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BANK OF NY v. BRAM MFG. CORP.

Supreme Court of the State of New York, Rockland County
Jul 20, 2005
2005 N.Y. Slip Op. 51130 (N.Y. Misc. 2005)

Opinion

4103/03.

Decided July 20, 2005.

John I. O'Neill, Esq., Bleakley Platt Schmidt, LLP, White Plains, New York, Attorneys for Plaintiff.

Jacob Ginsburg, Esq., Barr Haas, LLP, Spring Valley, New York, Attorneys for Defendants.


This action involves BONY's action to recover the outstanding principal and accrued interest on a Restated Mortgage Note dated January 14, 2000 (the "Restated Mortgage") executed by defendant Bram Manufacturing Corporation ("Bram"), and to recover that same amount allegedly due pursuant to the guarantee signed by the Mutone defendants and E B Leasing Enterprises, Inc. (collectively the "guarantors"), which has the effect of guaranteeing the payment to BONY of Bram's obligations under the Restated Mortgage. The principal amount set forth in the Restated Mortgage is $503,842.77, and it appears that the amount due and owing as of June, 2003 was $471,889.95. In support of its motion for summary judgment, BONY contends that Bram defaulted under the terms of the Restated Mortgage by "failing to pay the outstanding principal at its stated maturity on January 1, 2002." (Affidavit of Richard Gee at ¶ 8). BONY asserts that it made formal demand on Bram and the guarantors of the amount due by letter dated June 9, 2003. When the defendants failed to pay the outstanding amount due, plaintiff commenced this action.

To begin with, it is important to note that the two corporate defendants, Bram and E B Leasing Enterprises Inc. (a/k/a E B Leasing Ent. Inc.) have not opposed the plaintiff's motion for summary judgment, so at a minimum, summary judgment will be granted in plaintiff's favor with regard to these corporate entities. It appears that rather than foreclose on the property located at 26 Route 9W, Congers, New York (the "property"), which secures the Restated Mortgage, BONY has opted to sue on the note underlying the Restated Mortgage and on the guarantee. This strategy was chosen so that BONY could avoid becoming the owner of the property through the foreclosure process, which would then potentially subject it to liability for the costs associated with cleaning up the contamination that has been found on the property. The contamination was first discovered by the defendants pursuant to an offer by a third party to purchase the property in 1998, which required that the defendants undertake a Phase I analysis. The Phase I analysis was followed by a Phase II analysis of the property. Those studies revealed that the property is contaminated by Trichloroethylene, and it is undisputed that defendant Bram's operations did not cause the contamination. Instead, the Mutone defendants argue that the contamination resulted from the fact that the prior owner of the property had a painting operation and probably used the Trichloroethylene to clean metal and then dumped the Trichloroethylene on the property after it was finished with its cleaning process. (See Affidavit of Edward Mutone "Mutone Aff." at ¶ 12). There is also contamination from a petroleum release from the former operation of underground storage tanks located at a neighboring property (16-18 North Route 9W). (Mutone Aff. at ¶ 13). Needless to say, the contamination has rendered the property worthless and indeed the property has become a liability to the Mutone defendants to the extent they are required to cleanup the property. The costs of the cleanup have been estimated in the range of $200,000-$1,000,000.

It is this contamination issue that forms the basis of the Mutone defendants' opposition to plaintiff's motion for summary judgment. In support of their opposition, the Mutone defendants have submitted affidavits which aver that "BONY fraudulently concealed the presence of toxic waste at the premises . . . and . . . [the Mutone defendants] were fraudulently induced by plaintiff BONY to `guarantee' the cleanup costs. . . . [since] BONY had knowledge of the toxic waste or in the ordinary course should have had knowledge, yet concealed and failed to disclose it to them." (Affirmation of Jacob Ginsburg, Esq. at ¶ 3 ("Ginsburg Aff."); Mutone Aff. at ¶¶ 22, 26 and Affidavit of Barbara Mutone at ¶¶ 21, 25). With regard to why BONY in the ordinary course of business should have had knowledge of the toxic waste at the property, the Mutone defendants contend that it would be necessary for BONY to obtain such knowledge in order to "preserve an `innocent third party defense' in the event it is forced to foreclose or take over management of the property." (Ginsburg Aff. at ¶ 5). Thus, the Mutone defendants argue that "[i]n connection with its title work, if not its due diligence, with reference to Bram's loan, evidently, in order to preserve its innocent third-party defense, or simply to avoid the risk of a bad loan and worthless collateral . . . BONY had to have been put on notice . . . [of the prior use and potential contamination of the property]." (Ginsburg Aff. at ¶ 28). The Mutone defendants further argue that BONY has somehow improperly side-stepped the appropriate remedy i.e., foreclosure based on its fear of becoming directly liable for the costs to cleanup the property and that "by side-stepping foreclosure through the General Guarantee . . . [BONY] is attempting to pass the cleanup cost to them." (Ginsburg Aff. at ¶ 7). Furthermore, Mr. Mutone avers that "[m]y lawyers tell me that BONY had an obligation at all times they loaned monies (which Barbara and I guaranteed) to conduct a Phase I study. I believe a Phase I study had to or should have been done by BONY as part of the appraisal, underwriting, loan and guarantee process, since the property is commercial, and given the fact that manufacturing uses are associated with the property." (Mutone Aff. at ¶ 18). The Mutone defendants argue that the fraudulent inducement/concealment defense is established through the special facts doctrine (discussed infra). Furthermore, the Mutone defendants dispute that the disclaimer found in the guarantee absolves BONY from any liability for fraudulent inducement/concealment. The Mutone defendants also cross-move to (1) amend their answer to assert this fraudulent inducement/fraudulent concealment defense, and (2) stay plaintiff's summary motion so that they can engage in discovery of "a paper trail which will . . . establish BONY's knowledge at or about the time it made the loans which the Mutones guaranteed." (Reply Affirmation of Jacob Ginsburg, Esq. at ¶ 25).

