In re Cichanowicz

• Decision Date: 14 February 1964
• Docket Number: No. 63 B 635.,63 B 635.
• Citation: 226 F. Supp. 288
• Parties: In the Matter of Joseph CICHANOWICZ, Bankrupt.
• Court: U.S. District Court — Eastern District of New York

226 F. Supp. 288

In the Matter of Joseph CICHANOWICZ, Bankrupt.

No. 63 B 635.

United States District Court E. D. New York.

February 14, 1964.

Jack Weiss, Bay Shore, Weiss & Nelson, Bay Shore, for petitioner on review.

Albert Sacklow, Mineola, for the trustee.

DOOLING, District Judge.

The learned referee summed the case up as testing whether the chattel mortgage in question was like "the fabled Phoenix which when consumed by fire * * * rises in youthful freshness from its own ashes." He held, upon the objection of the trustee in bankruptcy to the chattel mortgagee's claim to recover the mortgaged property, that it was not, that, although it was security for present and future debts owed to the mortgagee, it nevertheless became "void" by its own terms when the debt was paid down to nothing and that it did not revive when new loans were later made by the mortgagee to the mortgagor.

The decision of the referee must be set aside. The chattel mortgage was intended to be, and could lawfully be, a continuing security for any future loans the mortgagee might make; it has not been shown that any equity available to the trustee intervened before the bank made its final loans on the faith of the chattel mortgage and the bank may, therefore, enforce its security.

The case was submitted for decision on affidavits and exhibits. On March 1, 1960, Petitioner, Franklin National Bank, lent $10,000 to the bankrupt and he gave the bank his notes, a Collateral Loan Agreement under which he pledged "the following property: Chattel Mortgage dated March 1, 1960, covering farm equipment," and the Chattell Mortgage, dated March 1, 1960, (and duly filed and refiled), covering ten pieces of automotive or farm equipment.

The Collateral Loan Agreement recites that it was given to induce the bank to make loans to the bankrupt, and to purchase his notes "and any security documents relative thereto," and to grant the bankrupt such renewals as the bank deemed advisable; it provided that the Chattel Mortgage was given as collateral security for the prompt payment of any and every obligation of and liability of the bankrupt to the bank whether then existing or thereafter incurred and whether then or thereafter owing. The Collateral Loan Agreement further provided that it might be terminated "only by written notice to that effect, relating solely to new obligations of the bankrupt subsequently incurred, delivered by the undersigned to the Bank and duly receipted for by it"; upon such termination, the bankrupt was to continue liable on preexisting obligations "and with respect to such obligations and any renewals, extensions thereof or other liabilities arising out of the same," the Agreement was to continue in force.

The Chattel Mortgage, concurrently given and promptly filed, was in the form of a bargain and sale of the scheduled automotive and farm equipment "as security" for the note indebtedness of even date (and renewals and extensions thereof) and "as additional collateral security for the payment of any other obligation or liability * * * of the Mortgagor to the Bank, whether now existing or hereafter arising * * * not exceeding the total amount hereof at any one time." The condition of the Mortgage grant was that if the Mortgagor paid "$10,000 as follows: As described in notes * * * (together with all other sums payable under said notes and hereunder) and all other debts, demands and liabilities secured hereby, as and when the same become due and payable, then this mortgage shall be void."

It appears that the note indebtedness rose to $11,000 and was paid down to nothing on January 31, 1961. There was no debt until, on March 20, 1961, $10,306.67 was borrowed. From that date forward the indebtedness continued, rising to $20,162.66 in September-October 1961 and ending on March 15, 1963, with a debt of $7,749.99 outstanding.

The Chattel Mortgage was refiled on or about February 4, 1963, when $8,749.99 and interest was stated to be secured by it. The bankruptcy was voluntary and it took place on June 25, 1963. In his schedules bankrupt listed the Franklin National Bank as a secured creditor for $10,000 and in the personal property schedule listed the automotive and farm equipment as subject to the Mortgage of March 1, 1960, and listed also as a mortgage the refiling of the earlier instrument.

