Rapoport, Beatrice R.

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St. John's University School of Law

St. John's Law Review Volume 8 Number 2 Volume 8, May 1934, Number 2 Article 13 June 2014 Receiver of Rents and Profits in New York Beatrice R. Rapoport Follow this and additional works at: https://scholarship.law.stjohns.edu/lawreview Recommended Citation Rapoport, Beatrice R. (1934) "Receiver of Rents and Profits in New York," St. John's Law Review: Vol. 8 : No. 2 , Article 13. Available at: https://scholarship.law.stjohns.edu/lawreview/vol8/iss2/13 This Note is brought to you for free and open access by the Journals at St. John's Law Scholarship Repository. It has been accepted for inclusion in St. John's Law Review by an authorized editor of St. John's Law Scholarship Repository. For more information, please contact selbyc@stjohns.edu. ST. JOHN'S LAW REVIEWlanguage in describing the lien and thus providing ample protectionagainst fraud would be a great step forward.JULIEN D. GOELL.RECEIVER OF RENTS AND PROFITS IN NEW YORK.The recent decision by the Court of Appeals in the Holmes v.Gravenhorst case ' has brought a solution to the problem as towhether, upon the appointment of a receiver in an action broughtto foreclose a mortgage containing the covenant: "That the holderof said mortgage, in any action to foreclose it, shall be entitled(without notice and without regard to the adequacy of any securityfor the debt) to the appointment of a receiver of the rents andprofits of said premises," a mortgagor-owner may be required topay rent to the receiver or be evicted from the premises prior toa sale under a judgment of foreclosure and sale.Tracing the recent New York decisions 2 our attention is broughtto the conflicting interests of the mortgagor, 3 lessee, and mortgagee,exhibiting the forceful influences exerted by them to control thepowers of the receiver of rents and profits pending foreclosure. 4The issue arises most often between the mortgagee and lessee, con-cerning the handling of leases in existence during the period ofreceivership. "Confronted by a debtor who has defaulted and asecurity which is probably inadequate, the mortgagee is concernedwith the making of the receiver's right to the rents and profits ofthe mortgaged premises productive of an amount sufficient to offsetthe contemplated deficiency. 5 However, leases made by the mort-gagor prior to the foreclosure action may not provide for an adequate'238 App. Div. 313, 263 N. Y. Supp. 738 (2d Dept. 1933).'See (1933) 33 COL. L. REv. 168. The discussion herein will be confinedto New York as the only jurisdiction in which the more complex aspects ofthis problem have been litigated to any appreciable degree.' Unless otherwise indicated, the terms "landlord" and "mortgagor" will beused to dominate the owner of the equity of redemption at the time of fore-closure, although in cases of assignments subsequent to the execution of themortgage these parties may have different interests and may be different persons.'Under §254 subd. 10 of N. Y. REAL PROP. LAW, where the mortgageemay have a receiver appointed on default. Heretofore, the rights to the exer-cise of judicial discretion were unhampered, although it has, at times, beenheld to be "a contract right." Butler v. Frazer, 57 N. Y. Supp. 900 (Sup. Ct.1896). In the absence of express provision in the mortgage, a receiver will beappointed upon application by the mortgagee, after the institution of fore-closure proceedings, only where the mortgagor is insolvent and the securityinadequate. See Finch v. Ray, 208 App. Div. 251, 255, 203 N. Y. Supp. 560,562 (3rd Dept. 1924). However, cf. Cohen v. Bartlett, 182 App. Div. 245,169 N. Y. Supp. 604 (1st Dept. 1918) insolvency was not required.See (1933) 33 COL. L. REv. 1212.NOTES AND COMMENTreturn, 6 or payment of rent by the tenant may threaten to make thespace occupied unproductive until the foreclosure sale, since thetenant's inferior interest subsists to that date." 7 Naturally, in caseswhere the lease made after institution of foreclosure proceedingscalled for greatly decreased rental where previously it had beenvery high,8 or where a short time prior to the action of foreclosurethe landlord had collected rents for three months in advance, 9 bothcases indicating fraud, there may be rescission of the lease or returnof moneys advanced. The policy of the lower courts has alwaysbeen one which protected the mortgagee, in which case the receivercould practically ignore leases in existence' 0 and demand a reason-able rental set by the court," "and irrespective of prepayment bythe tenant to the landlord." 