By
M. Robert Goldstein and Michael J. Goldstein
A recurring problem in condemnation proceedings is the status
of mortgages on condemned property. Inevitably there arises
the question of priorities, of proper rates of interest to
be paid to the mortgagee and the dates when interest is paid.
The answers to these problems are grounded in the fundamentals
of the relationships of the parties in a condemnation proceeding.
A mortgage, of course, is nothing else but the security for
a debt. While the mortgage is a real property interest, the
debt is personal whether in the form of a bond or note. While
often the owner of the property is personally liable for the
debt, besides having the property stand as security for its
payment, it is at least as usual that, for a variety of reasons,
the present property owner is not personally liable for the
debt but merely owns the property subject to the mortgage.
Debt Not Affected
When property is condemned the basic debt is not affected,
the debtor remains ____ on the bond or note and has the right
to proceed to collect the debt by enforcement of the bond
in accordance with its terms (Muldoon v. Mid-Bronx Holding
Corporation (287 N.Y. 229, 231, 1942, Copp v. Sands
Point Marina 17 N.Y. 2d 291, 1966). At the same time the
condemnation proceeding takes title down to the ground wiping
out the mortgage and converting the mortgage into an equitable
lien against the award having the same relative priority that
it had as to the property itself (Fliegel v. Manhattan
Savings Bank 296 N.Y. 214, 1947).
It is then that the obligation of the sovereign to pay the
award is substituted for the security of the real property.
While particular statutes may codify and amplify these principles,
these rights do not depend upon statute but are grounded in
the common law. Statutes such as section B 15-15.0(8) of the
Administrative Code of the City of New York recognize a mortgagee
as an "owner" of the property and thus entitled
to a share of the award.
Case is Cited
Cases such as In re Matter of Dry Dock Savings Institute
(104 N.Y.L.J., 115, decided Oct. 1, 1940, Sup. Ct. N.Y. Co.,
McLaughlin, J.) have stated that "after title is taken
by the City the Appellate Division of this department has
ruled that the money represented by the award is a fund and
that a first mortgagee as well as any other lienor shares
in that fund in accordance to its priority."
However, since the debt remains unaffected by the condemnation
it would appear that mortgagee in collecting its debt has
the right to collect on the bond or in the alternative to
enforce its debt against the condemnation award (or any deficiency
after suing on the bond) (Copp v. Sands Point Marina,
17 N.Y. 2d 291). Pragmatic considerations in almost all instances
foreclose the prior course of action since it takes a brave
mortgagee indeed to substitute the certainty of a collection
out of an award guaranteed by the sovereign for the uncertainty
of both the ability to collect on a judgment against a debtor
and to take one's place in line as a recent judgment
creditor against possible intervening lienors and/or judgment
creditors.
Rights of Mortgagee
Assuming now that the mortgagee does not pursue its rights
in accordance with the terms of its bond or note but looks
to the condemnation proceeding there then comes into question
the rights of the mortgagee in the condemnation proceeding.
To begin with, as an owner of a right in the award the mortgagee
has the right to appear in the proceeding to protect its interest,
whether by way of fixing the award or by fixing the amount
owing to it or by directing payment to it out of the award.
The courts have held that when an award has been tendered
for payment stopping interest, the mortgagee may not wait
for the former fee owner to move to collect the award and
insist on payment to it of the interest owing to the date
the mortgagee is paid, but it is the duty of the mortgagee
as an owner of a part (or all) of the award to affirmatively
move to collect the award and failing to do so in time, the
loss of interest fails on it to the extent that the payment
would have been paid to it (Matter of Dry Dock Savings
Institution, 104 N.Y.L.J., 115, Oct. 1, 1940, Sup. Ct.
N.Y. Co., McLaughlin, J.; In the Matter of the City of
N.Y. Franklin D. Roosevelt Houses, N.Y.L.J., May 25, 1962,
page 12; In re Washington Heights Federal Savings and Loan
Assoc., N.Y.L.J., May 18, 1964, p. 17, N.Y. Sup. Ct.,
Fine, J.).
Treatment of Mortgagee
Further if the mortgage debt is to be collected out of the
award the mortgagee is treated as an owner not only as to
the dates of when interest is paid, but also as to the rate
of interest. The statutory rate on condemnation awards presently
is 6 per cent per annum. A mortgage may provide for a different
rate. If the property is condemned the mortgagee will collect
interest at no different rate than any other owner despite
a different rate provided for in the mortgage (362 Washington
Ct. Corp. v. Peninsula National Bank 53 Misc. 2d 499,
279 N.Y.S. 2d 204, 1967; In re City of N.Y. 267 N.Y.S.
2d 950; In the Matter of the City of New York, Franklin
D. Roosevelt Houses, supra; In re Washington Heights
Federal Savings and Loan Association supra; Fliegel
v. Manhattan Savings Bank; supra; Muldoon v. Mid-Bronx
Holding Corporation, supra).
An interesting wrinkle to the problem is where the mortgage
instrument itself provides that in the event of condemnation
interest shall be as provided for in the mortgage rather than
at the statutory rate (In re Brooklyn Bridge Southwest
Urban Renewal Project, 46 Misc. 2d 558, 260 N.Y.S. 2d
229, aff'd ___ A.D. 2d ___, 262 N.Y.S. 2d 1020, 1965)
the court held the mortgagor to the agreement to pay the higher
rate.
One is given to wonder why such an agreement should be given
effect different than an ordinary bond or note which may provide
for a higher interest rate. The courts have specifically held
that the mortgagee is an owner, receive interest as does any
other owner, that it is the sovereign which is paying the
award and the interest and that where the mortgagee seeks
enforcement of its debt against the award it is limited to
the statutory rate.
Decision Cited
It is to be noted that the Appellate Division (Second Department
in Copp v. Sands Point Marina, Inc., 21 App. Div. 2d
823, 824, 1964), treated the problem of swinging on the note
and collecting the judgment from the award in the following
language:
"Without prejudice to defendant's future right
to a refund of the amount equal to the difference between
the statutory rate of 4 per cent interest payable in condemnation
and the contract rate of 5 per cent in the event that plaintiff
hereafter should obtain payment of the mortgage debt or interest
thereon from the condemnation award . . . ."
It is, to us, at least difficult to reconcile these later
two decisions. Apparently in the latter case the court has
followed through on the basic premise that despite any agreement
between the parties as to the rate of interest if the debt
is to be paid in any way out of the award in condemnation
then it is the statute which is to apply and not the agreement
between the parties.
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