Decided December 30, 2005.
Jason Chang Esq., Brooklyn, NY, for Plaintiff.
Kathleen R. Bradshaw Esq., Hayes Mensching, Bronx, NY, for Defendant Grant.
Plaintiff sues to foreclose a mortgage lien on real property at 1739 Grand Avenue in Bronx County, based on nonpayment of the principal and interest due her for the mortgage as of November 12, 2000. She moves for summary judgment on defendant Grant's liability and for appointment of a referee to compute the amount due for the mortgage and report whether the premises may be sold in parcels. C.P.L.R. §§ 3212(b) and (e), 4311. For the reasons explained below, the court denies plaintiff's motion for partial summary judgment. C.P.L.R. § 3212(b) and (e).
II. THE EVIDENCE PRESENTED AND CONTENTIONS ADVANCED
Plaintiff attests that she has received no payments on the mortgage since November 12, 2000. The certified copy of the mortgage presented by plaintiff, also authenticated by her attorney who was present at its execution October 2, 2000, and undisputed by Grant, shows the mortgage is between nonparty mortgagors, New Era Realty Services Inc. and Kemet Equities Inc., and plaintiff mortgagee. The mortgage covers two separate premises, 1737-1739 Grand Avenue, Bronx County, and 112 West 136th Street, New York County, and matured October 2, 2001. The mortgage on the property at 1737-1739 Grand Avenue, Bronx County, was recorded in Bronx County on the date the mortgage was executed. As shown by a certified copy of the deed, also undisputed, the mortgagor New Era Realty Services conveyed that property to Grant January 10, 2004.
The underlying promissory note for $65,000.00 authenticated by plaintiff's attorney provides that it is between both mortgagors and the mortgagee, but is executed only by New Era Realty Services, also October 2, 2000. The note further provides that the principal and accrued interest "shall become due . . . at the option of the holder . . . upon the sale or refinancing of the premises known as and located at 1737-1739 Grand Avenue, Bronx, New York." Aff. of Jason Chang, Ex. 1 at 1 ¶ 6(b). In the deed conveying the 1737-1739 Grand Avenue property to Grant, the mortgagor New Era Realty Services then covenants that it "has not done or suffered anything whereby the said premises have been encumbered in any way." 2d Supplemental Aff. of Jason Chang, Ex. C at 2. Nevertheless, the mortgage, by its terms, runs with the land and binds all subsequent owners of the premises.
Grant admits she owns the 1737-1739 Grand Avenue property and attests simply that she purchased it believing all mortgages on it had been paid, as covenanted in the deed. Grant maintains that this belief was reasonable, since the mortgage would have been more than two years overdue if it had not been paid when the property was sold, and neither plaintiff, nor New Era Realty Services, nor anyone else ever requested payment from Grant. Consequently, she contends that plaintiff mortgagee must look to the original mortgagor to satisfy the mortgage.
The parties also do not dispute that Grant does not own the other property, at 112 West 136th Street, New York County, subject to the mortgage. Grant therefore maintains that plaintiff mortgagee also must look to that property to satisfy the mortgage. The mortgage provides that in the event of a foreclosure sale, the covered premises "may be sold in one parcel." Id., Ex. A at 3 ¶ 11. Thus, while the mortgage does not expressly permit foreclosure on less than all covered premises, the mortgage neither prohibits foreclosure on less than all, nor requires it in one parcel.
III. GRANT'S LIABILITY
A. Mortgagor New Era Realty Services
Plaintiff need not sue the original mortgagor, either New Era Realty Services or Kemet Equities, in this action to foreclose on the mortgaged real property conveyed to Grant, as long as plaintiff, as here, does not seek a deficiency judgment on the underlying promissory note. Once the mortgagor has conveyed title, the mortgagor is no longer a necessary party to the foreclosure action. C.P.L.R. § 1001; R.P.A.P.L. § 1311; N.C. Venture I, L.P. v. Complete Analysis, Inc., 22 AD3d 540, 542-43 (2nd Dep't 2005); Equitable Life Ins. Co. of Iowa v. Suburban Med. Assoc., 104 AD2d 846, 847-48 (2nd Dep't 1984). Only persons holding an interest in the property need be joined as defendants. R.P.A.P.L. § 1311; N.C. Venture I, L.P. v. Complete Analysis, Inc., 22 AD3d at 542.