12 The decisions were a hardship to thetenant since they foresaw merely the foreclosure's success.' 3 WithMetropolitan Life Insurance Co. v. Childs Co. 14 we began the seriesof decisions culminating in the Holmes case.15 In the Metropolitancase 16 the Metropolitan Life Insurance Company was an owner in' See Note (1933) 46 HARv. L. REV. 491, 493."Metropolitan Life Insurance Company v. Childs Co., 230 N. Y. 285,130 N. E. 295 (1921); Knickerbocker Oil Corp. v. Richfield Oil Corp., 234App. Div. 199, 254 N. Y. Supp. 506 (2d Dept. 1931).' Sager v. Rebdor Realty Corp., 230 App. Div. 106, 243 N. Y. Supp. 314(1st Dept. 1930). Cf. infra note 10.' Peltz v. Broder, unreported N. Y. L. J., June 17, 1933, at 3645 (Sup. Ct.1933).'Olive v. Levy, 201 App. Div. 262, 194 N. Y. Supp. 80 (2d Dept. 1922);Monro-King & Gremmels Realty Corp. v. 9th Ave.-3lst St. Corp., 233 App.Div. 401, 253 N. Y. Supp. 303 (1st Dept. 1931); New Way Bldg. Co. v. TaftBldg. Co., 129 Misc. 170, 220 N. Y. Supp. 665 (Sup. Ct. 1927)."A rental fixed by the receiver himself has no binding force. Curren v.Gillam, 106 Misc. 652, 176 N. Y. Supp. 573 (Mun. Ct. 1919); Gibbons v.Wasserman, 137 Misc. 377, 244 N. Y. Supp. 26 (App. T. 1st Dept. 1930).Monro-King & Gremmels Realty Corp. v. 9th Ave.-31st St. Corp., supranote 10; Schoenberg v. Makstein Realty Co., 130 Misc. 695, 224 N. Y. Supp.636 (Sup. Ct. 1927) ; see Olive v. Levy, supra note 10, at 263, 194 N. Y. Supp.at 88. But cf. Lawrence v. Conlon, 26 Misc. 44, 56 N. Y. Supp. 345 (Sup.Ct. 1899).'Where the action was discontinued as against the tenant or judgmentrendered for the defendant, the status quo could not be restored if the tenanthad been forced to move and to make a new lease elsewhere. Cf. MetropolitanLife Insurance Co. v. Childs Co., supra note 7. If the receiver in such a casehad collected an occupational rental greater than the lease rental, the doctrineof voluntary payment would be an obstacle to the tenant's recovery of theexcess paid either from the landlord who received the fund or from thereceiver who compelled the payment. Cf. Note (1933) 33 COL. L. REv. 1030,1035. Obviously the receiver's conduct did not constitute duress. No authorityhas been found giving the tenant a claim against the fund in such a situation."Supra note 7. The court held that the mortgagors or their assigneeswere entitled to recover rent from the lessee from the date it ceased to payrent to the date of the sale, and that thereafter the purchaser might recover.Equity holds that the judgment of foreclosure is not a complete representationthat the mortgage will be foreclosed. Too, at foreclosure sale one takes theproperty free and clear of subordinate interests..Sura note 1."Supra note 7.ST. JOHN'S LAW REVIEWfee with an outstanding lease. As the new owner, it tried to collectback rent after having dropped this defendant as a party to its priorforecl6sure action. Childs Company set up estopped. The Court heldthat the commencement of foreclosure proceedings was a mere rep-resentation, and that: if and when judgment is entered, and if andwhen the sale is complete, then only is the lessee released. 17In conjunction with the aforementioned case is the Monro King& Gremmels Realty Corp. v. 9th Ave.