Opinion
10548/2007.
Decided September 11, 2008.
Richard J. Wagner, Esq., Brooklyn Legal Services Corp. Brooklyn, NY, Attorneys for Plaintiffs.
David L. Birch, Esq., Hofhimer, Gartlir Gross, LLP, NY, Attorneys for First Bank of Arizona and Bank of New York Trust Co.
Matthew Tracy, Esq., Winget, Spadafora Schwartzberg, LLP, NY, Attorneys for SPM Agency Ltd., Maria Tarasco and Susan Moberg.
Timothy J. Fierst, Esq., NY, Attorneys for Defendant First Franklin Financial Corp.
Attorney for Defendants Michael James Moberg, Esq., Moberg Associates, Thomas Moonis, Esq. Kristopher M. Dennis, Esq., New York, NY, Attorney for Vantage Mortgage, LLC, Massapequa Park, NY.
Plaintiff Alice Johnson ("Johnson") moves under CPLR 3212 for partial summary judgment voiding the mortgage currently held by defendant Bank of New York Trust Company, N.A. ("BNY") on her home at 70 Harman St., Brooklyn, and dismissing BNY's counterclaim. BNY opposes such relief, and moves under CPLR 3212 for summary judgment on BNY's counterclaim, declaring the mortgage to be valid, or, alternatively granting BNY relief in equitable subrogation. Plaintiff's motion to void the mortgage held by BNY is granted, and BNY's counterclaim to declare the mortgage valid is denied. However, BNY's counterclaim for equitable subrogation is granted to the extent of setting the matter down for hearing consistent with this decision.
BACKGROUND
The instant case involves a particularly convoluted series of events quite typical in the recent history of mortgage lending. The property at issue was acquired by Johnson on December 31, 1998. The purchase was financed in part by a loan of $180,100 from Saxon National Mortgage Bankers, LTD. ("Saxon Mortgage") secured by a mortgage which was later assigned to Homeside Lending, Inc. ("Homeside"). On March 14, 2000, Homeside initiated a foreclosure action against Johnson for failure to make monthly mortgage payments. A judgment of foreclosure was entered on September 6, 2002. Subsequent to entry of this judgment, Johnson filed several bankruptcy petitions. On December 9, 2003, the judgment of foreclosure was vacated on a motion by Homeside, and Johnson filed a Chapter 13 Bankruptcy Plan on February 3, 2004, under which she would continue to make her monthly mortgage payments of $1364 plus $1000 monthly towards the mortgage and her consumer debts.
Plaintiff alleges that subsequent to these events, defendant Vantage Mortgage ("Vantage") learned of Johnson's financial troubles and communicated this information to defendants John Langley ("Langley") and Chris Hayes ("Hayes"), who then approached Johnson at her home in April 2004 offering to refinance her mortgage so that she could lower her monthly payments, pay off her other debts, and obtain a cash payment. Johnson agreed to this plan and attended a meeting on June 25, 2004 that she believed was a closing of her refinanced mortgage. At this meeting was defendant attorney Michael James Moberg ("Moberg"), who plaintiff alleges was acting on behalf of defendant First Franklin Financial Corp. ("First Franklin"), and several other unidentified individuals. Johnson alleged that she was rushed through signing several documents, without being given an opportunity to read them, and that she signed the documents thinking that she was refinancing her mortgage. Among these documents, unbeknownst to Johnson at the time, was a deed transferring the subject property to defendant Matthew Melnikoff ("Melnikoff"). Johnson does not dispute that she signed her own name to the documents, but claims that she did not know she was signing a deed at the time.
The Court takes judicial notice of the analogous case of Watson v Melnikoff, 19 Misc 3d 1130A [Sup Ct, Kings County 2008]), recently litigated and decided before her, in which most of the same defendants engaged in an identical scheme which was actually closed on the same day at the same location.
Also on June 25, 2004, Melnikoff gave a mortgage on the property to First Franklin to secure a loan for $254,400.00 ("First Franklin Mortgage"). A portion of this mortgage was used to satisfy the remaining balance of $195,917.16 on the Saxon Mortgage, thus leaving the First Franklin Mortgage as the sole encumbrance on the property.
