
    Amelia E. Louis, as Administratrix, etc., of Alexander Louis, Deceased, Plaintiff, v. Moritz Bauer and Others, Defendants. Edward H. Hobbs and Benjamin B. Odell, Jr., as Receivers of the Murray Hill Bank, Appellants; Salomon Marx and Julius W. Rosenstein, Respondents.
    
      jDelivery of a deed as collateral to a specific debt—right to use the rents of the property to pay the interest on other debts—right of subrogation to an incumbrance paid.
    
    The cashier of a bank'delivered to a debtor thereof, on receipt of a deed of certain property, the following paper: “ Received from Moritz Bauer (the debtor) deed dated Jany. 31, 1884, of property cor. 3d Ave. & 158th St., New York City, as collateral security for Five thousand dollars, on payment of above amount, Five thousand dollars, said deed to be returned and this receipt canceled and his note now included in his line of discounts will be canceled for said amount of Five thousand dollars.”
    By authority of the debtor, the rents of the property thus conveyed were paid by the tenant directly to the bank, which, after paying current charges on the property, applied the balance of the rents, with the knowledge and assent of the debtor, to the payment of interest upon various obligations of his to the bank.
    
      Meld, that the rents realized from the property remained the debtor’s throughout; that he was at liberty to pay with them any debts of his which he might select, and that his right to insist that they should be used to pay the specific §5,000 loan mentioned in the receipt had been lost through his acquiescence in the application made of the rents by the bank;
    That the bank having, in order to prevent the foreclosure of a mortgage upon the property thus conveyed to it, paid, at the debtors request, the amount due thereon, had a right to receive payment of this sum out of the moneys arising on a subsequent foreclosure sale of the property, under the rule that one who redeems a security is entitled to toe subrogated thereto, whether or not a special agreement is made to this effect;
    That this right of subrogation was not.affected By the fhet that the bank took the debtor’s note for the amount paid upon the mortgage,- of which a foreclosure was threatened.
    Appeal .by Edward H. Hobbs "and Benjamin B. Odell, Jr., as receivers of the Murray Hill Bank, claimants to the surplus fund in this proceeding, from an order of the Supreme Court, made at the Hew York Special Term and entered in the office of the clerk of the county of' Hew York on the 7th day of January, 1898, overruling their- exceptions to the report of a referee appointed in the proceeding,, confirming such report, and directing the distribution of the surplus moneys.
    The surplus distributed by the order appealed from arose upon the foreclosure of property situated at the southwest corner of Third avenue and One Hundred and Fifty Eighth street in the city of Hew York, which was owned by the defendant Bauer and by him leased to the Mayor, Aldermen and Commonalty of the City of Hew York for use as a court house. The respondents are judgment creditors of Bauer. The appellants’ claim is principally founded upon a deed of the property to the president of the hank executed January 31, 1884. There is no proof that this deed was delivered until January 31, 1887. On that day the cashier of the bank delivered to Bauer a paper in the following words: . “ Received from Moritz Bauer deed dated Jany. 31,1884, of property Cor. 3d Ave. & 158th St., Hew York City, as collateral security for Five thousand dollars, on payment of above amount, Five thousand dollars, said deed to be returned and this receipt canceled and his note now included in bis line of discounts will be canceled for said amount of five thousand dollars.” Between Hovember 1, 1891, and May 1, 1896, the city, by Bauer’s authority, paid the rent of the property to the bank. It amounted in all to $11,400, out of which' the hank paid $4,499.99 for interest on mortgage, taxes and repairs. During this period Bauer had three accounts with the bank, and the rents. were deposited in one or the other .of them,- and used to meet current charges. At the time the bank suspended-, one of these accounts showed a balance in Bauer’s favor of $480.22, but the others, were overdmvn one for $61 and the other for $33.60,' At the date of suspension Bauer owed the bank over $53,000, the only security for which was the deed of the court house property, and bonds of the Mount Morris Electric Light Company, of the par value of $44,000, and worth between sixty and seventy cents on the dollar.
    Further facts are stated in the opinion.
    
      William C. Breed, for the appellants.
    
