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Metropolitan National Bank v. Adelphi Academy

Supreme Court of the State of New York, Kings County
May 27, 2009
2009 N.Y. Slip Op. 51044 (N.Y. Sup. Ct. 2009)



Decided May 27, 2009.

David A. Pellegrino, Esq, Tannenbaum, Helpern, Syracuse Hirshtritt LLP., Plaintiff Attorney.

Joseph M. Elhilow, Esq., Defendant Attorney.

Metropolitan National Bank (hereinafter MNB), by its attorney, has moved this court for an order granting it a default judgment as to defendant, Paul Signs, Inc., amending the caption to strike therefrom the names of defendants John Doe, # 1 to # 50, inclusive and without prejudice, summary judgment as against the defendant, Adelphi Academy (a/k/a The Corporation of Adelphi Academy; hereinafter Adelphi), and appointing a referee to compute the amount due it on account of the five-million, two-hundred thousand ($5,200,000.00) dollar note and mortgage, dated April 18, 2006 (with the latter recorded on May 26, 2006), on which foreclosure is sought in connection with a property commonly known as 8501-8529 Ridge Boulevard, Brooklyn, NY, and designated as Section 18, Block 6033, Lot 1. Incident to the mentioned note and mortgage, the parties executed an Interest Reserve Agreement which required Adelphi to establish and maintain a six-hundred and sixty thousand ($660,000.00) dollar money market account, with an interest rate of four (4%) percent, from which interest due under the note would be paid and which would not be permitted to dip below three months of interest payments. MNB, on May 18, 2007, sent Adelphi written notice of its deficit, which it is alleged Adelphi failed to rectify within five days thereof as required by said agreement. Due to ongoing non-compliance, MNB sent Adelphi a letter of default on October 16, 2007 advising that it had elected to declare the entire note due pursuant to the loan documents; to wit, five-million, two-hundred thousand ($5,200,000.00) dollars, plus interest, default interest, late fees, attorneys' fees, and other charges, which was followed by a second request for payment on January 23, 2008, with a caveat that foreclosure proceedings would be pursued. MNB's Vice-President submitted an affidavit confirming all of the foregoing.

In opposition, Adelphi's counsel stresses that her client was at no time delinquent in its monthly payments under the note, and that the sole basis for the instant foreclosure was solely a result of Adelphi's failure to have replenished the interest reserve account as per its terms. That omission, it is argued, in no way prejudiced MNB, was de minimus in consequence to MNB, and did not constitute a material breach of the parties' agreement. To the contrary, an acceleration of payment under the promissory note for failing to maintain the reserve at a designated level is an overly oppressive and unconscionable act to which a court of equity should not lend assistance.

Counsel noted several instances in which courts have rejected foreclosures for non-material breaches; e.g., omission to pay water assessment (Noyes v. Anderson, 124 NY 175 [1981]); default in payment of taxes (Clark-Robinson Corp. v. Jet Enterprises, 159 NYS2d 214 [1957]); and, five day delay in payment of quarterly interest (Domus Realty Corp. v. 3440 Realty Co., 179 Misc. 749, 40 NYS2d 69 [1943]). In addition, counsel submits that while meeting its monthly obligations, Adelphi had fully apprised MNB that it was making every effort to refinance and/or establish a "coordinated utilization of the academy's grounds, programs, and assistance with the debt" so as to be in full compliance with the reserve agreement. In any event, while MNB can demonstrate no actual harm, Adelphi's ". . . reputation was tainted, [its efforts to rectify the situation twarted], and enrollment weakened by the public's false belief that the school was no longer able to meet their (sic) monthly installment payments." The plain fact is that at the time MNB instituted the foreclosure in 2007, Adelphi was making its monthly interest payments under the promissory note, and the principal was not due until April 18, 2009. Although a member of Adelphi's Board of Trustees submitted an affidavit in corroboration of the preceding, Adelphi's Dean countermands, in his supplemental affidavit in opposition, that there is no proof that the interest reserve account ever reached or dipped under two months interest payments such that MNB was justified in its initial letter of default.