According to Johnson, at some point in August 2004, Langley contacted Johnson and requested she make monthly payments of $1995.00 to defendant SNX Consulting, Inc. ("SNX"), whereupon Johnson demanded that Langley provide her with copies of the documents relating to the June 25, 2004 transaction. Langley sent Johnson a packet of documents, including a deed to the subject property from Johnson to Melnikoff. According to Johnson, this was the first time she learned that the property had purportedly been sold. From August 2004 to May 2006, Johnson states she made monthly payments of $1995.00 to various parties, including defendants Melnikoff, "SF Consulting," and SNX. Between June 1, 2006 and the filing of the complaint in this action on March 27, 2007, Johnson states she paid $2450.00 monthly to Melnikoff.
On January 31, 2006, Melnikoff refinanced his mortgage through defendant First National Bank of Arizona ("FNBA") in the amount of $440,000 ("FNBA Mortgage"). The FNBA Mortgage provides that "MERS" (Mortgage Electronic Registration Sytems, Inc.) "acting solely as a nominee for Lender and Lender's successors and assigns . . . FOR PURPOSES OF RECORDING THIS MORTGAGE, . . . IS THE MORTGAGEE OF RECORD." Part of the proceeds of the FNBA Mortgage was used to pay off the remaining balance of the First Franklin Mortgage, leaving FNBA with the senior lien on the property. The FNBA Mortgage was recorded on February 15, 2006, under the MERS name. By assignment executed by MERS as nominee on May 21, 2007, purportedly effective nunc pro tunc to April 30, 2007, the FNBA Mortgage was transferred within the secondary mortgage market to Bank of New York Trust Company, NA, as Trustee.
According to BNY, prior to recording its mortgage on February 15, 2006, FNBA, "while retaining record title to the FNBA mortgage, transferred it to First National Bank of Nevada fnBN, which is owned by First National Bank Holding Company, a parent company of both defendant FNBA and FNBN, for the purpose of transactions within MERS. . . . On or about February 24, 2006, the FNBA mortgage was transferred on the secondary market as a part of mortgage-backed securities operations to Residential Funding Corporation [RFC] pursuant to Mortgage Loan Purchase and Sale Agreement, dated January 27, 2006. . . . [T]he Purchase Agreement contains a repurchase provision, requiring FNBA to repurchase the subject loan in event, inter alia, the lien is found invalid. Defendant FNBA remained the record owner of the FNBA mortgage and the FNBA mortgage remained on file with the New York City Register. The transfers from FNBA to FNBN and from FNBN to RFC were properly recorded only within the MERS system" (Birch Affirmation ¶ 15 in Support of Cross Motion of BNY).
Given the well-settled rule that "absent transfer of the debt, the assignment of the mortgage is a nullity" ( Kluge v Fugazy, 145 AD2d 537 [2d Dept 1988], citing, inter alia, Merritt v Bartholick, 36 NY 44 [1867]), these seriatum assignments within MERS were a legal nullity and are irrelevant to BNY's rights under the FNBA Mortgage.
No issue has been raised regarding the validity of the assignment of the bond to BNY by MERS as nominee of the "lender," FNBA, notwithstanding the language in the mortgage granting to MERS the rights granted by the "Security Instrument," that is, the mortgage itself, without reference to any right to the underlying debt or to any right to assign ( See Bank of New York v Trezza, 14 Misc 3d 1201 (A) [Sup. Ct., Suffolk County 2006]; compare, Mortgage Electronic Registration Systems, Inc. v Coakley , 41 AD3d 674 [2d Dept 2007]).
This action was commenced on March 27, 2007, with the filing of Johnson's complaint seeking, inter alia, a declaration under Real Property Actions and Proceedings Law (RPAPL) Article 15 voiding the deed conveying the property at 70 Harman St., Brooklyn to defendant Melnikoff, and declaring that plaintiff is the sole owner of the property, unencumbered by any liens. On March 28, 2007, a Notice of Pendency was filed with the Kings County Clerk, stating that the complaint seeks, inter alia, declarations cancelling the deed from Johnson to Melnikoff and declaring it void ab initio, and voiding the mortgages taken out by Melnikoff from defendant First Franklin and from defendant FNBA, along with any other encumbrances that Melnikoff may have placed on the property.
