Reilly v. Foursome Inn Corp., 64 N.Y.2d 580 (1985)
A mortgagor who provides an estoppel certificate may be barred from asserting a criminal usury defense against an assignee unless the certificate was executed under duress, the assignee knew of the usury, or invalidating circumstances existed.
Summary
This case addresses whether an estoppel certificate prevents a mortgagor from raising a defense of criminal usury against an assignee of the mortgage. Foursome Inn Corp. executed a mortgage with a high interest rate and then provided an estoppel certificate to an assignee, Reilly. When Foursome defaulted, Reilly sought foreclosure. Foursome then attempted to amend its answer to assert criminal usury. The court held that an estoppel certificate could waive criminal usury, but this waiver is invalid if the certificate was obtained through duress, the assignee had prior knowledge of the usurious nature of the transaction, or other invalidating circumstances existed. The court modified the lower court’s order, remitting the case for further proceedings because issues of fact remained.
Facts
In 1974, Foursome Inn Corp. borrowed $35,000 from Broadhollow Funding Corporation, secured by a mortgage on its inn. The mortgage had a 24% annual interest rate. Foursome only received $32,900, with $2,100 paid to Ira S. Schwartz, Broadhollow’s secretary-treasurer. In October 1975, Beatrice Reilly, Foursome’s president, signed an estoppel certificate stating there were no defenses or offsets to the mortgage. Negotiations for the certificate involved both Ira Schwartz and his father, Abraham. In July 1976, Foursome defaulted, and the plaintiffs, assignees of the mortgage, initiated a foreclosure action. Mrs. Reilly’s affidavit alleged the certificate was signed as a result of threats or being misled.
Procedural History
The plaintiffs brought a foreclosure action after Foursome defaulted. Foursome sought to amend its answer to include the defense of criminal usury. Special Term denied the motion to amend and granted summary judgment to the plaintiffs based on the estoppel certificate. Foursome then moved to vacate the judgment, which was also denied. The Appellate Division reversed, granting Foursome summary judgment and declaring the mortgage void. The Court of Appeals reversed the Appellate Division’s grant of summary judgment to Foursome and remitted the case for further proceedings.
Issue(s)
Whether an estoppel certificate can waive the defense of criminal usury.
Holding
No, because an estoppel certificate may be invalidated by duress, other invalidating circumstances, or the assignee’s knowledge of the criminal nature of the transaction before taking the assignment.
Court’s Reasoning
The court reasoned that while assignees of nonnegotiable mortgages typically take them subject to any defenses against the assignor, an estoppel certificate changes this rule. The certificate represents the validity of the mortgage, preventing the mortgagor from later asserting defenses. However, this is premised on the assignee being an innocent party. If the assignee knows of the usurious nature of the transaction, they cannot enforce the mortgage. The court also acknowledged that the policy against usury exists to protect vulnerable borrowers. The court noted that while the Legislature made criminal usury a defense for corporations, they did not explicitly address estoppel certificates in this context. The court balanced the public policy against usury with the principle that “where one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss, must sustain it” (National Safe Deposit Co. v Hibbs, 229 US 391, 394). The court determined that the estoppel certificate could be invalidated if obtained through duress or if the assignee had knowledge of the usurious nature of the transaction. The court found that questions of fact remained regarding the legitimacy of a commission paid and whether duress existed. The court stated, “the intention to change a long-established rule or principle is not to be imputed to the legislature in the absence of a clear manifestation”. The court ultimately held that a valid estoppel certificate, relied upon in good faith, could preclude a criminal usury defense unless duress or assignee knowledge existed.