-31st Street Corporation,'8wherein it was held that the receiver's demand for occupational rentconstituted "constructive eviction" giving the tenant the option tomove out or pay an increased rental.19The Court of Appeals went a step further in the Prudencecase 20 in which it held that the mortgagor could contract any wayhe desired, being a legal owner (unless there was fraud),21 and thereceiver must abide by the leases in existence at the time he is ap-pointed, the tenants being protected from paying higher rental thanthat stipulated in the lease.2 2 "Although the courts have since sanc-tioned the collection of an occupational rental less than that requiredby the lease,23 this imposes no hardship on the tenant, and does not" Mere appointment of a receiver did not give the tenant the privilege ofavoiding the lease."Supra note 10."Unless the tenant was made a party to the action the receiver could notcollect a rental other than that provided for in the lease. See Metropolitan LifeInsurance Co. v. Childs Co., supra note 7, at 289, 130 N. E. at 297.' Prudence Co. v. 160 W. 73rd St. Corp., 260 N. Y. 205, 183 N. E. 365(1932). In this case the rights of the holders under the "co-operative owner-ship plan" were derived from the mortgagor. Those rights could not bedestroyed by means of a mortgage foreclosure receivership.Mortgage contained the usual receivership clause for collection of rentsand profits by the receiver. But rent was not being paid in the usual rental.The receiver applied to the courts to make the tenants pay a fair and reasonablerental to be applied to the mortgage against foreclosure.""A mortgage is only a lien on the mortgaged real property. Titleremains in the mortgagor and those claiming under or through the mortgagoruntil the lien is foreclosed. Foreclosure of the lien does not take place uponthe commencement of a foreclosure action, but upon the sale under a judgmentof foreclosure. Though, during the pendency of the action, a court of equityhas power to issue interlocutory orders for the protection of an asserted lien,and cannot deprive any party of a title or right, which though subordinate tothe lien of the mortgage, survive and are valid until the lien is foreclosed by asale under a judgment of foreclosure." Per Lehman, J., in Prudence Co. v.160 W. 73rd St. Corp., supra note 20, at 211, 183 N. E. at 366. The considera-tion of this case is similar to that in Metropolitan Life Insurance Co. v. ChildsCo., supra note 7, Knickerbocker Oil Co. v. Richfield Oil Co., sapra note 7,and Loring M. Hewen Co. v. Malter, 145 Misc. 635, 636, 260 N. Y. Supp. 624,626 (Sup. Ct. 1932)."Cohen v. 908 Kelly St. Realty Co., N. Y. L. J., Oct. 20, 1932, at 1626;see Markantonis v. Madlan Realty Corp., 262 N. Y. 354, 360, 186 N. E. 862,864 (1933): "Even under our decision in the Prudence Company case * * * weheld only that a receiver could not require a person in occupation of thepremises to pay him any sum either for rent or for use and occupation, beyondsuch sums as were in their nature rents and profits of the premises to whichthe owner would have been entitled."NOTES AND COMMENTconflict with the reasoning in the Prudence case." 24This brings us to the Holmes v. Gravenhorst case.25 Here theaction was instituted to foreclose a mortgage on the private dwellingowned and occupied by Mariana Gravenhorst. A receiver was ap-pointed and given the usual authority to demand, collect, and receivefrom the person or persons in possession all rents due and unpaidor thereafter to become due, and those in possession were directedto attorn to the receiver as tenants. The receiver duly qualifiedand notice of his appointment and qualification was served upon theoccupants of the premises. The receiver then applied to SpecialTerm for an order fixing the fair and reasonable value of the rent,for the premises occupied by M. Gravenhorst. On appeal from theorder denying this motion, the determination sought was whether inthe absence of agreement by the mortgagor to relinquish possessionon default, a court might vest in a receiver appointed in an actionto foreclose a mortgage on real property, a right to collect rentswhich never accrued to the legal owner, who himself enjoyed posses-sion as an incident to his ownership.The court at Special Term, in holding that it was without powerto fix the fair and reasonable value of the use and occupation of thepremises as against the owner-mortgagor in possession, expresslyrelied on the authority of the Prudence decision. 