METROPOLITAN TRUST CO. v. TONAWANDA, &c. R. R. CO.

METROPOLITAN TRUST CO. v. TONAWANDA, &c. R. R. CO. N. Y. Supreme Court, Fifth Department; General Term, February, 1887. 1. Troper parties defendant in foreclosure ; senior mortgagees.] In an action to foreclose a mortgage, the plaintiff may properly make senior mortgagees parties defendant, so as to have the amount secured by their mortgages ascertained and determined by the judgment, that they may be paid out of the proceeds of the sale, and their lien discharged, or that the sale may be made subject to the known amount of their liens. 2. Counterclaim; foreclosure by senior mortgagee made defendant.] Where a senior mortgagee is thus made defendant, his claim for the foreclosure of his mortgage, since it embraces both a cause of action against the plaintiff, and against the co-defendant mortgagor, and is connected with the subject of the action, and in some degree goes to diminish the plaintiff’s recovery as measured by the relief within the demand and allegations of the complaint, is a ailable as a counterclaim within the meaning of section 501 of the Code of Civil Procedure. 3. Judgment between co-defendants in foreclosure.] Section 521 of tho Codo of Civil Procedure, allowing relief between co-defendants, and providing for service of pleadings by one defendant upon another, extends the operation and effect of the provisions of section 1204, so as to embrace within tho term counterclaim, some claims, which prior to the present Code, could not be made available as such. 4. The same.'] Proper provisions of judgment in such an action, permitting foreclosure of senior mortgages and sale. 6. Counterclaim; how jtleaded.] It is no objection to granting a defendant affirmative relief, that his answer did not, in express terms, define as a counterclaim the matter set up as such, where it distinctly appears by the relief demanded that it was intended as a counterclaim. Appeal by the plaintiff from a portion of judgment entered on report of referee. The action was brought by the Metropolitan Trust Company of the city of New York to foreclose a mortgage made by the defendant, the Tonawanda Valley and Cuba Railroad Co., to Jamos D. Fish, as trustee, to secure the payment of its bonds to the amount of $500.000 ; and the plaintiff was afterwards substituted in place of Fish, as such trustee. That railroad company was created by the consolidation of three companies, before then organized, known as tho Tonawanda Valley Railroad Co., the Tonawanda Valley Extension Railroad Co., and the Tonawanda Valley and Cuba Railroad Co. Before such-consolidation, the Tonawanda Valley Railroad Co. had made a mortgage upon its railroad and property to the defendant, the Farmers’ Loan and Trust, Company, as trustee, to secure the payment of its bonds to the amount of $100,000, and the Touawanda Valley Extension Railroad Co. had made a mortgage on its railroad and property to the defendant, James D. Fish, as trustee,' to secure the payment of its bonds amounting to $70,000. When the defendant railroad company was organized, it assumed the payment of the bonds of those other companies, then outstanding. At the time of the commencement of this action, default had been made in the payment of the interest on the bonds pf all those companies. The plaintiff in the complaint alleges a desire to have the amount of the outstanding bonds of the Tonawanda Valley and the Tonawanda Valley Extension Railroad Co’s, and the extent of the lien of those prior mortgages, and each of them, ascertained and determined, that the amount of them may be paid out of the proceeds of the sale; or that the premises and' property covered by them may be sold subject to such lien as may be just and proper, and that the Farmers’ Loan and Trust Co. aud Fish are made parties defendant for that purpose. It is alleged in the complaint that defendant railroad company has made default in the payment of interest upon its outstanding bonds, and those of the other companies. And amongst other relief the plaintiff demands judgment directing sale to be made “ subject to the lien of the said prior mortgages to the said Farmers’ Loan and Trust Co., and James D. Fish, as trustee, as aforesaid, on the premises covered by them ; or, that the amount of said lien be paid, satisfied and discharged out of the proceeds of such sale, as may be for the best interests of the parties to this action.” The defendant, the Farmers’ Loan and Trust Co., by answer, alleges amongst other things, all the facts essential to the maintenance of an action to foreclose the mortgage made by the Tonawanda Valley Railroad Co. to it, and demands judgment for the usual relief in such case ; which answer was served upon the attorneys for the plaintiff, and the other defendants. The referee found all the facts requisite to the foreclosure of both mortgages, also that the defendant