New York Law Review

Tag: guarantor liability

  • Kreisler v. Bartliff, 68 N.Y.2d 668 (1986): Deficiency Judgments and Mortgages on Multiple Properties

    Kreisler v. Bartliff, 68 N.Y.2d 668 (1986)

    When a single debt is secured by mortgages on both a corporate debtor’s property and an individual guarantor’s separate property, failure to obtain a deficiency judgment after foreclosing on the corporate property bars subsequent foreclosure on the guarantor’s property or further action on the guarantee under RPAPL 1371(3).

    Summary

    Plaintiffs loaned money to a corporation, secured by mortgages on corporate properties and a personal guarantee from the corporation’s principals, also secured by a mortgage on the guarantor’s property. After the corporation defaulted, plaintiffs foreclosed on the corporate property but did not seek a deficiency judgment. Subsequently, they attempted to foreclose on the guarantor’s property. The New York Court of Appeals held that the failure to obtain a deficiency judgment after the first foreclosure barred the second foreclosure action, as RPAPL 1371(3) deems the proceeds of the initial sale as full satisfaction of the debt, protecting guarantors from further liability in such situations. The court emphasized that the statute’s purpose extends beyond preventing multiple lawsuits to ensuring fair valuation of property in deficiency calculations.

    Facts

    1. Plaintiffs loaned $35,000 to Journey’s End Construction Corporation, receiving mortgages on three corporate properties as collateral.
    2. Sanford and Sue Kreisler, principals of the corporation, personally guaranteed the loan, as did Jeanette Palmer, who secured her guarantee with a second mortgage on her property.
    3. The corporation defaulted on payments in October 1975.
    4. Plaintiffs initiated separate foreclosure actions: one against the corporate property (Shirley property) and another against Palmer’s property (Sayville property).
    5. Palmer was named as a defendant in the corporate property foreclosure action.
    6. Plaintiffs obtained a Referee’s deed for the corporate property after foreclosure, but never moved for a deficiency judgment.
    7. Plaintiffs then scheduled a foreclosure sale of Palmer’s Sayville property.

    Procedural History

    1. Plaintiffs initiated foreclosure actions in Special Term.
    2. Special Term held that failure to move for a deficiency judgment in the corporate property foreclosure barred foreclosure on Palmer’s property.
    3. The Appellate Division affirmed this decision.
    4. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the failure to obtain a deficiency judgment after foreclosure on a corporate debtor’s property bars a subsequent foreclosure action on a guarantor’s property, when both secure the same debt.

    Holding

    1. Yes, because RPAPL 1371(3) deems the proceeds of the initial sale as full satisfaction of the mortgage debt when a deficiency judgment is not sought, thereby protecting the guarantor from further liability.

    Court’s Reasoning

    The Court of Appeals reasoned that while the original purpose of RPAPL 1371 was to avoid multiple lawsuits, amendments in the 1930s expanded its scope to protect mortgagors (and, by extension, guarantors) from unfair deficiency judgments during economic downturns. The court stated, “the proceeds of the sale regardless of amount shall be deemed to be in full satisfaction of the mortgage debt and no right to recover any deficiency in any action or proceeding shall exist” (RPAPL 1371 [3]). The court emphasized that this protection extends to guarantors who provide additional security. Because Palmer was named as a defendant in the initial foreclosure action, she was entitled to the statute’s protection. The court rejected the argument that separate foreclosure actions are permissible when multiple properties secure a single debt, holding that unless the court orders otherwise, separate sales should occur with deficiency applications made after each sale to determine the remaining debt. The court explicitly disapproved of cases suggesting a contrary view, underscoring the importance of protecting guarantors and ensuring fair valuation in deficiency calculations.

  • Marine Midland Bank v. Green, 48 N.Y.2d 903 (1979): Guarantor Liability and Constructive Repossession Under UCC

    Marine Midland Bank v. Green, 48 N.Y.2d 903 (1979)

    A creditor’s unsuccessful attempt to sell collateral and notification to the debtor of a proposed sale does not constitute constructive repossession under UCC § 9-503, thereby preserving the creditor’s right to pursue a deficiency judgment against a guarantor.

    Summary

    Marine Midland Bank sought to recover the unpaid balance on a guaranteed equipment lease from the defendants after the lessee defaulted. The defendants argued that the bank’s attempt to sell the equipment to a third party constituted a repossession under UCC § 9-503, limiting the bank’s recovery to the value of the collateral. The New York Court of Appeals held that the bank’s actions did not amount to constructive repossession because the bank never took physical possession or interfered with the lessee’s use of the equipment. The court affirmed the lower court’s decision, allowing the bank to recover the full amount due from the guarantors, including attorney’s fees.

    Facts

    Defendants guaranteed a note for theatre equipment leased to a third party. The lease required an advance payment and monthly installments. After nine months, the lessee defaulted. The bank attempted to find a buyer for the equipment and notified the defendants of a proposed sale to Mi-Ann Theatre. The sale to Mi-Ann never materialized, but the bank did not formally notify the defendants until months later. The equipment remained on the lessee’s premises and continued to be used. The bank then sued the guarantors for the unpaid balance of the lease.

    Procedural History

    The trial court ruled in favor of the bank, holding the guarantors liable for the unpaid balance. The Appellate Division affirmed, directing inclusion of attorney’s fees in the judgment after a hearing. The case was then appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the bank’s conduct in attempting to sell the collateral constituted a constructive repossession under UCC § 9-503, thereby limiting its recovery to the security interest in the equipment.

    2. Whether attorney’s fees can be included in the judgment before they are actually paid.

    Holding

    1. No, because the bank did not take physical possession of the equipment or interfere with the lessee’s use of it; thus, there was no repossession that would limit the bank’s recovery to the collateral.

    2. Yes, because the value of the services was established before inclusion in the judgment, even if the fees had not yet been paid.

    Court’s Reasoning

    The court reasoned that under UCC § 9-503, a creditor must take possession of the collateral either by removing it or by rendering it unusable on the debtor’s premises to constitute a repossession. Here, the equipment remained on the premises and was used by the debtor continuously. The notice of sale offered the defendants an opportunity to protect their interests, but no sale ever took place, and the bank did not interfere with the use of the property. The court distinguished the case from Crowe v. Liquid Carbonic Co., where the creditor leased the collateral to a third party and appropriated the rent. In this case, the bank did not exercise dominion and control over the collateral. Because the bank made no election to retain the collateral in satisfaction of the debt, it was entitled to recover the whole amount due on the guarantee from the defendants.

    Regarding attorney’s fees, the court stated that its prior decisions do not require that the fees be paid before recovery may be had, only that the value of the services be established before inclusion in the judgment, citing Matter of First Nat. Bank v. Brower, 42 N.Y.2d 471, 473. The court found that the Appellate Division properly directed inclusion of attorney’s fees in the judgment after a hearing to establish their value.