The essence of this defense is that had the Mutone defendants "known what BONY evidently knew or should have known about the serious environmental problems on the property, Bram, now an inactive New York corporation of which Edward is president, would never have borrowed monies from BONY and Edward and Barbara would never have guaranteed the obligations BONY seeks to enforce pursuant to the General Guarantee." (Reply Affirmation of Jacob Ginsburg, Esq. at ¶ 14).

This innocent third party defense arises in connection with the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. § 9601 et seq. Thus, pursuant to that statute a secured lender who has foreclosed on property may nevertheless be relieved from responsibility for the cleanup of the property if they fall within the parameters of the exemption provided in the statute for an innocent third-party ( i.e., "at the time the defendant acquired the facility the defendant did not know and had no reason to know that any hazardous substance which is the subject of the release or threatened release was disposed of on, in, or at the facility" 42 U.S.C. § 9601(35)(A)).

In BONY's Opposition/Reply, BONY advances a number of arguments in response to the Mutone defendants' opposition and cross-motion. First, BONY argues that given the timing of the transactions, the guarantee that the Mutone defendants allege they were fraudulently induced to sign "was subsequent in time to their receipt of the Phase I and Phase II reports to which the defendants refer and portions of which they annex to their answering papers. . . . The Phase I report was prepared on October 29, 1998. The Phase II report . . . is dated January 1999, and refers to groundwater investigation conducted at the Mortgaged Premises on November 27, 1998. The Guarantee, by contrast, was executed more than a year later, on January 14, 2000." (Reply Affirmation of John I. O'Neill, Esq. at ¶ 10 "O'Neill Reply"; emphasis in original). BONY argues that despite the Mutone defendants' knowledge of the contamination problems found on the property in 1998 and 1999 after the Phase I and Phase II analyses were performed, Mr. Mutone nevertheless signed the Restated Mortgage on behalf of Bram in 2000. The Restated Mortgage provides the following language concerning Mr. Mutone's (and Bram's) knowledge of the condition of the property at the time Mr. Mutone signed the Restated Mortgage on behalf of Bram and at the time he signed the guarantee:

"Except as previously disclosed to Mortgagee, the Mortgagor warrants and represents that the mortgaged premises and the improvements thereon, to the best of Mortgagor's knowledge, are not currently and have never been subject to hazardous or toxic substances or effects. . . ."

Further, Bram agreed pursuant to the Restated Mortgage's terms that "[i]f, at any time during the term of the Mortgage, any other environmental contamination is found on the mortgaged premises for which any removal or remedial action is required pursuant to law . . . the Mortgagor agrees that it will, at its sole cost and expense, effect such removal or remedial action promptly and to the Mortgagee's satisfaction. The Mortgagor agrees to defend, and indemnify and hold harmless the Mortgagee, its employees. . . . from and against any claims actions . . . arising out of . . . [t]he past or present disposal, release or threatened release of any hazardous or toxic substance. . . ."

BONY also argues that the Mutone defendants cannot claim that they were induced to purchase the property in reliance of BONY's fraudulent inducement or fraudulent concealment. Thus, BONY argues that the documentary evidence irrefutably shows that Bram acquired the property on May 1, 1985 from Josephine Wittens ("Wittens") and that it executed a purchase money mortgage to Wittens in the amount of $325,000. BONY asserts that the documentation further shows that a year and seven months later, Bram executed a $420,000 mortgage from BONY's predecessor-in-interest, Nanuet National Bank ("Nanuet") on December 16, 1986. Thereafter, Bram obtained another loan secured by another mortgage in the amount of $350,000 from Nanuet on October 13, 1988, and then another loan secured by another mortgage from BONY in the amount of $130,000 on July 24, 1996. According to BONY, "the current restated mortgage note for $503,842.77 . . . represents a consolidation of the principal balances of those three loans." (O'Neill Reply at ¶ 15). Based on the foregoing, BONY argues that "[t]he Mutones inherited the environmental issues of which they now complain, when (through Bram) they acquired the Mortgaged Premises, and that was long before Nanuet or [BONY] ever came on the scene." (O'Neill Reply at ¶ 16).