Even assuming Grant knew of no mortgage on her property until she was served in this action, she could have sought to avoid any inequity or prejudice from not being obligated on the mortgage debt by making a claim against the original obligor, C.P.L.R. § 1001; N.C. Venture I, L.P. v. Complete Analysis, Inc., 22 AD3d at 543, via a third party action, C.P.L.R. § 1007, or a separate action. While Grant may claim bad faith, fraud, or oppressive or unconscionable conduct against the original mortgagor, in not disclosing the mortgage upon selling the property to her, such conduct is a defense to a mortgage foreclosure only when claimed against the mortgagee and thus does not apply against plaintiff here. See, e.g., EBC Amro Asset Mgt. v. Kaiser, 256 AD2d 161, 162 (1st Dep't 1998).
The mortgage was recorded October 2, 2000, so Grant obviously could have ascertained the encumbrance before blindly purchasing the property. Fairmont Funding Ltd. v. Stefansky, 301 AD2d 562, 563-64 (2nd Dep't 2003). The public record of the mortgage gives a prospective purchaser constructive notice of the lien on the property, establishes a presumption that she has investigated any encumbrance on the title before purchase, and deprives her of any claim if her interest is affected by an encumbrance revealed in the public record when she purchased the property. Andy Assoc. v. Bankers Trust Co., 49 NY2d 13, 20, 24 (1979); Campbell v. Smith, 309 AD2d 581, 582 (1st Dep't 2003); Tibby v. Fletcher, 13 AD3d 877, 879 (3rd Dep't 2004); Fairmont Funding Ltd. v. Stefansky, 301 AD2d at 564. Therefore the conveyance does not extinguish the lien on the property. Tibby v. Fletcher, 13 AD3d at 879; Fairmont Funding Ltd. v. Stefansky, 301 AD2d at 564.
Although Grant seeks not necessarily to extinguish plaintiff's lien, but to shift liability for payment of the lien to the original obligor, for that purpose Grant had her remedies and still has a remedy. She simply has not availed herself of them.
Since the mortgage runs with the property and binds Grant, as a subsequent owner of the covered premises, she assumes the mortgage lien. Tibby v. Fletcher, 13 AD3d at 879. In fact, like the promissory note, which provides that upon sale of the 1737-1739 Gerard Avenue premises, the note becomes due only "at the option of" plaintiff holder, Chang Aff., Ex. 1 at 1 ¶ 6, the mortgage provides that if all or any part of the covered premises is sold, the principal "may be" declared due. 2d Supplemental Chang Aff., Ex. A, Rider ¶ 2. While Grant maintains that by the time she purchased her property, the note and mortgage were already due, these terms further evidence that the encumbrance on the property does not evaporate when it is sold.
Grant's assumption of the lien on her property is not assumption of the mortgage indebtedness secured by the mortgage on her property, Northeast Sav. v. Bailey, 143 AD2d 474, 475 (3rd Dep't 1988), unless she expressly agreed in writing to pay that debt in conjunction with the property's conveyance to her. NY Gen. Oblig. Law (GOL) § 5-705; Dime Sav. Bank of NY v. Weinstein, 259 AD2d 400 (1st Dep't 1999); Kane-Miller Corp. v. Salkin, 226 AD2d 1028, 1029-30 (3rd Dep't 1996). Absent such an acknowledgment in the deed to her or another simultaneously executed document, the original obligor remains obligated on the debt. The absence of that evidence here thus deprives plaintiff of any claim for a deficiency judgment against Grant, but does not affect plaintiff's foreclosure on the property. Dime Sav. Bank of NY v. Weinstein, 259 AD2d 400; Kane-Miller Corp. v. Salkin, 226 AD2d at 1030; Northeast Sav. v. Bailey, 143 AD2d at 475.
