Opinion
22878/05.
Decided May 6, 2008.
Richard J. Wagner, Esq. and Max Weinstein, Esq., Brooklyn Legal Services Corp., Brooklyn, NY, Attorneys for Plaintiffs.
Matthew Melnikoff, Daniel Tanenbaum, Esq., Great Neck, NY, Attorney for Defendant.
John Langley SNX Consulting Inc., Howard K. Pollack, Esq., Massapequa, NY, Attorney for Defendants.
First Franklin Financial Corp., Timothy J. Fierst, Esq. and Jamie C. Krapf, Esq., Crowell Moring, New York, NY, Attorneys for Defendant.
Thomas Moonis, Esq., Noah Numberg, Esq., L'Abbate, Balkan, Colavita and Contini, LLP, Garden City, NY, Attorney for Defendant.
SPM Title Agency, Andrew Bernstein, Esq., The Law Offices of Edward Garfinkel, New York, NY, Attorney for Defendant.
Citibank, N.A., Bridgette Botta, Esq., Zeichner Ellman Krause LLP, New York, NY, Attorney for Defendant.
Michael James Moberg, Esq. and Moberg Associates, Kristopher M. Dennis, Esq., Kaufman Borgest Ryan LLP, New York, NY, Attorney for Defendants.
Wells Fargo, John Pittoni, Esq., Pittoni Bonchonsky Zaino, LLP, Garden City, NY, Attorney for Defendant.
Joseph Hunsberger, Esq., Massapequa Park, NY, Attorney for Vantage Mortgage, LLC.
This case presents a most egregious example of what is commonly known as "mortgage rescue." Plaintiffs move for partial summary judgment for an order pursuant to Real Property Actions and Proceedings Law ("RPAPL") Article 15 voiding the deed purportedly conveying their home located at 602 East 92nd Street, Brooklyn, to defendant Matthew Melnikoff ("Melnikoff") and voiding the lien held by defendant Citibank, N.A. ("Citibank") against said property based upon Melnikoff's mortgaging of the property subsequent to his fraudulent acquisition thereof. Plaintiffs' motion is granted.
FACTS
The instant action was commenced on July 26, 2005, by Order to Show Cause seeking to preliminarily enjoin prosecution of a summary non-payment proceeding brought by Melnikoff against plaintiffs ( Melnikoff v William and Margaret Watson, L T No. 76574/05). Following argument upon return of the Order to Show Cause, this court held an evidentiary hearing to determine whether a preliminary injunction should be granted pending the adjudication of this matter on the merits. Testimony was adduced from plaintiff William Watson ("William") and defendants Matthew Melnikoff ("Melnikoff"), Michael James Moberg ("Moberg"), Thomas Moonis ("Moonis") and John Langley ("Langley"). At the conclusion of the hearing, this court granted a preliminary injunction staying the summary proceeding but ordering that plaintiffs escrow rent at the rate of that previously paid upon their pre-existing mortgage pending further order of the court.
The prior mortgage to Cityscape Corp., dated April 1, 1998, was for $60,000, upon which the monthly payments were $469.88. That mortgage had been foreclosed upon a balance due of $61,120.77.
Based upon the documentary evidence, including public records, and the testimony adduced at the hearing, the following relevant facts have been established.
Plaintiffs' motion is predicated entirely upon the hearing testimony of the defendants so as to avoid any issue of a disputed question of fact that might defeat their motion. In making its findings, the court has relied upon the documentary evidence and defendants' testimony except as to some background information that is undisputed.
The subject property was acquired by plaintiff Margaret Watson ("Margaret") and her husband, Willie J. Watson, by purchase on August 5, 1969. Their son, fifty-seven year old William, a former ten-year Goldman-Sachs clearing department employee subsequently employed as a security guard, with two years of college, became unemployed as a result of illness in March or April of 2004. He had returned to reside in his mother's home in 2003 and observed that his 76-year-old mother appeared to have memory problems and was not keeping up with her financial obligations, including payments on her mortgage. Eventually William learned that his mother's home was the subject of a mortgage foreclosure action and was scheduled to be sold. He stopped the sale by filing for bankruptcy protection on her behalf and began seeking refinancing through mortgage brokers. Several people made offers to buy the house, but plaintiffs did not want to sell their home. Mr. Watson testified that one of the prospective buyers suggested that William's name be placed on the deed so that he could further delay the foreclosure sale by filing for bankruptcy in his own right. On November 26, 2003, Margaret Watson deeded the property to herself and her son, co-plaintiff William. Mr. Watson testified that he had presented the deed for his mother's signature without explaining to her the purpose of the document. The same unidentified person who had made the suggestion to place William's name on the deed was paid $450 to file the necessary forms, which William used to further stay the foreclosure sale. Mr. Watson testified that he filed for bankruptcy "about three times."
During the course of litigation, based upon medical evaluation, testimony of relatives and the court's own interview of Margaret Watson, the court appointed her niece, Ruth Covington, as guardian ad litem to act upon Margaret Watson's behalf. See RPAPL § 1513. It is apparent that Margaret Watson is not able to remember events in which she participated and is not competent to conduct the proceedings or assist counsel. Because Mr. Watson's testimony suggests that he may have wittingly or unwittingly participated in the fraud perpetrated upon his mother, he is not an appropriate representative of her interests.