railroad com-, pany is insolvent; that its road could not be sold in parcels, without prejudice to the interests of the bondholders, and directed judgment of foreclosure of the plaintiff’s mortgage, and óf the Fanners’ Loan and Trust Co. mortgage, with qualified provisions as to the sale, which, as declared by the judgment were, that the property embraced in the plaintiffs mortgage be sold as an entirety, subject to the Tonawanda Valley Extension Railroad Co. imvtgage, and unless the purchaser within ninety days pay the amount secured by the Tonawanda Valley Railroad Co. mortgage with costs, that the property covered by the last mentioned mortgage may be sold separately to pay off the amount due on it with costs, and that the purchaser of the entire property shall not receive a deed for the entire property, pursuant to such sale, until the Tonawanda Valley Railroad Co. mortgage with costs, shall have been paid ; unless -such.- deed by its terms shall be made expressly subject to the provision of the judgment in regard to a separate sale of the property embraced in the Tonawanda Valley Railroad Co. mortgage, in case .of failure of the purchaser to pay it. The plaintiff took exceptions to the conclusions of law, and to refusal to find as requested. The plaintiff appeals from the part of the judgment granting such relief to the defendant. Thomas Q. .Hillhouse, for the plaintiff, appellant. Herbert JB. Tamer (Turner, Lee cfe MeOture, attorneys) for the defendant Trust Company, respondent. Prior incumbrancers may be made parties to a foreclosure for the purpose of having the amount of their incumbrances ascertained and paid off; but if such purpose is not indicated in the complaint, or provided for in the judgment, they are not affected by the judgment, and their appearance and “ waiver of service of all papers, except notice of salo and surplus,” will not be a waiver of the priority of their liens, unless such was the understanding, and the land was in fact sold free from their liens, with their consent. Emigrant Industrial Savings Bank v. Goldman, 75 N. Y. 127. As to the claim of the two senior mortgagees, joined as defendants, the complaint after alleging the giving of the senior mortgages,prior to the consolidation of the companies and to the giving of plaintiff’s mortgage, and the assumption thereof by the defendant’s railroad company in the joint agreement for consolidation, alleged as follows: “ That the several defendants in this action, other than the Tonawanda Valley and Cuba Railroad Company, and also the Farmers’ Loan and Trust Company, and the defendant James D. Fish, as trustees, respectively, under the mortgages made as aforesaid by the said Tonawanda Valley, and the said Tonawanda Valley Extension Railroad Companies, have, or claim to have, some interest in or lien upon the premises and property so mortgaged as aforesaid to the plaintiff, or some part thereof, which interest or lien, if any, has accrued subsequently to the lion created by the said indenture of trust and mortgage, so as aforesaid executed and delivered to the said defendant, .James D. Fish, and upon the trusts of which the plaintiff has duly become the new and substituted trustee, in his place and stead. “ That the plaintiff desires to have the amount of the outstanding bonds and coupons, secured by the said mortgages of said the Tonawanda Valley, and said the Tonawanda Valley Extension Railroad Companies, to the said Farmers’ Loan and Trust Company of New York, and the said James D. Fish, as trustees, as aforesaid, ascertained and determined, and the extent of the lien of said prior mortgages, and each of them, ascertained and determined, and that the amount thereof may be paid out of the proceeds of sale of the property and premises covered thereby, or that said property and premises covered thereby may be sold subject to such lien, as may be just and proper; and the said The Farmers’ Loan and Trust Company, and the said James D. Fish, as trustees, as aforesaid, are made parties defendant in this aetion for that purpose only. “ That the security so as aforesaid given to this plaintiff for the payment of the said bonds, secured by the said indenture of trust and mortgage, and of the interest thereon, is inadequate to secure the payment of said bonds with the said interest thereon, according to their tenor and effect, after the payment of the necessary expenses of operating and maintaining said railroad, and of the interest upon the outstanding bonds secured by the prior mortgages held by the said defendants, The Farmers’ Loan and Trust Company, and James D. Fish, as trustees, respectively, as aforesaid. “ That the said defendant, the Tonawanda Valley and Cuba Railroad Company has, since the date and delivery of its said indenture of trust and mortgage, incurred a large floating debt, amounting to upwards of one hundred and twentv-tive thousand