New York Law Review

Tag: Mortgages

  • M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd., 12 N.Y.3d 798 (2009): Establishing an Equitable Lien on Property

    M & B Joint Venture, Inc. v. Laurus Master Fund, Ltd., 12 N.Y.3d 798 (2009)

    An equitable lien requires an express or implied agreement clearly demonstrating the intent that specific property be held as security for an obligation; a mere expectation is insufficient.

    Summary

    M & B Joint Venture sought to establish an equitable lien on a property after loaning money to a holding company, EH. Realty. M & B claimed it was promised a second priority mortgage. However, documentation revealed the mortgage was intended for another entity, 21st Century Technologies, Inc. The New York Court of Appeals held that M & B failed to demonstrate a clear agreement that the property would serve as security for their loan. The Court reversed the Appellate Division’s order in part, dismissing M & B’s claim against Laurus Master Fund, the mortgagee, and 14-16 East 67th Street Holding Corp., the property owner, and canceling the notice of pendency.

    Facts

    Penthouse International secured a $24 million loan from Laurus Master Fund, using a mortgage on a New York City townhouse as collateral. Penthouse then transferred the property to EH. Realty Associates, LLC, a company Penthouse largely owned. M & B Joint Venture, Inc. (M & B) alleges it loaned $490,000 to EH. Realty, expecting a second-priority mortgage on the same property. M & B sent a letter instructing the escrow agent not to release the funds until it received a promissory note and the mortgage. The escrow agent allegedly released the funds without securing the mortgage for M & B. Penthouse defaulted on its loan, leading to foreclosure, and the property was conveyed to 14-16 East 67th Street Holding Corp., wholly owned by Laurus.

    Procedural History

    M & B Joint Venture sued Laurus and 14-16 East, claiming an equitable lien and filing a notice of pendency. The defendants moved to dismiss the equitable lien claim and cancel the notice of pendency. Supreme Court denied the motions. The Appellate Division modified the Supreme Court’s order by dismissing a claim for unjust enrichment, but otherwise affirmed the denial of the motion to dismiss the equitable lien claim. The Court of Appeals reversed the Appellate Division, granting the motion to dismiss the equitable lien claim and cancel the notice of pendency.

    Issue(s)

    Whether M & B Joint Venture presented sufficient evidence to establish an express or implied agreement demonstrating a clear intent that the property would be held as security for its loan, thereby justifying the imposition of an equitable lien.

    Holding

    No, because the evidence submitted by M & B itself indicated that any mortgage on the property was to be in favor of 21st Century Technologies, Inc., not M & B, and M & B provided no evidence of assignment or ownership interest in the alleged lien.

    Court’s Reasoning

    The Court of Appeals relied on the principle that an equitable lien requires an express or implied agreement demonstrating a sufficiently clear intent to hold property as security for an obligation. Citing Teichman v Community Hosp. of W. Suffolk, 87 NY2d 514, 520 (1996), the court emphasized that there must be an agreement “that there shall be a lien on specific property.” The court found M & B’s evidence contradicted its claim. The February 2004 letter, which M & B offered as proof, stated that any mortgage was to be in favor of 21st Century Technologies, Inc., not M & B. The Court noted that a party’s “mere expectation, however sincere, is insufficient to establish an equitable lien” (Scivoletti v Marsala, 61 NY2d 806, 809 (1984)). Because M & B’s own submissions proved it lacked a cause of action, the Court dismissed the complaint. The court referenced Rovello v Orofino Realty Co., 40 NY2d 633, 636 (1976) and Leon v Martinez, 84 NY2d 83, 88 (1994), underscoring that dismissal is appropriate when the plaintiff’s evidence conclusively negates their claim.

  • Federal Home Loan Mortgage Corp. v. New York State Division of Housing, 87 N.Y.2d 325 (1995): Reversion to Rent Stabilization After Cooperative Foreclosure

    87 N.Y.2d 325 (1995)

    Units in a rent-stabilized building that converts to cooperative ownership revert to rent-stabilized status upon foreclosure of the cooperative’s underlying mortgage and the building’s return to rental housing.

    Summary

    Federal Home Loan Mortgage Corporation (FHLMC) foreclosed on a cooperative building in New York City. The building had previously been a rent-stabilized apartment building before being converted to a cooperative. FHLMC sought a declaratory judgment to determine whether the units formerly owned as cooperative apartments reverted to rent-stabilized status after the foreclosure. The New York Court of Appeals held that the units did revert to rent-stabilized status, relying on the plain language of the Rent Stabilization Law (RSL) and the Rent Stabilization Code. The court rejected FHLMC’s claims that this reversion constituted an unconstitutional taking or a due process deprivation. The court reasoned that the RSL’s exemption for cooperatives applies only “so long as” the building maintains cooperative status.

