
    Pincus Lowenfeld and William Prager, Appellants, v. Maria Wimple and Others, Defendants, Impleaded with Empire City Woodworking Company, Respondent.
    First Department,
    July 7, 1910.
    Mortgage — contract between mortgagees as to priority — substitution of new mortgage in place of old — expenses and counsel fees.
    The plaintiff and defendant owning a bond and mortgage in severalty agreed that the plaintiff’s ownership should be prior to and superior to that of the defendant, as if the plaintiff held a first mortgage and the defendants a second, and that the plaintiff could receive the amounts due and receipt therefor, remitting the balance to the defendant. It was further agreed that the plaintiff should have all the rights of the holder of a bond and mortgage, including the authority to accept payment, to execute a satisfaction piece, etc., and that while the plaintiff should notify the defendant of any default of the mortgagor and of any foreclosure, the plaintiff should be under no obligation to protect the interest of the defendant in any suit or sale on foreclosure.
    As there were liens prior to the mortgage held by the plaintiff and defendant, and as a foreclosure thereof was threatened, it was arranged without the knowledge of the defendant that the prior liens should be paid by the proceeds of a new first mortgage and that the plaintiff should take a new second mortgage. . On the foreclosure of the second mortgage,
    
      Held, that the acts of the plaintiff in satisfying the participation mortgage and the taking of a new mortgage without the consent of the defendant was not a conversion by the plaintiff as trustee, and that the lien of the plaintiff was superior to that of the defendant as under the original participation agreement;
    That the plaintiff was justified in charging against the new mortgage the amounts paid for commissions and counsel fees for procuring a permanent loan in place of the liens the foreclosure of which was threatened.
    Laughlin, J., dissented.
    Appeal by the plaintiffs, Piricns Lowenfeld and another, from portions of a judgment of the Supreme Court in favor of the defendant Empire City Woodworking Company, entered in the office of the clerk of the county of Lew York on the 12th day of July, 1909, upon the decision of the court rendered after a trial at the Hew York Special Term.
    
      Alexander Pfeiffer, for the appellants.
    
      J. Charles Weschler, for the respondent.
   Scott, J. :

This is an action for the foreclosure of a mortgage, and the plaintiffs appeal from so.much of the judgment as provides that the amount due to the defendant Empire. City Woodworking Company be paid before any part of plaintiffs’ claim (except costs) is paid. The question raised by the appeal relates to the construction' and effect to be given to what is termed a participation agreement whereby the plaintiffs and the woodworking company became the owners in severalty of a certain bond and mortgage for $7,870, executed 1to plaintiffs by one Maria Wimpie. This agreement was dated September 18, 1906, and executed by plaintiffs and the said woodworking company. It recited the execution and delivery of the bond and -mortgage and that plaintiffs were the owners thereof to the extent of $5,300 and that the respondent was the owner of the balance of said mortgage, to wit, $2,570. It was agreed that the ownership of plaintiffs “ is ánd shall be in every way prior and superior to that of the party of the first part [the woodworking company] as if the parties of the second part [the plaintiffs] held a first mortgage for $5,300 and interest, and the party of the first part, held a second and subordinate mortgage to secure the balance of the mortgage debt.” The respective rights and obligations of the parties, as between themselves were regulated by the 2d, 3d and 4th articles of the agreement, which-read as follows, the “ parties of the second part,” meaning the plaintiffs, and “ the party of the first part,” meaning the defendant woodworking company:

“ 2nd. That the parties of the second part are authorized to receive' the installments of interest due and to become due on the said bond and mortgage, and to give proper receipts therefor, and after deducting from, each installment the amount thereof due under, this agreement to the parties of the second part shall remit the balance to the party of the first part.
“ 3rd. That the parties of the second part shall have all the rights of any holder 'of the said bond and mortgage and are authorized to accept payment of said bond and mortgage and to execute a satisfaction piece therefor, and, in the event of any default on said bond and mortgage, to foreclose; the same and receive the proceeds óf sale from the referee, but the party of the first part' shall in any and every event have the right to an accounting for all moneys received by the said parties of the second part in excess of the ownership of the parties of the second part in said bond and mortgage, and all rights and authority given hereunder by the party of the first part as irrevocable.
“ 4th. That the parties of the second part are to notify the party of the first part of any and every default oh said bond and mortgage and of ány and every foreclosure by making the party of the first part a defendant in any and every suit without further notice or demand, but the parties of the second part shall be under no other obligation to protect the interests of the party of the first part in any such suit or upon any sale in any such foreclosure.”

