Federal Deposit Ins. Corp. v. Forte

• Decision Date: 06 June 1983
• Citation: 94 A.D.2d 59,463 N.Y.S.2d 844
• Parties: , 37 UCC Rep.Serv. 354 FEDERAL DEPOSIT INSURANCE CORPORATION, Appellant, et al., Plaintiff, v. Michael FORTE, Defendant, Lamb Associates, Inc., et al., Respondents, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

Page 844

463 N.Y.S.2d 844

94 A.D.2d 59, 37 UCC Rep.Serv. 354

FEDERAL DEPOSIT INSURANCE CORPORATION, Appellant, et al., Plaintiff, v. Michael FORTE, Defendant, Lamb Associates, Inc., et al., Respondents, et al., Defendants.

Supreme Court, Appellate Division,

Second Department.

June 6, 1983.

Ira L. Hyams P.C., Jericho, for appellant.

Shapiro, Mortman & Schwartz, P.C., New York City (Marvin L. Schwartz and Ellen M. Coin, New York City, of counsel), for respondents.

Before GIBBONS, J.P., and GULOTTA, O'CONNOR and BOYERS, JJ.

GIBBONS, Justice Presiding.

The primary issues on these appeals concern the applicability of article 9 of the Uniform Commercial Code to the financial transactions in which the parties herein participated and the propriety of scrutinizing a disposition of collateral under the code standard of commercial reasonableness. Resolution of these issues requires, at the outset, that the different liabilities of the principal defendants be isolated and the nature and scope of the relief sought by the plaintiffs be explored.

I

On September 27, 1973 Franklin National Bank (Bank) loaned $55,000 to the principal debtor, Lamb Associates, Inc. The previous day, the individual respondents, Alfred and Miriam Gluckstal, entered into an agreement with the Bank whereby they personally guaranteed, among other things, any and all loans to be made by the Bank to Lamb Associates. On October 17, 1973 the loan to Lamb Associates was increased to $80,000 and was thereafter renewed periodically until November 6, 1974, when the promissory note which is a basis of this law suit was executed and delivered. The promissory note indicates a due date of January 3, 1975.

Apparently, there came a time when the Bank refused to roll over the loan without other security in addition to the personal guarantee of the Gluckstals. On August 7, 1974 such security was given in the form of an assignment of Alfred Gluckstal's one-half interest as mortgagee in a $200,000 mortgage note and mortgage on realty located in Westbury, New York. This mortgage and note were held jointly by Alfred Gluckstal and the plaintiff Rhoda Sugarman as assignees of the original mortgagee, Rammar Associates, Inc. At the time this suit was commenced, the property covered by the mortgage and note was owned, subject to same, by defendant Michael Forte who held title to the property from Walter L. Stackler, the original mortgagor. Pertinent to this suit, the mortgage agreement provides that, in the event that the realty was foreclosed and sold for less than the debt secured by the mortgage, no claim for a deficiency could be asserted against the mortgagor.

The Bank was declared insolvent and the appellant Federal Deposit Insurance Corporation (FDIC) was assigned all right, title and interest in the note of Lamb Associates, the guarantee by the respondents Gluckstal, and the assigned interest of Alfred Gluckstal in the mortgage and note given as collateral by him for the Lamb Associates loan. Lamb Associates defaulted when the promissory note came due on January 3, 1975. Apparently, the mortgage had also been in default for some time when the FDIC commenced this action.

The suit, jointly brought by the FDIC and the mortgagee, Rhoda Sugarman, contains the basic elements of two separate causes of action, although two causes are not separately pleaded. It requests a foreclosure of the mortgage and the sale of the Forte property, and it also contains a claim on behalf of the FDIC alone for a deficiency judgment against the guarantors, the Gluckstals, and the principal debtor, Lamb Associates, in the event that the FDIC's share of proceeds from the sale of the realty was insufficient to repay the amount due on the Lamb Associates loan. The relief demanded is set forth in the prayer, as follows:

"that the monies arising from the sale may be brought into court; that plaintiff FEDERAL DEPOSIT INSURANCE CORPORATION may be paid the amount due to it on the obligations of the defendants LAMB ASSOCIATES INC., ALFRED E. GLUCKSTAL and MIRIAM GLUCKSTAL to plaintiff FEDERAL DEPOSIT INSURANCE CORPORATION as hereinbefore set forth, with interest to the time of such payment and attorneys' fees; that plaintiff RHODA SUGARMAN may be paid the amount due her on the mortgage note and mortgage, with interest to the time of such payment"

and

"that the defendants LAMB ASSOCIATES, INC., ALFRED E. GLUCKSTAL and MIRIAM GLUCKSTAL may be adjudged to pay any deficiency due to the plaintiff FEDERAL DEPOSIT INSURANCE CORPORATION which may remain after the sale of the mortgaged premises and the application of the proceeds pursuant to the directions contained in such judgment".