    Facts

    FHLMC was the assignee of a mortgage on an 83-unit building in Brooklyn, NY, which was initially a rent-stabilized building. The building was converted to cooperative ownership. FHLMC approved the conversion but did not require its mortgage to be satisfied. A cooperative offering plan was submitted to the NY Department of Law and provided to the tenants. Of the 83 units, 3 were purchased by existing tenants, 17 by outsiders. The remaining 63 units remained rent-stabilized. The cooperative corporation defaulted on the mortgage, and FHLMC foreclosed and purchased the property at a public sale, canceling the proprietary leases.

    Procedural History

    FHLMC filed a declaratory judgment action in federal district court seeking a ruling on whether the units of former purchasers and tenants who moved in after the conversion were subject to rent regulation. The District Court ruled in favor of the New York State Division of Housing and Community Renewal (DHCR), declaring that the building reverted to rent regulatory status upon the demise of the cooperative. The Second Circuit Court of Appeals certified the question to the New York Court of Appeals.

    Issue(s)

    Whether, in light of FHLMC’s challenge to 9 N.Y.C.R.R. 2520.11(l), units in a rent-stabilized building that was converted to cooperative ownership revert to units subject to the Rent Stabilization Law, upon the foreclosure of the cooperative’s underlying mortgage and the return of the building to operation as rental housing?

    Holding

    Yes, because the Rent Stabilization Law exempts buildings “owned as a cooperative,” and upon foreclosure, the building is no longer owned as a cooperative; therefore, the exemption no longer applies.

    Court’s Reasoning

    The court relied on the plain language of the Rent Stabilization Law (RSL), which applies to Class A multiple dwellings “not owned as a cooperative.” The court noted that the DHCR’s Rent Stabilization Code (9 NYCRR 2520.11(l)) specifies that the RSL’s protections apply except to housing accommodations in buildings “owned as cooperatives” “for so long as they maintain [cooperative] status.” The court reasoned that once a cooperative reverts to rental status, it is again subject to the RSL’s provisions. The court rejected the argument that the absence of an express provision in the RSL directing that the units of a cooperative revert to regulated status upon foreclosure entitles the units to continue to enjoy the benefits of the cooperative exemption. The court reasoned that upon foreclosure, the condition that warranted the exemption—cooperative ownership—was removed, and the statute again applied to the building as a rental property. The court found no unconstitutional physical taking because FHLMC voluntarily purchased the building and acquiesced in its use as rental housing. The court found no regulatory taking because the regulation substantially advanced a legitimate state interest in preventing eviction and protecting tenants in a housing shortage. The court stated, “Indeed, we perceive no reason why these tenants should be penalized because of their prior status as shareholders in a failed cooperative.” The court also rejected the argument that the law was unconstitutionally vague, noting the existence of methods for calculating rents after reversion to rent-regulated status.

  • Surrey Strathmore Corp. v. Dollar Savings Bank, 36 N.Y.2d 173 (1975): Interest on Mortgage Tax Escrow Accounts

    36 N.Y.2d 173 (1975)

    In the absence of an explicit agreement or clear evidence of intent, a mortgagor is not entitled to interest or earnings on funds held in a tax escrow account by the mortgagee, especially when dealing with sophisticated commercial parties.

    Summary

    Surrey Strathmore Corp., a commercial mortgagor, sought an accounting from Dollar Savings Bank, the mortgagee, for earnings on monthly tax installment payments held in escrow. The mortgage agreement was silent on interest, and the bank explicitly stated it would not pay interest at closing. The New York Court of Appeals held that the mortgagor was not entitled to an accounting or any earnings on the tax account. The court reasoned that the absence of an express agreement, coupled with the closing conversation, indicated no intent to pay interest or earnings. The court further noted that as a matter of public policy, the issue was for the legislature, which subsequently required interest payments on tax accounts for owner-occupied residences.

    Facts

    Appellant, Surrey Strathmore Corp., a business corporation, secured a $450,000 loan from respondent Dollar Savings Bank for an apartment complex, using a first mortgage. The mortgage agreement required monthly installment payments for real estate taxes, stating, “The mortgagee shall hold such monthly payments in trust to apply the same against such taxes, when due.” At the closing, the mortgagor’s representative asked about interest on the tax account and was informed that no interest would be paid. The mortgagor later requested that the tax monies be held in a separate, interest-bearing account, which the bank denied.