There, are other provisions of the agreement which it is not necessary to quote. It will be observed that this agreement, in addition to securing to plaintiffs a priority of ownership, confershipon them a large measure of control over the mortgage and imposes upon them certain obligations towards the defendant woodworking company. At the time this agreement was executed Maria Wempie, the owner of.- the property, was insolvent, and the property was incumbered with certain unpaid taxes, a mechanic’s lien, and a number of mortgages, one held by the Mutual Life Insurance Company, one by the American Mortgage Company, and four by plaintiffs. All of these liens, the validity of none of which is disputed, were prior to the mortgage of which the defendant woodworking company was a part owner, and they aggregated, without interest about $112,125. Soon after the execution of the participation agreement it became necessary to provide for what are known to those engaged in building operations as permanent loans. The charges against the property were accumulating and the holders of the first and second mortgages, which were overdue,, were threatening foreclosure. It was, therefore, arranged that $82,000 should be borrowed upon a first mortgage, and that plaintiffs should take a second mortgage for $47,000, being the mortgage- now under foreclosure. These mortgages were executed and delivered on January 2, 1907, all previously existing liens being discharged, including the participation mortgage of $7,870. At this time there was due upon liens prior to the mortgage in which the woodworking company had an interest something over $117,748:48, in addition to which plaintiffs’ interest in the $7,870 mortgage, aggregating with interest $5,392,75, was, by the terms of the participation agreement, a prior lien to the Woodworking company’s interest in the same mortgage. The plaintiffs who, as the persons most largely interested, seem to have conducted the negotiation for consolidating the charges against the property, paid $2,520.50 for commissions and counsel fees incurred in procuring the permanent loan. The reasonableness of this charge is not disputed, although the respondent questions the right of plaintiffs to charge it against the proceeds of the loan. The plaintiffs next applied the proceeds of the $82,000 new first mortgage to the extinguishment of the pre-existing liens, so far as the amount would go and took the $47,000 second mortgage in replacement of their mortgages and the participation mortgage.' At- this time the liens held by plaintiffs, prior to the woodworking company’s interest in the participation mortgage, aggregated with interest about $82,000. A considerable part of these liens was of course discharged out of the proceeds of the $82,000 first mortgage, ' the $47,000 mortgage now. under foreclosure representing the remainder of plaintiffs’ liens, and the respondent’s interest in the participation mortgage. The provision of the judgment appealed from proceeds upon the theory, as appears by the mémorandum filed by the justice, that the act of plaintiffs in satisfying the participation mortgage, and taking a new mortgage without the knowledge- or consent of the woodworking company, amounted to a conversion by a trustee of securities held for a cestui que trust. Hence he awarded to the respondent what amounted to a prior lien over claims held by plaintiffs which, before the taking of the new mortgage, had been prior to the respondent’s lien. This view, as we think, resulted from a misconception of the rights and obligations assumed by plaintiffs by the execution of the participation agreement. They did not by that agreement become trustees for the respondent. They simply agreed to pay over to respondent such • proportions of any moneys collected as the latter might be entitled to, whether for interest or principal, and to notify respondent of any default in or foreclosure of the mortgage, but only in order to enable respondent to protect itself, for it is expressly stipulated that plaintiffs shall be under no obligation to protect the interests of the respondent. It is true that the par. ticipation agreement does not in terms authorize plaintiffs to satisfy the mortgage-except in the event that it is paid off, hut such authority is necessarily to be implied from the prior and much larger interest which plaintiffs reserved in the mortgage, and from the proviso that they shall “have all the rights of any holder of the said bond and mortgage.” It was not necessary to have obtained respondent’s consent because to so hold would imply that respondent might have refused to consent.

The plaintiffs were, undoubtedly bound to exercise the greatest good faith towards respondent, but they .were also entitled to protect their own superior interests, and could not be required to waive those in favor of the respondent. They were, therefore, justified in taking the necessary steps to consolidate the liens, and if they acted in good faith, and with reasonable prudence,, the respondent has no cause for complaint. Neither bad faith nor lack of prudence is charged, and the respondent is, therefore, entitled only to be placed in as good a position relatively as it Would have been if the former liens had been continued. That is to say, respondent is entitled to the payment, out of the proceeds of the sale, of the amount due under its lien, after all the superior liens are satisfied. As to the amount paid for commissions and counsel fees for procuring the permanent loan, we consider that the plaintiffs were justified in making the payments out of the proceeds of the loan. If we assume, as we must, that it was to the interest of all the lienors to place a permanent loan on the property, it was a necessary incident that certain expenses should be paid for we “ may take judicial notice that it is the ordinary and usual practice, when a party makes a loan on real estate, to pay out of the new loan so far as practicable existing incumbrances on the property, whether mortgages, or taxes and assessments, and also the expenses attendant on the loan, such as the examination of the title, brokerage and the like.” (Pennsylvania Steel Co. v. Title Guarantee & Trust Co., 193 N. Y. 37.)

We cannot find that the plaintiffs violated any duty which they had assumed to the respondent and see no reason why the claim of the latter upon the mortgaged property should be preferred to prior claims held by the plaintiffs.

The judgment will accordingly he modified in accordance with , the views expressed in this opinion, and as modified affirmed, with costs .to the plaintiffs against-the respondent personally.

■Ingraham, P. J., McLaughlin, and Dowling, JJ., concurred ; Laughlin, J., dissented. ' ' •

Judgment modified as directed" in opinion, and as modified affirmed, with costs to plaintiffs against respondent personally. Settle order on notice.  