      Samson Lachman, for the respondents.
   Barrett, J.:

The correctness of the decision below does not depend upon the solution of the question so elaborately discussed by counsel; namely, whether the definite sum specified in the receipt which accompanied ' the delivery of the deed could be extended by a subsequent parol agreement between the parties. It may be assumed for the purposes of this discussion that it could not. And it may also be assumed that, even if it could, the evidence of such extension was ' insufficient to justify a finding to that effect. The real question is-whether the definite sum so specified in the receipt has actually been paid. The burden of proof of such payment was clearly upon the respondents. They furnished no direct evidence thereof. What they claimed was that payment was effected in law by.the bank’s receipt and proper application of the rents subsequently assigned to it. This, too, is undoubtedly what the learned referee meant when he found as a fact that “the Murray Hill Bank was repaid the amount mentioned in said letter, to-wit, $5,000” — the letter here referred to being the paper to which we have attributed the character of a receipt. There could be no question that the parties could agree by parol upon the due application of these rents. They stood upon an entirely different footing-from the equitable mortgage effected by the deed and receipt. To extend such a mortgage by parol would be one thing; to agree upon the application of the-rents was quite another. The appellants claim that the original loan of $5,000 was not paid by the receipt of these rents, for the reason that the latter were applied to other purposes under an agreement which the parties were perfectly competent to make. If such an agreement is made out, either expressly or by implication, resulting from the understanding of the parties and the course of dealing between them, then the respondents’ rights are subject thereto, Bauer, it is true, would probably have had the right to insist' that the rents should be applied in liquidation of .that part of his indebtedness to the bank which was secured. (Pond v. Harwood, 139 N. Y. 111.) But if he chose to use the money in some other .way, there was nothing to prevent his doing so. It was his money.' The respondents had no lien upon, or interest in, it. They obtained no title to the land of their judgment creditor. (White’s Bank of Buffalo v. Farthing, 101 N. Y. 344, 348.) They could sell his interest in the land, but even then his right to receive the rent, as formerly, remained until the expiration of the period of redemption. (Code Civ. Proc. §§ 1440, 1441.) The money coming from the rents remained Bauer’s throughout;' and he was at liberty to pay with it any debt of his 'which he might select. The respondents’ liens were upon the equity of redemption, and - these liens were subordinate to that of- the b'ank for the original $5,000, and remained so until the latter sum should be extinguished in the ordinary manner — that is, by payment.

The question whether Bauer agreed that the rents should be applied to some other purpose than the payment of the $5,000 in question involves the consideration of the evidence. There is no proof of any express agreement, at the outset, as to what should be done with those rents. ’ The bank, in fact,- deposited them in.three accounts which Bauer had, and used them wherever advantageous to pay charges against him. An account marked Moritz Bauer account, 158th street Court House,” Was opened on December' 19,. 1895. In this the rents were thereafter deposited, and overdrafts from the other accounts were charged against it. Before this date the rents were placed to the credit of the other accounts, and used like any of Bauer’s deposits. - It is thus clear, so far as .the proof goes, that the rents were not used to pay this specific $5,000 loan. It is not pretended , that Bauer protested against this, or signified his disapprobation in any way. He says that he did' not inquire, and did not know what was being done with the rents, and that he had no knowledge that they were used to pay his overdrafts. It is difficult to credit this testimony. If we are to believe it, during a period of four years and a half the bank received' many thousands of dollars of Bauer’s money, about the disposition of which he never took the trouble to inform himself. It is clear that he had ample notice of what was being done. For two or three years prior to the opening of the court house account in December, 1895, his active account with, the bank was that one known as the “ special account,” and a large part of the rents must have been deposited in it. He admits that this account was regularly balanced, and the bank’s evidence shows that it was balanced as late as August, 1895. The entries in this account apprised, or should have apprised, Bauer ■of all of which he now claims to have been ignorant. As he himself testifies: “If I looked it up, I knew whether any of the moneys that came from the rent went to the special account. When my bank book was balanced I ought to know whether it went on to that special account or not.” The' boob also informed him with the same definiteness as to what charges were made against the rents. That Bauer made no inspection of his bank books during all • this, period seems quite incredible, and, if so, it was negligence for which the bank ought not now to be held responsible.

