Opinion
11-27-1929
FISCHGRUND v. ERIKSEN REAL ESTATE CO.
Wolber & Gilhooly and Thomas G. Walker, all of Newark, for complainant. George J. Miller, of Perth Amboy, for Katz. Pesin & Pesin, of Jersey City, for Bassetti. Merritt Lane and John J. Clancy, both of Newark, for Raritan Mercantile Co.
(Syllabus by the Court.)
Suit by Leo J. Fischgrund against the Eriksen Real Estate Company. On exceptions to report of master respecting amount due and priorities as between mortgages and mechanics' liens. Exceptions sustained, and report modified.
Wolber & Gilhooly and Thomas G. Walker, all of Newark, for complainant.
George J. Miller, of Perth Amboy, for Katz.
Pesin & Pesin, of Jersey City, for Bassetti.
Merritt Lane and John J. Clancy, both of Newark, for Raritan Mercantile Co.
BACKES, Vice Chancellor. The Eriksen Real. Estate Company built an apartment house in Perth Amboy on a capital investment of $1,000. A building and loan association holds a mortgage for $110,000; Bassetti, one for $31,000; Katz, for $10,000; and Fischgrund, for $5,000 —">and in that order of priority. The latter three, prior in time of execution and recording, have been subordinated to the building and loan association's mortgage. The mortgages were all executed after the commencement of the building. Mechanics' lien claims amount to nearly a hundred thousand dollars. The building and loan mortgage is admitted to be a prior lien, and as to it the suit has been discontinued. Katz's mortgage is conceded to be valid for moneys used in the building, and ahead of the lien claims. The contest is for priority by Bassetti and Fischgrund over the lien claims, they claiming that their mortgages are for "money actually advanced and paid by the mortgagee and applied to the erection of (any new) the building upon the mortgaged land." Mechanics' Lien Act (3 Comp. St. 1910, p. 3303, § 15). The matter was referred to a master to determine the amounts due and the priorities, and it is up on exceptions to his report.
Check vouchers show that $31,000 was advanced to the Eriksen Company on the Bassetti mortgage. When it was subordinated to the building and loan mortgage, $10,000 was paid Macucci on account. The master reported that there was due $21,000, and that the mortgage was prior to the lien claims. The exception is directed to the ruling as to priority. The loan was negotiated with one Macucci; a real estate operator of Jersey City, who claims to have acted for his brother-in-law, Bassetti. Macucci produced his forty-four check vouchers bearing dates between October 4, 1926, and February 12, 1927, inclusive, for various amounts totaling $31,000; all, with a single exception, to the order of the Eriksen Real Estate Company. Twenty-seven, for a total of $23,357.54, he claims were given for pay roll, and $7,642.46 for other than pay roll. Of the latter, one for the architect, $200, and ten, amounting to $4,010.65, for material; one for lawyer's fees, $110; four, for a total of $3,269.81, for dues and interest on the building and loan mortgage; and one for "bills," $52. These lastmentioned checks are identified by the indorsements of the parties for whom they were intended. The "pay roll" checks were apparently cashed by the Eriksen Company, although Macucci's name appears as the last indorser on many of them. For proof that the proceeds were used to pay labor, Macucci rests his case on the naked statement of the two Eriksens, president and treasurer of the Eriksen Company, that the whole of the $31,000 was used for material and labor, which obviously was not the fact. The master upheld the priority of the mortgage on their bald assertion, reporting that: "The testimony on behalf of the mortgagee clearly shows that the sum of $31,000 (sic) was actually used for labor and materials in the erection and construction of the building. The testimony adduced on behalf of the lienors and objectors, attempting to discredit, is vague and indefinite and does not sustain the burden; to wit, that the moneys so advanced did not go into the building." If the master meant that the burden of proof shifted, he misconceived the duty of the mortgagee. Mechanic liens have a statutory priority as of the commencement of the building. To subordinate the lien to a mortgage subsequently executed and recorded, the burden rests with the mortgagee to establish by clear, certain, and convincing evidence that the mortgage money was actually used in the erection of the building. He must trace it into the hands of labor or materialmen. The evidence does not meet this standard. The money laid out for lawyer's fees and for dues and interest on the building and loan mortgage is not available as a priority item, and there is no proof whatever that the persons to whom checks were given for material, furnished the material, and, if furnished, that it was used on this building. There is no memorandum or record of any kind of the labor, singly or in group, working on the building; and when, and the wages paid them. Treasurer Eriksen says he kept a tally of the men on the job, but that it is lost. The Eriksen Company had a paymaster who doled out the money to the workmen, but neither he nor his pay roll is produced. All there is, is Macucci's testimony that the pay roll checks were given for pay roll, and the Eriksens' statements that they were used for that purpose, none of which is dependable, for it is in evidence that pay rolls during the Fischgrund advances, hereinafter discussed, were padded, and that throughout the construction Treasurer Eriksen thrived, though he had no source of supply to support himself and family other than the pay rolls; and it is also in evidence that the Eriksens agreed to pay bonuses on the Katz and Fischgrund mortgages, and though they and Macucci deny any was promised or taken on the Bassetti loan, it would be a novelty if that were not the case. A safe 6 per cent. mortgage has its attraction, but one on skimp security, in a distant city, involving installment payment and watchfulness to attain a superiority over lien claims, usually has other allurements than legal interest. Macucci went weekly to Perth Amboy to make estimates. What was the inducementto put him, an agent, if he was only an agent, to all that trouble? Treasurer Eriksen, it is said, admitted an $11,000 bonus. That is not admissible against the Bassetti mortgage, but it is an incentive to investigate. The odd sum of $31,000 arouses curiosity, and nine so-called pay roll checks, aggregating $11,500, all out of alignment with an orderly weekly pay roll, look suspicious. They are foreign to this, a reconstructed weekly pay roll:
Pay Day. Pay Roll. Date of Check. Amount. Bonus.