dollars, which now-remains overdue and unpaid, and which the said defendant railroad company has no means to discharge. “ That many of the creditors to whom the said defendant railroad company is indebted on said floating debt, are pressing it for immediate payment, and that judgments against it have boon obtained by certain of said creditors; that the said defendant railroad company has made default in the payment of the semi-annual installments of interest which became due and payable on November 1, 1884, upon the said outstanding bonds secured by the said mortgage of the Tonawanda Valley Railroad Company, to the said defendant, The Farmers’ Loan and Trust Company, as trustee, as aforesaid; and that it has also made default in the payment of the semi-annual installment of interest due and payable on September 1, 1884, upon the said outstanding bonds secured by the said mortgage of the Tonawanda Valley Extension Railroad Company, to the said defendant, James D. Fish, as trustee, as aforesaid; that said defendant railroad company has not paid said semiannual installments of interest on said last- mentioned classes of bonds, or either or any of them, although payment thereof has been duly demanded.” The demand for judgment, so far as it referred to the claims of the senior mortgagees, was “that the said indenture of trust and mortgage so as aforesaid executed and delivered by the defendant, the Tonawanda Valley and Cuba Railroad Company, be decreed to be the first and paramount lien on the premises, thereby granted and mortgaged, subsequent and subject only to the lien created by the said prior mortgage to the Farmers’ Loan and Trust Company, and the said prior mortgage, to the said James D. Fish, as trustees, respectively, upon the premises granted respectively thereby. . . . “ That the amount of the outstanding bonds and coupons secured by each of the said prior mortgages lo the defendant, the Farmers’ Loan and Trust Company, and the defendant, James D. Fish, as trustees, respectively, as aforesaid, may be ascertained and determined, and the extent of the lien of the said prior mortgages ascertained and determined. “ That all and singular the said premises, with the appurtenances, property, effects, incidents, additions and increase thereof, and with all the rights, immunities and franchises in said mortgage mentioned, may be sold under a final judgment or decree of this court, and that such final judgment or decree may provide that the same'be sold, subject to the lieu of the said prior mortgages to the said. The Farmers’ Loan and Trust Company, and the said James D. Fish, as trustees, as aforesaid, on the premises covered by them; or that the amount of said lien be paid, satisfied and discharged out of the proceeds of such sale, as may appear to be for the best interests of the parties to this action. . . . “ That an accounting may be had wherein and whereby shall be ascertained and determined the amount due upon said bonds for principal and interest as aforesaid, secured by the said indenture of trust and mortgage, and what allowances should equitably be made to the plaintiff as trustee; and that out of the moneys arising from the sale of the said property under said decree, after the payment of the costs and expenses of the action, and the expenses of the sale, and any allowance which may be made to the plaintiff and to its attorneys and counsel, and any prior liens or incumbrances on said mortgaged- premises, the amount of the balance may be applied to the satisfaction of the whole sum secured by the indenture of trust and mortgage, with such a rebate of interest as justice may require, and. paid .over to the plaintiff, as trustee, or to the holders of said bonds pro rata." The special provisions of the judgment affecting the claim of the Farmers’ Loan and Trust Company, as mortgagee, were as follows: [Usual directions as to manner of sale at auction; adjournment of sale only upon the joint request of the plaintiff and the defendant, Trust Company, and decreed.] “ That the said entire property and premises shall be sold as an entirety, subject to the mortgage made by The Tonawanda Valley Extension Railroad Company, as aforesaid, and the payment of the amount due on the bonds secured by the same; and also with the proviso to be incorporated in the terms of sale (in case the mortgage made by The Tonawanda Valley Railroad Company, to the Farmers’ Loan and Trust Company, be outstanding and unpaid at the time of such sale), that unless the purchaser or purchasers at such sale, or some other person shall, within ninety days from the date of this judgment, pay off and discharge the amount here found due, for principal and interest under the mortgage made by The Tonawanda Valley Railroad Company, to the defendant, The Farmers’ Loan and Trust Company, together with the allowances made to The Farmers’ Loan and Trust Company, and