NEW YORK UNIVERSITY

LAW REVIEW

ffASTAME-U.PR.XQTA

CONTENTS

SUGGESTED IMPROVEMENTS IN THE LAW OF MORTGAGES

Harold G. Aron 76

NEW YORK CIVIL PRACTICE SIMPLIFIED-DREAM OR REALITY

Jay Leo Rothschild 84

THE SUBSTITUTION OF ARBITRATION FOR LITIGATION

Harris Jay Griston 107

THE BANKRUPTCY ACT-AND SUGGESTED CHANGES

Gustavus A. Rogers 118

CHILDREN BEFORE THE COURTS IN NEW YORKSamuel D. Levy 127

EDITORIAL NOTES:

A BANK'S RIGHT OF INSPECTION UNDER A COMMERCIAL

LETTER OF CREDIT ........................ Frances K. Marlatt 133

LIABILITY OF A CHARITABLE HOSPITAL IN TORT

Laurence J. Rittenband 137

DETECTIVE SERVICE AS A "NECESSARY" ........ David Belsky 141

Volume II. No. 2 May, 1925

A Complete Servicefor the New York Lawyer

The New York Supplement1888 to Date

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NEW YORK UNIVERSITY LAW REVIEWPublished by the Students May, 1925

Editorial BoardFRANCES KNOCHE MARLATr, Editor-in-chief

Associate EditorsRICHARD H. LEvmr JACOB L. WAxow

Staff EditorsMANUEL PRENNER SAMUEL ZINMANDAVID SISKIND LAURENCE J. RITTENBANDSAMUEL A. SCHACHTER I. IRWIN SHAPIRO

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Student Advisory Board, Committee on PublicationsP. HODGES COMBIER, Chairman

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AdvisorFRANK HENRY SoMmR, Dean of the Faculty

CONTRIBUTORSHarold G. Aron, A.M., LL.B., is a Professor of Law at the New York

Law School. He is the author of "The Gist of Real Property Law"and "Aron's Digest of New York Real Property," and is a memberof the New York State Bar Association and the Association of theBar of the City of New York.

Jay Leo Rothschild, A.B., A.M., LL.B., is a Professor of Law at Brook-lyn Law School, St. Lawrence University. He is a member of theNew York and New Jersey Bars and the author of monographs onCivil Practice.

Harry Jay Griston is a member of the New York Bar, the ClevelandBar and the Federal Bar, and is the author of "Shaking the Dustfrom Shakespeare."

Gustavus A. Rogers is a member of the New York Bar and a formerAssistant Corporation Counsel of the City of New York. He is co-author of Bevins and Rogers' "Appellate Court Practice" and is amember of the firm of Jenks and Rogers.

Samuel D. Levy is a member of the New York County Lawyers' Association.He was appointed a Special Sessions Judge in 1916 and was assignedto the Children's Court. He was a Director of the United HebrewCharities for 15 years and President of the Hebrew Sheltering Guar-dian Society Orphan Asylum for 9 years.

SUGGESTED IMPROVEMENTS IN THE LAWOF MORTGAGES

There is one phase of the real property law of New Yorkwhich particularly invites and, for its accomplishment, requiresthe co6peration of the scholar and practitioner of the legal pro-fession as well as of the real estate and financial world.

No other branches of the law of property more directlytouch so great a number of people as those of Landlord and Ten-ant and of Mortgages. The entire community, with hardly a frac-tion of a per cent omitted is affected by one or the other for thosewho do not pay rent usually do pay interest on mortgages. Since,fortunately, the number of individual home owners is increasing,the problems of finance in connection therewith intensify thepractical importance of secured interests in land, particularly ofmortgages. The social and economic aspects of the subject havenot been fully sensed, but it is at least arguable that the evolutionof a system which would make land ownership as easily financedas commercial enterprises or public improvements, would be quiteas important a step in human progress as some more alluring andfantastic social reforms. Into this realm of speculation I do notventure. I have tried to demonstrate practically the necessity forsome revision or codification of the entire real property law inmy Digest, published a little over a year ago. Since 1896 thestatute which is called, but is not, the Real Property Law of NewYork, has been patched up and built on, so that its original ninearticles and two hundred and ninety-six sections have more thandoubled in number. In nine other general laws and in scores ofadditional miscellaneous statutes are found the enacted realproperty law and these cover hardly half of the subject. Itwould be high recompense for this trifling contribution if this newReview, to which it is given, would take the lead in compellingconsideration and action by the bar and legislature on this im- -