In April 2004, following up on a referral from his co-worker Kevin Kelly, defendant Langley went to plaintiffs' home purporting to represent defendant Vantage Mortgage LLC, by whom he actually was employed, and offered to buy the home. When plaintiffs declined to sell, Langley proposed "a package" that would enable them "to remain in the house." Mr. Watson testified that Mr. Langley said he would "Pay off the loan to the bank. The foreclosure, pay off the foreclosure loan to the bank," would give him $25,000 and would give the Watsons a year to pay back $175,000. (Transcript of 4/18/06, at 20-21). Mr. Watson stated that he understood he was taking a loan and that he and his mother would continue to own their home. Langley testified that the terms of the proposal provided: "He would sell the house. We would hold $25,000.00 in escrow in case. He [sic] did not make his payments to assist Matthew into making the mortgage payments. He would take $25,000 to fix up his house. Pay off all his bills, credit cards, etcetera [sic], and then he would pay me a fee for the consulting of it. [The $25,000 in escrow was] obviously Matthew's money." (Transcript of 4/6/06, at 431). Melnikoff testified that the agreement between himself and William "was that I was purchasing the house for $25,000 over and above what was owed on the property" (Transcript of 3/30/06, at 53; also at 41) which he believed was "about $90,000.00 plus taxes and water" (at 63); Melnikoff "was willing to sell back the house to [plaintiffs] if they had paid their rent on time for the twelve month period" (at 61). The record is clear that Melnikoff never met or conferred with either plaintiff regarding the terms of the transaction, but that Langley and Moberg were the only defendants to meet directly with the Watsons.
Plaintiffs' second cause of action, premised on RPL § 320, characterizes the deed conveyed herein as security for an equitable mortgage loan rather than a transfer of title. While the facts would support such interpretation, to avoid the need for a full trial regarding the intent of the parties (see Henley v Foreclosure Sales, Inc. , 39 AD3d 470 [2d Dept 2007]), plaintiffs have limited their motion for summary judgment to the fraud allegations which they claim, upon the defendants' own testimony, require that the deed be voided.
A "Residential Contract of Sale" between William and Margaret and Melnikoff, specifying a purchase price of $225,000 with a $45,000 deposit, $13,500 as a "SELLERS CONCESSION" and a balance of $180,000 payable at closing, is dated May, 2004. This unnotarized document was signed by William in his own behalf and as "attorney-in-fact" for Margaret. James Moberg, who acted as attorney for the Watsons, testified that he first met the Watsons on or about June 4, when Margaret executed the Power of Attorney. Apparently the Residential Contract of Sale had already been signed by Melnikoff who had given his $45,000 check payable to "Moberg Ass" to Moberg on or about May 19, 2004, at which time Melnikoff believed Moberg already represented plaintiffs (Transcript of 3/30/06, at 31). By prior agreement with Moberg, the check was never deposited and was returned to Melnikoff following the closing. Mr. Watson testified that the first time he became aware of defendant Melnikoff was when mail addressed to Mr. Melnikoff arrived at his home in September or October of 2004. It is undisputed that the Watsons never met or spoke to Melnikoff throughout the transaction and that even the closing, which took place at Moberg's office, was bifurcated, with Melnikoff signing documents in the morning and William executing many of the same documents in the afternoon.
William testified that, prior to the subject transaction, he had purchased a power of attorney form from a stationary store that was signed by his mother granting him authority to act on her behalf, but such form was not produced.
While it is unclear exactly when William executed the Residential Contract of Sale, Moberg's testimony suggests it was on June 4. The evidence is that at the meeting on June 4, 2004, to which plaintiffs were taken by car provided by Langley, a Durable General Power of Attorney was executed by Margaret Watson appointing William to act on her behalf in several enumerated situations, including "Specifically to the sale of my property at 602 East 92nd Street, Brooklyn, NY including the snegotiating [sic] and execution of the Contract of Sale as well as executing the Deed and necessary transfer forms and title affidavits that may be required at closing to consummate the sale transaction." Margaret's signature was notarized by defendant Michael James Moberg. Mr. Moberg testified that he spent about five minutes explaining the sale to Margaret who was present as William and Langley discussed the terms of the transaction.
Other evidence indicates that Margaret became agitated at the discussion of the sale of her home and that the meeting was abruptly terminated.
Three weeks later, on June 25, 2004, a closing took place in Margaret's absence at which William, for himself and his mother, executed a deed conveying the property to defendant Melnikoff. Although the evidence is conflicted, either simultaneous with or prior to the closing, William also executed an undated document which is in letter form and references "Contract of Sale — 602 E 92nd Street, Brooklyn, NY (the "Property")" (Letter-Contract), consenting to various terms of a repurchase by the sellers after twelve months at a price of $250,000, purportedly $25,000 greater than the original contract sale price of $225,000. This document, prepared by attorney Moberg, is contradictory and incomprehensible on its face since it is addressed to the Watsons and is signed by defendant Melnikoff, but with pronouns used to describe the rights and obligations of the parties repeatedly reversed, thus confusing the intent of the document. The undated letter reads as follows:
WILLIAM WATSON
MARGARET WATSON
602 East 92nd Street
Brooklyn, NY 11236
RE: CONTRACT OF SALE — 602 E. 92nd Street
BROOKLYN, NY (the "Property")
Dear Mr. and Mrs. Watson
This letter shall confirm our mutual understanding regarding a Contract of Sale for the above noted property that we have entered into. The terms of this letter shall override and supercede any other terms or conditions of the Contract and shall be binding upon us and our successors and or assigns:
1.I shall have the right to remain in the property for a period of twelve months from the date of the transfer of the Deed to the property by ourselves to you. I shall deposit into an escrow account the sum of Twenty-Five Thousand Dollars ($25,000.00), which amount shall be used as a security to ensure that monthly rental payments are paid in a timely manner. At the closing of this transaction, a new lease will be executed between myself or a company to be formed and yourselves. The monthly payment shall be $1,495.00 with the payments to be made the first day of each month.