Melnikoff did not answer the complaint, and on May 22, 2007, a motion for default judgment against Melnikoff was served. FNBA answered the complaint on June 21, 2007, and, "unaware of the assignment done by MERS" (Birch Affirmation ¶ 10, In Support of Cross-Motion) asserted that it held a mortgage on the property in the amount of $440,000. On July 17, 2007, this court granted the motion for default judgment against Melnikoff and directed plaintiff to submit an order on notice for the court's signature. Following some negotiations between counsel for plaintiff and counsel for FNBA and amendment, the order was signed, without opposition, on August 12, 2007 ("Default Order"). The Default Order, which granted judgment only against defendant Melnikoff, provided that "the deed dated June 25, 2004, from Plaintiff to the Defendant Matthew Melnikoff for the subject property . . . is canceled, and deemed void ab initio" and that "Plaintiff has good and valid title to the above-described premises ¼ free and clear of any lien, ownership interest or easement held or claimed by the Defendant Matthew Melnikoff and any person or persons claiming under or through him, except as to any lien which is held by the Defendant First National Bank of Arizona."
At the time of entry of the Default Order, both Johnson and FNBA believed that FNBA still held the FNBA Mortgage when, in fact, on May 21, 2007, FNBA, acting through its nominee MERS, had assigned the FNBA mortgage to BNY. This assignment was recorded on June 5, 2007. When plaintiff discovered this assignment, she moved to add BNY to the action by filing a Supplemental Amended Complaint. This motion was granted on December 12, 2007, and the Supplemental Complaint was served on and subsequently answered by BNY on February 22, 2008. On March 12, 2008, plaintiff filed the instant motion for partial summary judgment seeking to void the FNBA Mortgage which had been assigned to BNY and to obtain dismissal of BNY's counterclaim. BNY responded with a cross-motion for summary judgment.
DISCUSSION
The standard for summary judgment is well settled. "[T]he proponent of a motion for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. Failure to make such a prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers." ( Alvarez v Prospect Hospital, 68 NY2d 320, 324). When considering a motion for summary judgment, the court will view the evidence in the light most favorable to the non-moving party, and draw all reasonable inferences in its favor ( See Negri v Stop and Shop, 65 NY2d 625; Erikson v J.I.B. Realty , 12 AD3d 344 , 345 [2d Dept 2004]).
Collateral Estoppel and Res Judicata
There are no material disputed facts regarding the making of FNBA's Mortgage from Melnikoff, nor regarding the assignment of the FNBA Mortgage to BNY, notwithstanding FNBA's misrepresentation in its pleading that it owned the mortgage when, in fact, it had been assigned to BNY. Rather, BNY contends that summary judgment is inappropriate because it has not had the opportunity to conduct discovery regarding the alleged underlying fraud that initially deprived Johnson of title to the property. Johnson relies on the doctrines of res judicata and collateral estoppel in contending that the Order and Judgment of August 12, 2007 binds the parties to the determinations contained therein, specifically, the determination that the deed from Johnson to Melnikoff is void ab initio.
Plaintiff insists that her motion is predicated, not upon the facts, as she claims to have no knowledge of the facts surrounding the making of the FBNA Mortgage from Melnikoff, but upon documentary evidence that she claims entitles her to partial judgment as a matter of law. Plaintiff's argument rests primarily upon the language of the Default Order, which was agreed to by counsel representing both FBNA and BNY, and also upon CPLR 6501, which imposes upon any party that obtains its interest in real property after the filing of a lis pendens, the full consequences of the adjudication of the pending action.
