Altshuler Shaham Provident Funds, Ltd., Appellant,v.GML Tower, LLC, et al., Defendants, The Pike Company, Inc., et al., Respondents.

Brief

N.Y.May 2, 2013

To Be Argued By: BRUCE H. LEDERMAN, ESQ. Time Requested: 15 Minutes ([ourf of ~pp~a15 STATE OF NEW YORK ALTSHULER SHAHAM PROVIDENT FUNDS, LTD., Plaintiff-Appellant, -against- GML TOWER LLC, GMLADDIS LLC, AMERIS HOLDINGS INC., LEVY KUSHNIR, and FINANCITECH, LTD., Defendants, .c -and- THE PIKE COMPANY, INC., PYRAMID ROOFING ~ SHEET METAL CO., INC., L.A. PAINTING, INC., THE HAYNER HOYT CORPORATION, THE EFFECT GROUP, INC., SYRACUSE MERIT ELECTRIC, A Division of O'CONNELL ELECTRIC CO., INC., and TAG MECHANICAL SYSTEMS, INC. Defendants-Respondents. REPLY BRIEF FOR PLAINTIFF-ApPELLANT ALTSHULER SHAHAM PROVIDENT FUNDS, LTD. Of Counsel: BRUCE H. LEDERMAN, ESQ. ERIC R. GARCIA, ESQ. CHRISTOPHER M. TARNOK, ESQ. D'AGOSTINO, LEVINE, Li\NDESMAN & LEDERMAN, LLP 345 Seventh A venue, 23rd Floor New York, New York 10001 (212) 564-9800 fax (212) 564-9802 -and- HANCOCK & ESTABROOK, LLP 1500 AXA Tower 1 100 Madison Street Syracuse, New York 13202 (315) 471-3151 Attorneys for Plaintiff-Appellant Altshuler Shaham Provident Funds, Ltd. Brief Completed on: 211412013 Echo Appellate Press, Inc.· 30 West Park Avenue· Long Beach, New York 11561 • (516) 432-3601 Printed on Recycled Paper 19709 SUPREME COURT OF THE STATE OF NEW YORK COURT OF APPEALS-STATE OF NEW YORK -----------------------------------------------------------------------------x Altshuler Shaham Provident Funds, Ltd., Plaintiff-Appellant, -against- GML Tower LLC, GML Addis LLC, Ameris Holdings Inc., Levy Kushnir, Financitech, Ltd., Defendants, -and- The Pike Company, Inc., Pyramid Roofing & Sheet Metal Co., Inc., L.A. Painting, Inc., The Hayner Hoyt Corporation, The Effect Group, Inc., Syracuse Merit Electric, A Division of O'Connell Electric Co., Inc., and Tag Mechanical Systems, Defendants-Respondents. -----------------------------------------------------------------------------x TABLE OF CONTENTS PAGE Table of Authorities .............................................. ~ ................................................... iii Preliminary Statement ............................................................................................... 1 Reply Argument ........................................................................................................ 9 Point I Plaintiff-Appellant Raised the Relevant Legal Issues in its Memorandum to the Supreme Court ........................................... 9 Point II Plaintiff-Appellant has Consistently Asserted that it did Not Claim a Mortgage Lien on the $4.5 Million Tranche Until it was Fully Funded ............................................................... 14 Point III Defendants-Respondents Improperly Rely upon Prior Laws, which have been Superseded ..................................................... 16 Point IV At a Minimum, Plaintiff-Appellant's $5,500,000.00 Acquisition Financing and $2,000,000.00 Lump Sum 2008 Financing Should have Priority over Subsequently Filed Mechanic's Liens .......................................................... 20 Point V Liberal Construction of the Lien Law does not Justify Imposing a Draconian Subordination Penalty where Plaintiff-Appellant Renegotiated an Agreement to Make a Building Loan and Eventually Restructured it as a Conventional Loan ........................................................ 24 Point VI Defendant-Respondent Hayner Hoyt's Accusation of Improper Conduct is Totally Unjustified and Incorrect. ............................... 26 Conclusion ............................................................................................................. 31 Addendum ............................................................................................................. 33 1. Relevant Portions of Memorandum of Law In Supreme Court ................................................................................ 34 2. 1930 Bar Association Memo .............................................................. 43 11 TABLE OF AUTHORITIES PAGE Cases Alden State Bank v. Sunrise Builders, 48 A.D.3d 1162, 1164, 853 N.Y.S.2d 230,232 (4th Department 2008) .................................................... 10 Christian v. Christian, 42 N.Y.2d 63, 73 (1977) ..................................................... 23 Fin & Save v. Task Assocs., Inc., 731 F. Supp. 64, 71 n.2 (N.D.N.Y. 1990) ..... 6, 22 Gary v. Flair Beverage Corp., 60 A.D.3d 413,414 (1st Dept. 2009) ..................... 12 Henner v. Everdry Marketing and Management, Inc., 74 A.D.3d 1776, 1778 (4th Dept. 2010) ................................................................................................... 12 Howard Save Bank v. Lefcon P'ship, 209 A.D.2d 473,476 (1994) .................. 24, 25 In re 445 CPW Assoc., 192 B.R. 85 (Bankr. S.D.N.Y 1996) ........................... 16, 22 In re Admirals Walk, 134 B.R. 105 (W.D.N.Y. 1991) ................... 10, 16, 18, 19,20 In re CPW Assoc. v. The Greater New York Savings Bank, 192 B.R. 85, 90 (1996) ......................................................................................... 22 Lakeville Pace Mech., Inc. v. Elmar Realty Corp., 276 A.D.2d 673, 675-76 (2000) ....................................................................................................... 12 Misicki v. Caradonna, 12 N.Y.3d 511, 526 (2009) ................................................. 13 Nanuet Nat'l Bank v. Eckerson Terrace, Inc., 47 N.Y.2d 243 (1979) ........ 20,21,25 Persky v. Bank of America N.A., 261 N.Y. 212, 217-18 (1933) ............................ 12 Riverside Syndicate, Inc. v. Victoria Munroe, 10 N.Y.3d 18,21 (2008) .......... 12-13 Telaro v. Telaro, 25 N.Y.2d 433, 439 (1969) .......................................................... 12 Yankee Bank for Fin & Sav. v. Task Assoc. Inc., 731 F. Supp. 64, 71 n.2 (N.D.N.Y 1990) .......................................................................................... 6, 11, 22 Statutes Lien Law Article 2 ................................................................................................... 21 Lien Law Section 13 .................................................................................................. 3 Lien Law Section 22 .................. 1,2-3,5,6,9, 13, 16, 17, 18, 19,20,21,22,31,32 Lien Law Section 23 ................................................................................................ 24 Other Citations Black's Law Dictionary (9th ed. 2009) .................................................................... 11 Karger, Powers of the Court of Appeals, Ch. 17 (3rd ed. 2005) ............................. 12 111 COURT OF APPEALS STATE OF NEW YORK -----------------------------------------------------------------------------)( Altshuler Shaham Provident Funds, Ltd., Plaintiff-Appellant, -against- GML Tower LLC, GML Addis LLC, Ameris Holdings Inc., Levy Kushnir, Financitech, Ltd., Defendants, -and- The Pike Company, Inc., Pyramid Roofing & Sheet Metal Co., Inc., L.A. Painting, Inc., The . Hayner Hoyt Corporation, The Effect Group, Inc., Syracuse Merit Electric, A Division of O'Connell Electric Co., Inc., and Tag Mechanical Systems, Defendants-Respondents. ----------------------------------------------------------------------------- )( REPLY BRIEF OF PLAINTIFF-APPELLANT PRELIMINARY STATEMENT Defendant-Respondents' answering briefs demonstrate the need for the Court of Appeals to confirm that Lien Law Section 22 only applies when, at the time a mortgage is recorded, it secures advances which will be funded after the mortgage is recorded. This issue was clearly and specifically raised before the Supreme Court in Plaintiff-Appellant's memorandum in opposition to summary judgment (the "SMJ Memo"). (See Point I below, and pages of SMJ Memo attached as an. Addendum hereto). The extended discussion by Defendants- Respondents of how the agreement dated March 29, 2007 (R. 271-312) is defined, and whether it expired before it was amended, is a red herring since the issue before the Court is whether the recorded mortgage secured future advances. (See