New York Law Review

Tag: Surplus Funds

  • Manufacturers and Traders Trust Co. v. David A. Dann, 85 N.Y.2d 760 (1995): Effect of RPAPL 1301(3) on Junior Mortgagees

    Manufacturers and Traders Trust Co. v. David A. Dann, 85 N.Y.2d 760 (1995)

    RPAPL 1301(3) is debt-specific and mortgagee-specific; a junior mortgagee who applies for surplus funds from a senior mortgagee’s foreclosure sale is not barred from bringing a separate action to recover the remaining debt without court permission.

    Summary

    This case addresses whether a junior mortgagee, after applying for surplus funds from a senior mortgagee’s foreclosure sale, must obtain court permission under RPAPL 1301(3) before suing the mortgagor for the remaining debt. The Court of Appeals held that applying for surplus funds is not a foreclosure action under the statute, and the statute is mortgagee and debt specific. Therefore, the junior mortgagee was not required to seek court permission before suing the mortgagor for the deficiency. The statute aims to prevent duplicative litigation concerning the same debt by the same party.

    Facts

    Defendant Dann borrowed money from Plaintiff Central Trust Co. (now Manufacturers and Traders Trust Co., MTT), securing the loan with a second mortgage on his property. Monroe Savings Bank held the first mortgage. Dann defaulted on both mortgages. Monroe initiated foreclosure proceedings, naming Central Trust as a defendant due to its subordinate lien. The property was sold, and a surplus remained after Monroe was paid. MTT claimed the surplus. Supreme Court ordered the balance paid to MTT. MTT then sued Dann for the remaining balance of the second mortgage loan.

    Procedural History

    MTT sued Dann in Supreme Court for the balance of the mortgage. Dann raised RPAPL 1301 as an affirmative defense. Supreme Court granted MTT’s summary judgment motion, holding that MTT did not commence a foreclosure action and that RPAPL 1301 did not apply. The Appellate Division affirmed. The Court of Appeals granted Dann leave to appeal.

    Issue(s)

    1. Whether a junior mortgagee’s application for surplus funds from a senior mortgagee’s foreclosure sale constitutes a foreclosure “action” under RPAPL 1301(3)?

    2. Whether RPAPL 1301(3) applies to all mortgagees after a senior mortgagee’s foreclosure action, requiring them to obtain court permission before commencing any legal action?

    Holding

    1. No, because an application for surplus funds is not an independent foreclosure action under RPAPL 1301(3).

    2. No, because RPAPL 1301(3) is debt-specific and mortgagee-specific.

    Court’s Reasoning

    The court reasoned that RPAPL 1301(3) is mortgagee and debt-specific, stating that “[w]hile the action is pending or after final judgment for the plaintiff therein, no other action shall be commenced…to recover any part of the mortgage debt” (emphasis in original). The use of “the” signifies a specific action and debt, not just any mortgage debt. The court cited Reichert v. Stilwell, stating that the statute aims to shield the mortgagor from multiple simultaneous actions concerning the same debt. The court also relied on Wyckoff v. Devlin, which held that the predecessor statute of RPAPL 1301(3) did not prohibit a junior mortgagee involved in surplus proceedings from commencing its own action to recover the debt without court permission because a deficiency judgment could not be obtained in the surplus proceeding. The Court emphasized that because MTT could not have obtained a deficiency judgment in the surplus money proceeding, it was not barred from suing on the note. The court explicitly declined to address whether the plaintiff could have sought a deficiency judgment in the senior mortgagee’s foreclosure proceeding, as that was not the proceeding in which the plaintiff participated. This case clarifies that RPAPL 1301(3) is narrowly construed and that junior mortgagees retain their right to sue for the deficiency under their own mortgage without court approval after participating in a surplus money proceeding initiated by a senior mortgagee.

  • Sheehan v. County of Suffolk, 67 N.Y.2d 52 (1986): Constitutionality of Tax Foreclosure and Retention of Surplus Funds

    Sheehan v. County of Suffolk, 67 N.Y.2d 52 (1986)

    A real property tax scheme providing notice to the taxpayer of taxes due, notice of delinquency, a tax lien sale, a redemption period, and notice of impending expiration of the redemption period before resale at public auction, with the county retaining any surplus, does not violate due process or constitute a taking without just compensation.

    Summary

    This case addresses whether a county’s tax foreclosure procedures, which involve purchasing tax liens without competitive bidding and retaining surplus funds after the property’s resale, violate the Due Process Clauses of the State and Federal Constitutions or constitute a taking without just compensation. The Court of Appeals held that such procedures are constitutional, emphasizing the property owner’s responsibility to be aware of relevant statutes and the sufficiency of the provided redemption period. The court reasoned that due process is satisfied when taxpayers receive notice and an opportunity to be heard regarding property valuation, and a lengthy redemption period mitigates any potential unfairness arising from the county’s retention of surplus funds.

    Facts

    Plaintiffs in Sheehan v. County of Suffolk and MacKechnie v. County of Sullivan failed to pay their real property taxes. Suffolk County notified the plaintiffs of their tax delinquency and impending tax lien sale. Suffolk County purchased the tax liens itself at a sale where it was the only allowed bidder. Plaintiffs were notified before the end of the 36-month redemption period. After the redemption period expired and the plaintiffs failed to redeem, the counties obtained deeds to the properties and later sold them at public auctions, retaining the surplus. Orange County retained the deed to one property and refused redemption.

    Procedural History

    In Sheehan v. County of Suffolk, Special Term dismissed the complaint upon cross-motions for summary judgment, and the plaintiffs appealed directly to the Court of Appeals. In MacKechnie v. County of Sullivan, Special Term dismissed the plaintiff’s action for failure to state a cause of action, and the plaintiffs took a direct appeal to the Court of Appeals.