The law is well-settled in New York that a final judgment is conclusive of all claims related to or dependent upon the claim disposed ( O'Brien v City of Syracuse, 54 NY2d 353, 357; Silverman v Leucadia, Inc., 156 AD2d 442, 443 [2d Dept 1989]), and that a party to that litigation or in privity with a party thereto will be collaterally estopped from relitigating a previously-resolved issue where the party in the earlier litigation was afforded a full and fair opportunity to contest the decision ( Silverman, at 443). "Furthermore, a judgment on consent is conclusive and has the same preclusive effect as a judgment after trial [citation omitted]. A default judgment is similarly conclusive for res judicata purposes" ( Silverman, at 444; see also, Rosendale v Citibank, NA, 262 AD2d 628 [2d Dept 1999]). However, "CPLR 3215 (a) requires that when a default judgment is taken against fewer than all of the defendants, the action is severed as against the remaining defendants . . . The judgment obtained by the plaintiff as against the defaulting defendant is not entitled to collateral estoppel effect against the nondefaulting defendants who would otherwise be denied a full and fair opportunity to litigate issues of liability" ( Holt v Holt, 262 AD2d 530 [2d Dept 1999]). The issue herein is whether BNY, through its predecessor in interest, FNBA, had a full opportunity to litigate the issues determined by the Default Order entered against Melnikoff and is therefore collaterally estopped from relitigating the legal consequences of the terms of that judgment.
BNY acknowledges that, as assignee of FNBA, it is in privity with FNBA and its rights are derived from and defined by those of its assignor ( See Gramatan Home Investors Corp. v Lopez, 46 NY2d 481, 486-487 ("[A]n assignee is deemed to be in privity with the assignor where the action against the assignor is commenced before there has been an assignment"). Though much is made of the fact that, at the time the Default Order was entered, FNBA was not actually the owner of the mortgage and, therefore, had no standing to assert any claims thereunder, the validity of the assignment to BNY during the pendency of the action has not been challenged and it is acknowledged that FNBA and BNY continue to be joined in interest by virtue of a Repurchase Agreement which requires FNBA to take back the mortgage upon a finding that it is invalid. Accordingly, FNBA was and is possessed of a contingent interest in the mortgage and had a compelling reason to vigorously litigate all issues relating to the validity of the FNBA Mortgage. All rights reserved to FNBA accrue to the benefit of BNY. To the extent that FNBA participated in the litigation and actively negotiated the terms of the Default Order, acceding to its entry with full awareness of the legal consequences, BNY is also bound. See Buechel v Bain, 97 NY2d 295.
Although the assignment of May 21, 2007, technically divested FNBA of the beneficial ownership of the mortgage, the FNBA Mortgage was recorded in the MERS name. MERS also effected the assignment, apparently acting as agent for FNBA. In appearing by the same attorney who had represented to the court that FNBA still held the mortgage at the time of entry of the Default Order, BNY adopted the representations of counsel and ratified the actions of FNBA. Certainly, the practices of the various MERS members, including both FNBA and BNY, in obscuring from the public the actual ownership of a mortgage, thereby creating the opportunity for substantial abuses and prejudice to mortgagors (see dissenting opinions of Judges Ciparick and Kaye in Merscorp, Inc. v Romaine , 8 NY3d 90 , 100, 104), should not be permitted to insulate BNY from the consequences of its actions in accepting a mortgage from FNBA that was already the subject of litigation in which FNBA had erroneously represented that it had authority to act as mortgagee.
Plaintiff seeks to assert the doctrine of collateral estoppel and res judicata against BNY, claiming that BNY's rights are determined in the Default Order, while BNY insists that the validity of its mortgage was not previously determined and that such doctrines are therefore inapplicable. In the circumstances at bar, the Default Order was entered in this litigation and is actually the law of the case rather than "collateral" to the instant litigation. The Default Order therefore precludes relitigation of any issue necessarily resolved therein. It is noted that no motion has been made to vacate the Default Order, which must now be accorded res judicata effect. See Matter of Shea, 309 NY 605, 616.