its costs herein, then that the portion of the entire property herinafter described and designated as “Parcel No. 1” (being the property subject to the said .mortgage made to the defendant, The Farmers’ Loan and Trust Company), shall be sold separately, in order to satisfy, pay off and discharge the amount found due on said mortgage, so made by the Tonawanda Valley Railroad Company to The Farmers’ Loan and Trust Company, as aforesaid. “ That unless the purchaser or purchasers at the sale of the entire property so to he made, as aforesaid, or some other person, shall, within ninety days from the date of this judgment, pay off and discharge the amount here found due for principal and interest under the mortgage made by The Tonawanda Valley Railroad Company to the defendant, The Farmers’ Loan and- Trust Company, together with the allowances made to the-Farmers’Loan and Trust Company, and its costs herein, then ” [that the Parcel No. 1 be sold separately in the same manner, with the usual provisions for notice and adjournment of sale, and for purchase by the parties.] “ But in case the plaintiff, or any other person shall pay The Farmers’ Loan and Trust Company, as trustee, the entire amount due under the bonds secured by the mortgage made to that company as trustee, as aforesaid, before the sale of the entire property as aforesaid, together with all costs and allowances hereby made to the said Farmers’ Loan and Trust Company, and its attorneys, then the entire property as hereinafter described, shall he sold as an entirety, subject only to the lien of the mortgage made by the Tonawanda Valley Extension Railroad Company to James D. Fish, as aforesaid, and of the bonds secured thereby. “ In no case shall the purchaser of the entire property under this decree be entitled to receive a deed for the entire property in pursuance of such sale until the said mortgage made by The Tonawanda Valley Railroad Company to The Farmers’ Loan and Trust Company, shall have been paid off and discharged as aforesaid, together with the allowances to The Farmers’ Loan and Trust Company, and its costs herein, unless such deed by the terms thereof shall be made expressly subject to the provisions of this judgment in regard to a separate sale oí “ Parcel No. 1,” in case the purchaser of the entire property fail to pay off the mortgage to the Farmers’ Loan and Trust' Company, within the time limited therein, together with costs and allowances, or in case such payment shall not be made, until the property covered by the said mortgage has been sold separately in pursuance to this decree in order to satisfy the said mortgage. In case it shall be necessary to make such sale, and such sale shall actually be made, then the deed which the purchaser of the entire property shall receive, shall not include the said first parcel, being the property subject to the said mortgage to The Farmers’ Loan and Trust Company, but shall only convey to the purchaser the remainder of the property covered by the mortgage under which the plaintiff herein is trustee.” [Terms of sale. Usual provisions foreclosing defendants, and all claiming under them, “ except that the lien of the Tonawanda Valley Extension mortgage is not effected by this sale;” any deed of the entire property to be given subject to the mortgage made by the Tonawanda Valley Extension Railroad Company ] “ That the referee hereby appointed to pay and distribute the proceeds of the sale of the entire property, had under and in pursuance hereof (such sale being made subject to the said mortgage as aforesaid) as follows, namely:” [Provisions as to costs and allowances to the respective parties, and] ,l that in case the referee hereby appointed shall sell, under the provisions of this decree, as a separate parcel, Parcel No. 1, being the property covered by the mortgage to the Farmers* Loan and Trust Company; he shall pay and distribute the proceeds of such separate sale of Parcel No. 1, as follows, namely: He shall retain his own fees and expenses in executing this judgment as to said Parcel No. .1, to be settled and allowed by this court, and shall then pay to the following persons, taking their receipts respectively therefor, and in the following order, priority and proportion, that is to say, he shall pay (unless any of said payments shall have been already made from the proceeds of the sale of the entire property, in which case he shall only pay the amounts then unpaid) to the defendant, the Farmers’ Loan and Trust Company, or its attorneys [its costs, allowance, and compensation as trustee; a portion of indebtedness and compensation of receiver therein appointed.] “ The balance of the proceeds of such sale he shall pay over to the defendant, the Farmers’ Loan and Trust Company, to the extent of the amount found due under the mortgage made to the said defendant, the Farmers’ Loan and Trust Company, as