2.In the event that we shall rent a portion of the subject premises, such rental payments shall be made payable to yourselves and you will be responsible to collect the rent and to deal with such tenants.
3.We hereby agree that you shall purchase the property back to me in twelve months from the date of the transfer herein at a sales price of $250,000. The new Contract of Sale must be signed twelve months from the date of transfer with a closing date to be not more than two months from the date of the contract. You do not have the right to assign your interest in this agreement to a third party.
4.In the event that you do not purchase the property from me as stipulated herein we agree that there is no landlord-tenant relationship created between us and that you agree to vacate the subject premises upon thirty days notice given to you by me. You agree that there are no tenant claims to be made by you.
5.We hereby agree that there has been consideration for this letter agreement between you and I and that there shall not be any claim now or in the future that there was any lack of consideration on behalf of any party.
6.The laws of the State of New York shall govern this letter agreement.
Yours truly,
(Matthew Melnicoff Signature)
MATTHEW MELNICOFF
CONSENTED TO
(William Watson Signature)
WILLIAM WATSON
(Margaret Watson Signature "by William Watson her attorney in fact")
MARGARET WATSON by
WILLIAM WATSON her attorney in fact
The confusion inherent in this document drafted by an experienced real estate attorney evidences a deliberate effort to obscure the true intent of the transaction, despite the repeated protests of the defendants that their purpose was "to save" plaintiffs' home. There can be no doubt that while assuring William that he would remain in his home, defendants conspired to swindle the home away from him and his mother.
Defendant Langley testified that, preliminary to his initial overture to plaintiffs, a credit check had been done and it was clear that plaintiffs would be unqualified to refinance the balance of their $60,000 mortgage. From such information, defendants were also necessarily informed that plaintiffs would be unable to pay the $1495 monthly charge for their continued occupancy of their home called for in the Letter-Contract (which specifically disclaims a continuing landlord-tenant relationship) or to "purchase back" their home for $250,000 within a year. It is noted that the monthly "payment" of $1495 is more than three times the original mortgage payment upon which plaintiffs had defaulted. Thus, defendants' representations to plaintiffs that they would be able to recover their home were known to be false. While William, in signing the deed, presumably was aware of the nature of the transaction (see Guerra v Astoria Generating Co., L.P. , 8 AD3d 617 , 618 [2d Dept 2004]("A party that signs a document is conclusively bound by its terms absent a valid excuse for having failed to read it.") and may have been deluding himself, Margaret was not competent to understand and give consent and was thus defrauded by the defendants who took advantage of her misfortune and incapacity.
Whether this is true is disputed as counsel for plaintiffs insists that plaintiffs would have been able to refinance had the foreclosure been addressed promptly and properly and plaintiffs were thus further misled by defendant Langley's advice to the contrary.
Also executed at the June 25, 2004, closing was a "Residential Lease", between Melnikoff as Landlord and William and Margaret as Tenants, for a term of one year commencing August 1, 2004, at an annual rent of $17,940, payable monthly at $1495. The Lease expressly provides that no security deposit has been given, however, the undisputed evidence is that, consistent with paragraph 1 of the Letter-Contract above, Melnikoff was given, from the proceeds of the purchase mortgage from First Franklin Financial Corp. ("First Franklin"), $25,000 to be held in escrow to secure the payment of monthly rent. It is noted that this sum far exceeds the annual rent due from plaintiffs under the terms of the Lease. Notwithstanding that Melnikoff had actually received all of the rent due in advance and had in fact applied the "security" to his own mortgage payments, when plaintiffs failed to make timely payments of rent beginning in December 2004, by 3 Day Notice dated May 5, 2005, Melnikoff demanded payment of $9870 in rent due through May at the rate of $1595 per month ($100 per month more than that provided in the Lease) plus a $50 per month late fee not contained in the Lease. By petition dated June 3, 2005, Melnikoff brought a summary proceeding seeking a judgment for "arrears" in the sum of $5,515, $1500 in attorney's fees and a warrant to remove plaintiffs from the premises. A year had not yet elapsed from the date of closing.
On July 29, 2005, Melnikoff executed an equity line of credit agreement with defendant Citibank, capped at $100,000, which granted to Citibank a mortgage lien upon the premises. Citibank's mortgage was recorded on August 22, 2005. On August 7, 2007, the Citibank lien, including interest and other charges, totaled $107,310.29.
Plaintiffs' counsel, Brooklyn Center for Law and Justice, took on the representation of plaintiffs in the Housing Court summary proceeding and subsequently instituted this action to void the deed to Melnikoff and the outstanding mortgages given by Melnikoff to First Franklin and Citibank and to obtain an adjudication that plaintiffs are the sole owners in fee simple of the subject premises pursuant to RPAPL Article 15. Plaintiffs allege fraud and violations of New York General Business Law § 349, the federal Truth in Lending Act, 15 USC § 1601 et seq., the federal Real Estate Settlement Procedures Act, 12 USC § 2601 et seq., and legal malpractice against defendant Moberg.
Plaintiffs further contend that the purported deed is actually a mortgage pursuant to New York Real Property Law ("RPL") § 320. A Notice of Pendency, based on the instant action, was docketed by the Kings County Clerk on July 26, 2005, three days before Citibank's loan to Melnikoff.