Point I below). Plaintiff-Appellant has always claimed that an initial commitment was made in 2007 for $10,000,000.00 with the funds deposited on March 29, 2007 into an attorney's trust account in Israel to be released once proper mortgages were prepared and properly recorded by New York counsel. $5,500,000.00 was initially advanced when a pre-existing acquisition mortgage was refinanced. $2,500,000.00 was paid as Interim Unsecured Advances while the lender and borrower restructured a failed transaction, and the balance of $2,000,000.00 was paid into an unrestricted lump sum pursuant to the 2008 Amended Commitment before the 2008 Consolidated Mortgage was recorded. (R.378-379). Plaintiff-Appellant has consistently argued that this was perfectly lawful and argues that the claims by Defendants-Respondents of some judicial estoppel are unjustified. (See Point II below). Turning to the merits, this appeal presents important legal issues where this Court can enunciate a clear standard as to when compliance to Lien Law 2 Section 22 is required. Where a mortgage secures a loan which is .already fully funded, pursuant to Lien Law Section 13 ordinary first-in-time, first-in-right, priority rules govern. Indeed, if mortgage loans that are fully funded at closing could be attacked as improperly recorded building loans, it could open the floodgates for massive litigation since homeowners and businesses routinely take ordinary second mortgages to finance renovations. and construction without lenders treating such loans as building loans where commitments need to be filed. Where mortgages are fully funded before they are recorded, the statutory framework established by the. Lien Law protects lenders' priorities so as not to discourage lending in the State of New York. (See Plaintiff-Appellant's original brief at pages 35-44, and Points I and III below). Lien Law Section 22 was amended in 1930 to eliminate the requirement for filing all building loan contracts, which DefeQdants-Respondents, and the lower courts, erroneously suggest is required. (See Point III below). Building loan contracts need only be filed before a mortgage is "recorded pursuant thereto," which was expressly argued in the Supreme Court. (See Addendum hereto). If no mortgage is recorded, per force, there is no requirement to file a commitment or an agreement to make a building loan. In this case, since the 2007 Commitment and 3 the MOUI were both amended before any mortgage was recorded, they did not need to be filed. The 2008 Amended Commitment (R.313-354) was not a building loan contract within the meaning of the Lien Law because it was for lump sum financing, sometimes referred to as a project finance loan. Typically, a project finance loan is fully disbursed at closing, without restrictions tied· to construction progress. A project finance loan is a very typical conventional loan, which is a separate concept from a "building loan" where a lender advances funds after a mortgage is recorded as construction milestones are met. The 2008 Consolidated Mortgage was properly recorded as a conventional project finance loan of lump sum financing - not a building loan for advances after the mortgage was recorded and tied to construction milestones. The primary cases relied upon by Defendants-Respondents (this Court's PT McDermott decision and the Schenectady County Supreme Court's Dearstein decision) were decided under pre-1930 law. Under the prior law, all building loan agreements needed to be recorded within 10 days of execution, rather than before a corresponding mortgage was recorded. The cases relied upon by Defendants- Respondents are completely inapplicable to situations where a commitment was amended before any mortgage was filed. In order to allow lenders to comply with 1 Terms defined in the Plaintiff-Appellant's main briefhave the same meaning in this Reply Brief. 4 Lien Law Section 22' s filing requirements without uncertainty as to whether a particular fully funded lump sum project loan might later be recharacterized as a building loan~ this Court should enunciate a simple rule that a building loan contract only needs to be filed with the County Clerk before a mortgage IS recorded if mortgage proceeds will be disbursed after the mortgage is recorded. Lien Law Section 22 requires disclosure of the amounts to be advanced and the times when such advances will be made. This information only serves a purpose when a recorded mortgage has priority over potential mechanic's liens, and there are still advances under the mortgage to be made. In such cases, a contractor may wish to know what funds will be disbursed and when they will be disbursed in evaluating whether to perform work in the face of a recorded mortgage. Where there are no future advances after a mortgage is recorded, the contractor performs work with full notice of a prior recorded mortgage. In such cases, Lien Law Section 13 provides contractors with extensive rights against the borrower under fund theories with regard to funds that have already. been disbursed. No bona fide purpose would be served whatsoever by providing information as to advances since they have already been made in the amount of the recorded mortgage to the borrower. Irrespective of whether the 2008 Consolidated Mortgage (R. 61; 74) is characterized as a building loan mortgage, Defendant-Respondents inexcusably 5 ignore the logical interpretation of Lien Law Section 22 by the Federal District Court in Yankee Bank for Fin & Save v. Task Assoc. Inc., 731 F. Supp. 64, 71 n.2 (N.D.N.Y 1990). (See Point V below). This important issue was explicitly raised in the Supreme Court. (See Point I and Addendum hereto). In Yankee Bank, a Federal Judge held that any "subordination penalty" under Lien Law Section 22 was limited to the amount of any building loan funds, and not applied to distinct prior acquisition financing which may have been consolidated therewith. Additionally, Defendants-Respondents refuse to recognize express provisions of recorded documents (which they supposedly relied upon) providing that any unenforceable provision of the recorded mortgage shall be deemed severed (R. 108) so that the remaining provisions shall be fully enforceable as if the unenforceable provisions had never been a part of the mortgage. Instead of properly addressing the substantive issues, Defendant-Respondent Hayner-Hoyt's reply brief (the "HH Brief') is filled with improper, scurrilous and unsupported accusations of misconduct and misrepresentation. (See Point VI below). There was absolutely nothing wrong (as suggested by the HH Brief at p.49) with a fore~gn developer initially making an agreement for financing in its home country with a foreign lender, with the intention of recording mortgages in accordance with New York law after New York counsel was retained to advise on New York law documenting the transaction. Would Defendants-Respondents 6 question the ethics of a British developer borrowing money from a British bank, a German developer borrowing money from a German bank, or a Japanese developer borrowing money from a Japanese bank? As a matter of policy, foreign lenders should not be placed at risk for initially negotiating in their home country and then following the advice of New York counsel. Hayner-Hoyt's suggestion that "under current United States Banking regulations," Plaintiff-Appellant's actions might be "prohibited" (HH Brief at 22) is completely without basis. Such suggestions smack of the worst type of "McCarthyism" and should not be tolerated by this Court. Indeed, as explained below, the HH Briefs acc~sation of secret dealings result from quoting only parts of loan provisions and omitting important information. Once the full loan provisions are "reviewed, it is clear that both the 2007 recorded and unrecorded documents were substantively identical, and all discuss financing the construction of 20 out of 54 apartments, with the developer financing the remainder with sales proceeds or other funds. HH's suggestion (HH Brief at 23-24) that the Defendants-Respondents acted in reliance upon representations by the Plaintiff- Appellant