Guleserian v. Fields

• Decision Date: 27 June 1966
• Parties: Walter A. GULESERIAN et al., Trustees, v. Irwin FIELDS et al. 1
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 397

218 N.E.2d 397

351 Mass. 238

Walter A. GULESERIAN et al., Trustees, v. Irwin FIELDS et al. ¹

Supreme Judicial Court of Massachusetts, Middlesex.

Argued June 2, 1966.

Decided June 27, 1966.

Samuel Hoar, Jr., and Harold I. Pratt, Jr., Boston, for plaintiffs and another.

David Burstein, Boston, for defendants Fields.

Lawrence A. Sullivan, and Henry P. Monaghan, Boston, for Savings Bank Ass'n of Massachusetts, amicus curiae.

Frederick D. Bonner, Boston, for Massachusetts Co-operative Bank League, amicus curiae.

Richard Wait, Boston, for Massachusetts Conveyancers Ass'n and another, amici curiae.

Before WILKINS, C.J., and WHITTEMORE, CUTTER, SPIEGEL and REARDON, JJ.

CUTTER, Justice.

The plaintiffs (the mortgagors) are the trustees of a Massachusetts real estate trust which owns, subject to the mortgages hereinafter mentioned, land and buildings (the locus) on Garden Street, Cambridge. On September 15, 1960, the mortgagors gave a duly recorded first mortgage covering the locus to Charlestown Savings Bank (the bank) to secure the payment of $750,000 'in fifteen years, with interest thereon, or on any unpaid balance thereof, and on any sums hereafter advanced by the (h)older which lawfully accrued to the mortgage debt, as provided in our * * * note of even date.' The note provided that the mortgagors would pay monthly instalments of $6,249.99, consisting of principal and interest at the rate of six per cent per annum. ²

On August 1, 1962, the mortgagors gave a second mortgage in statutory form covering the locus to Commander Operating Company (Operating) to secure the payment of $400,000 in twenty years, 'as provided in a * * * note of Commander Properties, Inc. * * * of even date' with the second mortgage. The note secured by the second mortgage provided for monthly payments of $1,666.67, on account of principal only, with interest 'payable only on any past due installment * * * at the rate of seven per cent * * * per annum.'

The mortgagors have sought the consent of Operating, as second mortgagee, to a proposed agreement between the mortgagors and the bank (as first mortgagee) 'to extent the terms of payments of principal under * * * (the first mortgage) note in the following manner: The * * * (first) mortgage note provides for the payment of monthly installments of * * * $6,249.99 * * * to be applied first to interest due under * * * (the) note and the balance to principal. The proposed extension agreement * * * would postpone the principal payments included in the twenty-four * * * installments next following * * * the execution of such agreement until October 15, 1975, the stated maturity date of the * * * (first) mortgage note, all of * * * (the) postponed principal payments becoming due in a lump sum on * * * (that) date. Interest at the rate of six per centum * * * per annum, as specified in the note, would continue to be paid monthly on the outstanding principal balance, which by reason of the foregoing arrangement would remain constant during * * * (such) period of twenty-four * * * months.'

Operating has refused to consent to this arrangement and has notified the mortgagors that if such an agreement is made with the bank Operating 'will demand that * * * (the mortgagors) continue to pay monthly installments according to the present tenor of the first mortgage note, and (will take the position) that failure to make such payments would constitute a default under the terms of the second mortgage.' Operating also contends that any such extension agreement will not be binding on it, will constitute a violation of its rights as holder of the second mortgage, and will affect the priorities as between the holders of the first and second mortgages.

The mortgagors by their bill seek a declaration (G.L. c. 231A) 'that any lawful extension of the terms of payment of the first mortgage note, made without * * * (Operating's) consent * * * does not constitute a breach by the * * * (Mortgagors) of the conditions of the second mortgage.' The parties, since the earlier remand of this case (fn. 1), have agreed upon a revised case stated. The case for a second time has been reported without decision for the determination of this court by a judge of the Superior Court.

1. The crucial language of each of the mortgages is that of the statutory mortgage condition found in G.L. c. 183, § 20, set out in the margin, ³ so far as relevant. The questions for decision are (a) whether by reason of the proposed extension agreement, the bank, as first mortgagee, will lose in any degree the priority of its security interest in the locus with respect to any part of the secured indebtedness and the interest thereon, and (b) whether the extension agreement, if carried out, will constitute a breach of the second mortgagee, entitling Operating, as second mortgagee, to foreclose.