    Procedural History

    The mortgagor initiated an Article 77 proceeding for an accounting of the tax payments and any income earned. Special Term ruled against the mortgagor. The Appellate Division affirmed, granting leave to appeal to the Court of Appeals. The Court of Appeals affirmed the Appellate Division’s order, denying the mortgagor’s claim.

    Issue(s)

    Whether, under the terms of a commercial mortgage agreement requiring monthly tax installment payments, the corporate mortgagor is entitled to an accounting and any earnings realized by the mortgagee on those funds.

    Holding

    No, because the written agreement contained no explicit provision for interest or earnings, and parol evidence from the closing confirmed the parties’ intent that no such payment would be made.

    Court’s Reasoning

    The court determined that resolving the issue does not depend on labels such as “trust” or “debtor-creditor relationship,” but rather on the parties’ intended rights and obligations as shown in their written agreement. “Reasoning predicated on such concepts would accordingly be untrustworthy.” The court noted the absence of an express provision for interest or earnings in the agreement. While the mortgage stated that payments shall be held “in trust,” the court found that the language did not create an obligation to pay the mortgagor any income the bank may have earned by using those funds, specifically noting the silence on the matter suggests that no such payment was intended. Further, the court relied on parol evidence – specifically, the undisputed discussion at the closing where the bank explicitly stated that no interest would be paid on the tax payments. The court emphasized the sophistication of the mortgagor, precluding any claims of a contract of adhesion. Legislative action requiring interest on tax accounts for residential mortgages, passed after this mortgage was initiated, was also addressed. Dissenting judges argued that the “in trust” language created a trust relationship, entitling the mortgagor to any earnings, and that the parol evidence rule should bar consideration of the closing conversation. Judge Fuchsberg directly quoted the Restatement of Trusts to support the argument that the absence of an interest obligation does not negate the existence of a trust relationship, and therefore an obligation to remit earned income. However, the majority held that the legislature was the more appropriate venue to address a policy decision on those financial vehicles.

  • Riverside Syndicate, Inc. v. Munroe, 10 N.Y.2d 478 (1962): Enforceability of Mortgage Release Clause

    Riverside Syndicate, Inc. v. Munroe, 10 N.Y.2d 18 (1961)

    A mortgagor seeking to enforce a release clause in a mortgage agreement after the mortgagee’s initial refusal must keep their offer to pay for the releases open and available, or lose the right to specific performance.

    Summary

    This case concerns a dispute over a mortgage agreement containing a clause allowing the mortgagor to obtain releases of individual lots upon payment of a specified sum. The mortgagor, Dade, attempted to pay for the release of several lots, but the mortgagee, Riverside Syndicate, refused, allegedly demanding a larger sum than agreed upon. Dade argued that Riverside’s breach of the release clause extinguished the mortgage lien on those lots. The court held that while Riverside breached the agreement, Dade was not entitled to a windfall and had to keep its offer to pay open to be entitled to equitable relief. Failure to do so meant the mortgage remained in effect.

    Facts

    Riverside Syndicate held a mortgage on land owned by Dade. The mortgage agreement contained a clause that allowed Dade to obtain a release of individual lots from the mortgage lien by paying $2,000 per lot upon sale or encumbrance. On November 27, 1968, Dade notified Riverside that it was ready to pay $42,000 for the release of 21 specified lots and tendered a check for that amount. Riverside refused to accept the payment and execute the releases.

    Procedural History

    Riverside brought a foreclosure action against Dade. The Special Term found that Riverside had breached the agreement by refusing to accept the $2,000 per lot and denied foreclosure on the 21 lots in question. The Appellate Division reversed, finding that Dade had not made a proper tender of payment. The Court of Appeals then reviewed the Appellate Division’s decision.

    Issue(s)

    1. Whether Riverside breached the mortgage agreement by refusing to release the lots upon Dade’s offer to pay the agreed-upon amount.
    2. Whether Dade’s failure to keep the offer to pay open after Riverside’s initial refusal precluded it from obtaining equitable relief (i.e., release of the mortgage lien).

    Holding

    1. Yes, because Riverside’s refusal to accept the $2,000 per lot and execute the releases, based on a desire for more money, constituted a breach of the mortgage agreement.
    2. Yes, because to obtain equitable relief, Dade was required to keep its offer to pay open after Riverside’s initial refusal.

