
    Charles M. Preston, as Receiver of the New York Building-Loan Banking Company, Respondent, v. Caroline Brinley and Julia Knapp, Appellants, Impleaded with Elias Hartman and Carl Porges, Comprising the firm of Hartman, Goldsmith & Co., and Others.
    
      insolvent building and loan association — enforcement of a mortgage given to it by a stockholder —fines imposed are not secured by the mortgage — mortgage construed in favor of the borrower — nature of the relation between the association and the borrowing member —no reduction allowed in the foreclosure action for dues, interest or premiums paid to the association,
    
    -Fines imposed by a building and loan association pursuant to its by-laws upon a borrowing member for a failure to make timely payment of the dues and interest charged against his stock do not constitute a part of the principal secured by the mortgage given by the borrowing member in the absence of a provision to that effect contained in the mortgage, at least as between the-building and loan association and a person purchasing the mortgaged premises from the borrowing member.
    'The fact that the by-laws of the association and the certificates of stock issued to the borrowing member contained a provision for the imposition of the fine, and that the mortgage contained the following clause: “All payments to be made by the party of the first part * * - shall be deemed to be conditioned upon the * * * By-laws of the said corporation, although the same may not be fully expressed herein,” does not establish an express agreement between the parties that the fines shall constitute part of the principal due upon the mortgage.
    If there is any uncertainty or ambiguity in the terms of the mortgage executed by the borrowing member, that construction must be adopted which is most favorable to the latter.
    The nature of the relation existing between the association and the borrowing member, and the status of such borrowing member in the event of the insolvency of the corporation, considered.
    
      ■Semble, that in an action brought, after the association has become insolvent, to foreclose the mortgage executed by the borrowing member, the latter is not entitled, by way of reduction in the amount found due upon the mortgage, to be allowed any part of the sums she has paid the association in dues, interest or premiums, as the exact proportion which she is entitled to receive cannot then -be determined with any degree of certainty.
    Appeal by the defendants, Caroline Brinley and another, from a judgment of the Supreme Court in favor of the plaintiff, entered In the office of the clerk of the county of New York on the 6th ’ day of July, 1904, upon the decision of the court, rendered after a trial at the New York Special Term, directing the foreclosure of a mortgage and a sale of the real estate covered thereby.
    
      Alfred R. Page, for the appellants.
    
      Charles W. Dayton, for the respondent.
   McLaughlin, J.:

On the 30th of March, 1899, the defendant Brinley was the owner of certain real estate in the city of New York, upon which "there was a. mortgage of $83,000. She desired an additional loan of $8,000 and applied to the plaintiff corporation for membership and made a premium bid of $21,840 in stock for the loan of $91,000 which she required. The result, of her application was that the corporation accepted her as a member and, instead of advancing the $83,000 necessary to pay off the prior mortgage, it assumed and agreed to pay the same and advance in cash the $8,000 required. It issued to her its stock to the amount of 910 shares of the par value of $100 each, representing the prior mortgage and. the cash advanced, and-218.4 shares, representing the $21,840 which she had bid as a premium for the loan. To secure the' payment of such sum she gave her bond to the corporation, secured by a mortgage Upon such real estate, for $112,840, by which she agreed to pay the sum of $705.25 per month^made up of $113.75 dues on 910 shares of regular stock at • twelve and one-half cents each; $27.30 dues on 218.4 shares premium stock; $455 interest on $91,000, the amount of the prior mortgage and. the $8,000 advanced, and $109.20 interest on the premium of $21,840; The premium was not paid in monthly installments as stich, but the stock representing it was. treated in precisely the same manner as the balance of the Stock issued upon the application for the loan, and interest at the rate of six per cent was agreed to be paid upon the principal Sum of the mortgage. As additional collateral security for the. payment of the sum agreed to be paid, she assigned to the corporation all of the stock for which she had subscribed and upon which she thereafter made ■ partial payments. She failed and neglected, however, to make the payment due under the mortgage on January 1, 1903, and in July following the corporation declared-the whole sum due under a default clause in the mortgage and began foreclosure. During the pendency of the action and on the 2éth of February, 1904, judgment was entered dissolving the corporation and appointing the plaintiff permanent receiver thereof, and he was subsequently substituted as the party plaintiff herein.