SUBSEQUENT LEGAL PROCEEDINGS
Following the entry of the preliminary injunction enjoining prosecution of the summary non-payment proceeding, based upon the testimony at the hearing which satisfied this court that there was a probability of plaintiffs' success on the merits, that irreparable harm would result from plaintiffs' imminent removal from the premises and that such removal would contravene the rights of plaintiffs and render a judgment ineffectual (CPLR § 6301), the case was repeatedly conferenced among all parties, both independently and with this court's participation, in an effort to resolve the matter without further litigation. The agreed plan was to return title to Margaret and to obtain affordable refinancing of that portion of the First Franklin mortgage lien properly chargeable to the plaintiffs. The remaining indebtedness to First Franklin and Citibank, both of which had obtained their rights as mortgagees from Melnikoff, would be satisfied by settlement contributions from the other various defendants and by turnover of the sums held in escrow by plaintiffs' counsel as monthly "rent" paid pursuant to this court's order. After many months of unsuccessful negotiation among all parties, between mid-October and mid-December 2006, defendants Langley, SF Consulting and SNX Consultants, Inc., Moonis, and Moberg and Moberg Associates entered into separate confidential Stipulations of Partial Settlement with plaintiffs. When these confidential agreements were revealed to the court, the court directed disclosure to all other parties and further directed plaintiffs to move for leave to discontinue as to only those defendants pursuant to CPLR § 3217. See Matter of Eighth Judicial District Asbestos Litigation, 8 NY3d 717. Plaintiffs' motion for leave to discontinue against Langley, SF, SNX, Moonis and Moberg and Moberg Associates was denied on September 6, 2007, upon a finding that the remaining defendants would be thereby prejudiced.
At a conference on December 18, 2006, plaintiffs indicated their intent to move for partial summary judgment voiding the deed to Melnikoff upon the transcripts of the hearing which were not yet available. The court directed the parties to proceed with discovery and adjourned the matter to March 21, 2007, for return on the proposed motion. Unfortunately, in the intervening period it was learned that the mortgage held by First Franklin had actually been assigned, not to Chase as was previously represented, but to Wells Fargo, NA, as Trustee through a securitization agreement, thus necessitating a Fifth Supplemental Summons and Complaint bringing in a new party and delaying any adjudication of the merits. Various cross-motions were made and all motions were adjourned through the summer at the request of counsel.
Following the hearing, plaintiff William Watson represented through counsel his intent to waive any rights asserted in this action on his behalf in deference to the claims of his mother and transfer title exclusively back to her. The court declined to so order a stipulation to that effect without an appearance by Mr. Watson to acknowledge such intentions, which has never occurred. The court has been recently advised that William Watson continues to be a title holder of the premises. According to counsel, Mr. Watson's name on the deed would facilitate the plaintiffs' obtaining a new mortgage so as to effectuate the terms of a settlement.
It has also been revealed that the Securitization Agreement between First Franklin and Wells Fargo calls for a buy-back of the subject defaulted mortgage, but it is not yet certain whether Wells Fargo will exercise this right.
All parties except Vantage Mortgage LLC appeared on September 6, 2007, to argue their respective positions. Plaintiffs' motion for partial summary judgment was not opposed by defendants Langley, SF, SNX, Moonis, Moberg and Moberg Associates and SPM Title Agency, all of which took no position. First Franklin had cross-moved to dismiss as to it and opposed plaintiffs' motion, which did not seek relief against First Franklin per se, contending that the evidence established an arms-length transaction devoid of fraud and that plaintiffs had received what they had bargained for. Defendant Melnikoff opposed, contending that unspecified questions of fact precluded the granting of partial summary judgment. Defendant Wells Fargo joined in opposing the motion, relying on the court's comment at the close of the hearing that William was not "the most credible of witnesses." Citibank vigorously opposed plaintiffs' motion, suggesting that summary judgment dismissing the complaint as to Citibank should be granted.
Following argument, on the record in open court, plaintiffs' motion was granted, voiding the deed to Melnikoff upon a finding of fraud in the inducement and voiding Citibank's mortgage lien based upon the fact that it derived from the fraudulent deed to Melnikoff and was predicated upon a loan made subsequent to the filing of the lis pendens in the instant action. First Franklin's cross-motion to dismiss was held in abeyance and was subsequently withdrawn. The motion for leave to discontinue was denied and motions by the settling defendants to dismiss based upon the terms of their partial settlements were deferred pending further argument. A brief recess was taken, following which, a stipulation of settlement, including all parties except Citibank, was set forth on the record. Contrary to the court's expectation that the entire matter, including Citibank's remaining claims against Melnikoff, would ultimately be resolved by settlement, the court is now advised that Citibank intends to perfect its appeal and the terms of the settlement as to the other parties have not been implemented, largely because of the implosion of the real estate / mortgage market, thus necessitating this decision.
THE EVIDENCE
As noted by the court at the close of the hearing, William Watson was found not to be the most credible witness. His claim not to have read the numerous documents describing himself and his mother as "sellers" and creating a leasehold with the purchaser Melnikoff is dubious given his education and prior work experience. Certainly, plaintiffs would not prevail on this motion on the testimony of Mr. Watson alone. However, Mr. Watson's testimony was preceded at hearing by the testimony of defendants Matthew Melnikoff, Michael James Moberg, Thomas Moonis and John Langley. Notwithstanding plaintiffs' claims that the deed given to Melnikoff was actually security against the loan of $175,000 and therefore must be deemed to be an equitable mortgage pursuant to common law and RPL § 320, acknowledging that such theory would not support summary judgment in light of the factual issues raised, plaintiffs move for partial summary judgment exclusively upon the defendants' testimony, accepting such testimony as true and accurate in describing the subject transaction as a sale, but arguing that such testimony establishes the fraud necessary to void the deed and the Citibank mortgage subsequently secured by Melnikoff based upon such voidable deed.