Plaintiff's counsel argues that the contradictory nature of the Board of Trustee's affidavit in relation to the Dean's suggests an attempt by Adelphi to tailor its arguments so as to re-interpret the parties' unequivocal written agreement. MNB's President and Chief Operating Officer and Vice-President, in their respective reply affidavits, also advised that the loan in question would never have been authorized without the specific five-month interest reserve protection (initially asserted as a three-month reserve). In addition, the interest reserve agreement permitted Adelphi to avoid its reserve requirement if it operated at a debt service ratio of at least one point two five to one (1.25:1), when, in fact, Adelphi was operating at a deficit of one point three million ($1,300,000.00) dollars, with a total income of one point seven million ($1,700,000.00) dollars as per its 2005 to 2006 Profit and Loss Statement. By August, 2007, Adelphi's July 2006 to June 2007 Profit and Loss Statement demonstrated a deficit of two-hundred and nine thousand, nine-hundred and seventy-nine ($209,979.16) dollars and sixteen cents, which, after applying its debt service to MNB, grew to seven-hundred and fifty-seven thousand, three-hundred and eighteen ($757,318.16) dollars and sixteen cents, with total income of one million, eight-hundred and eighty thousand, one-hundred and sixty-two ($1,880,162.00) dollars, revealing that Adelphi was spending one-hundred and forty (140%) percent of its income. These financials were confirmed by Adelphi representatives at two September, 2007 meetings with no indication as to how the situation would be rectified, thereby leaving MNB with no alternative but to accelerate payments in October, 2007, make a final demand for payment in January, 2008, and institute foreclosure proceedings in March, 2008. In short, it is MNB's contention that Adelphi, though initially conceding its breach, is now attempting to deny and/or minimize the same as immaterial when, in fact, its failure to comply with the requirements of the interest reserve account or to maintain its projected debt service ratio constitutes a material breach warranting foreclosure.

In response to the cases above-referenced by Adelphi and others below-noted, MNB's counsel notes that the pertinent courts had denied foreclosure since subject defaulters had promptly resolved, or had been willing and able to resolve any arrears that had arisen; to wit, sewer assessment was paid (Noyes v. Anderson, supra, 124 NY 175 [1981]); tax arrears paid prior to service of process (Clark-Robinson Corp. v. Jet Enterprises, supra, 159 NYS2d 214 [1957]); only five-day delay in payment of principal (Domus Realty Corp. v. 3440 Realty Co., 179 Misc. 749, 40 NYS2d 69 [1943]); one day delay in payment of taxes (Germania Life Ins. Co. v. Potter, 124 AD 184, 109 NYS2d 435 [1st Dept., 1908]); tax arrears paid prior to service of process (Norbant Health Corp. v. A.C. Oaks, Inc., 116 NYS2d 215); minor delay with no opportunity to cure (Di Matteo v. North Tonawanda Auto Wash, Inc., 101 AD2d 692, 476 NYS2d 40 [4th Dept., 1984]). In the matter sub judice although MNB waited seven months to accelerate the loan and nine months to commence the foreclosure action, Adelphi nevertheless allowed its situation to worsen; i.e., the reserve account to become completely depleted, ignored virtually all attempts to address its predicament, and, even in its more recent supplemental submissions, has failed to document any proof of actual attempts to refinance or otherwise establish an ability to cure.

"A party seeking 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" (Ayotte v. Grevasioi, 81 NY2d 1062, 601 NYS2d 463; Alvarez v. Prospect Hosp., 68 NY2d 320, 508 NYS2d 923). Once a prima facie showing has been made, the burden shifts to the opposing party to produce evidentiary proof in admissible form sufficient to establish the existence of material questions of fact (see Alvarez v. Prospect Hosp., supra).

23 Williston on Contracts (4th ed.), § 63:3 instructs that ". . .if a breach is relatively minor and not of the essence, the plaintiff is still bound by the contract and may not abandon performance and obtain damages for a total breach by the defendant, though the non-breaching party is entitled to damages caused even by the immaterial breach, albeit that these may be nominal in amount. Otherwise stated, a non-performing party is liable for any breach of contract, but the other party is discharged from further performance, and is entitled to substantial damages only when there is a material breach. . . .Thus, it has been said that a material breach' is a failure to do something that is so fundamental to a contract that the failure to perform that obligation defeats the essential purpose of the contract or makes it impossible for the other party to perform under the contract. In other words, for a breach to be material, it must "go to the root" or essence' of the agreement between the parties, or be "one which touches the fundamental purpose of the contract and defeats the object of the parties in entering into the contract." A breach is material' if a party fails to perform a substantial part of the contract or one or more of its essential terms or conditions, the breach substantially defeats the contract's purpose, or the breach is such that upon a reasonable interpretation of the contract, the parties considered the breach as vital to the existence of the contract. . . .Conversely, where a breach causes no damages or prejudice to the other party, it may be deemed not to be material'. . . .The determination whether a material breach has occurred is generally a question of fact." Restatement (2d) of Contracts, § 241, sets forth the circumstances (not rules) for consideration; to wit, "[i]n determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing."