that the $4,500,000.00 construction component of the 2007 Commitment was sufficient to complete all 54 apartments is a gross distortion of the record and totally improper speculation. Defendants-Respondents, as the contractors working on the project, certainly knew that the project contained over 50 apartments and a 7 commercial space. Therefore, the suggestion that they were misled by a statement that the proposed financing was funding construction of the improvements necessary to build 20 apartments makes no sense. There is no suggestion in the record that any of Defendants-Respondents ever reviewed recorded documents. Absolutely nothing was done improperly, and nothing was done to mislead anyone. In any event, the Defendants-Respondents' confused and misleading parsing of the language of the· loan documents and commitments which diq not close and were instead amended (in a witch-hunt style attempt to find secret dealings which never actually took place) demonstrates the need for the Court of Appeals to confirm a clear and simple rule that a mortgage is only a building loan mortgage for purposes of Lien Law Section 22 when there are advances to be disbursed after the mortgage is recorded. Moreover, if there is some technical violation of Lien Law Section 22, which Plaintiff-Appellant submits there is not, a subordination penalty should only be applied to the building loan aspect of a consolidated mortgage and not to otherwise valid portions. 8 REPL Y ARGUMENT 1. PLAINTIFF-APPELLANT RAISED THE RELEVANT LEGAL ISSUES IN ITS MEMORANDUM TO THE SUPREME COURT The legal issues which the Plaintiff-Appellant raised in its initial brief to this Court were specifically raised in its SMJ Memo dated January 20, 2010 submitted in opposition to summary judgment. Relevant pages of the SMJ Memo are attached as an Addendum 1 hereto. In the preliminary statement of the SMJ Memo, Plaintiff-Appellant described the issues as follows: "[S]ince the entire $10 million loan was advance prior to the recording of the last mortgage modification, neither the policy behind Section 22 of the Lien Law, nor any sensible statutory construction thereof, required Perfect Provident to file the loan agreement. In short, although the loan agreement was executed prior to funding any , loan proceeds, Perfect Provident never purported to have a mortgage lien with respect to any funds to be advanced thereunder until after those funds were actually advanced. Accordingly, since a building loan contract by definition contemplates secured future advances being made thereunder, and the mortgage herein never secured future advances, neither the loan agreement, nor any amendments thereto, had to be filed under Section 22 of the Lien Law. Third, since Perfect Provident's mortgage is not a "building loan mortgage," as such term is strictly defined in the Lien Law, the Section 22 subordination penalty does not apply to Perfec,t Provident's mortgage lien. Finally, if the Section 22 Lien Law subordination does apply, and it should not, the penalty should only 9 subordinate the portion of the mortgage lien securing the later advanced $4.5 million of construction loan proceeds, and not the portion securing' the earlier advanced $5.5 million of loan proceeds that were specifically allocated to refinance pre-existing acquisition debt. SMJ Memo at pages 1 and 2, attached as an Addendum hereto. Court: At page 7 of the SMJ Memo, Plaintiff-Appellant argued to the Supreme The Loan Agreement did not have to be filed with the Clerk's Office to warn potential mechanics lienors about how much was actually available under a recorded mortgage secure future advances thereunder because at no point did the Mortgage secure any unadvanced portions of the loan. * * * It is well settled that a "building loan contract" cont~mplates future advances to be made as construction progresses. See, e.g. Alden State Bank v. Sunrise Builders, 48 A.D.3d 1162, 1164, 853 N.Y.S.2d 230, 232 (4th Department 2008) SMJ Memo at pages 7 and 10, attached as an Addendum hereto. The amendments to the Lien Law in 1930, and their implications for this case, including citation to In re Admirals Walk, 134 B.R. 105 (W.D.N.Y. 1991), were discussed at page 13 of the SMJ Memo, attached as an Addendum hereto. The argument that the subordination penalty should only be applied to the $4.5 million portion of the loan advanced for construction was specifically addressed, 10 including a discussion of Yankee Bank, 731 F~ Supp. 64 (N.D.N.Y 1990), at page 17 of the SM] Memo, attached as an Addendum hereto. * * * Defendants-Respondents are turning into a red herring the issue of how the agreement dated March 29, 2007 (R. 271-312) is characterized and defined. The March 29, 2007 agreement (which has been referred to as the 2007 Commitment), by its terms, is an agreement to make a loan which was scheduled to close in 30 days, provided various conditions were met. According to Black's Law Dictionary, a loan commitment is "[a] lender's binding promise to a borrower to lend a specified amount of money at a certain interest rate, usually within a specified period and for a specified purpose" (such as buying real estate). Black's Law Dictionary (9th ed. 2009). The Court of Appeals may take judicial notice that virtually all mortgages are made as a result of an initial commitment or term sheet, followed by an actual closing where mortgage documents are signed and recorded. In rejecting attempts by contractors to claim benefits under a loan commitment, the Second Department, observed: [C]ontractors were not third-party beneficiaries to the Bank's commitment letter. Agreements to provide financing do not require banks to advance funds outside the terms of their commitment, or to guarantee full funding of a project. 11 Lakeville Pace Mech., Inc. v. Elmar Realty Corp., 276 A.D.2d 673, 675-76 (2000). By identifying on this appeal that the 2007 Commitment and MOO had an expiration date which, passed without a closing of the $4,500,000 construction component, Plaintiff-Appellant has not raised any new issues.· Even if the legal theories involved in this appeal were not raised below as clearly raised herein, pure issues of law presented on the face of the record may properly be raised on appeal. Persky v. Bank of America N.A., 261 N.Y. 212,217- 18 (1933); Henner v. Everdry Marketing and Management, Inc., 74 A.D.3d 1776, 1778 (4th Dept. 2010); Gary v. Flair Beverage Corp., 60 -A.D.3d 413, 414 (1st Dept. 2009); see generally Karger, Powers of the Court of Appeals, Ch. 17 (3rd ed. 2005) (Reviewability of New Questions on Appeal). This Court has stated: It should also be noted that the general rule concerning questions raised neither at the trial nor at previous stages of appeal is far less restrictive than some case language would indicate. Thus, it has been said: "if a conclusive question is presented on appeal, it does not matter that the question is a new one not previously suggested. No party should prevail on appeal, given an unimpeachable showing that he had no case in the trial court." (Cohen & Karger, Ope cit. Supra, pp. 627-628.) [Emphasis added.] Telaro v. Telaro, 25 N.Y.2d 433,439 (1969). Various Court of Appeals cases, which Defendants-Respondents claim preclude review, are readily distinguishable. For example, Riverside Syndicate, 12 Inc. v. Victoria Munroe, 10 N.Y.3d 18, 21 (2008) involved substantive questions of whether a landlord or tenant could enforce a court-ordered stipulation which violated rent stabilization orders. This has nothing to do with the situation at bar. In Misicki v. Caradonna, 12 N.Y.3d 511, 526 (2009), this Court assumed an issue not addressed below in denying summary judgment based upon whether a certain hand-held saw was heavy equipment within the meaning of certain safety regulations, but stated that the issue not raised below could still be raised at trial. Again, this has nothing to do with whether the Court of Appeals should address an issue of statewide importance as to whether Lien Law 22 applies to loans which were fully funded before mortgages were recorded when such facts were clearly raised in the affidavit in opposition to summary judgment and the memorandum of law submitted below. (R. 376-380; Addendum 1). Thus, as explained herein and in the main brief, the issues of compliance with Lien Law Section 22 are pure issues of law, framed by documentary evidence and undisputed facts, which can and should be addressed by this Court of Appeals. 