    Issue(s)

    Whether a county’s failure to inform property owners that tax liens would not be sold at competitive bidding and that owners would not receive any surplus from the ultimate sale of the properties violated the Due Process Clauses of the State and Federal Constitutions.

    Whether permitting the counties to purchase tax liens without competitive bidding and then sell the properties without turning over the surplus to the owners constitutes a taking without just compensation.

    Holding

    No, because an owner of property is charged with the knowledge of statutory provisions affecting the disposition of their property, and the taxpayers received sufficient notice and opportunity to redeem their property.

    No, because taxpayers are given a sufficient redemption period to either pay the taxes and penalties or sell the property subject to the lien and retain the surplus.

    Court’s Reasoning

    The Court reasoned that property owners are presumed to know the statutory provisions governing their property. Therefore, the plaintiffs’ failure to understand the implications of non-payment, including the potential for non-competitive bidding and the county’s retention of surplus funds, was their own responsibility. The Court emphasized that “an owner of property is charged with knowledge of statutory provisions affecting the control or disposition of his or her property.”

    The Court cited Texaco, Inc. v. Short, 454 U.S. 516, 531, and Congregation Yetev Lev D’Satmar v. County of Sullivan, 59 N.Y.2d 418, 423 to support its assertion that owners are responsible for knowing the law. The Court also found that due process does not require that every taxpayer be advised of all possible consequences of default, as long as they receive notice and an opportunity to be heard on the valuation of their property.

    The court highlighted that the three-year redemption period provided a sufficient opportunity for the taxpayers to reclaim their property. The court cited Chapman v. Zobelein, 237 U.S. 135 and Turner v. New York, 168 U.S. 90, 94, noting that statutes allowing the state to retain excess funds upon public sale have been upheld when coupled with a lengthy redemption period. The Court distinguished United States v. Lawton, 110 U.S. 146, noting that the statute in that case required the return of any surplus.

    Finally, the Court stated that there is no constitutional requirement for tax liens to be sold through competitive bidding. Citing Saranac Land & Timber Co. v. Comptroller of N. Y., 177 U.S. 318, 326-328, the Court acknowledged that legislatures can permit localities to restrict tax lien sales to governmental bodies in response to abuses by land speculators.

  • People ex rel. Union Trust Co. v. Coleman, 126 N.Y. 433 (1891): Taxation of Corporate Franchise Based on Dividends

    People ex rel. Union Trust Co. v. Coleman, 126 N.Y. 433 (1891)

    Dividends declared from surplus funds accumulated prior to the enactment of franchise tax laws are not considered ‘dividends made or declared’ for the purpose of computing franchise taxes under those laws.

    Summary

    The New York Court of Appeals addressed whether a dividend paid from a corporation’s surplus, accumulated before the enactment of franchise tax laws, should be included when calculating the corporation’s franchise tax. The Court held that such dividends should not be included. The tax is on the corporate franchise, measured by dividends declared during the tax year. Dividends from previously accumulated surplus do not reflect the current year’s value of the franchise. Including them would be contrary to the spirit and intent of the tax law, which aims to measure the value of the privilege of doing business during the year in question.

    Facts

    The Union Trust Company had a capital of $2,000,000. On January 1, 1881, the company had a surplus of $201,942.64, accumulated from past earnings. In January 1881, the company declared a dividend of $12,500 (6.25% of its capital stock) from current earnings. In February 1881, the company also resolved to distribute $100,000 from its surplus fund to its stockholders, in anticipation of a charter extension. This $100,000 was earned before January 1, 1880.

    Procedural History

    The case originated from a dispute over the amount of franchise tax owed by the Union Trust Company. The lower court calculated the tax based on a dividend rate of 56.25% (including both the $12,500 and the $100,000 dividends). The Union Trust Company appealed. The Court of Appeals reversed the lower court’s decision, holding that the $100,000 dividend should not have been included in calculating the franchise tax.

    Issue(s)

    Whether a dividend paid out of a surplus fund, accumulated from earnings prior to the enactment of the franchise tax law, constitutes a ‘dividend made or declared’ during the relevant tax year for the purpose of calculating the franchise tax.

    Holding

    No, because the franchise tax is intended to measure the value of the corporate franchise during the year in question, and a distribution of previously accumulated earnings does not accurately reflect that value. The Court amended the judgement, excluding the $2,500 in tax associated with the $100,000 dividend from surplus.

    Court’s Reasoning

    The Court reasoned that the franchise tax is not a tax on dividends themselves or on the corporation’s property, but rather a tax on the privilege of operating as a corporation. The amount of dividends declared during the year is simply a measure of the annual value of that franchise. The court emphasized, “As dividends can be legally made only out of earnings or profits, and cannot be made out of capital, they are assumed to approximate as nearly as practicable the just measure of the tax which should be imposed upon the corporation for the enjoyment of its franchise.” The court distinguished between current earnings and previously accumulated surplus. The Court stated that including a distribution of surplus earned in prior years would be contrary to the spirit and intent of the law: “A division of property thus previously acquired could not have been within the contemplation of the framers of the act, in fixing upon the annual dividends as a measure of the value of the franchise of the corporation, and even if a dividend within the letter of the act, to construe it as a dividend for the purposes of the act would be so contrary to its spirit and intent, that such a construction is inadmissible.” The Court cited Bailey v. Railroad Co., 106 U.S. 109, where the Supreme Court held that a tax on dividends should only apply to earnings accrued after the passage of the tax law. The Court concluded that the tax should be calculated based only on the dividend of 6.25% paid from current earnings.