| Oct. 16, 1926 | $ 565 | Oct. 15, 1926 | $ 565 | |
| 23 | 435 | 21 22 | 435 | $ 1,000 |
| 30 | 600 | Nov. 3 | 600 | |
| Nov. 6 | 500 | 4 | 500 | |
| 13 | 609.54 | 10 18 | 609.54 | 1,000 |
| 20 | 565 | 15 18 | 165 400 | |
| 27 | 1,525 | 26 28 26 | 600 600 325 | |
| Dec. 4, 1926 | 1,360 | Dec. 3, 1926 3 | 500 860 | |
| 11 | 1,149 | 10 | 1,149 | |
| 18 | 1,336 | 17 20 | 1,336 | 2,500 |
| 24 | 1,550 | 24 28 | 1,550 | 1,000 |
| 31 | 973.55 | 31 Jan. 4, 1927 | 973.55 | 1,500 |
| Jan. 8, 1927 | 1,172.45 | 7 7 | 889.45 283 | |
| 15 | 1,870 | 11 14 14 | 1,000 500 370 | |
| 22 | 1,359 | 22 22 | 1,100 259 | |
| 29 | 1,329 | 28 31 | 1,329 | 1,500 |
| Feb. 5 | 1,483.25 | 6 6 8 9 | 1,483.25 | 1,500 600 1,000 |
| 12 | 1,482. | 11 | 1,482 | |
| $19,663.79 | $11,500 |
Macucci claims to have laid out in all:
| Not only | $31,000 00 | |
| But additional pay roll for which he prodces vouchers | 7,806 26 | |
| 1,000 00 | $39,806 25 | |
| Then we have pay roll as recon-structed | $19,663 79 | |
| For other pay roll and material | 8,642 46 | |
| Probable bonus | 11,500 00 | $39,806 25 |
| Macucci was reimbursed by the building and loan association | $ 8,806 25 | |
| Net amount of Bassettl mortgage | $31,000 00 |
This analysis is not intended as decisive of the issue, but merely to illustrate the futility of omnibus assertions that mortgage moneys were used in the construction of a building and the impropriety of accepting them as sufficient evidence to subject a mechanic's lien to a construction mortgage. Nor is it to be viewed as holding that the so-called pay roll was all used in the construction of the building. The exception is sustained with leave to establish the claim with the precise-ness required by law as herein indicated, and on motion a day will be set for a hearing. This course is taken because it is beyond question that some of the Bassetti mortgage money was used for labor and material.
As to the Fischgrund mortgage of $5,000: The master allowed $2,617.05, upon proof of pay roll sheets submitted to the mortgagee, weekly, by Eriksen; the receipts of workmen who professedly worked on the building, and by checks for their wages made directly to them. Notwithstanding the care taken by Fischgrund, it appears that he was deceived by pay roll padding. That is his misfortune. He can have priority only for so much of his money as was actually applied to the erection of the building. In the pay roll of July 1, 1927, $927.60, an item to Anton. Eriksen for $100 is proved to be not for wages and will be disallowed, as well as an item for $7 to the Eriksen Real Estate Company. The "Eddie Smith" items on all the pay rolls, a total of $384, will be disallowed. Eddie Smith undoubtedly was Edward Eriksen, connected with the company, and not an employee on the job. The indorsements on the checks are in his handwriting, and some of them carry the indorsement of Astrid Eriksen, whoever he may be. In the pay roll of July 8 appears the name of Steve Kazmarik for $40. It is proved he was not a workman on the job, and that item will be disallowed. The master erroneously allowed $9.90 in the pay roll of July 8. Restated, the pay rolls are the following amounts: July 1, 1927, $754.60; July 8, 1927, $365.80; July 15, 1927, $238.80; July 22, 1927, $211.85; July 29, 1927, $246.70; August 5, 1927, $246.70—a total of $2,064.45.
The exception is sustained and the report modified allowing $2,064.45 as a preferential lien. As against the mortgagor, Fischgrund is entitled to a decree for the sum allowed by the master.