36 N.Y.2d 173 (1975)

In the absence of an explicit agreement or clear evidence of intent, a mortgagor is not entitled to interest or earnings on funds held in a tax escrow account by the mortgagee, especially when dealing with sophisticated commercial parties.

Summary

Surrey Strathmore Corp., a commercial mortgagor, sought an accounting from Dollar Savings Bank, the mortgagee, for earnings on monthly tax installment payments held in escrow. The mortgage agreement was silent on interest, and the bank explicitly stated it would not pay interest at closing. The New York Court of Appeals held that the mortgagor was not entitled to an accounting or any earnings on the tax account. The court reasoned that the absence of an express agreement, coupled with the closing conversation, indicated no intent to pay interest or earnings. The court further noted that as a matter of public policy, the issue was for the legislature, which subsequently required interest payments on tax accounts for owner-occupied residences.

Facts

Appellant, Surrey Strathmore Corp., a business corporation, secured a $450,000 loan from respondent Dollar Savings Bank for an apartment complex, using a first mortgage. The mortgage agreement required monthly installment payments for real estate taxes, stating, “The mortgagee shall hold such monthly payments in trust to apply the same against such taxes, when due.” At the closing, the mortgagor’s representative asked about interest on the tax account and was informed that no interest would be paid. The mortgagor later requested that the tax monies be held in a separate, interest-bearing account, which the bank denied.

Procedural History

The mortgagor initiated an Article 77 proceeding for an accounting of the tax payments and any income earned. Special Term ruled against the mortgagor. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. The Court of Appeals affirmed the Appellate Division’s order, denying the mortgagor’s claim.

Issue(s)

Whether, under the terms of a commercial mortgage agreement requiring monthly tax installment payments, the corporate mortgagor is entitled to an accounting and any earnings realized by the mortgagee on those funds.

Holding

No, because the written agreement contained no explicit provision for interest or earnings, and parol evidence from the closing confirmed the parties’ intent that no such payment would be made.

Court’s Reasoning

The court determined that resolving the issue does not depend on labels such as “trust” or “debtor-creditor relationship,” but rather on the parties’ intended rights and obligations as shown in their written agreement. “Reasoning predicated on such concepts would accordingly be untrustworthy.” The court noted the absence of an express provision for interest or earnings in the agreement. While the mortgage stated that payments shall be held “in trust,” the court found that the language did not create an obligation to pay the mortgagor any income the bank may have earned by using those funds, specifically noting the silence on the matter suggests that no such payment was intended. Further, the court relied on parol evidence – specifically, the undisputed discussion at the closing where the bank explicitly stated that no interest would be paid on the tax payments. The court emphasized the sophistication of the mortgagor, precluding any claims of a contract of adhesion. Legislative action requiring interest on tax accounts for residential mortgages, passed after this mortgage was initiated, was also addressed. Dissenting judges argued that the “in trust” language created a trust relationship, entitling the mortgagor to any earnings, and that the parol evidence rule should bar consideration of the closing conversation. Judge Fuchsberg directly quoted the Restatement of Trusts to support the argument that the absence of an interest obligation does not negate the existence of a trust relationship, and therefore an obligation to remit earned income. However, the majority held that the legislature was the more appropriate venue to address a policy decision on those financial vehicles.