While the Bank made a long series of advances to the Bankrupt, there is no evidence that it was committed or obligated to do so. It must be taken that the making of fresh loans to the bankrupt from time to time was optional with the Bank. It is plain enough, too, that the Bank supposed itself secured and lent on the faith of its supposed security.

As the learned Referee said, New York recognizes that a mortgage can validly be given to secure future advances whether the making of the advances is optional or obligatory. Agawam Bank v. Strever, 1859, 18 N.Y. 502; Brown v. Kiefer, 1877, 71 N.Y. 610; Merchants Nat'l. Bank v. Hall, 1881, 83 N.Y. 338. The anomaly of an interminable security, where the security instrument is not self-limiting, is avoided by the implicit power to call a halt to advances (Cf. Merchants Nat'l. Bank v. Hall, supra, 83 N.Y. at page 345); in the present case the Collateral Loan Agreement provided for such a termination.

While it is often said, and is certainly in some sense true, that in New York a mortgage has no validity except as it creates a lien, that there can be no lien without a debt, and that therefore, there can be a valid mortgage and lien only if and so long as there is a debt (Brown v. Guthrie, 1888, 110 N.Y. 435, 442, 18 N.E. 254; Bogert v. Bliss, 1896, 148 N.Y. 194, 42 N.E. 582; Kommel v. Herb-Gner Constr. Co., 1931, 256 N.Y. 333, 337-338, 176 N.E. 413; Cf. In re Rosenblatt, E.D.N.Y.1924, 299 F. 771, 773), the cases are clear that a mortgage will be valid and enforced notwithstanding that at the moment when it was given and recorded no loan had yet been made and only future advances were intended to be secured. Robinson v. Williams, 1860, 22 N.Y. 380, 383; Ackerman v. Hunsicker, 1881, 85 N.Y. 43; Brown v. Guthrie, supra. And, while it is settled that if the particular mortgage debt identified in a mortgage is unqualifiedly paid, then the mortgage is discharged and is extinguished beyond revival (Bogert v. Bliss, supra); it is equally settled that, by agreement, the parties can preserve the mortgage from extinction and the mortgagor can use it a second time to obtain a new loan. Champney v. Coope, 1865, 32 N.Y. 543 (mortgage extinct as to $1,200 because to that extent paid off unqualifiedly; preserved as security for new loan to the extent of $3,800 because parties to payment stipulated to keep the mortgage alive); Salvin v. Myles Realty Co., 1919, 227 N.Y. 51, 124 N.E. 94, 6 A.L.R. 581; Cf. Application of Cumberland Garage, Inc., Sup., Queens Co. 1947, 73 N.Y.S.2d 571; American Trust Co. v. New York Credit Men's Adjustment Bureau, Inc., 2d Cir. 1953, 207 F.2d 685, 689.

Reducing the indebtedness outstanding under the mortgage to zero does not extinguish the mortgage if the parties keep the mortgage alive by agreement, or if the mortgage was given as a continuing security for future loans, and future loans are still in the parties' contemplation. The language in Monnot v. Ibert, Gen'l Term 1859, 33 Barb. 24 to which the learned Referee referred was used in deciding that the chattel mortgage there before the Court, even if so drafted as to secure all future advances made to the mortgagor, did not secure still further loans later made to the mortgagor's successor in business; the Court held that the chattel mortgage was discharged when the last loans made to the mortgagor had been paid. Like the earlier case of Truscott v. King, 1852, 6 N.Y. 147, the Court also distinguished between a mortgage that secures certain specific future loans and a mortgage that secures the balance, up to a stated amount, at any time due on a continuing series of loan transactions. Under the first kind of mortgage, as in Truscott v. King, supra, when loans in the mortgage amount have been made and paid, the mortgage...