Aetna Life Ins. Co. v. Avalon Orchards, Inc.

• Decision Date: 17 July 1986
• Parties: AETNA LIFE INSURANCE COMPANY, Respondent, v. AVALON ORCHARDS, INC., et al., Appellants, et al., Defendant.
• Court: New York Supreme Court — Appellate Division

Page 216

505 N.Y.S.2d 216

118 A.D.2d 297

AETNA LIFE INSURANCE COMPANY, Respondent, v. AVALON ORCHARDS, INC., et al., Appellants, et al., Defendant.

Supreme Court, Appellate Division Third Department.

July 17, 1986.

William G. Kerwick, Baldwin, for appellants.

Frederick S. Dennin, Lake Placid, for respondent.

Before MAHONEY, P.J., and KANE, WEISS, YESAWICH and LEVINE, JJ.

YESAWICH, Justice.

In December 1982, plaintiff obtained a judgment of foreclosure and sale against defendants Avalon Orchards, Inc. and Kent L. Aldershof (hereinafter defendants) in the amount of $1,006,926.33. The public sale, conducted January 6, 1983, at which plaintiff bid in the mortgaged property for $650,000--the then value of the property as claimed by plaintiff's appraiser--was subsequently set aside because of a procedural defect and a new sale was ordered (103 A.D.2d 948, 479 N.Y.S.2d 564); at the second sale, held October 22, 1984, plaintiff was again the successful bidder and the amount bid was the same. Plaintiff then moved for an order confirming the sale and leave to enter a deficiency judgment in the amount of $452,417.26. To demonstrate that the mortgaged property had sold for a fair price, as RPAPL 1371 (2) requires, plaintiff made available to Special Term an updated appraisal report which placed the fair market value of the property as of the date of the second sale at $335,000. That figure was not challenged by defendants, who confirm that the property had "substantially diminished" in value from its worth at the time of the first sale--as attested to by Aldershof--of $1,650,000. Instead, defendants attribute this decrease in value to plaintiff's mishandling of the property and on that ground, inter alia, seek to bar entry of any deficiency judgment. Special Term granted plaintiff's application in all respects and defendants appeal.

Two of the several arguments advanced by defendants merit discussion. Insofar as defendants question the reasonableness of the counsel fees subsumed in the deficiency judgment, their grievance is untimely, for these fees were awarded in the original judgment of foreclosure and are final since they affect the amount of the debt (see, 2A Warren's Weed, New York Real Property, Foreclosure of Mortgage, § 14.04 [4th ed.]; cf. Ogdensburg Sav. & Loan Assn. v. Moore, 100 A.D.2d 679, 679-680, 473 N.Y.S.2d 877, appeal dismissed 62 N.Y.2d 942). Moreover, an appeal from that judgment was withdrawn. And the kindred claim that further legal fees cannot be charged to defendants because of the need to conduct the second sale is a spurious contention, for it appears from the record that no additional legal fees were levied.

More effective is the assertion that defendants are entitled to offset against any deficiency the substantial waste the mortgaged premises allegedly underwent during the period plaintiff temporarily possessed and owned the property pursuant to the first foreclosure sale. Although ordinarily an application for a deficiency judgment focuses upon the fairness of the auction sale price, matters which could not have been put forth and litigated in the foreclosure action proper can nevertheless be taken into consideration in the deficiency proceeding (Gray v. Bankers Trust Co. of Albany, N.A., 82 A.D.2d 168, 171, 442 N.Y.S.2d 610, lv. denied 58 N.Y.2d 604, 459 N.Y.S.2d 1026, 445 N.E.2d 654; see, 2A Warren's Weed, New York Real Property, Foreclosure of Mortgage, § 17.08 [4th ed.] ). Defendants' argument falls into the latter category. Beyond that, since mortgage foreclosures are circumscribed by equity, elementary fairness dictates examination of defendants' position in this regard for, as Monaghan v. May, 242 App.Div. 64, 273 N.Y.S. 475 makes plain:

No rights vest, perforce the judgment of foreclosure, in plaintiff for a deficiency judgment in any amount until plaintiff satisfies a court of equity that it would be equitable and just, as a consequence of what has occurred on the sale, to authorize the entry of a deficiency judgment (id., at 67, 273 N.Y.S. 475).

Where, as here, there has been a flawed foreclosure proceedin equity's principal goal has been to restore the parties to the positions they occupied before the nullified sale (see generally, 2 Wiltsie, Real Property Mortgage Foreclosure § 771, at 1251 [5th ed.]; 2A Warren's Weed, New York Real Property, Foreclosure of Mortgage, § 15.29 [4th ed.]; cf. Willets v. Van Alst, 26 How Prac. 325, 344). To achieve this objective in analogous circumstances, equity has called upon occupants of the property to account for the rents and profits, or the value of their use and occupation, for the period subsequent to a voided or voidable foreclosure of a mortgage (see, Hubbell v. Moulsen, 53 N.Y. 225; Osborne, Handbook on the Law of Mortgages §§ 164-176, at 285-304 [2d ed.] ).

Despite the obvious complexity of the parties' equities, applying similarly fashioned relief to their unique situation does not seem at all inappropriate for, with the setting aside of the first sale, plaintiff's status was redefined from that of an absolute owner in possession to that of a mortgagee in possession. ^* As such, plaintiff was bound, while it controlled and possessed the property, to use reasonable means to preserve the property from loss and injury and to conserve its value, except, of course, for depreciation caused by ordinary wear and tear occasioned by time (see, Osborne, Handbook on the Law of Mortgages § 168, at 291 [2d ed.] ). Just as an action for waste lies against a mortgagee in possession whose mismanagement damages the value of the property (3 Kerr, Treatise on the Law of Real Property § 2172, at 2185-2186 [New York 1895]; see, e.g., Van Pelt v. McGraw, 4 N.Y. 110), so also does such an action lie against a mortgagee who purchases mortgaged premises at a foreclosure sale that is later voided (see, e.g., Fort v. Roush, 104 U.S. [14 Otto] 142, 26 L.Ed. 664).

However, whether the deficiency judgment that has been entered herein is indeed justified cannot be determined without consideration being given to defendants' allegations that plaintiff permitted substantial waste to be visited upon the property from and after consummation of the first foreclosure sale. These allegations bear directly on the satisfaction, in whole or in part, of the mortgage debt and ought--not only from the standpoint of simple justice, but judicial economy as well--to be...