Mr. Melnikoff identified the Residential Contract of Sale of May 2004, testifying that upon its execution on May 19, 2004, he wrote a check for $45,000 from his personal account payable to "Moberg Ass" as a down payment, which was never to be deposited and therefore remained in his own account. Proof established that there were insufficient funds available in Melnikoff's account to cover the check. In evidence is an unnotarized document purportedly executed by William at the closing on June 25, 2004, authorizing the return of the $45,000 down payment to Melnikoff and acknowledging that this sum would not be paid to the sellers. Melnikoff testified that Michael Moberg acted as the lawyer for the Watsons at least as early as May 19, 2004 and told him, on that date, that "the check will not be cashed" and would be returned at the closing (Transcript of 3/30/06, at 31). Melnikoff testified that the purpose of the $45,000 check was to induce First Franklin to loan $180,000 on the purchase in the belief that that sum represented only 80% of the value and the purchaser was providing the other 20% of the purchase price of $225,000.
Melnikoff was purportedly represented in the transaction by Thomas Moonis, an attorney in the employ of Moberg, who was provided to Melnikoff by Langley (Transcript of 3/30/06, at 47), as Moberg was apparently provided to the Watsons. Moberg testified, however, that Melnikoff substantially represented himself, although Moberg did send a letter dated May 21, 2004, to Moonis confirming the receipt "in escrow" of $45,000 on the contract. Moonis did not recall receiving the letter and had no file for the transaction. Moonis, who acknowledged receiving referrals from Moberg, speculated that he "possibly" reviewed the contract for Melnikoff, but testified that he had never met Melnikoff prior to the court hearing and had no recollection of the matter. Moonis admitted that he received a W-2 tax form from Moberg and Associates. Although Moonis is listed on the Real Property Transfer Report as the Buyer's Attorney, accepting his testimony at face value, he appears to have had little or no actual participation in the subject transaction. The Moberg Associates firm was, however, also representing the mortgagee First Franklin and acted as the settlement agent at the closing. Thus the Moberg firm was essentially representing all parties in the transaction in violation of the Code of Professional Responsibility, DR 5-101, 5-105 and DR 5-107 ( 22 NYCRR §§ 1200.20, 1200.24, 1200.26). It is further noted that Moberg's failure to deposit the $45,000 check from Melnikoff violated his fiduciary duty to Margaret and First Franklin, if not William, to ensure the integrity of the prospective purchaser/mortgagor by verifying the availability of the funds drawn against. Mr. Moberg also admitted that he did not record the Letter-Contract giving plaintiffs the all-important right to buy back their property for $250,000. (Transcript of 4/4/06, at 261), acknowledging that Melnikoff could have destroyed such right by selling the property to a third party (at 263). Moberg testified that paragraph 3 of the Letter-Contract actually provides for a new contract to be signed within twelve months (Transcript of 4/4/06, at 220).
Defendant's A in evidence is an unsigned letter upon the Moberg Associates letterhead to both plaintiffs, dated June 4, 2004, acknowledging plaintiffs' retention of Moberg as counsel and "confirming" their satisfaction with the terms of the agreement with Melnikoff and that Moberg was "not involved in the negotiating of the terms" as summarized: "You shall sell your property to Mr. Melnikoff who will pay off all encumbrances against the property, including, but not limited to, your existing mortgage and any outstanding taxes and DEP charges. In return you will receive $25,000.00 as well as entering into a rental agreement with Mr. Melnikoff to remain in the property for 12 months with a monthly rent of $1,495.00." The letter also contains a reference to plaintiffs inability to qualify for alternate financing though Moberg testified that he did not know the appraised value of the property or the amount of plaintiffs monthly payments on the existing mortgage (Transcript of 4/4/06, at 251).
By letter dated June 15, 2004, Moberg advised plaintiffs, in anticipation of the closing, that taxes outstanding "in excess of $8500" would be paid at closing unless they could produce proof of payment. The letter also disclosed that Moberg would be representing "the lender" at closing and that plaintiffs could instruct that Moberg was not authorized to represent both parties and could obtain their own "independent" counsel. The letter further advised: "In the event that you consent to my representation of yourself and the lender, you are hereby notified that in the even that an issue should arise with respect to this transaction, that cannot be resolved between yourself and the lender, then you are hereby notified that I will not be able to represent you with respect to any litigation that may arise as a result of any irresolvable conflict." Not disclosed is Moberg Associates' representation, purportedly through their employee Moonis, of the purchaser Melnikoff, in addition to both sellers and the lender, which, according to both Langley's and Melnikoff's testimony, was also defrauded in the transaction. Nor was First Franklin advised of Moberg's representation of multiple clients. Moberg acknowledged that he did not explain to any of the parties the actual conflict that existed among the interests of the various parties so as to obtain informed consent to the simultaneous representation of the several parties as required by DR 1-105. See Greene v Greene, 47 NY2d 447 [1979]; Matter of Kelly, 23 NY2d 368, 376-379 [1968]; Matter of Gelbwaks, 260 AD2d 47, 50 [1st Dept 1999]; Matter of Hof, 102 AD2d 591 [2d Dept 1984]; NY State Bar Assn Comm on Prof Ethics Op 162 [1970]. The failure to address the potential, and actual, conflicts with all clients is particularly egregious here where Margaret's limitations and the possible overreaching by her son should have been apparent. See EC 7-12 of the Code of Professional Responsibility. It is further noted that the title company defendant SPM Agency Ltd a/k/a SPM Title Agency ("SPM") was incorporated by Moberg in 2002 for his wife and Maria Drasco who own the company, thus creating another possible conflict. See NY State Bar Assn Comm on Prof Ethics Op 73 [2000].