Bauer’s testimony is directly contradicted-by that of Iieimburg, ■one of the directors of the bank. The latter states: “ I had repeated talks with Mr. Bauer ás to how the rents of the real estate were being applied. , * * * Mr. Bauer told me, whenever either of the.accounts should be short, the rents should be applied to either one of them; and he often said ‘ in about two weeks you will have $650 again when the rent becomes due from the city.’ Q. A:nd either account that would be short, you could apply the rent to? A. Yes, sir.” The whole situation of the parties lends great weight to this testimony. Bauer was in constant need of .money, .and kept soliciting the bank to make him advances. He also repeatedly overdrew his accounts. In the end he owed the bank over $50,000, for which the security was quite insufficient. His .account was a source of anxiety to the bank, which was trying to protect itself. Among other things, the bank officials endeavored without success to get Bauer to execute an instrument making the equity in the court house property security for his general indebtedness. It is most improbable that the officers of the bank would have consented to allow the money derived from the rents to be applied to that small portion of his debt which was .abundantly and overwhelmingly secured. That Bauer could ever have entertained such an idea is, also, most improbable. That he did not is demonstrated by a letter dated July 5, 1895, which, though unsigned,, was prepared and acknowledged by Bauer, and acted upon at a meeting of the directors of the bank.: ■ In it he said : “I am paying $3,000 a year, net interest (this sum included the rents) which is 6% on. my whole indebtedness, and as this has been the case for the last four or five yea/rs, without inereasing my debt one dollar, it is plain enough that these interests are applied out of the income of my property ; to the contrary, I have decreased the same by paying off $500 recently. Said account, which is now overdrawn by a few hundred dollars, will have a good surplus on the 1st of September by collecting $650 on the 1st of August, as quarterly rent on my real estate, and $850 on the 1st of September, as one-half yearly interest on the Bonds.” This letter conclusively shows his own. understanding that the rents were being used to reduce the-interest on the debt. His present testimony to the contrary cannot be credited. It is not only shaken in the particulars to which we have referred, but it is in conflict with testimony which he-gave in supplementary proceedings in . 1893, and with that of' numerous officers of. the bank. In one , particular he is refuted by another letter which he himself wrote in May, 1887; and it is a. significant; circumstance that he was formerly a partner of the-respondent Marx, and has lived with him, rent free, for fifteen years..

The result of our examination of this branch of the case is that,, whether or not Bauer expressly and specifically agreed at the outset-as to what should be done with the rents, they were applied as they were with his full knowledge and consent; and ■ that the arrangement thus entered into is .binding upon both him and the respondents. - We think that it would be a fraud upon the bank now to-allow the money to be diverted to another purpose.

A different result would follow if there were proof that the-rents yere actually applied in payment of this particular loan in whole or in part.. But, as we have seen,'the respondents rely, not. upon proof of this sort, but upon the general right of Bauer, in. the absence of any special agreement, to have the rents so applied. That right, however, was lost by the implied agreement resulting from the clear understanding and course of dealing between the parties of which we have treated.

We also think that the bank was entitled in. any event to prior payment of the sum of $4,6'l8.15 advanced to Bauer in March, 1892. At this time the plaintiff had begun a foreclosure action, and the bank, ¡at Bauer’s request, paid this sum (which was the amount then due) and stopped the suit. It had the right to prior payment of this sum out of the surplus under the rule that one who redeems a security is entitled to be subrogated thereto, whether or not a special ■agreement to this effect is made. (Gans v. Thieme, 93 N. Y. 225.) It is immaterial that the bank took Bauer’s note for the amount. There was no agreement, express or implied, to relinquish the right of subrogation given by law. The bank merely took tangible evidence of Bauer’s liability, a liability the retention of which wás entirely consistent with their right of subrogation.

These views necessitate a reversal. The other questions discussed need not now be considered, as they are not likely to arise upon a rehearing.

The ■ order appealed from should be reversed, the exceptions to the report sustained, and a rehearing ordered before another referee, with costs to the appellants to abide the event.

Van Brunt, P. J., Rumsey, O’Brien and McLaughlin, JJ., concurred.

Order reversed, exceptions to report, sustained, and rehearing ordered before another referee, with costs to appellants to abide event.  