BNY insists that, not having been brought into the litigation until after the entry of the Default Order (due to FNBA's misrepresentations in its answer regarding its status as holder of the mortgage), it should not be estopped from contesting the determinations reflected in that Order. However, all sides acknowledge the privity between FNBA and BNY. The legal consequence of this relationship is to preclude BNY from relitigating issues determined with FNBA's participation. Buechel v Bain, 97 NY2d at 304; Green v Santa Fe Industries, Inc., 70 NY2d 244, 253; Matter of Shea, 309 NY at 617. Moreover, as has been further argued by plaintiff, BNY took the assignment of the mortgage during the pendency of the action, in which a notice of pendency had been duly filed, and was thus on notice that it would be bound to any adjudication of the action. See CPLR 6501 ; Novastar Mortgage Inc. v Mendoza , 26 AD3d 479 [2d Dept 2006]; Green Point Savings Bank v St. Hilaire, 267 AD2d 203 [2d Dept 1999]; Goldstein v Gold, 106 AD2d 100, 102 [2d Dept 1984]. BNY is therefore collaterally estopped from contesting or relitigating the issues determined in the Default Order.
The Default Order does not expressly determine the validity of BNY's mortgage but, rather, excludes from the extinguishment of all rights derived through Melnikoff's void title "any lien which is held by the Defendant First National Bank of Arizona." Counsel for both FNBA and BNY, David Birch, acknowledges in his Affirmation in Opposition and In Support of Cross-Motion that defendant FNBA was fully apprised of the motion for a default judgment against Melnikoff, appeared in court in response thereto, and actually negotiated the language of the proposed judgment with plaintiff's counsel, Max Weinstein, who added the exclusion of FNBA's "lien" (¶ 21). Mr. Birch notes the "identity of interest" between FNBA and BNY and cites to waivers from both banks as to any conflict of interest that might arise out of counsel's simultaneous representation of both parties (¶ 19). The thrust of Mr. Birch's argument is that BNY is entitled to the benefits of the exclusion of "any lien" held by FNBA, concluding that, because neither FNBA nor BNY were participants in or knew of the fraud perpetrated on plaintiff by the other defendants, FNBA and BNY should be treated as bona fide purchasers under Real Property Law § 266 and the mortgage should be enforced.
Real Property Law § 266"Pursuant to Real Property Law § 266, a bona fide purchaser or encumbrancer for value is protected in his or her title unless he or she had previous notice of the alleged prior fraud by the seller'" ( Fischer v Sadov Realty Corp. , 34 AD3d 630 , 631 [2d Dept 2006], quoting, Karan v Hoskins , 22 AD3d 638 [2d Dept 2005]). However, "[o]ne cannot be a bona fide encumbrancer for value through a forged deed, as it is void and conveys no title" ( LaSalle Bank National Assoc. v Ally, 39 AD3d 597, 600 [2d Dept 2007]; see also, Karan v Hoskins, 22 AD3d at 639; Yin Wu v Wu, 288 AD2d 104, 105 [1st Dept 2001] ("Real Property Law § 266 applies to fraud situations that are voidable, not those which are void such as here where a forged deed is alleged"); Public Administrator v Samerson, 298 AD2d 512, 513 [2d Dept 2002]). This rule was explicated by Judge O'Brien in Marden v Dorthy, 160 NY 39, 49, 54, a case similar to that herein in which plaintiff acknowledged she had affixed her signature to a document without knowledge of its character as a deed and without intending to convey title:
"A party cannot make a deed without some assent of the will. It must be a conscious act accompanied by an intention . . . The genuine signature of a party may be procured by some trick or device . . . It does not follow in such a case that because the signature is genuine that the party signed a deed or other contract. It is simply a spurious paper, and of no more effect than any other forgery.
. . .
"So, it is held that forgery may be committed by fraudulently procuring the signature of another to an instrument which he has no intention of signing."
The Marden court expressly rejected the argument proffered by BNY here that it was a bona fide purchaser: "It is legally impossible for any one to become a bona fide purchaser of real estate, or a purchaser at all, from one who never had any title. . . . Void things are no things" (at 56). See also, Ameriquest Mortgage Company v Gaffney, 41 AD3d 750, 751 [2d Dept 2007]. Thus, Real Property Law § 266 offers no protection for one who purchases or encumbers a deed that is void based on forgery, regardless of prior notice of the fraud.