Melnikoff testified that pursuant to the above-quoted "Contract of Sale", which superceded the "Residential Contract of Sale" dated May 2004 provided to mortgagee First Franklin, the repurchase price was supposed to be $25,000 above the balance outstanding on the existing mortgage to be satisfied at closing, plus any outstanding taxes and water charges. The total of such payouts, according to the HUD-1 Settlement Statement (HUD-1), was $104,857.08. Even adjusting for legal fees to Moberg of $1500 and the agreed sellers concession of $13,500, using this formula, the repurchase price would be $144,857. Mr. Melnikoff also testified, however, that, as reflected in the Letter-Contract, the buy-back price for the Watsons would be $250,000, $25,000 over the $225,000 sale price listed in the Residential Contract of Sale, conditioned upon the Watsons' timely payment of rent for the twelve-month lease term.
The HUD-1 indicates that the existing mortgage was paid off at closing in the sum of $92,000 to "Fairbanks," which appears to be a servicer or agent for "The Chase Manhattan Bank as Trustee of IMC Home Equity Loan Trust 1998-5," apparently a collateral trust for numerous mortgages owned by IMC Mortgage Company ("AKA Industry Mortgage Company, L.P., Inc. DBA IMC Mortgage Company and DBA Corewest Company and DBA American Mortgage Reduction") to which the Cityscape mortgage was assigned on September 15, 1999. Moberg's IOLA disbursement sheet (plaintiffs' Exhibit 11 in evidence) indicates a payment to Fairbanks of $90,321.26 plus $895 to the law firm Rosicki, Rosicki.
During Melnikoff's testimony, the HUD-1, the Combined Real Estate Transfer Tax Return, the New York City Real Property Transfer Tax Return and the New York State Real Property Transfer Report (RP-5217NYC), all signed by Matthew Melnikoff and William Watson and all showing a "sale price" or "consideration" of $225,000, were admitted in evidence. The HUD-1, prepared and acknowledged to be accurate by Moberg Associates as settlement agent, recites the payment by the borrower of a $45,000 "deposit or earnest money" and a net payment of $103,692.92 in cash to seller. It is undisputed that the Watsons received a total of $25,000 in cash by check dated July 4, 2004 from the account of S F Consulting, Inc. ("SF"). S F Consulting is not listed on the HUD-1 as a recipient of any funds. The check register for Moberg Associates IOLA account, in evidence, lists, however, the disbursement on June 29, 2004 of $59,476.66 to S F Consulting from the $179,146.47 deposit of the proceeds of the closing to Melnikoff on June 25, 2004. Out of this sum, $25,000 was paid to William Watson. Mr. Melnikoff, one the officers of SF, acknowledged that SF provided no services to plaintiffs and was unable to explain why the $59,476.66 payment was made to SF. Also included among the disbursements from the Moberg IOLA account relating to the instant transaction was: $6,293.47 to Vantage Mortgage Broker, not withstanding that the Residential Contract of Sale states unequivocally that no broker was involved; $500 to Moonis; $2100 to Moberg; and a total of $9918 to SPM Title. Melnikoff testified that from the $59,476.66 transferred to SF, $25,000 was paid to Watson directly and $25,000 was paid to himself "in escrow" to be applied as security for mortgage payments in the event William failed to pay the rent. Melnikoff acknowledged that he had in fact applied some of the funds from the escrow account to his mortgage. Langley, who was the other principal of SF and also the owner of SNX Consulting, Inc. ("SNX"), agreed that mortgage payments had been made from the "escrowed" funds. Mr. Melnikoff admitted that he had not paid anything out of his own pocket in exchange for the deed to plaintiffs' home. Defendants acknowledged that the property had been appraised at $395,000. The undisputed evidence establishes a lack of consideration for the deed to Margaret's home alone sufficient to void the transfer for fraud.
"S F Consulting, Inc." was a name selected for a corporation to be formed by defendants Melnikoff and Langley but was not accepted by the Secretary of State and therefore never came into being. SNX Consulting, Inc. was formed in its place. Melnikoff disputed his participation in SNX but acknowledged his association with Langley in the plan to form a corporation. Moreover, in his Affidavit submitted to this court in September, 2005, opposing plaintiffs' request to stay the summary proceeding for non-payment of rent, Melnikoff swore: "I am the owner of S F Consulting . . . John Langley and I are partners." Langley testified that he is the sole owner of SF but was present when Melnikoff signed the quoted affidavit.
Langley, who initially exercised his Fifth Amendment right not to incriminate himself by responding to questions regarding this transaction, and who was present at every meeting with plaintiffs and appears to have orchestrated the transaction, testified that although the Watsons were to deposit $25,000 "in escrow" as rent to cover mortgage payments by Melnikoff, in fact, the $25,000 held by SF was Melnikoff's money. (This testimony is in contrast to that of Moberg who testified such escrow funds belonged to plaintiffs.) The rent payments were made, not to Melnikoff, but to SF. It was Langley who sent rent notices to plaintiffs and had weekly discussions with William about the arrears and who made distributions for the mortgage from SF's account. It was Langley who acted as the loan officer in filling out Melnikoff's Uniform Residential Loan Application representing that the property would be occupied by Melnikoff as a primary residence though Melnikoff never visited the property. Langley was fully familiar with the terms of the sale-leaseback drafted by himself and Moberg who never advised his client First Franklin that the seller would retain the right to repurchase at a pre-determined price significantly less than First Franklin's own appraised value. Langley stated he received between nine and ten thousand dollars for consultation, insisting he was acting "on behalf" of plaintiffs in arranging the deal "so Mr. Watson could stay in his house and not lose it to foreclosure." (Transcript of April 6, 2006, at 484). He acknowledged that he made no attempt to arrange financing for the Watsons, but claims to have relied upon his co-worker Kelly who "tried at first." Langley made no attempt to find a buyer other than Melnikoff since Watson "agreed to the bid."