portant legal reform, beginning as the first steps with the lawsof Landlord and Tenant and of Mortgages.

I make bold to suggest that no member of the bar, or of thebench for that matter, can with or without library reference statewith precision the effect of usury on a mortgage or on the assigneethereof; the legal consequences of a mortgage being taken for agaming debt; the result to the mortgagee in the absence of ex-press stipulation, of destruction by fire due to causes such as thestorage of explosives, which invalidates the policy of insurance;

76

Suggested Improvements in the Law of Mortgages

the extent of the mortgagee's right to intervene and prevent,again in the absence of covenant, alterations or removal of mort-gaged buildings, especially under circumstances which in Englandmight have been termed "meliorating waste." In such frequentlyoccurring, every day commercial transactions of such practicalimportance it is unfortunate and dangerous that such questionsmust still be regarded as unsettled, especially in view of the ex-cellent results from codification in the case of the NegotiableInstruments Law and of the Sales Act.

It is fundamental in the practice of finance that the reason-ably predicated ability of prompt liquidation in the event ofdefault is a factor second to none in the introduction of invest-ment capital. No such ability as to mortgages exists underthe present state of the law and an astute lawyer may, if it suitshis ethics, delay a sale by foreclosure for months and sometimeseven for years during which intervening changes may diminish,perhaps substantially annihilate, *what was ample security.

It is my personal conviction that this, more than any otherfact, has for many years made second mortgages an outlaw fieldof finance in New York. As a matter of fact, junior liens,corporate securities of far less safety have always had a legiti-mate market and only recently we have seen the skill of WallStreet evolve a euphemism and find a way of presenting to thepublic in proper style what in simple parlance are second mortgagereal estate bonds. If the mortgage law of New York is once ridof useless and obsolete theories and simplified in practice to con-form to our now long established concept of the legal nature ofa real property mortgage, we shall find the traditional antipathiesof the financial world giving way to a recognition of real estatemortgages of various types and grades as an attractive and soundfield for its extremely useful and skillful aid and participation.

In this direction the courts of New York have been moreprogressive than the legislature which directly represents thosemost affected. The door has long been opened wide for a reformof our mortgage practice, and it is surprising that neither thebar, the real estate profession,-for it is now worthy of thatdesignation-nor the financial interests have availed of that opendoor. In other words, we still climb up the stairs when we mightuse an elevator.

My premise for this statement is the fact that a real estatemortgage in New York does not create and never has created"an equity of redemption."

Yet our whole statutory mortgage law and practice in fore-

New York University Law Review

closure is based upon the equitable practice, theories and refine-ments necessitated by the existence under the English mortgageof an equity of redemption. Psycho-analytically speaking, wehave suffered from an "equity of redemption" complex. Oncethat is eliminated, the way to a simplification of our mortgagelaw and practice is clear.

We have but to carry to its natural and pragmatic conclusionsthe summarization of Chancellor Earl:-

"But this common law rule has never, to its full extent,been adopted in this state. Here the mortgage has, bothin law and equity, been regarded as a mere chose in action,a mere security of a personal nature." Trimm v. Marsh,54 N. Y. 599.