The Default Order
The Marden decision was rendered upon a full record following trial. It is recognized that the validity of a purported deed, whether void ab initio due to fraud in the factum as in a forgery ( see Dalessio v Kessler, 6 AD3d 57, 61 [2d Dept 2004]), or merely voidable based upon fraud in the inducement, is dependent upon the facts. See Marden; Fischer v Sadov Realty Corp., 34 AD3d at 631; Karon v Hoskins, 22 AD3d at 639; Mix v Neff, 99AD2d 180, 182 [3d Dept 1984]. BNY resists plaintiff's motion in part because it has not had the opportunity of full discovery of the facts surrounding Johnson's execution of the document purporting to be a deed upon which rests the viability of its mortgage. This argument would be successful but for the Default Order.
The Default Order, entered upon FNBA's consent following a full opportunity to challenge, states in the fourth decretal paragraph:
"ORDERED, ADJUDGED AND DECREED that the deed dated June 25, 2004, from Plaintiff to the Defendant Matthew Melnikoff for the subject property located at 70 Harman Street, Brooklyn, New York, also known as BLOCK 3285, LOT 25, and recorded in the office of the City Register for the County of Kings on September 23, 2004 is canceled, and deemed void ab initio, and that the Clerk of the City Register's Office for the County of Kings where such deed was recorded is further directed to strike said deed from the records and to make a notation on the records of said office to the effect that said deed is null and void"
It is inconceivable that defendant FNBA, a national bank experienced in the real estate financing business, with the assistance of able and experienced counsel, did not know that the legal consequence of the adjudication that Melnikoff's deed was "void ab initio" would be the invalidating of its own mortgage as a matter of law. See Cruz v Cruz , 37 AD3d 754 [2d Dept 2007] ("A deed based on forgery or obtained by false pretenses is void ab initio, and a mortgage based on such a deed is likewise invalid"). The only logical and reasonable interpretation of the critical exclusion of "any lien" held by FNBA from the third decretal paragraph declaring plaintiff's title to be "free and clear of any lien" claimed through Melnikoff, is that the bank defendants were intending to reserve their claim, as interposed in BNY's counterclaim, for equitable relief. Thus, plaintiff's motion for summary judgment declaring the FNBA Mortgage, now held by BNY, to be void is granted.
Equitable SubrogationAlthough FNBA did not assert any counterclaims in its answer, BNY counterclaimed that if its mortgage is cancelled, it is entitled to relief pursuant to the doctrine of equitable subrogation for sums paid "by any defendant" to satisfy any encumbrances on title that would inure to plaintiff's benefit so as to unjustly enrich her. The Restatement describes the doctrine of subrogation as follows:
"One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee."
(Restatement (Third) of Property (Mortgages) § 7.6(a); see also, King v Pelkofski, 20 NY2d 326, 333, citing to The Restatement, Restitution § 162).
"Rooted in equity, the purpose of the subrogation doctrine is to afford a person who pays a debt that is owed primarily by someone else every opportunity to be reimbursed in full" ( Chemical Bank v Melzer, 93 NY2d 296, 304). The purpose of subrogation is to avoid the unjust enrichment of the person whose debt is paid off ( see Great Eastern Bank v Chang, 227 AD2d 589 [2d Dept 1996]; Zeidel v Dunne, 215 AD2d 472, 473 [2d Dept 1995]), and it is a highly favored remedy that the courts are inclined to extend rather than restrict ( see 3105 Grand Corporation v City of New York, 288 NY 178, 182; Bonham v Coe, 249 AD 428, 435 [4th Dept 1937]; Ohio Savings Bank v First Island Realty Corp., 14 Misc 3d 1237[A] [Sup Ct, New York County 2007]. Equitable subrogation has been applied to situations where the mortgage would be void due to forgery. "Even if, as appellant contends, her signature on the subject mortgage was forged, partial summary judgment [would be] properly granted . . . on the theory of equitable subrogation, based on its payoff of prior mortgages against appellant's property at the closing of the subject mortgage" ( Federal National Mortgage Association v Woodbury, 254 AD2d 182 [1st Dept 1998]; see also Great Eastern Bank, 227 AD2d 589.)