Of course if New Era Realty Services, Kemet Equities, or anyone paid the mortgage, neither Grant nor anyone is liable for it. She claims that it must have been paid, not only because it had matured more than two years before she purchased the property and payment was never requested from her, but also because subsequent mortgage liens were placed on the property after plaintiff's mortgage matured, albeit also before Grant's purchase.
Nothing in the law would prohibit these subsequent mortgages. Nor would they be impossible in fact or practicality. Even though plaintiff's mortgage was in default, as long as sufficient equity remained in the property, it could be encumbered by additional mortgages.
In any event, Grant presents no evidence, only speculation, that plaintiff's mortgage has been paid, in full or in part. E.g., Northeast Sav. v. Bailey, 143 AD2d at 475. Most tellingly, nothing from the public record evidences a satisfaction of or release from this mortgage. See Andy Assoc. v. Bankers Trust Co., 49 NY2d at 22; Fairmont Funding Ltd. v. Stefansky, 301 AD2d at 564; N.C. Venture I, L.P. v. Complete Analysis, Inc., 22 AD3d at 543. Nor does Grant present any admissible evidence even of the claimed subsequent mortgages.
C. The Other Property Subject to the Mortgage
Plaintiff is entitled to foreclose on any one parcel of real property covered by a mortgage. If the same mortgage covers other property, the penalty she incurs in electing that recourse is abandonment of her lien and right to foreclose on that other property, in this or a future action. State Sav. v. Parc Vendome Assocs., 223 AD2d 464, 465 (1st Dep't 1996); Lombardo v. Fielding, 225 AD2d 672 (2nd Dep't 1996). See R.P.A.P.L. § 1371(3); Sanders v. Palmer, 68 NY2d 180, 185-86 (1986).
A. The Usury Laws
The mortgage interest rate is 2% per month, which exceeds the 16% per year maximum chargeable rate. NY Banking Law § 14-a(1); GOL § 5-501(1) and (2); Borowski v. Falleder, 296 AD2d 301 (1st Dep't 2002); Cohen v. Eisenberg, 265 AD2d 365, 366 (2nd Dep't 1999); C M Air Sys. v. Custom Land Dev. Group II, 262 AD2d 440 (2nd Dep't 1999). The laws defining and prohibiting usury are intended to protect against a lender's overreaching. Norman Goldstein Assocs. v. Bank of NY, 204 AD2d 288, 289 (2nd Dep't 1994). "All . . . conveyances, all other contracts and securities . . . whereby there shall be agreed to be reserved or taken, any greater sum . . . than is prescribed in section 5-501, shall be void. . . ." GOL § 5-511(1); Szerdahelyi v. Harris, 67 NY2d 42, 47 (1986). Consequently, when any "conveyance, contract, security or any evidence of debt, has been taken or received in violation" of the usury laws, "the court shall declare the same to be void, and enjoin any prosecution thereon, and order the same to be surrendered and cancelled," GOL § 5-511(2); Seidel v. 18 E. 17th St. Owners, 79 NY2d 735, 740 (1992); Szerdahelyi v. Harris, 67 NY2d at 47, including all supporting documents and collateral. Id. at 48. A usurious mortgage thus is unenforceable and without effect and relieves the mortgagor of all obligation to pay either the principal or any interest. GOL § 5-515; Seidel v. 18 E. 17th St. Owners, 79 NY2d at 740; Szerdahelyi v. Harris, 67 NY2d at 48; Borowski v. Falleder, 296 AD2d 301; Pemper v. Reifer, 264 AD2d 625, 626 (1st Dep't 1999).