    Court’s Reasoning

    The court found that Riverside’s refusal to execute the releases was not based on a legitimate concern about a sale but on a desire to extract more money from Dade, which constituted a breach of the agreement. The court noted that the strict rules of tender are not applicable in this situation, as Dade made a sufficient offer of performance to prevent Riverside from relying on the defense that a check was not physically presented.

    However, the court also held that Dade was not entitled to a windfall. Citing Werner v. Tuch, the court emphasized that a tender on which equitable relief turns must be kept good. Since Dade did not continue to hold the funds available for Riverside, it was not entitled to have the mortgage lien on the lots removed. To remedy the situation, the Court of Appeals ordered that Dade be given the opportunity to pay the $42,000 plus accrued interest and taxes into the court. If Dade complied, the foreclosure action would be dismissed; otherwise, the original judgment in Riverside’s favor would stand. The court reasoned that this outcome placed the parties in the position they were in when the offer was initially made and refused. The court observed, “It would be inequitable to allow the defendant, having made an effort to perform a condition on which plaintiffs had an affirmative obligation but which they did not accept, to sit by thereafter on this past event and gain the remarkable consequence that the lien on 21 lots was gone and a $42,000 windfall had dropped down to defendant as mortgagor.”

  • Copp v. Sands Point Marina, Inc., 17 N.Y.2d 291 (1966): Enforceability of a Note After Condemnation of Mortgaged Property

    Copp v. Sands Point Marina, Inc., 17 N.Y.2d 291 (1966)

    The condemnation of mortgaged property affects only the mortgage lien, and the holder of the note may still sue at law on the note itself and recover interest at the rate specified in the note, even after condemnation.

    Summary

    Copp sued Sands Point Marina to recover unpaid interest payments on a note secured by a mortgage. Sands Point argued that because the mortgaged property had been condemned, Copp was limited to a statutory interest rate of 4% and had to seek recovery from the condemnation award. The court held that condemnation only affects the mortgage lien, not the underlying debt. Copp could sue on the note and recover the contractual interest rate. This case clarifies the rights of noteholders when mortgaged property is taken by eminent domain and distinguishes between remedies on the note versus foreclosure on the mortgage.

    Facts

    In November 1958, Sands Point Marina executed a note for $103,500 secured by a purchase-money mortgage with a 5% interest rate. The principal was due in five years, with semi-annual interest payments. The Town of North Hempstead condemned the property on October 8, 1962. Sands Point failed to make the interest payments due November 21, 1962, and May 21, 1963, leading Copp to sue on the note for the unpaid interest.

    Procedural History

    The Special Term denied Copp’s motion for summary judgment. The Appellate Division reversed the Special Term’s decision and granted summary judgment to Copp. Sands Point Marina appealed to the New York Court of Appeals.

    Issue(s)

    Whether, after the condemnation of mortgaged property, the holder of the note may assert their rights against the mortgagee in an action on the note and recover interest at the rate specified therein, or whether they are limited to a statutory interest rate and must proceed against the condemnation award.

    Holding

    Yes, because only the mortgage lien is affected by the condemnation, the holder of the note may sue at law on the note and recover interest at the rate specified in the note.

    Court’s Reasoning

    The court reasoned that a noteholder has two distinct remedies: a suit at law on the note and an action in equity to foreclose the mortgage. The note represents the mortgagor’s primary personal obligation, while the mortgage serves as security for that obligation. When condemnation occurs, the award substitutes for the security previously provided by the mortgage, meaning the lien transfers to the award. However, this substitution only affects the mortgage lien, not the underlying debt represented by the note.

    The court distinguished this case from situations where the mortgagee attempts to enforce the lien against the award. Here, Copp was pursuing a separate remedy by suing on the note itself. The court emphasized that condemning the property doesn’t extinguish the debt; it merely changes the form of the security. Therefore, the noteholder is entitled to pursue the mortgagor’s personal obligation under the note and recover interest at the contractual rate. The court noted that it had previously left this specific question open in Muldoon v. Mid-Bronx Holding Corp., stating, “Chief Judge Lehman, writing for this court in Muldoon, specifically left open the question presented here, i.e., whether, after the condemnation of mortgaged property, the holder of the note may assert his rights against the mortgagee in an action on the note and not be circumscribed by the change of the status of the security (287 N. Y. 227, 231).”