In essence, the FDIC turned, first, to the guarantor's security by way of the in rem foreclosure proceeding in which it was joined with Sugarman. Under the format of pleading and procedure thus adopted by it, if the share of the foreclosure proceeds, obtainable by it from Gluckstal's security assignment, was insufficient to pay Lamb Associates' debt, it then sought to place itself in a position to litigate in personam against the debtor and the guarantors for any deficiency still owing.

Confronted with this complaint, defendants Lamb Associates and both Gluckstals, appearing by the same attorneys, served a notice of appearance and waiver of "service of all papers and of notices of all proceedings in said action except notice of sale, Referee's report of sale and notice of proceedings to obtain surplus moneys".

On June 15, 1979 a judgment of foreclosure and sale was entered in plaintiffs' favor. The judgment includes a direction that the FDIC "recover of the defendants LAMB ASSOCIATES, INC., ALFRED E. GLUCKSTAL and MIRIAM GLUCKSTAL the whole deficiency or so much thereof as the court may determine to be just and equitable of the residue of the debt remaining due and payable to plaintiff and satisfied after a sale of the mortgaged premises and the application of the proceeds thereof, provided a motion for a deficiency judgment shall be made and the amount thereof is determined and awarded by an order of this court as provided by law". The property was sold at the foreclosure sale to the highest bidder, Taxco Holding Corp., for the sum of $165,000, the deed being delivered on August 12, 1980. According to the FDIC, the total due it on the Lamb Associates note, as of that date, taking into account accrued interest and attorney fees, was $176,237.57. By order to show cause, dated November 3, 1980, the FDIC moved to ratify the sale and for leave to enter a deficiency judgment against the Gluckstals and Lamb Associates for the balance due it. Miriam Gluckstal and Lamb Associates, represented by the same counsel, and Alfred Gluckstal, represented by separate counsel, opposed the FDIC's application on equitable grounds, claiming that no deficiency should be entered since, allegedly, the collateral security was sold for an amount dramatically less than market value, and the commencement of the suit and the sale of the property was unjustifiably delayed. The respondents also challenged the computations of attorney's fees and demanded a hearing.

Special Term held, and adhered to its holding on reargument, that section 1371 of the RPAPL was applicable and ordered a hearing pursuant to its terms on the fair and reasonable value of the mortgaged premises and reasonableness of the attorney's fees.

II

We agree with Special Term that a hearing should be held in this case prior to the granting of a deficiency judgment, but we do not agree that section 1371 of the RPAPL provides the framework for such a hearing. Rather, section 9-504 of the Uniform Commercial Code and the code standard of commercial reasonableness govern.

A significant portion of the litigation in this case has been concerned with the applicability of the provisions of the RPAPL to the transactions herein. The FDIC maintains that Special Term should not have applied section 1371 of the RPAPL to the application for a deficiency judgment. Reliance is placed on our decision in GIT Inds. v. Rose, 81 A.D.2d 656, 438 N.Y.S.2d 372. Respondents, in turn, argue that the FDIC should not be permitted to obtain a foreclosure pursuant to the RPAPL and then avoid that statute's restrictions on obtaining a deficiency judgment as found in section 1371.

Besides relying on GIT Inds. v. Rose (supra ), the FDIC argues that State law has no application to its right to a deficiency judgment, that a "uniform national rule is required and FDIC may obtain the full deficiency regardless of the respondents' claim that the property was worth more than the price realized at the foreclosure sale", and that Federal law governs in "suits brought by FDIC to recover the assets of the insolvent bank". Citation is made to D'Oench, Duhme & Co. v. Federal Deposit Ins. Co., 315 U.S. 447, 62 S.Ct. 676, 86 L.Ed. 956. Apparently, in the alternative, the FDIC argues for the applicability of the Uniform Commercial Code.

At the outset it is necessary to determine whether Federal or State law governs in this case. In circumstances akin to those at bar, the United States Supreme Court has recently held that, in order to avoid disrupting commercial relationships, where "the state commercial codes 'furnish convenient solutions in no way inconsistent with adequate protection of the federal interest" the court should "decline to override intricate state laws of general applicability on which private creditors base their daily commercial transactions" (United States v. Kimbell Foods, 440 U.S. 715, 729, 99 S.Ct. 1448, 1459, 59 L.Ed.2d 711, quoting United States v. Standard Oil Co., 332 U.S. 301, 309, 67 S.Ct. 1604, 1609, 91 L.Ed. 2067). "Accordingly, to the extent that federal law is applicable to the instant case, the federal rule of decision is given by the applicable state law" (Landmark Land Co. v. Sprague, 529 F.Supp. 971, 975; United States v. Kimbell Foods, supra ). We therefore turn to an analysis of...