A purchase-money mortgage, executed as part of a transaction acquiring the property mortgaged, to secure an unpaid balance of the purchase price, is not subject to the usury laws. Szerdahelyi v. Harris, 67 NY2d at 46; C M Air Sys. v. Custom Land Dev. Group II, 262 AD2d at 441; Christopher v. Gurrieri, 238 AD2d 299 (2nd Dep't 1997). No evidence here, however, indicates plaintiff was selling 1737-1739 Grand Avenue or taking a mortgage on the property to secure funds New Era Realty Services borrowed to purchase it. Szerdahelyi v. Harris, 67 NY2d at 46. See C M Air Sys. v. Custom Land Dev. Group II, 262 AD2d at 441.
The usury defense is also unavailable to a corporate mortgagor, GOL § 5-521(1); Seidel v. 18 E. 17th St. Owners, 79 NY2d at 740; Tri-Land Props. v. 115 W. 28th St. Corp., 260 AD2d 295, 296 (1st Dep't 1999), except in limited circumstances. GOL § 5-521(2) and (3). If the facts disclose that an individual borrower incorporated to obtain the loan, enabling the lender to conceal a usurious loan to an individual and evade usury laws, the court may see through this artificial device and apply the usury laws in favor of the true borrower. Hammelburger v. Foursome Inn Corp., 54 NY2d at 589-90 (1981); Schneider v. Phelps, 41 NY2d 238, 241-42 (1977).
On the current record, the original mortgagor New Era Realty Services was a corporation in name only. Nothing discloses that it was in fact a corporation and not actually incorporated as a conduit for loans to its sole director and shareholder. Id. See Tri-Land Props. v. 115 W. 28th St. Corp., 260 AD2d at 296. In fact the record suggests a relationship between plaintiff and New Era Realty Services, as plaintiff's attorney was involved in transactions involving New Era Realty Services and other nonparties. E.g., 2d Supplemental Chang Aff., Ex. B. Therefore, for purposes of plaintiff's summary judgment motion, the court must assume New Era Realty Services was not a corporation or was established for purposes facilitating evasion of usury laws.
C. Rights Enforceable by the Mortgagor's Grantee
Even if the mortgagor New Era Realty Services was not a corporation, the further question is whether only the original mortgagor may raise a claim regarding the interest rate, or Grant, who was not a party to the mortgage, may raise such a claim. The usury defense may be unavailable to "certain persons" who, like Grant, were not a party to the original mortgage and who, as strangers to the transaction, "under certain circumstances" would have no standing to claim the mortgage was usurious. Seidel v. 18 E. 17th St. Owners, 79 NY2d at 741. The definition of who these "certain persons" are and what these "certain circumstances" are remains incomplete and imprecise. If the defense is to be used either against the lender in the original usurious transaction or in favor of the borrower in that transaction, and a party has suffered harm from that transaction, the defense may accomplish its punitive, restorative, or protective purposes. Norman Goldstein Assocs. v. Bank of NY, 204 AD2d at 289.
Where a mortgagee has assigned her rights under a mortgage, and the assignee has relied on the mortgagor's certificate relinquishing any defenses to the mortgage, to permit this "innocent assignee" recovery of the principal and lawful interest does not contravene the usury laws' purpose. Hammelburger v. Foursome Inn Corp., 54 NY2d at 588. To void the transaction and permit the mortgagor to keep the principal, having induced reliance on the transaction's legality, would give the mortgagor a windfall through that "subterfuge and inequitable deception," at an innocent person's expense. Seidel v. 18 E. 17th St. Owners, 79 NY2d at 743.
Here, only if New Era Realty Services were a corporation and established for purposes other than the mortgage, such that plaintiff was not exacting usurious interest from the original mortgagor, would this rationale permit her to recover. Then the only question would be whether she is entitled to recover the original interest rate against Grant, who is not a corporation, even if not through a deficiency judgment, as part of the sale proceeds from the property, should it command such a price.
Assuming, as the court must, for purposes of summary judgment on the current record, that the original mortgagor was not a corporation or was an artificial one, then plaintiff took a usurious mortgage that she may not enforce against the mortgagor. GOL § 5-515; Szerdahelyi v. Harris, 67 NY2d at 48; Hammelburger v. Foursome Inn Corp., 54 NY2d at 588; Borowski v. Falleder, 296 AD2d 301. Under the circumstances here, it is difficult to perceive how permitting a usurer now to benefit from the mortgagor's transfer, effectuate and enforce a usurious mortgage, and recover what she could not from the mortgagor, if only principal and lawful interest, would be consistent with the usury laws' purpose. Hammelburger v. Foursome Inn Corp., 54 NY2d at 591.