13 II. PLAINTIFF-APPELLANT HAS CONSISTENTLY ASSERTED THAT IT DID NOT CLAIM A MORTGAGE LIEN ON THE $4.5 MILLION TRANCHE UNTIL IT WAS FULLY FUNDED Defendants-Respondents hide behind claims that Plaintiff-Appellant's position that it did not claim a mortgage lien on the $4.5 million tranche until it was fully funded. This is shnply not true. The complaint specifically pleads that $10,000,000.00 was advanced "on or before the date of the [2008] Mortgage." (R.39, Complaint at ~10; emphasis added). It has never been disputed that the $10,000,000.00 was initially placed in an attorney's escrow/trustee account with Israeli counsel when the 2007 Commitment was signed2, pending retaining New York counsel to prepare all documents necessary to properly record valid mortgages. In his affidavit in opposition to summary judgment in the Supreme Court below, Yair Lowenstein (Plaintiff-Appellant's General Manager) specifically asserts: Plaintiff-Appellant has never asserted that the 2007 Commitment and MOD "were not binding because they were executed in Israel" as suggested in the Syracuse Merit Brief at page 21. The agreements were commitment by their express terms in that they contemplated future closings, with extensive requirements for closing. They expired and became unenforceable when they did not timely close, having nothing to do with where they were executed. 14 "20. At no time to [did] Perfect Provident claim a mortgage lien with respect to the $4.5 million tranche prior to advancing the full $4.5 million. (R. 379, Lowenstein Aff. at ~20). In his affidavit in support of entry of a judgment of foreclosure and sale, Yair Lowenstein once again confirms that while the entire $10,000,000.00 was advanced in Israel into a trustee account pursuant to the. 2007 Commitment on March 29,2007, $5,500,000.00 was disbursed to refinance acquisition financing on or about April30, 2007, $2,500,000.00 was disbursed as Interim Unsecured Advances between May 24, 2007 and February 21, ·2008, and the final $2,000,000.00 was disbursed on March 6,2008 .. (CA. 49, 37-38; R 378-379). The same arguments were made in the· SMJ Memo. (See Addendum hereto). Plaintiff-Appellant has never wavered from this explanation and has consistently asserted that documentary evidence entitles it to priority under these undisputed facts. HH's assertions (HH Brief at 28) that it did not have discovery are disingenuous because Defendants-Respondents moved for summary judgment and never sought such discovery. Accordingly, there is no basis for application of any estoppel against the arguments made on this appeal. 15 III. DEFENDANTS-RESPONDENTS IMPROPERLY REL Y UPON PRIOR LAWS, WHICH HAVE BEEN SUPERSEDED Defendants-Respondents fail to cite a single case where a Court required filing, with the County Clerk, a commitment to make a building loan which was later amended so that all funds were advanced before a mortgage was recorded. The basic concept that a particular transaction is only a building loan if it secures advances which will be made after the mortgage is recorded as construction progresses is fully discussed at pages 36-38 of Plaintiff-Appellant's main brief and will not be repeated here. See also In re 445 CPW Assoc., 192 B.R. 85 (Bankr. S.D.N.Y 1996) (finding that Lien Law 22 did not apply to a consolidated loan where $19,350,000.00 was loaned in 1988, of which $13,535,000.00 was used to payoff existing loans and obtain an assignment of the existing mortgages, and another $4,000,000.00 which was loaned under in 1989, pursuant to "Project Loan Agreements" and consolidated to form a $23,350,000.00 first mortgage). This section of this Reply Brief will focus on the question of what happens if a commitment to make a building loan is amended and funded as a conventional loan, without advances being made as construction proceeds. The only reported case to address the issue of whether a commitment, which was later amended, needs to be filed is In re Admiral's Walk, 134 B.R. 105 (Bankr. W.D.N.Y 1991). In re Admiral's Walk was decided in the context of an 16 undisputed bona fide building loan mortgage, which was recorded following the filing of a building loan . contract for future advances, where the original commitment had been modified and amended. Contractors sought Lien Law Section 22 subordination penalties based upon inconsistencies they discovered following discovery between the original commitment and the recorded documents. Not surprisingly, Defendants-Respondents completely ignore In re Admiral's Walk. In In re Admiral's Walk, the bankruptcy court, which has great familiarity with addressing competing lien priorities, engaged in a very thorough analysis of the 1930 Amendments to Lien Law Section 22, and rejected arguments very similar to those made here by Defendants-Respondents, noting that cases decided before 1930 were likely not good law. The bankruptcy court noted as follows: Language from a 1906 decision of a New York Court of general jurisdiction regarding the purpose of section 22 (then section 21) is often cited even today for the proposition that: The statute is a safeguard against secret arrangements between lender and owner or contractor. It commands that all [ emphasis in the original] agreements or modifications thereof be filed .... * * * 17 Continued reliance on the language of the 1906 case, whether by courts in more recent cases or by parties, is curious in four regards. Firstly, that 1906 decision was reversed on the merits, the highest Court of the State ruling that the BLC was not required to disclose the fact that $160,000 of the $370,000 loan proceeds were going to be used to satisfy a prior mortgage. Consequently, the highest court obviously did not agree that "all agreements ... be filed" or that "Nothing should be left to conjecture." * * * Lastly, the Lien Law was materially amended in 1930. The last pre-1930-amendment statement of the highest c'ourt of the State regarding the purpose of the statute was in 1922 and was far less sweeping than the 1906 lower- court case cited. The State's High Court stated that the object of the statute "is to acquaint prospective contractors with the fact that they furnish labor and materials subject to claims prior to theirs against the property ... and also to inform such contractors of the amounts to be advanced and the times of such advances." The basis of the State High Court's 1908 decision in Penn Steel and its statement of section 22 purposes in P. T. McDermott are such, in light of the 1930 amendments, as to render them (and the Lower Court's Penn Steel statements) highly questionable authority for use as post- 1930 statements of purpose .... In re Admiral's Walk, Inc., 134 B.R. at 113-15 (emphasis added; internal citations omitted). Ultimately, the bankruptcy court concluded that Lien Law Section 22 did not require filing commitments which had been amended before a mortgage was 18 recorded. In In re Admiral's Walk, the subsequently amended commitment·was a true building loan contract for future advances and was recorded at the time a building loan mortgage was recorded. Here, the logic of In re Admiral's Walk is applicable here because the commitment, as amended, was not a commitment for a loan to be advanced in installments after the mortgage was recorded. The bankruptcy court's recognition that the purpose of the Lien Law is "to inform such contractors of the amounts to be advanced and the times of such advances" supports the finding that there should be no subordination in this case because there were no future advances as to which contractors arguably might need information. Id. at 113-15 (emphasis added). The bankruptcy court rejected attempts to rely upon inconsistencies based upon the unfiled prior commitment: Section 22 of itself did not require that the Commitment Letter be filed. ... [Contractors] ought not to be able to invoke section 22, and the discovery processes of a lawsuit, in mere hopes that they will find (as happened here) in some prior agreement of the borrower and lender a provision to their possible benefit which they can point to and say, "I never knew about it; the [ recorded document] was silent about any benefit it might contain for me; but section 22 now requires subordination for my benefit." Id. at 116 (emphasis added). 