aforesaid; but if the proceeds of such sale be not sufficient to pay the same in full, then the entire balance shall be paid over to the defendant, the Farmers’ Loan and Trust Company. If any surplus moneys shall remain of the proceeds of the sale of the said Parcel No. 1, after-payment in full of the several amounts hereinabove directed to be paid out of the proceeds of the sale of said parcel, then the balance shall be applied in the same manner as the referee is hereinbefore directed to apply the proceeds of the sale of the entire property, on a sale thereof, under the provisions of this decree. [Distribution of proceeds by trustees among the holders of the bonds and coupons. Deficiency judgments in favor of the plaintiff, and of the defendant Trust Company-; release by the railroad company and its receiver, jointly with the referee, to purchasers at the sale; usual provision for further directions at the foot of the judgment, and a description of the property referred to .as “Parcel No. 1,” and of that referred to as the “ Entire Property,” [MAJORITY — Bradley, J.] Bradley, J. The plaintiff was at liberty to make the senior mortgagees parties defendant so as to have the amount secured by their mortgages ascertained and determined by the judgment, that they might be paid out of the proceeds of the sale, and their lien discharged, or that the sale might be made subject to the known amount of their liens (Western Ins. Co. v. Eagle Fire Ins. Co., 1 Paige, 284; Vanderkemp v. Shelton, 11 Id. 29; Holcomb v. Holcomb, 2 Barb. 20; Emigrant Industrial Savings Bank v. Goldman, 75 N. Y. 127). The desire expressed in the complaint is to have the amount of those mortgages ascertained that the amount may be paid out of the proceeds of the sale, or that the premises may be sold subject to their liens; and judgment is in like manner in the alternative demanded. The question is, whether the defendant, The Farmers’ Loan and Trust Company, could properly set up in the answer and make available by the judgment, the matter alleged, and the demand for affirmative relief by way of foreclosure of its mortgage, and sale of the premises and property covered by it. This defendant could have brought its action in the nature of a cross-bill for such relief.. The right to seek it as a defendant is dependent wholly upon the statute. And the enquiry arises whether it is a counterclaim within the meaning of the statute, which provides that the answer may contain a statement of new matter constituting a counterclaim (Code Civ. Pro. § 500); that the counter-claim “must tend in some way to diminish or defeat the plaintiff’s recovery,” and must be a cause of action “against the plaintiff, or in a proper case, against the person whom he represents, and in favor of the defendant, or of one or more defendants, between whom and the plaintiff a separate judgment may bo had in the action.” And such cause of action must arise “ out of the contract or tiansaction, set forth in the complaint as the foundation of the plaintiff’s claim, or connected with the subject of the action or 2, “In an action on contract, any other cause of action on contract existing at the commencement of the action” (Id. § 501.) And in such case, when entitled thereto, the defendant may have judgment for the affirmative relief demanded in the answer (Id. §504). The subject of the plaintiff’s action is the mortgage made by the consolidated company, and the property covered by it, which embraces that in the senior mortgage of the defendant, and the purpose of the action is to foreclose the mortgage and sell the property. It is contended on the part of the plaintiff, that the cause of action alleged in the answer, is not a cause of action against the plaintiff, and does not tend to diminish or defeat the plaintiff’s recovery, and that it is not connected with the subject of the action. The plaintiff, as a junior mortgagee, would be a necessary party defendant, in an action to foreclose the senior mortgage. That situation seems to be sufficient to constitute a cause of action against the plaintiff, within the meaning of the statute. The affirmative relief demanded by the answer, and given by the judgment, in some sense qualifies or diminishes the plaintiff’s recovery, in view of the allegations of the complaint and the relief demanded by it; and yet preserves all the rights to which the junior mortgagee is entitled, and affords to the senior one only such priority as it is entitled to. And this is a legitimate result if the matter alleged in the answer is in other respects within the requirements of a counterclaim. In Vassear v. Livingston (13 N. Y. 248), the plaintiff was not a proper party to any action in favor of the defendant upon the claim alleged. And it was not a counterclaim, because it was no cause of action against the plaintiff. And to the same effect is Frick v. White (57 N. Y. 103-107). While