When it is clearly perceived that a real estate mortgage inNew York is a "mere chose in action, a mere security of a personalnature," in short, that the "lien theory" of the mortgage is a longestablished fact, then we shall satisfy such liens upon defaultby practical means adapted to the purpose and abandon forms andpractices designed to foreclose an equity of redemption or todetermine questions of title and intermediate equities. No steelmanufacturer today follows the practices which Bessemer ren-dered obsolete, or attempts, in making rails, to use machinerydesigned for woodworking.

There must be assumed no lack of respect on the part ofthe writer for the high achievements revealed in the historicaldevelopment of the English mortgage, its equity of redemptionand foreclosure. There is hardly a page of legal history moreinteresting or which better reveals the conquering genius of theCommon Law. If we dealt with the economic -and social needsof our day as skillfully as did the early "Keepers of the King'sConscience," the laity would have more respect for the modernbench and bar. It is only with knowledge of the historical ante-cedents of our modern mortgage that we can arrive at simpli-fication of form and enforcement. There is no implied radicalismin radical changes, when intelligently conceived and with skilland patience accomplished. Our English brethren have revisedtheir whole real property law in a bold attempt to simplify itby assimilating it to the law of chattel ownership, although theystill hesitate to put the new scheme into practice.

Whether in form the vivum vadium, the Welsh mortgageor the mortuum gagum, the mortgage has always been essentiallya pledge of land as security for the performance of an obligation.Here a distinction must be made. In the feudal concept, a free-

Suggested Improvements in the Law of Mortgages

hold, or feud, was the right to use land in exchange for servicesor other things of value, and the right of recapture, to use amodern phrase, on the part of the overlord was, in the lastanalysis, his security for the performance of the tenant's obli-gation. Here we are not dealing with proprietorship, and theenfeoffment of the tenant was in no sense a pledge of the landor in any way related to a mortgage. For practical purposes,dealing in the assignable right to the use of the land was tant-amount to the modem practice of transferring the fee or lesserestates, and the mortgage undoubtedly developed out of the effortof tenants holding valuable feuds, to use the feud as security forsome loan or other obligation by transferring the feud to thelender or obligee, subject to the borrower's or obligor's rightto have it back upon due performance of the obligation. Digres-sing for a moment, let us analogize this situation to the muchmooted conditional sale of real property in our own time andconveyances absolute in form intended as security and subjectto recapture or reconveyance.

There has been much discussion in the books as to theenforceability of so-called conditional sales of real property.From the practical standpoint there seems nothing particularlyvicious in A. meeting a financial stringency in his private affairsby conveying a parcel of real estate to B. upon the understandingthat B. will reconvey it to him if within a prescribed time A.repays B. the original purchase price, with interest or even witha stipulated advance over and above the interest. Here again wefind the application of what was originally a salutary equitablemaxim frequently defeating the practical and legitimate purposesof the parties to the transaction. We are reminded that "oncea mortgage always a mortgage," and some amazing results fol-low- the intention of the parties is utterly defeated; the deedmust be construed as a mortgage; the. new purchaser, regardlessof the definite agreement to the contrary, must bring foreclosureto get his money back or hold the property under cloud of theseller's right to recover whenever the seller sees fit. Althoughthe deed must be construed as a mortgage, no mortgage tax hasbeen paid thereon and the buyer must pay the tax before he canforeclose, although the courts have on occasion brushed thisaside, upon what theory does not appear, in view of the languageof the statute.

It is true that the courts have recognized conditional salesof real property as effective and it is said that the real test liesin whether the original owner is obligated to repurchase or has

New York University Law Review

merely the option so to do. Those decisions tend to simplify theissue, but it would seem that no great injustice would result if,in the absence of circumstances of fraud or duress, the purchaserunder the conditional sale has the option, after the stipulatedrights of the seller have lapsed, to waive the right to be repaidand to hold the property free and clear.