At the trial the facts were stipulated and by such stipulation it appeared that no part of the principal of the prior mortgage for $83,000 had been paid, but that the corporation had paid out, on account of its mortgage, $4,405.69 for taxes and insurance; $18,957.57 for interest on the $83,000 mortgage, and had also advanced the $8,000 above mentioned; that defendant Brinley had paid to the • corporation, after the execution of the mortgage, in interest and stock dues, the sum of $8,654.99; that one of the by-laws of the corporation (Art. 35) provided that any member failing to pay his monthly dues or interest oil shares such as the defendant Brinley subscribed for, on or before the third business day of each month, in advance, should be subject to and pay a fine of five cents per share; that by reason of defendant Brinley’s default, under this by-law, the fines imposed upon her amounted to $2,595.32, which sum the trial court added to the other sums found due under the mortgage.

The plaintiff contended, upon the trial, that- in computing the amount due upon the mortgage, either the whole amount of premium and fines, or else a proportionate amount of the premium, together with the fines, should be charged. The defendant Brinley contended that the fines were not secured by the mortgage and that she should have credit for all payments of dues and interest on her •premium stock, which was for all dues paid on the stock.issued to represent the first mortgage of $83,000, on the theory that the corporation, being insolvent and unable to carry out its agreement to pay off that mortgage, the consideration for the premium of the stock represented by that sum had failed. The trial court held that the' mortgagor should be charged Avith a proportionate amount of the premiums on all of the stock, together with the fines, and that there was due the plaintiff — adopting this method of computation — the sum of • $27,979.82 (of which $2,595.32 represented fines), for which amount judgment of foreclosure and sale was directed. The appellants challenge the correctness of the conclusion thus reached.

I am of the opinion that the fines were not secured hy the mortgage, and to this extent the judgment is erroneous, but. in all other respects the method of computation adopted by the trial court was-as favorable to the appellants as could be demanded.

Turning to the bond and mortgage it will be found that neither of them expressly states that it is given to secure the payment of any fines which may be imposed, and their payment is sought to be made a lien, even against subsequent purchasers, and including the same in the judgment of foreclosure justified, under a clause which provides that “ all payments to: be made by the party of the first. part * * * shall be deemed to be conditioned upon the * * * By-laws of the said corporation, although the same may not be fully expressed herein,” and also because the stock certificates specified that upon default of payment in the manner provided in-the by-laws a fine of five cents per share would be imposed. If the' payment of such fines is secured by the mortgage it is only by an inference to be drawn, because there is no language expressed therein which justifies such a result.

The complicated manner in which building loan associations have heretofore conducted their business has given rise, especially when they have become insolvent, to no little confusion as to the legal principle to be applied where the foreclosure of a mortgage given by a member to secure a loan is sought. The relation existing between such corporations and a borrowing member is not, strictly speaking, the same as. that which exists between an ordinary debtor ' and creditor. When a person becomes a member of such association for. the purpose of borrowing money and subscribes for stock to the amount of his loan, he becomes not only a borrower, but also an investor, and in the - latter capacity has an interest in the profits realized by the corporation out of the loan proportionate to his stock. The premium is a bonus charged to a member wishing to borrow for the privilege. of anticipating, the ultimate, value of his stock by obtaining the immediate use of the money his stock will be worth at the end of the period contemplated by the parties to the transaction. (6 Cyc. 147; Curtis v. Granite State Provident Assn., 69 Conn. 6.) ITis membership gives him the advantage of making gradual deferred payments, and he is af all times a shareholder subject to be affected by the success or failure of the company. He is entitled to share in the profits and obligated to pay his share of the. losses. If the corporation becomes insolvent, as in the present case, he is obligated to bear his proportionate loss with other stockholders similarly situated. While it is true the insolvency of the corporation in a sense works a destruction of the contract, his obligation, nevertheless, as mortgagor still remains and he must pay what he has agreed to. If the assets of the insolvent corporation are sufficient to reimburse him for what he has paid on his stock he is without loss, but if they are not, he must lose in proportion to other investors. It is only in this way that justice can be done to all persons situated as he is.