the defendant is not a necessary party defendant to the action for the foreclosure of the plaintiff’s mortgage, and the defendant’s cause of action may not arise out of the contract or transaction set forth in the complaint as the foundation of the plaintiff’s claim, it seems to be connected with the subject of the action. The requisite of connection of the defendant’s cause of action, with the subject of the plaintiff’s action, is not defined or restricted by the provisions of the statute. There must only be some connection. And it has been said that it “ must have such relation to, and connection with the subject of the action, that it will be just and equitable that the controversy between the parties as to the matters alleged in the complaint and in the counterclaim should be settled in one action by one litigation ” (Carpenter v. Manhattan Life Ins. Co., 93 N. Y. 552, 556). The theory and policy of the statute providing for the disposition of controversies by actions, is that the rights of all parties to an action, as between the plaintiff and all or any of the defendants, and as between the defendants themselves, shall be adjusted and declared by the judgment, when the relation between them and the subjects involved are such as to permit it to be done within the practice prescribed (Code Civ. Pro. § 1204; Derham v. Lee, 87 N. Y. 599). In Raffarty v. Williams (34 Hun, 544), cited by the plaintiff’s counsel, the controversy presented by the answer, was wholly between the defendants, and had no relation to the subject of the action. And the court held that it was not within section 1204 of the Code, But, prior to the present Code, the affirmative relief sought by the defendant in this action was not available as a counterclaim, because the practice did not provide for service of pleadings by one defendant upon another, and thus permit to be brought before the court, upon the cause of action so alleged by a defendant, the' other parties defendant requisite to the determination of the claim. The statute now, in view of such practice, provides that “ where the judgment may determine the ultimate rights of two or more defendants as between themselves, a defendant who requires such a determination must demand it in his answer, and must at least twenty days before the trial serve a copy of his answer upon the attorney for each of the defendants to be affected by the determination,” etc. (Code Civ. Pro. § 521). This service was made, and all the parties requisite to the relief, so far as appears, were thus brought into the controversy tendered by the defendant’s answer of the alleged counterclaim. That section, and this proceeding under it, extended the application and practical effect of section 1204 (Kenney v. Apgar, 93 N. Y. 539-547). And as the alleged claim of the defendant embraces both a.cause of action against the plaintiff, arid against some of the co-defendants, and is connected with the subject of the action, and in some degree may goto diminish the plaintiff’s recovery, as measured by the relief within the demand and allegations of the complaint, the relief asked for and obtained by this defendant, seems to come within the meaning of the statute defining a counterclaim. This does not necessarily result from or require the conclusion of any enlargement of the power of the court by the provisions of section 521, but as a matter of practice, extended and regulated by that section, the manner of the exercise of the power of the court is enlarged, and the means are provided to parties defendant, in proper cases, to extend the operation and effect of the provisions of section 1204, and embrace within the term counterclaim some claims which before then the practice provided by the statute did not permit to be made available as such. (Albany Savgs. Inst. v. Burdick, 87 N. Y. 40). The practice as applied to a case of this character, and the judgment as rendered in this action, we think are not in contravention of any provision of the statute providing for the foreclosure of mortgages by action, and the sale of the premises pursuant to judgments therein. And there seems to be no impropriety in providing for, and pursuing the practice adopted in this case. The rights of the parties are as effectually preserved in the one, as they could have been in two distinct actions. And it is not seen that the interests of the parties represented by the plaintiff are prejudiced by the dual relief given by the judgment. There is no force in the objection that the answer did not in express terms define as a counterclaim the matter set up as such, inasmuch as it distinctly appears by the relief demanded that it was intended as a counterclaim. Hone of the plaintiff’s exceptions presented here for consideration seem to have been well taken. . The portion of the judgment appealed from should be affirmed. Babkeb and Haight, JJ., concurred.