The digression to this practical matter has been made toillustrate how deeply the philosophy of the old equity of re-demption still permeates our real property law. The solicitudewhich the courts show in relation to the modern conditional salein protecting the vendor is the direct result of the reasoning ofthe courts which evolved the equity of redemption to savethe mortgagor from the consequences of the passage of the "lawday," after which in the absence of the intervention of equity,the ancient borrower would have lost all rights in the property.

Undoubtedly the equity of redemption was evolved to avoidthe hardships which resulted from the recurrent and usual factthat the amount for which the property was pledged was dis-proportionate to its value and, rather contrary to the general spiritof English jurisprudence, the courts remade the bargain for theparties by allowing the borrower an additional time in which tomeet his obligation and redeem his property. This period ofgrace which was probably arbitrary originally, gradually becameextended until such time as the lender procured a decree inequity foreclosing the right to redeem. The original equity fore-closure finds its counterpart in New York only under the so-called strict foreclosure permitted under Section 1082 of the CivilPractice Act.

The solicitude of equity has been abused; the refinements offoreclosure have made it susceptible of fraudulent uses; and theconsequence has not been sufficiently considered in its effect onrepressing and retarding real estate financing, with its inevitableresults on the social and economic structure of our day. Thereis no reason why a loan on real estate should not be as easilyliquidated as any other collateral loan, and until this is accomp-lished real estate will suffer from an unnecessarily restricted accessto loan and investment capital.

Whatever may have been true in feudal England, is thereany reason why a loan on real estate should be treated differentlythan a loan on chattels? It is creditably reported that eightyper cent of the automobile business is financed through the useof purchaser's notes. It is safe-to say that the automobile industrywould not have reached half its presenf proportions if a mortgage

Suggested Imaprovements in the Law of Mortgages

or conditional sales agreement affecting a motor vehicle impliedthe delay and legal red-tape which is involved in every real estatemortgage. From a social standpoint it were perhaps better ifit were easier for the populace to buy homes and harder to buyautomobiles.

The real estate world has tried to broaden the mortgage field,with a degree of success. It is really a problem for the bar andthe legislature. The root of the difficulty is in the fictitiouscharacter of a real estate mortgage. It is under the law of thisState fundamentally not different from any other pledge, andthere is no reason why it should be cumbered with the trappingsof the middle ages. The "equity of redemption" must be relegatedto the antiquarians and the ancient sacredness of "the law day"respected but not observed.

The sole legitimate purpose of foreclosure in New York isto effect a final and commercial sale, not by cutting off the bor-rower's equity of redemption, but the right of junior encum-brancers, tenants, et al. to protect their subordinate position bypaying off the senior obligation.

It is a sharp departure from our accepted ideas, but is thereany sound reason of justice, equity or public policy, why the lendershould not have the right by giving notice to the necessary andproper parties, to sell the property at public sale precisely as isdone in the case of other collateral? Junior lienors would havethere and then the same right now accorded in our statutoryforeclosure. The lender would not in a falling market be forcedto stand by through months, perhaps years, of unnecessary andfrequently malicious delay. The costly burden of receivershipswould be avoided and an extremely simple practice developedbefore an official referee or master who would conduct the sale,furnishing a certificate to be recorded quite as effectually as thenow ponderous judgment roll. The door would be closed againstthe offensive practice of attacks upon titles acquired by fore-closure, due to some clerical and unimportant omission in thepresent clumsy procedure. The congested court calendars wouldbe instantly and appreciably relieved and the bar can, in thepublic interest, well afford to give up the comparatively modestcompensation (frequently quite absorbed in overhead before theend of the proceeding) which attends foreclosure suits.

It is the writer's opinion, and in fact experience, that the!results outlined can be accomplished under the existing state ofthe law by the use of a statutory trust. Nevertheless, a frank

New York University Law Review

revision of the practice will be eminently more satisfactory andof wider utility.