Langley explained that Melnikoff is a mortgage banker to whom he sent "business" he was unable to handle himself.
LEGAL ANALYSIS
Plaintiffs contend that the evidence adduced at the hearing before this court establishes that they were fraudulently induced to transfer title to their home and that the deed effecting such transfer is voidable as a result. Unlike fraud in the factum, in which the maker of a document executes not knowing its nature or believes the document to be something other than what it is thereby rendering such document void ab initio, plaintiffs concede, for the purposes of their motion, that William knowingly executed a deed, but based upon fraudulent representations. The elements of fraudulent inducement include representation of a material fact, falsity, scienter, deception and injury. Channel Master Corp. v Aluminium Limited Sales, Inc., 4 NY2d 403; Dalessio v Kessler, 6 AD3d 57, 61 [2d Dept 2004]. "[F]raud in the inducement renders the obligation voidable based upon facts occurring prior or subsequent to its execution" ( Dalessio at 61).
In State of New York v Cortelle Corp, 38 NY2d 83, in which the Attorney General was seeking redress for the fraudulent acts of defendant in inducing the transfer of title to distressed properties based upon sale-leaseback agreements similar to that herein, the Court of Appeals stated that proof of such scheme would establish wrongful conduct constituting "promissory fraud." In this case, the defendants have themselves testified that plaintiffs were induced to sign over their home upon the representation that their home would be "saved" from the pending foreclosure and that they would continue to reside in the house. Title would be reconveyed upon payment to Melnikoff of $25,000 over the sums paid out by Melnikoff on plaintiffs' behalf from funds received from First Franklin. A review of the HUD-1, however, indicates that this sum should have been approximately a hundred thousand dollars less than the $250,000 specified in the Letter-Contract. It is also undisputed that plaintiffs only received a total of $25,000 in cash from the proceeds of the sale, rather than the $103,692.92 set forth in the HUD-1, on a property assessed at $395,000. Thus, from the equity in their home, valued at approximately $120,000 even under the terms of the Residential Contract of Sale ($225,000 purchase price less approximately $105,000 in liens), plaintiffs received only $25,000.
While this court does not excuse William Watson from his duty to exercise due care in reviewing the documents he signed and to decline terms that were clearly grossly disadvantageous to him, the complexity of the "deal" and the gross disparity between the promises made by defendants and the actual benefit to plaintiffs establishes to this court's satisfaction that plaintiffs were duped by false representations of terms which defendants knew were not possible and that were designed to permanently obtain title to plaintiffs home at no cost to defendants. The commencement of a summary eviction proceeding alleging nonpayment of rent greater than that called for under the terms of the Lease, at a time when defendants Langley and Melnikoff were holding the full amount of the rent due "in escrow," was clearly fraudulent and designed to preclude any possibility that plaintiffs would reacquire title to their home.
The extent of attorney Moberg's participation in contriving the fraud at bar is unknown, however, his preparation of false and deliberately confusing documents, his agreement not to deposit the down payment, and his failure to provide proper counsel to plaintiffs in protecting them from what was obviously an unconscionable transaction, clearly facilitated it. The breach of his professional obligations in purporting to represent all sides in the transaction, and his certification to the accuracy of what was clearly a false HUD-1, contribute significantly to the finding that plaintiffs were defrauded both before, during and after the closing of title. It is indisputable, based upon defendants' own admissions, that plaintiffs were induced to convey title to their home by false representations, which were known to be false and upon which plaintiffs relied to their detriment, that they would continue to reside in their home and would ultimately be able to recover title. But for these representations, which defendants never intended to be realized, plaintiffs would not have given away their property, worth nearly $400,000, for $25,000 and the payoff of liens totaling $105,000. Defendants Melnikoff's and Langley's pre-emptive effort to remove plaintiffs from their home before the expiration of the one-year period set forth in the Lease and the Letter-Contract which permitted continued occupancy and ultimate repurchase, establishes their intent from the outset to permanently divest plaintiffs of title and take possession from them. "[I]t is settled that, if a promise was actually made with a preconceived and undisclosed intention of not performing it, it constitutes a misrepresentation of a material existing fact' upon which an action for rescission may be predicated." Sabo v Delman, 3 NY2d 155, 160; see also, Deerfield Communications Corp. v Chesebrough-Ponds, Inc., 68 NY2d 954; Adams v Gillig, 199 NY 314, 319 ("Any statement of an existing fact material to the person to whom it is made that is false and known by the person making it to be false and which is made to induce the execution of a contract, and which does induce the contract, constitutes a fraud that will sustain an action to avoid the contract if the person making it is injured thereby."). Accordingly, the sale of the property must be rescinded and the deed declared void.
The court takes judicial notice of the pending action of Alice Johnson brought against all of the defendants herein except Citibank ( Johnson v Melnikoff, et al., Index No. 10548/07) in which it is alleged that the same scheme to defraud was executed against Ms. Johnson on the same day at the same location as that herein.
Citibank acknowledges in its Answer that the loan made to Melnikoff by Citibank was actually made three days after the docketing on July 26, 2005, of a Notice of Pendency against 602 East 92nd Street, Brooklyn, in this action, specifically identifying the relief requested as "setting aside the alleged deed transfer occurring on or about June 25, 2004, which purported to transfer title from William Watson and Margaret Watson to Matthew Melnikoff . . . and declaring such transfer of title to be null and void." Pursuant to CPLR § 6501, such Notice provides constructive notice from the moment of filing to any "incumbrancer against, any defendant named" in the notice indexed against the property. The statute further provides: "A person whose conveyance or incumberance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party."