A mortgagee's right of recovery may depend on the mortgagor's conduct evincing a valid mortgage. Hammelburger v. Foursome Inn Corp., 54 NY2d at 587. While nothing discloses conduct by New Era Realty Services toward plaintiff assuring a valid, enforceable mortgage despite the interest rate, New Era Realty Services' deed to Grant assured there was no valid, enforceable mortgage on 1737-1739 Grand Avenue. See Seidel v. 18 E. 17th St. Owners, 79 NY2d at 743; Hammelburger v. Foursome Inn Corp., 54 NY2d at 587-588; Keezing v. Rodriguez, 196 Misc 2d 408, 411 (Sup.Ct. Kings Co. 2003). Grant, moreover, the mortgagor's grantee, has evinced no actual knowledge of the mortgage, let alone its interest rate; that ignorance is the very reason for her current predicament. Although she is chargeable with constructive knowledge of the mortgage, she hardly may be equated with the mortgagor who affirmatively and expressly has relinquished any defenses to the mortgage. Since she received no consideration for the mortgage lien on her property, by avoiding the mortgage she would neither achieve a windfall, nor avoid the mortgage through her "own subterfuge" or "deception" or, assuming the mortgage was usurious, at the expense of "an innocent person." Seidel v. 18 E. 17th St. Owners, 79 NY2d at 743.
Looking at Seidel's underpinnings for guidance in fleshing out and imparting precision to the persons for whom and the circumstances for which the usury defense is unavailable, because the persons claiming it were not parties to the original usurious transaction, leaves room for Grant's claim under the particular circumstances here. Id. at 741. Where, for example, individual accommodation endorsers or sureties for a corporate mortgagor seek to cancel a usurious mortgage, that relief is available only after they tender the balance of the principal loaned plus legal interest. Metz v. Gunther, 14 AD2d 574, 575 (2nd Dep't 1961) (citing Buckingham v. Corning, 91 NY 525, 529-30 (1883)). The defense's full parameters are unavailable, because the mortgagee still may recover from the corporate mortgagor. Here, assuming the mortgagor is not a corporation, the mortgagor could use the usury defense against further recovery.
A mortgagor may transfer its usury defense.
A cause of action to cancel, or otherwise affect, an instrument executed, or an act done, as security for a usurious loan or forbearance, can be transferred, where the instrument or act creates a specific charge upon property, which is also transferred in disaffirmance thereof, and not otherwise; but in that case, the transferee does not succeed to the right, conferred by statute upon the borrower, to procure relief, without paying, or offering to pay, any part of the sum or thing loaned.
GOL § 5-517. See Halsey v. Winant, 258 NY 512, 528-29 (1932), cited in Seidel v. 18 E. 17th St. Owners, 79 NY2d at 741. Thus, when a mortgagor transfers the mortgaged property and expressly transfers the mortgage debt, but disaffirms the mortgage lien, and the transferee pays consideration for the property, accounting for the debt assumed as well as the disaffirmance of the lien, the mortgagee's transferee is entitled to recover the debt up to the amount loaned with legal interest. This result is comparable to the situation above: when a mortgagee transfers the mortgage, the mortgagor has expressly disaffirmed the usury defense, and the transferee pays consideration for the mortgage in reliance on the disaffirmance of defenses, the mortgagee is entitled to recover the debt up to the principal with legal interest. In both situations, the mortgagor's grantee is estopped to the extent the grantee voluntarily assumed the mortgage debt. See Geddes Sav. Loan Assn. v. Mishel, 89 AD2d 792, 793 (2nd Dep't 1982) (applying GOL § 5-517 and following Halsey v. Winant, 258 NY 512).