Assuming the proper statutory changes to have been made,A. desires to borrow from B. $5,000 on the security of hisdwelling. He executes a collateral promissory note in formsimilar to those in general use by commercial banks, reciting thedebt, interest rate and maturity. The note is recorded in lieu ofa mortgage. If a junior loan is taken by A. a similar process isfollowed. Default occurring, the promisee gives such notice as isstipulated in the recorded note, to all junior note holders orencumbrancers appearing upon the record, and at the expirationof notice, be it thirty days, sixty days, or more, the propertyis sold at public auction at the time and place stated. The sur-plus, if any results, is subject to the lien of junior obligationsand is paid to a trustee designated in the recorded note or tothe promisor if there be no junior obligees.

The objection that such a procedure precludes the litigationof defenses affecting the borrower's title or interest between de-fendants emphasizes the advantage of this simplified procedure.The mortgage foreclosure suit has been distorted into a devicefor clearing titles and determining equities, at the expense ofimpairing the access of real property to the investment capital mar-ket. If the same perverted ingenuity had developed in ordinarybanking practice, the stock exchanges of this country and England,would have to shut down. What plausible explanation can be madeto the lay mind that if a loan is made on real estate its collectionnecessarily involves litigation, but if made on corporate shares(which are not negotiable securities) its collection is a matter ofswift commercial practice? Is it possible that the law has pre-served the mortgage with ancient panoply of technicalities inorder to make the employment of a lawyer a necessity in prac-tically every real estate loan, and may not the tremendous anddeserved growth of the so-called mortgage companies be theinevitable answer to the retention of these obsolete forms? Igo further.-Is it today sound advice to involve a client with afew thousand dollars to lend in the intricacies of our presentmortgage law to gain the difference of one-half to one per centas against an investment which can be realized upon at maturitywithout the expense and delay of litigation or with that expenseand delay resting on others than the lender? Again, on thematter of the assignment of mortgages, there are at least fournecessary steps to consummate it safely involving search of title,estoppel certificates, recording, etc., involving weeks of time,

Suggested Improvements in the Law of Mortgages

expense and again the presence of counsel on both sides. Is thereany good reason why a real property mortgage should not be asreadily transferred as a certificate of stock, namely, by therecorded endorsement of the mortgage note? In other states,notably in the west, the use of mortgage notes has given a certainamount of flexibility to land loans, but it is the purpose of thisarticle to deal only with the law and practice of New York.There is still retained upon our statute books, but rarely used, thepractice of foreclosure by advertisement. Essentially sound intheory, the practical utility of the statute has been destroyed bytechnical limitation and construction which are again the reflexof the "equity of redemption" complex, and the notion thatevery lender on land is a Shylock and every borrower "the wardof the court."

If it be argued that the sheer celerity of such a changedpractice would work a hardship on the small house owner, thecontention falls of its own weight. The law is not sentiment;and delay has no part in the course of justice. The small manhas to pay his promissory note when it is due; and no grace orsolicitude by the courts is shown if he defaults in redeemingsome pawned and precious personal belonging. Lenders on realestate are entitled to the same consideration, and if it be the factthat our fictitious, antiquated and cumbersome foreclosure hasbeen preserved to give indirectly what even-handed justice wouldhave to deny directly, the fact alone is strong reason for reform-ing our mortgage practice.

There appear no constitutional questions involved in themodernization of procedure suggested. We are dealing withremedies in which vested rights do not obtain. The mechanicsof the reform are extremely simple through legislative action.No departure from principle is involved-rather the acceptanceof the true theory of the modern mortgage long recognized inthis State.

The suggestions made are broad and far-reaching; and per-haps in the true sense, radical. If deserving of any consideration,the more analytical and critical such consideration is, the nearerwe shall arrive at a correct view.

That the real property law of this State needs revision andcodification, there must be general concurrence; and that the lawof Mortgages, next to that of Landlord and Tenant, can with thegreatest practical results be given the attention of the bar, seemsfairly demonstrable.

HAROLD G. ARON.