Ferris v. Prudence Realization Corp.

• Decision Date: 10 March 1944
• Citation: 292 N.Y. 210,54 N.E.2d 367
• Court: New York Court of Appeals Court of Appeals
• Parties: FERRIS et al. v. PRUDENCE REALIZATION CORPORATION et al. ZAUDERER et al. v. SAME.

292 N.Y. 210

54 N.E.2d 367

FERRIS et al.

v.PRUDENCE REALIZATION CORPORATION et al.

ZAUDERER et al.

v.SAME.

Court of Appeals of New York.

March 10, 1944.

Appeal from Supreme Court, Appellate Division, First Department.

Consolidated actions by Joseph W. Ferris and others, as trustees, against Prudence Realization Corporation, City Bank Farmers Trust Company, and another, as trustees, and others, and by Solomon Zauderer and others, doing business as Kimmelman & Zauderer, on behalf of themselves and others, against Prudence Realization Corporation, and others, to determine relative rights in property held for satisfaction of a mortgage. From a judgment, entered August 5, 1943, upon an order of the Appellate Division of the Supreme Court which (1) reversed upon questions of law, an order of a Special Term of the Supreme Court, New York County (McLaughlen, J.), denying a motion by defendant Prudence Realization Corporation for summary judgment in its favor and (2) directed judgment in favor of said defendant as prayed for in its answer, and unanimously affirming the order at Special Term insofar as it denied summary judgment to defendants City Bank Farmers Trust Company and another, as trustees, and to Joseph W. Ferris and others, as trustees, Joseph W. Ferris and others, as trustees, and City Bank Farmers Trust Company and another, as trustees, appeal.

Judgment of Appellate Division reversed with directions. Charles H. Kriger and Henrietta Kriger, both of Brooklyn, for plaintiff-appellants.

Eugene Blanc, Jr., of New York City, for defendants-appellants.

Irving L. Schanzer, of New York City, for respondent.

THACHER, Judge.

These consolidated actions arose under a plan for the reorganization in bankruptcy of guaranteed mortgage participation certificates known as the Burnside issue which was confirmed by the United States District Court for the Eastern District of New York on June 14, 1938, in proceedings for the reorganization in bankruptcy of Amalgamated Properties, Inc. (hereinafter called Amalgamated). Before the confirmation of the plan, these proceedings were on April 22, 1938, severed from similar proceedings for the reorganization of The Prudence Company, Inc. (hereinafter called Prudence). Under a plan for the reorganization of another issue of guaranteed mortgage participation certificates questions similar to those involved here were raised in the reorganization court and were ultimately decided by the Supreme Court of the United States in Prudence Realization Corp. v. Geist, 316 U.S. 89, 62 S.Ct. 978, 86 L.Ed. 1293, and we are confronted at the outset by the contention that that case is controlling here. It is therefore necessary to consider the proceedings in the Federal courts in that case, the proceedings in bankruptcy with reference to the Burnside issue and the terms and conditions of the Burnside plan of reorganization pursuant to which these suits were brought in the Supreme Court of this State.

The decision of the United States Supreme Court in Prudence Realization Corp. v. Geist, supra, was rendered in consolidated reorganization proceedings for the reorganization in bankruptcy of Prudence and Amalgamated. The particular proceeding under review in that case related to the reorganization of an issue of guaranteed mortgage participation certificates known as the Zo-Gale Realty Co. issue. In connection with that issue Prudence, the guarantor of the certificates, claimed parity of payment of the certificates purchased by it from the proceeds of assets received by Amalgamated on account of the mortgage debt. It was held that Prudence in bankruptcy reorganization was entitled to such parity of payment on the certificates purchased by it, notwithstanding the decisions of this court in Matter of Lawyers Title & Guaranty Co., 287 N.Y. 264, 39 N.E.2d 233;Matter of People (Union Guar. & Mtg. Co.), 285 N.Y. 337, 34 N.E.2d 345;Pink v. Thomas, 282 N.Y. 10, 24 N.E.2d 724;Matter of Title & Mortgage Guaranty Co. of Sullivan County, 275 N.Y. 347, 9 N.E.2d 957, 115 A.L.R. 35;Title G. & T. Co. v. Mortgage Comm., 273 N.Y. 415, 7 N.E.2d 841; Matter of Lawyers Mortgage Co. (545 West End Ave.), 272 N.Y. 554, 4 N.E.2d 733;Matter of New York Title & Mortgage Co., 272 N.Y. 556, 4 N.E.2d 734.

