In re Lawyers Title & Guar. Co.

• Decision Date: 15 January 1942
• Parties: In re LAWYERS TITLE & GUARANTY CO.
• Court: New York Court of Appeals Court of Appeals

287 N.Y. 264

39 N.E.2d 233

In re LAWYERS TITLE & GUARANTY CO.

Court of Appeals of New York.

Jan. 15, 1942.

Appeal from Supreme Court, Appellate Division, First Department.

Proceeding in the matter of the liquidation of Lawyers Title & Guaranty Company. From an order of the Appellate Division of the Supreme Court, 262 App.Div. 827, 29 N.Y.S.2d 503, which modified and affirmed as modified, on the law, an order of the court at Special Term (McLaughlin, J.), Netacos Corporation, Louis H. Pink, Superintendent of Insurance of the State of New York, as liquidator of Lawyers Title & Guaranty Company, and Reconstruction Finance Corporation appeal.

Order of the Appellate Division modified, and as so modified affirmed.

LEHMAN, C. J., and RIPPEY, J., dissenting. Edward J. Ross, of New York City, for Netacos Corporation, appellant and respondent.

Irving H. Jurow and Edward F. Keenan, both of New York City, for Superintendent of Insurance, as liquidator, appellant.

Effingham Evarts and Henry A. Linn, both of New York City, for Reconstruction Finance Corporation, respondent and appellant.

LEWIS, Judge.

The Superintendent of Insurance, as liquidator under article XI (now art. XVI) of the Insurance Law, Consol.Laws, ch. 28, took possession of the property of Lawyers Title and Guaranty Company on January 21, 1936, upon an adjudication that the company was insolvent. Prior to the liquidation order the company was the owner and holder of a bond and mortgage in the principal amount of $75,000, the lien of which attached to real property in Long Island City. On February 8, 1927, the company had sold the bond and mortgage to Adele Kneeland, as executrix of the estate of Charles Kneeland, for $75,000, and had guaranteed the payment of the principal and interest on the mortgage debt. Upon its maturity the mortgage debt was not paid, the company's guaranty was not fulfilled, and the executrix found by an appraisal of the mortgaged property that its value was not sufficient to warrant a mortgage in the principal amount of $75,000. It was in these circumstances that the company, in an endeavor to readjust the mortgage debt, entered into an agreement whereby the company paid $25,000 on the principal debt and the exectrix accepted a guaranteed first mortgage participation certificate for the sum of $50,000. This $50,000 certificate known in this proceeding as Certificate No. 1 of Mortgage No. ‘Q’ 25088 was sold and assigned by the Kneeland estate on July 12, 1938, to the present appellant, The Netacos Corporation.

Prior to that date, and on December 29, 1932, the company had issued to Chase National Bank a guaranteed participation certificate in the same mortgage in the amount of $25,000, which certificate is known as Certificate No. 2 of Mortgage No. ‘Q’ 25088. That certificate, however, is of no importance in the present proceeding in view of the fact that it was reacquired by the company and canceled as of February 1, 1933.

On January 26, 1933, the company negotiated a loan of $1,300,000 from Reconstruction Finance Corporation hereinafter referred to as R. F. C. As collateral security for the repayment of the loan the company pledged with R. F. C. twenty-nine mortgages and mortgage participation certificates, including a guaranteed participation certificate in the mortgage mentioned above in the amount of $25,000. The certificate last mentioned, known in this proceeding as Certificate No. 3 of Mortgage No. ‘Q’ 25088, was issued in lieu of Certificate No. 2 of the same mortgage. It was registered in the name of Reconstruction Finance Corporation on January 26, 1933, and, except for issuing data not material here, is conceded to be identical in form with Certificate No. 1.

We are thus concerned upon this appeal with only two participation certificates of Mortgage No. ‘Q’ 25088: No. 1, in the amount of $50,000, sold by the company and now owned by the appellant, The Netacos Corporation; and No. 3, in the amount of $25,000, pledged by the company with R. F. C. as one of twenty-nine items which comprised collateral security for a loan of $1,300,000.

When it appeared that the value of the mortgaged property was insufficient to pay on liquidation the face amount of the two certificates, the present proceeding was commenced in which The Netacos Corporation, the present appellant, alleges that its rights represented by Certificate No. 1 are superior in interest to and have priority over rights represented by Certificate No. 3, now pledged by the company with R. F. C. The relief sought is an order adjudging (1) that Certificate No. 1 is entitled to priority over Certificate No. 3; (2) that the interests of the liquidator, as owner of Certificate No. 3, and of R. F. C. as its pledgee, are each subordinate to the interest of The Netacos Corporation in Certificate No. 1; (3) that the liquidator and R. F. C. shall have the right to receive from the liquidator of the property here involved only so much as may remain after paying whatever may be due on principal and interest on Certificate No. 1.

Special Term denied the application of The Netacos Corporation, its ruling being, in effect, that Certificate No. 1 was not entitled to priority over Certificate No. 3. The Appellate Division modified the order of Special Term by providing ‘that Certificate No. 1 * * * owned and held by The Netacos Corporation * * * has priority and seniority over and is superior to the ownership by Louis H. Pink, Superintendent of Insurance of the State of New York, as liquidator of Lawyers Title and Guaranty Company, of Certificate No. 3; * * * That the interest in said mortgage of said Superintendent of Insurance, as liquidator, as the owner of said Certificate No. 3, is subordinate and junior to the interest in said mortgage of The Netacos Corporation, as owner and holder of said Certificate No. 1; and * * * That said Superintendent of Insurance, as liquidator, shall have the right to receive out of the proceeds of the income or liquidation of the property here involved, only so much as may remain after paying whatever may be due on principal and interest on said Certificate No. 1.’ Otherwise the order of Special Term was affirmed. 262 App.Div. 827, 29 N.Y.S.2d 503.

The parties have treated the Appellate Division order as granting to rights represented by Certificate No. 1 priority over only the liquidator's rights as represented by Certificate No. 3, but not over the rights of R. F. C., as pledgee of Certificate No. 3. In other words, the order is interpreted as providing that The Netacos Corporation and R. F. C. shall share pro rata in Certificates Nos. 1 and 3 and prior to the liquidator. The liquidator, The Netacos Corporation and R. F. C. have each appealed. The liquidator seeks to have the order of Special Term reinstated which would deny any priority to Certificate No. 1. The appellant, The Netacos Corporation, would have this court rule that Certificate No. 1 is entitled to priority over the rights of both the liquidator and R. F. C. as pledgee, which attach to Certificate No. 3. By its appeal R. F. C. would have the order of the Appellate Division affirmed in so far only as it holds that Certificate No. 1 is on parity with Certificate No. 3 to the extent of its interest, but a modification is sought of so much of the order as attributes to the liquidator ownership of Certificate No. 3, now pledged to R. F. C., and provides for the distribution of the proceeds from a liquidation of the properties involved.

(1) Both Certificate No. 1 (originally sold to the Kneeland estate and later acquired by The Netacos Corporation) and Certificate No. 3 (pledged by the company to R. F. C.) contain a provision assigning to the holder thereof an undivided share in the bond and mortgage No. ‘Q’ 25088 ‘equal and co-ordinate with all other shares assigned or retained by the Company, the aggregate amount of all such shares, issued and retained, at no one time to exceed the amount then owing on said bond and mortgage.’ We read the provision in the light of the explanation given in Pink v. Thomas, 282 N.Y. 10, 13, 24 N.E.2d 724, 725: ‘As we know, these mortgage certificates are sold at different times to different individuals. The words ‘equal and co-ordinate with all other...