Clearly, Citibank's mortgage against plaintiffs' home is an incumbrance derived from an obligation undertaken by Matthew Melnikoff, the first-named defendant in the Notice of Pendency. Citibank's lien was not recorded until August 22, 2005. Citibank was thus statutorily bound by the determination herein voiding its obligor's deed.
Citibank argues in opposition to plaintiffs' motion to void its mortgage, first, that the deed is presumptively valid on its face and that the evidence is insufficient to establish that it was intended as a mortgage rather than a conveyance of title. However, plaintiffs do not rely, in making this motion, on their claim that the deed evidences a mortgage, but accept the claim that the transaction was a sale. Citibank's argument in this regard is therefore unavailing.
Citibank further argues that plaintiffs are bound to the terms of the documents executed by William, citing several cases to that effect. However, the authorities cited exclude documents induced by fraud or misrepresentation from the purview of the rule. See, e.g., Pimpinello v Swift Co., 253 NY 159; Metzger v Aetna Insurance Co., 227 NY 411; Norstar Bank v Office Control Systems, Inc., 165 AD2d 265 [3d Dept 1991]; Dunkin' Donuts of America, Inc. v Liberatore, 138 AD2d 559 [2d Dept 1988]. Citibank's argument that the evidence does not establish fraud sufficient to void the deed is rejected by this court.
Finally, Citibank contends that their lien on the property should be preserved as a matter of equity because Melnikoff in fact obtained funds based upon his deed and Citibank "had no actual notice of the Notice of Pendency." However, it is well settled that "New York has a so-called race-notice' recording statutory scheme. . . . That the [mortgagee] lacks actual knowledge of the filing is irrelevant as the principle underlying the doctrine of notice of pendency does not rest upon the presumption of notice but upon reasons of public policy, manifested by the language of [CPLR 6501] (citation omitted)'." Goldstein v Gold, 106 AD2d 100, 101-102 [2d Dept 1984], aff'd, 66 NY2d 624. Pleading further on grounds of equity, Citibank discloses that, pursuant to an order placed July 25, 2005, its title company performed "a limited title search" on July 27, 2005, confirming that Melnikoff held title. Whether the failure to perform a search sufficient to disclose plaintiffs' Notice of Pendency was the result of Citibank's direction to limit the search or due to negligence on the part of the title company is unknown. However, this court fails to perceive how such lack of care on the part of either Citibank or its title company can inure to Citibank's benefit in the circumstances. The fault lies either with defendant Citibank or its title company. See Goldstein v. Gold, id at 103. Unlike defendant First Franklin, whose mortgage funds were actually applied against the debt of plaintiffs on their prior mortgage and which would be entitled to be equitably subrogated to the now satisfied debt to that creditor ( LaSalle Bank Nat'l Assoc. v Ally, 39 AD3d 597, 600 [2d Dept 2007]), Citibank has provided no benefit to plaintiffs. Accordingly, plaintiffs' motion to void the Citibank mortgage against their property must be granted.
Finally, several defendants have argued that plaintiffs' motion must be denied because there are issues of fact requiring further litigation. There is no question that "[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 prima facie showing requires a denial of the motion, regardless of the sufficiency of the opposing papers.'" JMD Holding Corp. v Congress Financial Corp. , 4 NY3d 373 , 384, citing, Alvarez v Prospect Hospital, 68 NY2d 320, 324; see also Peerless Ins. Co. v Allied Bldg Prods Corp., 15AD3d 373, 374 [2d Dept 2005]. However, none of the parties articulating this argument have identified a genuine issue of disputed fact.
As noted, plaintiffs have framed their motion entirely in reliance upon the testimony of defendants Melnikoff, Langley, Moonis and Moberg. These individuals are the only available persons having actual knowledge of the relevant facts constituting the alleged fraud other than plaintiff William Watson, whose testimony is being disregarded for the purpose of the decision. Their testimony regarding the essential facts is not disputed. All parties were represented at the hearing in which defendants testified and each had a full opportunity to cross-examine so as to develop any conflicting evidence or to produce other evidence. Moreover, much of plaintiffs' evidence is predicated upon publicly-filed documentary evidence. There is nothing in the entire record before the court to suggest that a legitimate dispute exists regarding the facts. While the defendants may disagree with the court's interpretation of the facts and its legal conclusions, such determination is properly vested in the court upon a full record.
The defendants' testimony indicates that a Vantage Mortgage LLC loan officer named Kevin Kelly had some role in identifying plaintiffs as targets, but he was not joined in the action because his whereabouts are unknown.
Defendant Wells Fargo has argued that it was not present at the hearing. Until an appearance on May 6, 2008, this court understood that Wells Fargo had acquired the mortgage from First Franklin only during the pendency of this action and subsequent to the hearing, however, in discussion this day, it was first revealed that First Franklin had assigned its mortgage almost immediately after the closing on June 25, 2004, although Wells Fargo's interest was not recorded until December 2007, after this court had rendered its decision on plaintiffs' motion. Under these circumstances, so typical of the confusion generated by the secondary mortgage market, the participation by counsel for First Franklin, which in fact had no standing, is deemed to have been on behalf of Wells Fargo, which is now estopped, by its own failure to appear, from claiming a lack of due process.
CONCLUSION
Plaintiffs' motion for partial summary judgment voiding the deed of June 25, 2004, conveying title to Matthew Melnikoff, and voiding and cancelling the mortgage of Citibank NA, recorded August 22, 2005, and declaring that plaintiffs are the sole owners of 602 East 92nd Street, Brooklyn, New York in fee simple absolute is granted. Judgment to that effect, directing the City Register's Office to amend it's records in accordance with this decision, was entered on October 3, 2007.
The foregoing constitutes the decision of the court.