The Supreme Court held that there was no basis for the conclusion of the Circuit Court of Appeals that it was bound to apply, as ‘a rule of construction of the guaranty in the certificates,’ the rule announced in New York; that there was no evidence of actual intent to subordinate certificates owned by Prudence, and that, so far as the New York cases, without evidence of the actual intent of the parties, subordinate the guarantor on grounds of ‘presumed intention’, or ‘the existence of special equities,’ or the ‘natural equities' involved, the rule laid down is one of State law governing the relative rights of claimants in a State liquidation. 316 U.S. 93, 95, 62 ,.sCt. 978, 86 L.Ed. 1293.

The suits in the State court which are now before us are not proceedings in bankruptcy nor are they State liquidation proceedings. Each is brought to determine relative rights in property held for the satisfaction of a mortgage. Such rights, if nor determined or defined by provisions of a plan of reorganization predicated upon the consents required by the Bankruptcy Act, 11 U.S.C.A. s 1 et seq., and approved by the bankruptcy Judge as ‘fair and equitable’, must be determined by the law of New York where the land is situated and where the bond and mortgage, the participation certificates and the agreement of guaranty were made and delivered. Accordingly, it becomes necessary for us to consider whether any provision of an approved plan of reorganization or any order of the bankruptcy court has determined or defined the relative rights of Prudence and other certificate holders to share in the security of the mortgage or in sums received on account of the mortgage debt. We find none in this record, which, so far as pertinent, may be summarized as follows:

Action No. 1 was brought by the trustees named in the declaration of trust required by the plan for the reorganization of the Burnside issue. This plan was confined to reorganization of the certificated bond and mortgage and the certificates. It did not embrace in its scope anything other than the mortgaged property 307 West 36th Street in the city of New York the personal property therein owned by Amalgamated, the certificated bond and mortgage, the certificates, and any other money or property to which the certificate holders were entitled. All rights of action against the obligor upon the bond and against Prudence, pursuant to its agreement of guaranty, were expressly reserved. With reference to the payment of certificates acquired by Prudence, the plan as amended contained the following reservation:

‘A question has arisen with respect to the rights of The Prudence Company, Inc., or its Trustees on account of the certificates held or claimed by them, including so-called ‘unissued certificates.’ Anything in the Plan to the contrary notwithstanding, the Trustees to be appointed hereunder shall make no distributions of cash or other property or securities which would be otherwise distributable on account of the certificates now held or claimed by The Prudence Company, Inc., or its Trustees, including said ‘unissued certificates,’ unless and until it shall have been finally adjudicated by a Court of competent jurisdiction whether or not The Prudence Company, Inc., or its Trustees, or their successors or assigns, are entitled to receive such cash or other property or securities and to share in the proceeds of the property to be assigned to the Trustee pursuant to the Plan and on a parity with other certificate holders or otherwise. The actual distribution of such cash, securities or other property shall be made in accordance with such final adjudication. Pending such final adjudication the Trustee to be appointed pursuant to the Plan shall hold in escrow the share of any cash, property or other securities distributed under the Plan to which the certificates held by The Prudence Company, Inc., or its Trustees, including said ‘unissued certificates,’ would be entitled if owned and held by persons other than The Prudence Company, Inc., or its Trustees.'

Among the defendants named were Prudence Realization Corporation (herein called Realization Corporation), which holds legal title to the assets formerly owned by Prudence, including certificates of the Burnside issue. The defendants other than Realization Corporation were sued as representatives of holders of Burnside certificates.

Plaintiffs acknowledged that they were holding as trustees the bond and mortgage, the title to the mortgaged premises 307-13 West 36th Street without merger of the mortgage with the fee and the rights of the holders of mortgage participation certificates in and to the bond and mortgage and in and to the guarantee of Prudence were assigned to plaintiffs as trustees, who also hold the guarantee and the sum of $26,950.80 distributable to certificate holders when the relative rights of Prudence and of other certificate holders have been determined.

The relief sought was a judgment declaring the rights and interests of Realization Corporation and all other certificate holders in and to the corpus and income of the trust estate and an accounting by Realization Corporation for moneys distributed to or held by it or by Prudence on account of Burnside certificates.

Action No. 2 was brought by Kimmelman and Zauderer, a firm holding Burnside certificates, against Realization Corporation and Ferris et al., the plaintiffs in Action No. 1. The relief sought is similar to that prayed for in Action No. 1. Actions Nos. 1 and 2 were consolidated.

Special Term held that an issue of fact was presented and denied summary judgment. Realization Corporation, City Bank Farmers Trust Company and Lindgrove, as trustees, and plaintiffs...