In the Matter of Louis Winter, Andrew Winter, Sam Winter and Pincus Winter, Individually and As Copartners, Doing Business As Winter & Sons, and the Partnership of Winter and Sons, Bankrupts.daniel N. Camoia, Trustee in Bankruptcy, Appellant, v. the City of New York, Appellee, 439 F.2d 808 (2d Cir. 1971)

In June, 1965, the bankrupts had mortgaged to the City of New York the premises at 916 Kelly Street, Bronx, as security for an indebtedness of approximately $121,000. The mortgage granted to the City a further security interest in rents derived from that building.¹  After the mortgagors were adjudicated bankrupt in November, 1966 and a bankruptcy trustee took over the operation of the building, the referee authorized the mortgagee to initiate an action to foreclose the defaulted mortgage. Pursuant to this order the mortgagee obtained a state court judgment of foreclosure and sale in the amount of $132,552.31. At public auction the mortgagee purchased the property for $500. Subsequently the referee ordered the trustee to account to the City for rents and profits collected after initiation of the foreclosure action. The referee, in his report, determined a deficiency in the amount of $132,052.31 by subtracting the sale proceeds from the total indebtedness specified in the judgment of foreclosure, and ordered the trustee to pay over to the mortgagee the accumulated rents and profits.

This appeal is from the order of the district court denying the trustee's petition for review of that order. Because the findings upon which the referee relied are insufficient to support his order, we reverse and remand.

Because it had made no motion for a deficiency judgment, the City was entitled under the applicable statute to recover the collected rents and profits only "to the extent of the amount, if any, by which the judgment of foreclosure and sale exceed [ed] the amount paid for the property upon the sale." N.Y. Real Property Actions and Proc.Law § 1371(4) (McKinney's Consol.Laws, c. 81, 1962). The record demonstrates, and counsel for the City quite properly did not at oral argument in this court claim otherwise, that the "amount paid for the property" was not $500, as the referee found, but $500 plus the total mortgage indebtedness.

When the mortgagee became the successful bidder at the foreclosure sale, it acquired title to the mortgaged premises and the mortgagors were entitled to set off against the outstanding indebtedness the fair market value of the property on the date of that sale. See Hepworth v. Manetto Holding Corp., 262 App.Div. 877, 28 N.Y.S.2d 526 (1941). Both bankruptcy and mortgage foreclosure are equitable proceedings, but a judgment which gives the foreclosing mortgagee full title to an income producing apartment building, which in 1965 was of sufficient value to warrant a mortgage of $121,000, and also grants a deficiency judgment of $132,052.31 is hardly an equitable disposition, and must be set aside.

The City could have moved for a deficiency judgment under § 1371(2) of the Real Property Actions and Proc.Law which provides for a determination of fair market value. This was not done, however, and the City could only proceed under § 1371(4); but by bidding and paying $500 in addition to the mortgage indebtedness it, in effect, has taken the position that the value of the property is $500 over the mortgage debt, so that no deficiency is possible.

The judgment of the district court is reversed and the case is remanded for proceedings consistent with this opinion.