19 Since the recorded 2008 Mortgage had no provision for future advances, and consequently no express provision requiring use of future advances for the benefit of contractors upon which they might rely, the efforts to gain priority based upon something in an unfiled commitment should be. rejected here, just as they were rejected in In re Admiral's Walk. In sum, the 1930 Amendments to Lien Law Section 22 eliminated the requirement to file a building loan contract within 10 days of execution. The Defendants-Respondents' argument that the 2007 Commitment and MOU needed to be filed is wrong, because they were amended. IV. AT A MINIMUM, PLAINTIFF-APPELLANT'S $5,500,000.00 ACQUISITION FINANCING AND $2,000,000.00 LUMP SUM 2008 FINANCING SHOULD HAVE PRIORITY OVER SUBSEQUENTLY FILED MECHANIC'S LIENS In Nanuet Nat'l Bank v. Eckerson Terrace, Inc., 47 N.Y.2d 243 (1979), this Court recognized that issues arise under the Lien Law which are not clearly covered by the statute's express language, and that resolution of such issues has great importance to the construction lending industry. At the outset, we acknowledge that· section 22 provides no explicit answer to the dilemma which confronted the courts below. Id. at 246-47. 20 In Nanuet, this Court found that even though Lien Law Section 22 did not expressly state that when a building loan c,ontract needed to be filed, it needed to have accurate statements of the amounts to be disbursed, the Court nonetheless found that such a requirement was implied. Id. at 247-48. Conversely, in this case, nothing in Lien Law Section 22 states a subordination penalty should be imposed upon otherwise valid first priority liens which had been later consolidated with building loan financing for which a building loan contract was not filed. This Court imposed a reasonable and sensible application of the law in Nanuet to penalize a bank for filing a building loan agreement containing a material misrepresentation. Similarly, the Court should now impose a reasonable and sensible application of Lien Law Section 22 to limit any "subordination penalty," to the extent they are even warranted, to only the amount of building loan financing, since the Defendants-Respondents all began construction with complete constructive knowledge of a prior $5,500,000.00 acquisition financing mortgage. There is no statutory or policy basis for applying a Lien Law Section 22 "subordination penalty" to either valid prior acquisition or unrestricted lump sum financing advanced before a mortgage is recorded. Lien Law Section 22 does not mention consolidation with regard to subordination. Moreover, the fact that the definition of a building loan mortgage in Lien Law Article 2 may include a 21 consolidated mortgage, in no way requires application of a subordination penalty' under Lien Law Section 22 to a portion of a consolidated mortgage which can be severed as a distinct unrelated acquisition loan or refinance thereof. The reasoning of the bankruptcy court in In re 455. CPW Associates IS particularly applicable: [T]he purpose behind the Lien Law statutes has not been subverted here. The Greater's mortgage was not a secret, it was recorded as an ordinary mortgage.. . . [the Contractor "performed the labor and furnish the material with full knowledge that, with respect to any advances made on the mortgage prior to. the filing of the mechanic's lien, the mortgage would be superior." In re CPW Assoc. v. The Greater New York Savings Bank, 192 B.R. 85,90 (1996) (internal citations omitted). Particularly with respect to the $5,500,000.00 acquisition financing, it cannot be disputed that all the Defendants-Respondents were on notice of this financing before any work commenced. Federal courts recognizing this issue have found that where a consolidated mortgage had a valid component and a component which was recorded without compliance with Lien Law Section 22, any subordination penalty should only be applied to the building loan component. See Yankee Bank for Fin & Save v. Task Assocs., Inc., 731 F. Supp. 64, 71 n.2 (N.D.N.Y. 1990). 22 This Court has recognized that parties may agree that unenforceable contractual provisions (see R. 108) can be severed so as to leave the balance of the agreement in full force and effect. [T]he parties had a right to and did, by expressly stipulating that if any provision of the ... agreement be held invalid or unenforceable all other shall nevertheless continue in full force ... Christian v. Christian, 42 N.Y.2d 63, 73 (1977). Here, to the extent the $4,500,000.00 aspect of the transaction required recording, the applicable loan documents permit the severance of the consolidation, so that the original $5,500,000.00 remains in full force and effect and only the $4,500,000.00 (or the $2,500,000.00 it secured of Interim Unsecured Advances), would be a subordinate mortgage. Thus, this case affords the Court an important opportunity to clarify the law, and at the· same time achieve a just result in this case where Plaintiff-Appellant's mortgage retains priority, at a minimum, for the $5,500,000.00 acquisition financing and/or the $2,000,000.00 lump sum advance made at the time the 2008 Consolidated Mortgage was recorded, even if a building loan contract needed to be filed in this case, either for the entire $4,500,000.00 of construction financing or for the $2,500,000.00 of Interim Unsecured Advances. 23 V. LIBERAL CONSTRUCTION OF THE LIEN LAW DOES NOT JUSTIFY IMPOSING A DRACONIAN SUBORDINATION PENALTY WHERE PLAINTIFF-APPELLANT RENEGOTIATED AN AGREEMENT TO MAKE A BUILDING LOAN AND EVENTUALLY RESTRUCTURED IT AS A CONVENTIONAL LOAN Defendants-Respondents' reliance upon Lien Law Section 23's instruction to liberally construe the statute is misplaced. Plaintiff-Appellant, as lender, had no privity with the Defendants-Respondents and no duty to guarantee that the financing was sufficient to pay all contractors. In Howard Sav. Bank v. Lefcon P'ship, 209 A.D.2d 473,476 (1994), the Second Department, observed: [T]he disclosure contemplated by the Lien Law is not intended to function as a guarantee that a construction project is adequately financed or economically viable. Nor does the "Lien Law impose upon a lender a continuing duty to apprise a contractor of the economic condition of its borrower. Howard Save Bank, 209 A.D.2d at 476 (affirming declaration that mechanic's liens were subordinate to bank's first mortgage, and rejecting claims that "bank allegedly knew from the inception that the project was underfunded"). With respect to the relevant issues on this appeal, the Lien Law establishes a statutory framework which balances contractor and lender rights when a loan has been funded before a mortgage is recorded. A 1930 Bar Association memorandum to the Governor regarding proposed amendments to the Lien Law confirmed that 24 two of its major purposes were to eliminate requirements to file preliminary loan commitments and also increase contractor rights under Lien law trust theories by making violations larceny. (See Addendum 2). Liberal construction does not justify ignoring this balanced statutory framework upon which only requires the filing of agreements to make a building loan where a mortgage is recorded pursuant thereto. The lender is not a guarantor that all contractors will be paid. Id. at 476. As discussed above, in Nanuet, liberal construction of the Lien Law was in the context of a gap in statutory language where the lender made a required filing containing materially incorrect statements. In Nanuet, the statute provided no guidance for whether a lender could claim compliance