New York is in full keeping with the foregoing principles of law inasmuch as for a breach to be material it must be so substantial that it defeats the object of the parties in making the contract; the breach must go to the root of the agreement between the parties (see Qualcomm Inc. v. Texas Instruments Inc., 875 AD2d 626 [2005]; In re Balco Equities Ltd., Inc., 323 B.R. 85, citing Lipsky v. Commonwealth United Corp., 551 F2d 887 [2d Circ., 1976]; Katz v. Berisford Int'l PLC, No. 96 Civ. 8695, 2000 WL 959721 [S.D.NY, July 10, 2000]; Lanvin Inc. v. Colonia, Inc., 739 Fsupp 182, [S.D.N.Y, 1990]). So too, while it is true that "[t]he law is clear that when a mortgagor defaults on loan payments, even if only for a day, a mortgagee may accelerate the loan, require that the balance be tendered or commence foreclosure proceedings, and equity will not intervene" (see Home Savings of America, FSB v. Isaacson, 240 AD2d 633, 659 NYS2d 94 [1997]; quoting New York Guardian Mortgagee Corp. v. Olexa, 176 AD2d 399, 574 NYS2d 107 [1991]), the issue in the matter sub judice is whether there was ever any material breach, much less missed loan payments.

The root of the parties' agreement herein is an interest only loan for three years, followed by a balloon payment, secured by a mortgage on the defendant's premises, with three month's advanced interest to be kept in a reserve account, provided a certain debt ratio is not maintained. The premises secured by the subject mortgage is an academy for school aged children. While it is clear that Adelphi failed to maintain the designated amount as per the interest reserve account agreement, there is no indication that it did not make its actual monthly payment obligations or that it would not have been able to make its lump sum principal payment when due, pursuant to the promissory note, at any time prior to MNB's election to accelerate under the loan documents. In light of the fact that Adelphi was meeting its primary financial obligations, however, it cannot be said that it was in material breach of the parties' basic agreement.

In addition, issues of fact exist as to why Adelphi was allegedly operating at a deficit, the full extent of efforts made by Adelphi to refinance and/or restructure in a manner to effectively meet its commitments under the interest reserve account, and what, if any, negative impact MNB may have exerted on those efforts. Furthermore, the record presently before the court is inadequate to parse exactly what financial benefit MNB was deprived of which it reasonably expected; what would constitute adequate compensation for the added assurance that the reserve account was to have afforded MNB which it failed to get; the likelihood that Adelphi could have cured its failure to maintain the reserve account through refinancing, increased enrollment, restructuring, etc.; the cause and/or rationale of Adelphi's behavior in making full financial disclosure of its fiscal standing, yet not seeming to have engaged in full disclosure of its refinancing attempts, and whether such omission violated standards of good faith and fair dealing under the attendant circumstances.

With regards to the MNB's motion for a default judgment as to Paul Signs, Inc, it is to be noted that the latter has not appeared and/or answered in the within action and/or motion.

WHEREFORE, on the basis on all of the foregoing, MNB's motion for an order granting it a default judgment as to defendant, Paul Signs, Inc. and amending the caption to strike therefrom the names of defendants John Doe, # 1 to # 50, inclusive and without prejudice, is granted. Its additional motion for summary judgment as against the defendant, Adelphi Academy and appointing a referee to compute the amount due it on account is denied. This constitutes the decision and order of this Court.

Summaries of

Metropolitan National Bank v. Adelphi Academy

Supreme Court of the State of New York, Kings County
May 27, 2009
2009 N.Y. Slip Op. 51044 (N.Y. Sup. Ct. 2009)
Case details for

Metropolitan National Bank v. Adelphi Academy

Case Details


Court:Supreme Court of the State of New York, Kings County

Date published: May 27, 2009


2009 N.Y. Slip Op. 51044 (N.Y. Sup. Ct. 2009)

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