26  Mr. JusticeSteinbrink's statement was: "There is no contention here that rentsand profits now issue from the premises or that there exists anylease or agreement in connection therewith. Nor does it appear thatthe owner of the equity has agreed to relinquish possession to themortgagee on default. The receiver having failed to furnish proofof any of these facts, the court is free to assume that the defendant,as an incident to his ownership, rightfully retains possession of themortgaged premises." In reversing the order of the Special Term,the Appellate Division took the position that there was nothing inthe Prudence decision inconsistent with the doctrine that with thereceivership goes the right to take full possession of the premisesfrom the owner. Without restating the basic principles it is suffi-cient to quote Judge Lehman: "In no event is the owner deprivedof any rights or the mortgagee accorded rights beyond the stipula-tions of the mortgage. A mortgage is only a lien on the mortgagedreal property. Title remains in the mortgagor and those claimingunder or through the mortgagor until the lien is foreclosed. Fore-closure of the lien does not take place upon the commencement ofthe foreclosure action, but upon the sale under a judgment offoreclosure. Though during the pendency of the action a courtSupra note 20.Supra note 1. The mortgage contained the following clause: "that theholder of said mortgage, in any action to foreclose it, shall be entitled (withoutnotice and without regard to the adequacy of any security for the debt) to theappointment of a receiver of the rents and profits of said premises."' Supra note 20.ST. JOHN'S LAW REVIEWof equity has the power to issue interlocutory orders for the protec-tion of an asserted lien, such orders must be auxiliary to the rightto foreclose the lien." Under the Prudence decision it was madeclear that if the mortgage had provided for relinquishment of posses-sion on default or for the payment of rent then the power to fixoccupational rent pending the foreclosure action would have beencreated. In the absence of such provision the power could not exist.It seems to me that the language of the mortgage was quite clear.2 7One must merely bear in mind that a receiver's possession for thepurpose of preserving the mortgage security does not include withinit the right to collect rents when none in fact accrue. His right isto collect whatever rents the mortgaged premises yield. That rightcomes from the language of the mortgage only. To grant the re-ceiver greater rights would be to "accord the mortgagee rights be-yond the stipulations of the mortgage" in direct violation of thePrudence decision.There is no statutory authority for holding that a mortgagorin possession may be evicted from the mortgaged premises prior toa sale under a judgment of foreclosure and sale. The right of pos-session given to a receiver is incidental to the purpose for which thereceiver is appointed, namely, the collection of the rents and profits.Actual possession being in one having the right of possession in-herent in his ownership, no right of possession exists which may beconferred upon a receiver. To prevent the mortgagee from becom-ing possessory owner, equity will not compel the owner to pay occu-pational rent unless it is specifically contracted so to do. Thus, thedecision in this case, in conformity with former decisions, reachesa definite conclusion and lays down the rule of law for similarsituations in the future.BEATRicE R. RAPOPORT.THE MINNE SOTA MORTGAGE CASE.The present day has brought to this country conditions thatnever confronted the founders of our country and, it might be safelystated, never came within the purview of their great vision. It is aperiod in which the very foundations of the nation are being shaken.We all know that we are in the midst of a great economic depressionwhich has brought with it great social questions. How have thestates attempted to meet the situation?One of the methods employed by the legislatures of the variousstates 1 is the enactment of statutes granting temporary relief to" See supra note 25.'Arizona, Arkansas, Illinois, Iowa, Michigan, Minnesota, Montana, Ne-braska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Penn-sylvania, South Dakota, Texas, Vermont, West Virginia, Wisconsin.

Receiver of Rents and Profits in New York

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Receiver of Rents and Profits in New York

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