with the Lien Law when the filing was materially false. Nanuet, 47 N.Y.2d at 247-48. Nanuet essentially presents the exact opposite of the situation at bar. Here, the statute was amended in 1930 to eliminate a strict requirement to file any agreement to make a building loan and replaced it with a limited requirement to file an agreement to "make a building loan if a lender at or before the time a mortgage was recorded pursuant thereto. The issues are true issues of law resulting from statutory changes, not a matter of liberal or conservative interpretation. Likewise, even if the law is liberally construed, nothing therein requires subordination of the original $5,500,000.00 acquisition financing which 25 was of record long before Defendants-Respondents commenced work. Granting lienors priority over prior acquisition financing, separate from construction loan funds, would be an unjust windfall. No bona fide policy goal is served by subordinating unrelated acquisition financing. Such a draconian result could very well have a chilling effect on lenders of finance construction, particularly during economic downturns when commitments may be restructured, which is exactly what has occurred in this case. VI. DEFENDANT-RESPONDENT HAYNER HOYT'S ACCUSATION OF IMPROPER CONDUCT IS TOT ALLY UNmSTIFIED AND INCORRECT The HH Brief is . laced with unjustified accusations against a reputable public foreign company in a transparent effort to improperly color the record. Essentially, the HH Brief implies there was something wrong with negotiating a commitment in Israel and some intention to mislead contractors. There is no evidence or allegation in the record that Hayner Hoyt or any contractor ever reviewed the public record or in any way relied upon anything in either the recorded 2007 Mortgage or 2008 Consolidated Mortgage. Rather, what you have here is nothing more than parsing complex documents, which were initially drafted in Israel (where English is a second language), and comparing 26 them to recorded documents subsequently prepared by a Buffalo law firm, to fabricate a legal position. These tactics should not be tolerated. Haynor Hoyt suggests that there is something inherently wrong with a foreign company purchasing property in New York and working with a lender from its home country. See lffi Brief at 49. In this modem era where foreign and multinational companies routinely make investments in the United States, no one should find it surprising that a foreign developer might initially approach a lender in its home country. What transpired here, as confirmed by the record, demonstrates perfectly proper and appropriate conduct. At the outset, a detailed loan commitment was negotiated in Israel, which expressly required compliance with New York law before any funds were released. The initial agreements were negotiated in Israel, drafted by Israeli counsel, and provided that the parties would comply with New York law before any mortgages were recorded. Based upon local custom and practice, and the terms of the 2007 Commitment, on March 29, 2007, the lender placed the amount of the proposed financing in a trust account, with its attorneys, pending a closing. (See R. 280; 378). There were conditions for release once New York counsel was retained and all necessary documents were prepared and recorded to ensure that Plaintiff- Appellant had a first priority lien (see R. 280-281; 378-379). Plaintiff-Appellant then retained laeckle Fleishmann & Mugel LLP, a large Buffalo based law firm, to 27 prepare documents that complied with New York law3• Funds were only released from the Israeli attorneys' trust account, as described above and in the moving brief, after New York counsel was retained,' and documents were properly recorded. (R.378-379). Plaintiff-Appellant never claimed priorities for the Interim Unsecured Advances before the 2008 Consolidated Mortgage was recorded. When the transaction was restructured in 2008, the entire concept of funding as a typical building loan was eliminated4• Hayner Hoyt apparently believes that the recorded 2007 Mortgage was somehow a guarantee by the lender that the Loan Proceeds were sufficient to pay for the complete development project. In making this assertion, the HH Brief misconstrues the language and also deliberately omits important language. Section 3 As disclosed in Plaintiff-Appellant's initial brief, it also has a pending malpractice case against its counsel and a coverage case against its title insurer. Nothing in the instant brief is intended to be or should be construed as a waiver or an admission by Altshuler with respect to its rights, positions or arguments in the pending actions. 4 Section 4.4.2 of the 2007 Commitment, which required funding into the Restricted Account, was entirely eliminated from the 2008 Amended Commitment. (Compare R.281 with R.330). Section 7.1 of the 2007 Commitment, which governed use of funds in the Restricted Account, was "Intentionally Deleted. " [emphasis in original] (Compare R. 295 with R. 340). Section 8 of the 2007 Commitment, which provided for lender inspection of construction progress, was "Intentionally Deleted. " [emphasis in original] (Compare R. 298 with R. 346). Thus, the 2008 Consolidated Mortgage was a true lump sum, unrestricted, project loan, not a building loan to be advanced in installments based upon construction milestones. 28 5.12 of the recorded 2007 Mortgage, quoted at page 25 of the lll-I Brief, actually states that the loan proceeds will be sufficient to pay for improvements through "completion, marketing and construction of twenty (20) Property condominiums," . and recites that $2,000,000.00 of sales proceeds would then be used to complete construction along with other funds of the developer. (R. 451). In a blatant effort to misrepresent the record,' the lll-I Brief ends the quote at page 25 with an ellipses [ ... ] and fails to advise the Court that the recorded document states that the developer would be providing the additional funds needed to complete the project. Haynor Hoyt completely omits from its quotation the part of paragraph 5.12 of the 2007 Mortgage which advises that "Borrower. otherwise has or shall provide resources for the completion in full of construction." Since this paragraph of the recorded 2007 Mortgage quoted by Raynor Hoyt addresses Plaintiff-Appellant's financing in the context of construction of 20 out of 54 apartme~ts5, with sales proceeds and other funds from the Borrower paying for "completion in full of the construction," the quote is misleading and inaccurate. 5 The issue of the language of section 5.12 of the 2007 Mortgage was never raised below by Defendants-Respondents so it is not fully developed in the record. The information provided herein is therefore supplementary to the record. Minor inconsistencies between the documents prepared by New York counsel, based 'upon those previously prepared by Israeli counsel, are stylistic and substantively insignificant. 29 Indeed, while the Ill-I Brief now identifies paragraph 5.12 of the 2007 Mortgage as some sort of smoking gun, it was not even included in its motion for summary judgment (R. 23-375), and is only in the record because it was included in the opposing affidavit of Yair Lowenstein (R.376-483). It was the opposing affidavit of Yair Lowenstein which affirmatively explained that the Second Tranche was not sufficient to complete the project and was only sufficient to complete the plumbing (sanitation) and electric systems and allow completion and sale of 20 apartments. (R. 378). Clearly, on this appeal, counsel for Hayner Hoyt is now misrepresenting the record and falsely accusing Plaintiff-Appellant of deliberate wrongdoing. Likewise, Haynor Hoyt attempts to suggest impropriety by noting that the word "confidential" appears on each page of the 2007 Commitment. (See HH Brief at 25, n.5). The Court is respectfully asked to take judicial notice that most commitments for large commercial transactions are issued on a confidential basis. There is absolutely nothing unusual or improper about a borrower and lender agreeing to keep terms of an initial commitment confidential. Indeed, in general, New York's recording system, under which a note containing confidential business terms is typically not recorded, recognizes that there are aspects of mortgage transactions which are properly kept confidential. 