280 N.Y. 9 (1939)

A municipality cannot enact legislation that retroactively impairs the priority of existing mortgage liens to enforce compliance with housing codes, as this violates the Due Process and Contract Clauses of the U.S. and New York Constitutions.

Summary

Central Savings Bank challenged the constitutionality of a 1937 amendment to the Multiple Dwelling Law, which allowed New York City to prioritize liens for housing code violations over existing mortgages. The Court of Appeals held the amendment unconstitutional as applied to prior mortgagees. The court reasoned that the law deprived mortgagees of their contractual rights and property without due process by allowing the city to unilaterally impose liens that diminished the value of their security without providing an opportunity to be heard on the reasonableness of the expenses. The law forced mortgagees to finance improvements without their consent, impairing their existing contractual lien priority.

Facts

Central Savings Bank, Emigrant Industrial Savings Bank, and Dry Dock Savings Institution collectively held approximately 4,500 mortgages on old law tenement houses in New York City. Central Savings Bank held a $20,000 first mortgage on a property at 45 First Avenue, dated March 24, 1927. The property had existing violations for failing to comply with the Multiple Dwelling Law. The Department of Housing and Buildings issued an order to remove the violations. The city intended to make the repairs itself and impose a lien of $1,621 on the property that would take priority over the bank’s mortgage.

Procedural History

The banks brought a lawsuit challenging the constitutionality of Section 309 of the Multiple Dwelling Law, as amended by Chapter 353 of the Laws of 1937, as it applied to them as mortgagees. The lower court ruled in favor of the City. The banks appealed to the New York Court of Appeals.

Issue(s)

Whether Section 309 of the Multiple Dwelling Law, as amended by Chapter 353 of the Laws of 1937, is constitutional under the United States and New York State Constitutions, specifically regarding its impact on the rights of existing mortgagees.

Holding

No, because the law impairs the contractual rights of mortgagees and deprives them of property without due process of law, violating both the Federal and State Constitutions.

Court’s Reasoning

The court reasoned that the amendment to the Multiple Dwelling Law unconstitutionally impaired the mortgagees’ contractual rights and deprived them of property without due process. The court emphasized that while the state has the power to regulate tenement houses for public health and safety, it cannot force mortgagees to bear the cost of improvements without their consent or an opportunity to be heard. The court stated, “The mortgagee not being in possession, has no option whatever, but must sit idly by while the department or the owner proceeds to diminish the value of his lien. The work being done, and the record and affidavit being filed with the Board of Assessors, as required, the expenses become a lien upon the property ahead of his mortgage, all of which is final as to him. The law affords him no opportunity to be heard as to the reasonableness of the proceeding or the expenses. His property is thus taken without due process of law.” The court distinguished the mortgagee’s situation from the owner’s, noting that the owner could choose to close the building or convert it to other uses, whereas the mortgagee had no such option and was forced to accept a diminished security interest. The court also rejected the argument that the improvements necessarily increased the value of the property, stating, “It is a speculation, with the chances greatly against their doing so. We may fairly assume that the lien given to the city for the required improvements very materially affects the mortgage security, the property of the mortgagee, and abrogates the contract which he has made with the mortgagor.”