A recurring problem in condemnation proceedings is the status of mortgages on condemned property. Inevitably there arises the question of priorities, of proper rates of interest to be paid to the mortgagee and the dates when interest is paid. The answers to these problems are grounded in the fundamentals of the relationships of the parties in a condemnation proceeding.

A mortgage, of course, is nothing else but the security for a debt. While the mortgage is a real property interest, the debt is personal whether in the form of a bond or note. While often the owner of the property is personally liable for the debt, besides having the property stand as security for its payment, it is at least as usual that, for a variety of reasons, the present property owner is not personally liable for the debt but merely owns the property subject to the mortgage.

Debt Not Affected

When property is condemned the basic debt is not affected, the debtor remains ____ on the bond or note and has the right to proceed to collect the debt by enforcement of the bond in accordance with its terms (Muldoon v. Mid-Bronx Holding Corporation (287 N.Y. 229, 231, 1942, Copp v. Sands Point Marina 17 N.Y. 2d 291, 1966). At the same time the condemnation proceeding takes title down to the ground wiping out the mortgage and converting the mortgage into an equitable lien against the award having the same relative priority that it had as to the property itself (Fliegel v. Manhattan Savings Bank 296 N.Y. 214, 1947).

It is then that the obligation of the sovereign to pay the award is substituted for the security of the real property. While particular statutes may codify and amplify these principles, these rights do not depend upon statute but are grounded in the common law. Statutes such as section B 15-15.0(8) of the Administrative Code of the City of New York recognize a mortgagee as an “owner” of the property and thus entitled to a share of the award.

Case is Cited

Cases such as In re Matter of Dry Dock Savings Institute (104 N.Y.L.J., 115, decided Oct. 1, 1940, Sup. Ct. N.Y. Co., McLaughlin, J.) have stated that “after title is taken by the City the Appellate Division of this department has ruled that the money represented by the award is a fund and that a first mortgagee as well as any other lienor shares in that fund in accordance to its priority.”

However, since the debt remains unaffected by the condemnation it would appear that mortgagee in collecting its debt has the right to collect on the bond or in the alternative to enforce its debt against the condemnation award (or any deficiency after suing on the bond) (Copp v. Sands Point Marina, 17 N.Y. 2d 291). Pragmatic considerations in almost all instances foreclose the prior course of action since it takes a brave mortgagee indeed to substitute the certainty of a collection out of an award guaranteed by the sovereign for the uncertainty of both the ability to collect on a judgment against a debtor and to take one’s place in line as a recent judgment creditor against possible intervening lienors and/or judgment creditors.

Rights of Mortgagee

Assuming now that the mortgagee does not pursue its rights in accordance with the terms of its bond or note but looks to the condemnation proceeding there then comes into question the rights of the mortgagee in the condemnation proceeding. To begin with, as an owner of a right in the award the mortgagee has the right to appear in the proceeding to protect its interest, whether by way of fixing the award or by fixing the amount owing to it or by directing payment to it out of the award.

The courts have held that when an award has been tendered for payment stopping interest, the mortgagee may not wait for the former fee owner to move to collect the award and insist on payment to it of the interest owing to the date the mortgagee is paid, but it is the duty of the mortgagee as an owner of a part (or all) of the award to affirmatively move to collect the award and failing to do so in time, the loss of interest fails on it to the extent that the payment would have been paid to it (Matter of Dry Dock Savings Institution, 104 N.Y.L.J., 115, Oct. 1, 1940, Sup. Ct. N.Y. Co., McLaughlin, J.; In the Matter of the City of N.Y. Franklin D. Roosevelt Houses, N.Y.L.J., May 25, 1962, page 12; In re Washington Heights Federal Savings and Loan Assoc., N.Y.L.J., May 18, 1964, p. 17, N.Y. Sup. Ct., Fine, J.).

Treatment of Mortgagee

Further if the mortgage debt is to be collected out of the award the mortgagee is treated as an owner not only as to the dates of when interest is paid, but also as to the rate of interest. The statutory rate on condemnation awards presently is 6 per cent per annum. A mortgage may provide for a different rate. If the property is condemned the mortgagee will collect interest at no different rate than any other owner despite a different rate provided for in the mortgage (362 Washington Ct. Corp. v. Peninsula National Bank 53 Misc. 2d 499, 279 N.Y.S. 2d 204, 1967; In re City of N.Y. 267 N.Y.S. 2d 950; In the Matter of the City of New York, Franklin D. Roosevelt Houses, supra; In re Washington Heights Federal Savings and Loan Association supra; Fliegel v. Manhattan Savings Bank; supra; Muldoon v. Mid-Bronx Holding Corporation, supra).

An interesting wrinkle to the problem is where the mortgage instrument itself provides that in the event of condemnation interest shall be as provided for in the mortgage rather than at the statutory rate (In re Brooklyn Bridge Southwest Urban Renewal Project, 46 Misc. 2d 558, 260 N.Y.S. 2d 229, aff’d ___ A.D. 2d ___, 262 N.Y.S. 2d 1020, 1965) the court held the mortgagor to the agreement to pay the higher rate.

One is given to wonder why such an agreement should be given effect different than an ordinary bond or note which may provide for a higher interest rate. The courts have specifically held that the mortgagee is an owner, receive interest as does any other owner, that it is the sovereign which is paying the award and the interest and that where the mortgagee seeks enforcement of its debt against the award it is limited to the statutory rate.

Decision Cited

It is to be noted that the Appellate Division (Second Department in Copp v. Sands Point Marina, Inc., 21 App. Div. 2d 823, 824, 1964), treated the problem of swinging on the note and collecting the judgment from the award in the following language:

“Without prejudice to defendant’s future right to a refund of the amount equal to the difference between the statutory rate of 4 per cent interest payable in condemnation and the contract rate of 5 per cent in the event that plaintiff hereafter should obtain payment of the mortgage debt or interest thereon from the condemnation award . . . .”

It is, to us, at least difficult to reconcile these later two decisions. Apparently in the latter case the court has followed through on the basic premise that despite any agreement between the parties as to the rate of interest if the debt is to be paid in any way out of the award in condemnation then it is the statute which is to apply and not the agreement between the parties.

Reprinted with permission from the July 1, 1975 edition of the New York Law Journal © 2010 Incisive Media Properties, Inc. All rights reserved. Further duplication without permission is prohibited.