If this be true, then it necessarily follows that his rights cannot be adjusted on the foreclosure of his mortgage, and for the reason that it cannot then be determined with any degree of certainty what the assets of the corporation are, or whether they will be sufficient to pay stockholders in full or only a proportionate part. (Hall v. Stowell, 75 App. Div. 21; Riggs v. Carter, 77 id. 580; Roberts v. Cronk, 94 id. 171.) The only authority which I have been able to discover suggesting that a deduction should be made from the amount found due on the mortgage by estimating dividends thereafter to be made, is Breed v. Ruoff (54 App. Div. 142), and this doctrine seems to have been repudiated in Breed v. Ruoff (173 N. Y. 340).

To allow the defendant Brinley, by way of reduction of the amount found due upon her mortgage, what she has paid to the association in dues, interest or premium, would give her a preference over other stockholders who might eventually be compelled to take a less percentage on their claims than she would thus receive. (Hannon v. Cobb, 49 App. Div. 480.) The trial • court, however, did allow her what is denominated a proportionate amount of the dues paid upon her stock. Of this the plaintiff does not complain, and if the defendant has received more than she is entitled to in that respect, she ought not to* complain.

The case of Riggs v. Carter (supra), upon 'which the trial court relied in including the fines as a part of the amount due, is not in point. That case is clearly distinguishable from this. There it was said that the mortgage contained an express provision for the payment of all fines which may be imposed - by said association for default in payment of said interest, premium and dues.” So, too, did the mortgage considered in Roberts v. Cronk (supra). Fines may be deemed a part of the money to grow due upon a mortgage if the parties have so agreed. (Concordia Savings & Aid Association v. Read, 93 N. Y. 474.) Here “ dues,” “ interest,” “ taxes ” and “ assessments” are specifically mentioned in both the bond and mortgage, and penalties are prescribed for their non-payment, but nothing is specifically said as tó fines, and the most that can be claimed is that the same are included because a reference is made to the by-laws regarding the payments. In the application for membership, too, nothing was specifically said as to fines. In the agreement which was made after the execution, of the mortgage by which the defendant Brinley turned over to the corporation the rents of the premises upon which the mortgage was given, nothing was said with respect to the payment of fines, and some of' which, at least, must at that time have been due, because there had been a default under the mortgage. Nor in the account of the receipts and application of the rents did the corporation apply any of the moneys received to the payment of fines, the inference being at least that it did- not consider the same applicable- to such payment. To hold that the mortgage covers the fines there must be spelled into it a provision which is not expressly found therein. This cannot be done, because if there is any uncertainty Or ambiguity in the terms,of the mortgage a construction must be adopted which is most favorable to the borrower. ■ I do not think that fines imposed by an association upon its members for default in the payment of dues and interest can be collected by foreclosure of a, mortgage given to secure the payment of the sum borrowed or of dues and interest, unless the parties have expressly agreed that such fines may be so collected. (Bowen v. Lincoln Building & Loan Assn., 51 N. J. Eq. 272; Hamilton Building Assn. v. Reynolds, 5 Duer, 671.) The. fines are imposed as a penalty, and before collection can be made a clear legal right thereto must be made to appear. -That was a part of the discipline of the association towards its members. If the original mortgagor had continued to be the owner of the mortgaged premises there might possibly be some reason for saying the fines should become a part of the amount found due on the mortgage, but she has transferred it to the defendant Knapp, who is now the owner of the equity of redemption. The purchaser had a right to rely upon the strict terms of the mortgage in making her purchase, and there is no evidence that she had any knowledge that fines had accumulated which were chargeable upon the property purchased or that she acquiesced in their so being made a charge.

I am of the opinion, therefore, that the fines were not properly chargeable as a part of the principal, and that the judgment appealed from should be modified by -deducting from the amount found due $2,595.32, and as so modified the judgment should be affirmed, with costs to the appellants to be deducted from the amount of the judgment.

O’Brien, P. J., Patterson, Ingraham and Hatch, JJ., concurred.

Judgment modified as directed in opinion, and as modified affirmed, with costs to the appellants to be deducted from the amount of the judgment.  