This statute, however, does not apply here. While the mortgagor New Era Realty Services may have had a cause of action to cancel the mortgage on 1737-1739 Grand Avenue, when the mortgagor transferred the property to Grant, the mortgagor neither transferred the mortgage debt, nor transferred it with an express disaffirmance of the lien's validity due to usury. See GOL §§ 5-517, 5-705; Dime Sav. Bank of NY v. Weinstein, 259 AD2d 400; Kane-Miller Corp. v. Salkin, 226 AD2d at 1029-30; Northeast Sav. v. Bailey, 143 AD2d at 475. New Era Realty Services acknowledged neither the debt, nor the lien, nor, consequently, the defenses to either.
When the mortgagor transfers the mortgaged property subject to the debt, and the transferee purchases the property expressly so encumbered, the mortgagor waives the usury defense, and the purchaser binds herself to payment of the debt, so that she may not avail herself of the defense's full parameters, to cancel the mortgage without any payment. This result pertains on two grounds. First, the original mortgagor is no longer the ultimate obligor for the debt. Second, the purchaser received consideration for purchasing the property subject to payment of the debt. To permit the purchaser to avoid that payment would discharge her from an obligation expressly undertaken, for which she received consideration, and leave the mortgagor still ultimately liable, continuing under an obligation the purchaser voluntarily had assumed. Sands v. Church, 6 NY 347, 355-56 (1852), cited in Seidel v. 18 E. 17th St. Owners, 79 NY2d at 741.
Each decision following Halsey v. Winant, 258 NY 512, or its predecessors, where a usury defense to a mortgage lien was unavailable to the mortgagor's grantee or guarantor without payment of the amount loaned and legal interest, is premised on the grantee or guarantor expressly and voluntarily having assumed both the mortgage debt and the mortgage lien on the property conveyed. Geddes Sav. Loan Assn. v. Mishel, 89 AD2d at 793; Gross v. Lichtman, 55 AD2d 670, 671 (2nd Dep't 1976); Metz v. Gunther, 14 AD2d at 574-75; Kahn v. Sohmer, 12 AD2d 982 (2nd Dep't 1961) (citing Sands v. Church, 6 NY 347). In addition, either the mortgagor or the grantee may have been a corporation to whom the defense was unavailable. The central premise, nonetheless, does not pertain here. New Era Realty remains obligated for the mortgage debt, to plaintiff to the extent she does not recover the debt through this foreclosure action, and to Grant to the extent plaintiff does recover through the foreclosure. Further, Grant neither purchased the property subject to payment of the debt, nor agreed the property would be subject to any lien, and hence never received consideration for either.
Thus, while Grant is not the direct victim of a usurer, neither is she the grantee of an expressed mortgage debt and lien that she assumed with full knowledge of the attendant liabilities as well as defenses. See Buckingham v. Corning, 91 NY at 529-30, cited in Seidel v. 18 E. 17th St. Owners, 79 NY2d at 741. If in fact the mortgage was usurious, its nonenforcement still would discourage usury and prevent the use of a usurious mortgage as a weapon to defeat the right of one who has since acquired title. Halsey v. Winant, 258 NY at 530-31; Buckingham v. Corning, 91 NY at 530.
While a defense that plaintiff must join the mortgagor as a defendant in this foreclosure action or must foreclose on all property covered by the mortgage is unavailable to defendant Grant, the court may not conclude, on this incomplete record, that the defense of usury is unavailable to her.Since Seidel contemplated that not all nonparties to a usurious transaction are precluded from claiming the usury defense, and there are circumstances where it is available to such individuals, a determination whether Grant is such an individual, and this case presents such circumstances, must be on a fuller record than the current one. Seidel v. 18 E. 17th St. Owners, 79 NY2d at 741. In view of the unresolved factual issues as to the mortgagor's true identity and the nature of the transactions surrounding Grant's ownership of the mortgaged property, the court denies plaintiff partial summary judgment against Grant on this record. C.P.L.R. § 3212(b) and (e); Schneider v. Phelps, 41 NY2d at 244.