30 Similarly, there - is nothing surpnSIng or unusual about two foreign companies agreeing that a commitment would be subject to the laws of the place it was negotiated. Had there been a lawsuit between Plaintiff-Appellant and its borrower over the 2007 Commitment before it was amended and finally closed, it would have been logical for the parties to expect to litigate certain issues in Israel subject to Israeli law. If the transaction never closed, Plaintiff-Appellant would have had no connection with the State of New York to justify imposition of New York law. Thus, despite accusations to the contrary, there is nothing improper or secret in the dealings of Plaintiff-Appellant. What occurred is simply that there was . initially a commitment to make a building loan, which did not close, with unsecured advances made while the parties renegotiated. In the end, the transaction was restructured as a conventional loan and a conventional mortgage was recorded based upon the advice of a major Buffalo based law firm. CONCLUSION The Court of Appeals should reverse and clarify that where a commitment to make a building loan expires, and is subsequently amended to provide for a conventional unrestricted lump-sum project financing rather than a building loan, neither the original expired commitment nor the amended commitment need to be filed pursuant to Lien Law Section 22. This Court should enunciate a clear 31 standard, which is based upon the plain language of the statute as well as its underlying purposes, which allows lenders, their counsel and title insurers to readily determine when compliance with Lien Law Section 22 is required. Alternatively, any subordination penalty imposed on account of not filing either the 2007 Commitment or the 2008 Amended Commitment, should be limited to the amount of building loan funding and not applied to the $5,500,000.00 of prior acquisition financing and/or the $2,000,000.00 advanced at the time the 2008 Consolidated Mortgage was recorded. Dated: February 14, 2013 D' AGOSTINO, LEVINE, LANDESMAN, & LEDERMAN, LLP By: {P~h~---- Bruce H. Lederman Eric R. Garcia Christopher M. Tarnok Attorney for Plaintiff-Appellant 345 Seventh Avenue, 23rd Floor New York, NY.10001 Tel: (212) 564-9800 Fax: (212) 564-9802 -and- Hancock & Estabrook, LLP 1500 AXA Tower I 100 Madison Street Syracuse, NY 13202 32 ADDENDUM C\J o STATE OF NEW YORK SUPREME COURT COUNTY OF ONONDAGA ALTSHULER SHAMAM PROVIDENT FUNDS LTD., Plaintiff, MEMORANDUM OF LAW ~ vs. Index No. 2008-9348 RJI No. 33-08-4664 Hon. Deborah H. Karalunas ~ tr ~ GML TOWER LLC, et al., . ~ Defendant. z W ~----------------------------------~ J U ~ II: >- III 3 I- ~ ~ tr o .J W ~ Z J o U n. .J .J ',Z o o II: III ~ Ifl W c!j ~ lJ o U z ~ I MEMORANDUM OF LAW IN OPPOSITION TO THE HAYNER HOYT CORPORATION'S MOTION FOR SUMMARY JUDGMENT TROUTMAN SANDERS LLP Robert J. Chanis, Esq. The Chrysler Building 405 Lexington Avenue New York; New York 10174 (212) 704-6007 HANCOCK & ESTABROOK, LLP John G. Powers, Esq. 1500 AXA Tower I 100 Madison Street Syracuse, New York 13202 (3 15) 471-3151 Attorneys for Plaintiff Altshuler Sham am Provident Funds Ltd. \ {H1226458.1} TABLE OF CONTENTS Page TABLE OF AUTHORITIES ....................................................................................................... -ii- PRELIMINARY STATEMENT .................................................................................................... 1 C\I STATEMENT OF FACTS ............................................................................................................ 2 o· C\I (1) l<: a: ~ ?; w Z iii 2005 Pllrchase by GML ..................................................................................................... 2 Perfect Provident's 2007 Refinancing ............................................................................... 3 Post May 3) 2007 Disbursement of the Second Tranche ................................................... 4 ~ ARGUMENT ................................................................................................................................. 5 ~ ~ THE MORTGAGE, AS A MATTER OF LAW AND POLICY, IS NOT SUBJECT TO U1 II: w ?; {!. « x « o o U) ?; j ~ « fJ) II: o .J W fJ) Z :J o U D. .J SUBORDINATION PURSUANT TO SECTION 22 OF THE LIEN LAW .................... 5 A. B. C. D. The Mortgage Was Recorded Prior to the Mechanic's Lien ................................. 5 The Loan Agreelnent Did Not Have to be Filed with the Clerk's Office Since the· Mortgage Never Secured More Than the Exact Amount of the Loan Outstanding and Never Purported to Create a Lien with Respect to· Unadvanced Funds, .................................................................................................. 6 The Mortgage is Not a Building Loan Mortgage as Defined in the Lien Law ................................................................................................. : ...................... 15 The Subordination Penalty Under Lien Law § 22 Should Only Subordinate the $4.5 Million Portion of the Loan Advanced for COl1struction ......................................................................................................... 1 7 ~ CONCLUSION ............................................................................................................................ 20 o o II: !Q ~ III W - ~ ~ Lien Law Seetioll 13(1) ............................................................................................................. 5 n.4 w- III :J ~ Lien Law Section 22 ............................................................................................................... passi7n II: >- til II: I.tI ~ ~ « o o In ~ ..J l- e{ III a: o .J III UI Z :J o U n. .J .J '.i o o a: !Q e{ I- UI W dj ~ u o u z e{ I {H1226~58.1 } 111 N AI . • Plaintiff, Altshuler Shaham Provident Funds Ltd. ("Perfect Provident") 1 , _ respectfully sub~ts this memorandum of law in opposition to the summary judgment mo!ion filed by The Hayner Hoyt Corporation ("Hayner Hoyt"). Hayner Hoyt seeks an order declaring that its mechanic's lien is entitled to priority over the Perfect Provident's mortgage on the misplaced theory that Perfect Provident failed to ,record its loan agreement in accordance with ~ Section 22 of the New York Lien Law ("Lien Law"). Hayner Hoyt is wrong. Perfect ~ ~ - ~ Provident's mortgage was recorded prior to Hayner Hoyt's mechanic's lien and Perfect ~ III ~ Provident did not violate Section 22 of the Lien Law. Accordingly, Perfect Provident's [/) :J U ~ mortgage lien has priority over Hayner Hoyt's mechanic's lien. C/) ~ PRELIMINARY STATEMENT g ~ Hayner Hoyt argues that its later- filed mechanic's lien has priority over Perfect o o ~ Provident's prior recorded mortgage. The mechanic's lien encumbers only one of the two ~ « ~ par~els encumbered by Perfect Provident's mortgage (i. e., 101-131 Onondaga Street, Syracuse, « - In ~ ~ New York) and, therefore, the priority issue relates only to that one parcel. [/) z :> 8 We will demonstrate herein that Perfect Provident's prior recorded mortgage has II. .J ~ priority over Hayner Hoyt's later filed mechanic's lien. First, the mortgage and all of the o o II: ~ modifications thereof were recorded prior to Hayner Hoyt's filing of its mechanic's lien. [/) III ~ - Second, since the entire $10 million loan was advanced prior to the recording of the last u o u Z ~ mortgage modification, neither the policy behind Section 22 of the Lien Law, nor any sensible statutory constructIon thereof, required Perfect Provident to file the loan agreement. In short, although the loan- agreement was executed prior to the funding of any loan proceeds, Perfect Provident never purported to have a mortgage lien with respect any funds to be advanced 1 Altshuler Shaham Provident Funds Ltd. is the successor by merger to Perfect Provident Funds Ltd. and was substituted as the named plaintiff