It is important to bear in mind precisely what form of extension is now proposed. There would be no increase in the interest rate payable upon the balance of principal from time to time due upon the first mortgage note. That rate is now fixed at six per cent per annum and is to remain at six per cent. The only change proposed in the terms of the mortgage note is that the monthly payments of principal coming due within the period of twenty-four months following the execution of the extension agreement will be postponed to the maturity date of the first mortgage. There will be no increase, by reason of the extension agreement, in the principal amount due upon the first mortgage at the date of the execution of the extension agreement. Thus the only adverse effects, so far as the second mortgagee is concerned, of the extension agreement will be that the first mortgage debt will not be reduced as rapidly as the parties to the first mortgage and note originally had agreed that it would be (obviously, primarily at least, for the benefit of the first mortgagee), and interest will be paid upon the amount of the postponed principal payments for a longer period than was originally contemplated.

2. The mortgagors and the bank, as between themselves, any extend the time for payment of the first mortgage indebtedness, or any part thereof, by agreement binding on them as parties to the extension. See G.L. c. 183, appendix, form (7); Depon v. Shawye, 263 Mass. 206, 210, 161 N.E. 243; Norfolk County Trust Co. v. Green, 304 Mass. 406, 407--408, 24 N.E.2d 12; Tiffany, Real Property (3d ed.) § 1487; Jones, Mortgages (8th ed.) §§ 438, 1186--1187, 1202; Glenn, Mortgages, § 50.4; Swaim, Crocker's Notes on Common Forms, (7th ed.) §§ 446, 577--578. The general rule is that a renewal or extension of an existing senior mortgage and the note (or other obligation) secured thereby, without an increase of the principal or interest payable with respect to the secured indebtedness, will not result in any loss of priority of that senior mortgage over junior encumbrances. ⁴ The Holder of the junior encumbrance is treated as taking his interest 'subject to a possible extension of the time of payment' of the debt secured by a senior encumbrance. See Consolidated Natl. Bank of Tucson v. Van Slyke, 27 Ariz. 501, 506--508, 234 P. 553, 38 A.L.R. 825. The holder of the junior encumbrance is regarded as necessarily taking the risk of a postponement (frequently an advantage to a second mortgagee) of the date of payment of the whole or part of the senior mortgage debt. See Commonwealth Life Ins. Co. v. Louisville Ry. Co., 234 Ky. 802, 806, 809--810, 29 S.W.2d 552. The rule has been referred to as the 'universal rule.' Beckman v. Altoona Trust Co., 332 Pa. 545, 550, ⁵ 2 A.2d 826.

A brief filed by amici curiae places emphasis upon G.L. c. 168, § 36, par. 4 (authorizing savings banks to make certain changes in the amount of periodic payments under mortgages); see amendment by St. 1962, c. 50, § 6. The existence of this provision has the effect of drawing the attention of junior lienholders to the possibility ⁶ that the holder of a savings bank mortgage may wish to extend the debt secured by a mortgage of which the savings bank is a holder. The statute, of course, confirms the authority of the bank, within its statutory powers, to make an extension like that now proposed. Apart from the statute, however, the authorities, already cited, show that an extension of the time for payment may be made by a holder of a mortgage without the consent of the holders of junior encumbrances and without loss of priority. See also G.L. c. 170, § 24, par. 8 (as amended through St.1961, c. 333, § 8); c. 183, § 28A (as amended through St.1956, c. 92.) ⁷

We see no sound basis (see Barbano v. Central-Hudson Steamboat Co., 47 F.2d 160, 163 (2d Cir.)) for any contention that execution of the proposed extension agreement would affect or diminish the priority of the bank's security interest as it existed at the time of the execution of the second mortgage, as against the holder of that mortgage.

3. If the proposed extension agreement in fact should be executed, failure to make any of the postponed twenty-four monthly payments of principal would not constitute a default under the first mortgage. The bank as first mortgagee would not be in a position to foreclose because of any failure of the mortgagors to make such payments on the date originally scheduled. As was said in the Commonwealth Life Ins. Co. case, 234 Ky. 802, 809, 29 S.W.2d 552, 556, 'If the party to whom payment is due * * * agrees to a postponement of the date of payment, there is no default in any real sense of the word.' By the proposed extension agreement the time for the performance of 'the (first mortgage) note * * * or any extension thereof' (see fn. 3, at points (A) and (B)) would be changed, so that there would be no breach of the statutory condition of the second mortgage with respect to payments of principal on the 'prior' first mortgage, and also no failure to 'perform the condition of' the first mortgage (see fn. 3, at point (C)...