It is not disputed that, upon the closing of Melnikoff's purchase mortgage, a portion of the First Franklin Mortgage funds was used to pay off the Saxon Mortgage, on which Johnson still owed $195,917.16. Regardless of the validity of the First Franklin Mortgage itself, this payoff subrogated First Franklin to the rights of plaintiff's original mortgagee for that amount. See King v Pelkofski, 20 NY2d at 333. Similarly, as a portion of the FNBA Mortgage was subsequently used to pay off the First Franklin Mortgage, FNBA was subrogated to the position of First Franklin. As assignee of FNBA, BNY stepped into the shoes of FNBA, and took over FNBA's rights. Since both the First Franklin Mortgage and the FNBA Mortgage were void as based on Melnikoff's fraudulently obtained deed, the only valid claim that passed down the chain was the $195,917.16 Johnson originally owed on the Saxon Mortgage. To cancel this debt would result in the unjust enrichment that equitable subrogation was designed to avoid ( see Great Eastern Bank, 227 AD2d 589).
Plaintiff contends that BNY is barred from receiving equitable relief based on the doctrine of unclean hands, which precludes a party from obtaining equitable relief if that party is itself guilty of inequitable conduct ( See Levy v Braverman, 24 AD2d 430 [1st Dept 1965]). However, the doctrine of unclean hands "is never used unless the [party] is guilty of immoral, unconscionable conduct and even then only when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct" ( National Distillers and Chemical Corporation v Seyopp Corp., 17 NY2d 12, 15-16; see also, Kopsidas v Krokos, 294 AD2d 406, 407 [2d Dept 2002]; Cohn Berk v Rothman-Goodman Management Corp., 125 AD2d 435,436 [1986]). While BNY's failure to check the lis pendens rolls before taking the assignment of the FNBA Mortgage may have been negligent, it certainly does not rise to the level of immoral or unconscionable conduct, even though BNY's commencement of a foreclosure action against plaintiff and Melnikoff, on May 10, 2007, based upon that mortgage indicates that it was actually aware of Melnikoff's default beginning in January 2007, as well as the continuing interest of plaintiff as claimed in the instant action. There is no allegation that either BNY or FNBA in any way participated in the alleged fraud perpetrated on Johnson, nor was Johnson in any way affected or prejudiced by BNY's assumption of the FNBA Mortgage during the pendency of this action as she has been afforded the full benefit of FNBA's participation as a bar to recovery by BNY. The additional costs incurred by plaintiff in having to amend her complaint so as to belatedly bring BNY into this action as a result of FNBA's misrepresentations regarding ownership of the mortgage can be compensated by an award to her of such costs, including attorneys' fees, to be offset against any recovery by BNY on its equitable claim.
The fact that BNY retains a viable claim against Melnikoff upon his note, or against other defendants for their role in the fraud perpetrated upon Johnson, does not preclude the equitable relief BNY seeks. See New York TRW Title Ins. v Wade's Canadian Inn and Cocktail Lounge, Inc., 199 AD2d 661 [3d Dept 1993]. BNY is not precluded due to unclean hands from seeking equitable relief.
However, plaintiff has alleged that she has paid substantial sums to Melnikoff and other defendants over the years in the belief that a valid mortgage existed. Presumably, at least some of these funds were paid over to the mortgagees in reduction of the debts incurred by Melnikoff. These sums must be credited to plaintiff in determining the amount due to BNY as subrogee of the plaintiff's mortgage to Saxon since plaintiff did not owe money to these defendants independent of the obligation that Melnikoff had satisfied on her behalf using funds from First Franklin. A hearing will therefore be held to determine the sums paid by plaintiff to all of the defendants, to be offset against the original balance remaining upon the Saxon Mortgage to which BNY is subrogated.
CONCLUSION
The plaintiff's motion for partial summary judgment is granted only to the extent that the mortgage of BNY is declared to be null and void. BNY's cross-motion for summary judgment declaring BNY's mortgage to be valid is denied, but is granted as to its claim for equitable subrogation to the Saxon Mortgage. In light of the claims that Johnson paid substantial sums to various defendants from August 2004 to March 2007 for what she thought were mortgage payments, a hearing shall be scheduled to determine the amount of the credit due to Johnson to be set off against BNY's lien. The parties shall appear for conference before the court on October 17, 2008 at 10 A.M.
The foregoing constitutes the decision and order of the Court.