herein by order of this Court dated December 23,2009. {HI226458.1 } 1 thereunder until after those funds were actually advanced. Accordingly, since a building loan contract by definition contemplates secured future advances being made thereunder, and the mortgage herein never secured future advances, neither the loan agreement, nor any amendments thereto, had to be filed under Section 22 of the Lien Law. Third, since Perfect Provident's mortgage is not a "building loan mortgage", as such tenn is strictly defined in the N ~ Lien Law, the Section 22 subordination penalty does not apply to Perfect Provident's mortgage ~ 0: ~ lien. Finally, if the Section 22 Lien Law subordination penalty does apply, and it should not, ;;: IJI ~ the penalty should only subordinate the portion of the mortgage lien securing the later advanced en :J U ~ $4.5 million of construction loan proceeds, and not the portion securing the earlier advanced Ul ~ $5.5 million of loan proceeds that were specifically allocated to refinance pre-existing ~ ~ < acquisition debt. x < o o Ul II) STATEMENT OF FACTS 2005 Purchase by GML 3 On or about September 7, 2005, three related entities, GML Tower LLC, GML IJI II) z 6 Addis LLC and GML Syracuse LLC (collectively, "GML Entities") purchased property u j consisting of a hotel complex in Syracuse, New York. Yair Aff. ~3.2 More specifically: (i) . ~ o o ~ GML Tower LLC purchased the property commonly known as 101-131 Onondaga Street, « l- II) !IJ ~ ~ u o Syracuse, New York ("Tower Property") for $7,000,000.00; (ii) GML Addis LLC purchased ~ contiguous property commonly known as 449-53 South Salina Street, Syracuse, New York for J: $750,000.00; and (iii) GML Syracuse LLC purchased additional property comn1only known as 100-08 Onondaga and E. Warren Streets, Syracuse, New York for $2,000,000.00. Yair Aff .. ~3, Exhs. A, Band C. 2 References to "Yair Aff." mean the Affidavit of Yair Lowenstein sworn to January 10,2010 submitted herewith in opposition to.Hayner HoyCs motion. {H1226458.1} 2 N o the Clerk's Office pursuant to Section 22 of the Lien Law.6 Hayner Hoyt further argues that as a penalty for not filing the Loan Agreement7, the lien of the entire Mortgage should be subordinated to the Mechanic's Lien. A careful analysis of the Lien Law shows that Hayner Hoyt is wrong. The Loan Agreement did not have to be filed with the Clerk's Office to warn potential mechanics lienors ~ about how much was actually available under a recorded mortgage securing future advances :.: 0: ~ thereunder because at no point did the Mortgage secure any unadvanced portion of the loan. In 3 111 Z ~~ other words, Perfect Provident never purported to have a mortgage lien in an amount exceeding :J u ~ ~ the full outstanding balance of the loan (i.e., a mortgage securing future advances). The Lien· It) ffi Law, as well ~s the policy behind it, indicates that Section 22 only requires a building loan 3 o I- ~ contract to be filed when future advances are required to be made thereunder and a mortgage « o o It) securing those future advances is recorded prior to the funding those future advances. 3 j ~ The Loan Agreement bifurcated the $10 million loan into two separate and 1/1 g distinct tranches. The first tranche consisted of $5.5 million ("First Tranche") that was 111 1/1 Z 8 advanced on May 2, 2007 to refinance pre-existing purchase money debt8• Section 4.4.1 of the Do :l Loan Agreement explicitly lhnits the use of the $5.5 Inillion to refinancing the indebtedness II o o ; secured by the pre-existing mortgage. Section 4.4.1 of the Loan Agreement provides that "Five I- 1/1 W ______________________ __ ~ 6 Additionally) Hayner Hoyt argues that the amendments to the loan agreement constituted building loan contract u S modifications that were also required to be filed under Section 22. If, as argued herein, the Loan Agreement did ~ not have to be filed, then modifications thereto did not have to be filed. :r 7 References to Loan Agreement shall hereinafter mean the loan agreement dated March 29,2007 between Perfect Provident, as lender, and Ameris and GML Tower, as borrower, as modified by the memorandum of understanding dated May 1, 2007 between Perfect Provident, as lender, and Ameris and GML Tower, as borrower, and as fUl1hered modified by amendment no. 1 to loan agreement dated March 4, 2008 between Perfect Provident, as lender, and Ameris and GML Tower, as borrower. S GML Tower purchased 101·131 Onondaga Street, Syracuse, New York on September 7, 2005 and two related GML entities purchased contiguous properties on that same day. The deeds recite aggregate consideration of $9,750,000.00. Yair Aff. Exhs. A, Band C. The three entities borrowed $7 million from First Bank of Oak Park to partially finance that purchase and the mortgage securing that loan initially encumbered all three properties. The mortgage lien with respect to the property owned by GML Syracuse LLC was released on March 6, 2008 in connection with the last advance of the Second Tranche. Yair Aff. ~22. {H )226458.1} 7 N o the terms of Section 22 of the Lien Law, indicates that a "building loan contract" does not have to be filed prior to the date that a mortgage securing a fully advanced loan is recorded. Rather, the only type of mortgage giving rise to the filing requirement is a nlOligage that secures future advances under the building loan contract. More specifically, Section 2(13) of the Lien Law defines a "building ·loan ~ contract" as follows: 0: Id ~ g « x « o ·0 I/) 13. Building loan contract. The ternl "building loan contract," when used in this chapter, means a contract whereby a party thereto, in this chapter termed "lender," in consideration of the express promise of an owner to make an improvement upon real property, agrees to make advances to or for the account of such owner to be secured by a n1.ortgage on such real property, whether such advances represent moneys to be loaned or represent moneys to be paid in purchasing. fronl or in selling for such owner bonds or certificates secured by such mortgage upon such real property. . . . ~ It is well settled that a "building loan ·contract" contemplates future advances to be luade as j ~ Ul construction progresses. See e.g., Alden State Bank v. Sunrise Builders, Inc., 48 A.D.3d 1162, 0: o .J ~ 1164, 853 N.Y.S.2d 230, 232 (4th Dep't 2008) ("A building loan agreelnent is ... an agreement ::J o U D. to provide a loan for the purpose of erecting a building and to be advanced in installments from oJ oJ g time to time as might be rendered safe by the condition of the buIlding.") (internal citations and It: III ~ .... ~ quotations omitted; elnphasis added). c!j ~ u o u z ~ J: follows: {H1226458.J} Section 2(14) of the Lien Law, in turn, defines "building loan mOligage" as "Building loan mortgage. The tenn "building loan mortgage," when used in this chapter, Ineans a mortgage made pursuant to a building loan contract and includes an agreelnent wherein and whereby a building loan Inortgage is consolidated with existing Inortgages so as to constitute one lien upon the ·mortgaged property. " 10 [\j o ordinary mortgage, has been fully advanced, there is no reason for a contractor or Inateriahnan to review the construction loan agreement. On the other hand, if the mortgage is a building loan mortgage, the contractor/materialman can, by reviewing the building .loan contract on file, determine the amounts available from the construction loan to pay for labor and Inaterials, the conditions to disbursement of that construction loan, and the likelihood that its potential ~ mechanic's lien will be subordinate to future advances to be made under the building loan !Ii: II: ~ contract. ~ III Z W III :J ~ One court, trying to decipher the policy behind Section 22 of the Lien Law, cited ~ the statements made on July 10, 1930 by the chainnan of the Joint Legislature COlnrnittee Ul ~ which spearheaded Section 22 in its current form: ~ o I- 6 t,.;;::~~ qh io i l:ltl~g:r ~l a,tJl{;; , (}r;;nm1tt'~ e.~" ." .' • • .,' • • • • •.... , .... '~ f., .. ,.,. :~rd'··~·mb0d..i.~:B ,1.,ta. 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