In any event, BONY argues that even if it had been involved from the outset, the Mutone defendants cannot show justifiable reliance as a matter of law since the Mutone defendants had equal access to investigate the condition of the property. (O'Neill Reply at ¶ 17 citing Bando v. Achenbaum, 234 AD2d 242, app. denied, 90 NY2d 920; MT Mtge. Corp. v. Alleyne, 7 AD3d 761; CFJ Assoc. of New York Inc. v. Hanson Indus., 274 AD2d 892).

The second argument proffered by BONY is that the plain and unambiguous language of the disclaimer found in the guarantee bars any defense of fraudulent inducement/concealment as a matter of law. Thus, BONY cites to what it claims is a "specific disclaimer of reliance upon parol representations inconsistent with their absolute and unconditional guarantee of payment" (O'Neill Reply at ¶ 20), by quoting the following disclaimer language from the guarantee:

"This guarantee contains the entire agreement and understanding between the Bank and the undersigned with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. This guarantee may not be amended and compliance with its terms many not be waived, orally or by course of dealing, but only by a writing signed by an authorized officer of the Bank."

Based on what it argues is the controlling case law in this area, plaintiff cites to cases which stand for the proposition that:

"[f]raud in the inducement of a guarantee by corporate officers of the corporation's indebtedness is not a defense to an action on the guarantee when the guarantee recites that it is absolute and unconditional irrespective of any lack of validity or enforceability of the guarantee, or any other circumstance which might otherwise constitute a defense available to a guarantor in respect to the guarantee, those recitals being inconsistent with the guarantors' claim of reliance upon an oral representation that the lending banks were committed to extend to the corporation an additional line of credit."

( Citibank, N.A. v. Plapinger, 66 NY2d 90, 92; see also BNY Fin. Corp. v. Clare, 172 AD2d 203, 205).

BONY argues that the Mutone defendants' cross-motion for leave to amend their answer should be denied because (1) as a matter of law, their defense of fraudulent inducement/concealment is without merit (O'Neill Reply at ¶ 24), (2) that the Mutone defendants have always been aware of the facts underlying this defense and that their delay in asserting this claims has caused prejudice to plaintiff; and (3) the amendment should be denied for the procedural reason that the Mutone defendants have failed to annex the proposed amended pleading to their cross-motion. In support of its claim that the Mutone defendants cannot plead fraudulent inducement or fraudulent concealment, BONY argues:

In support of its position, plaintiff cites Goldner Trucking Corp. v. Stoll Packing Corp., 12 AD2d 639; Branch v. Abraham Strauss Dept. Store, 220 AD2d 474; Langdon v. Town of Webster, 182 Misc 2d 603, aff'd, 270 AD2d 896, app. denied, 95 NY2d 766 and Ausderau v. State of New York, 130 Misc 2d 848, aff'd, 127 AD2d 980, app. denied, 69 NY2d 613. Plaintiff further argues that the annexed pleading should especially be required in a situation wherein the party is claiming fraud since such claims must be pleaded in detail. Thus, the failure to annex the proposed amended answer "inhibits this Court's determination of the merit of their motion and is prejudicial to [BONY]." (O'Neill Reply at ¶ 26; citing Knight v. State, 177 Misc 2d 181, 182).

(A) The Mutone defendants' defense of fraudulent inducement fails because: (I) claim of fraudulent inducement requires the representation of a material existing fact and nowhere do the Mutone defendants allege that BONY made any misrepresentation regarding the contamination (or lack thereof) with regard to the property; (ii) there are no factual assertions that BONY had the requisite scienter ( i.e., intent to deceive); (iii) as discussed previously there can be no justifiable reliance; and (iv) there are no damages because defendants acquired the property prior to the property being mortgaged by BONY and Nanuet.

(B) The Mutone defendants' defense of fraudulent concealment requires, in addition to all the elements of a claim of fraudulent inducement, "proof that the other party had a duty to disclose material information but failed to do so." (O'Neill Reply at ¶ 28; citing P.T. Bank Central Asia v. ABN AMRO Bank, 301 AD2d 373, 376). BONY argues that in this case, the Mutone defendants cannot, as a matter of law, establish a duty to disclose since (1) no fiduciary relationship exists between a bank and its borrower or guarantors (Id. at ¶ 29; citing Bank Leumi Trust Co. of New York v. Block 3102 Corp., 180 AD2d 588, app. denied, 80 NY2d 754; Matas v. Binghamton Savings Bank, 233 AD2d 545, app. dismissed, 89 NY2d 1029, app. denied, 89 NY2d 813; Marine Midland Bank N.A. v. Hallman's Budget Rent-A-Car of Rochester, Inc., 204 AD2d 1007); and (2) BONY did not have superior knowledge of essential facts which were unavailable to the Mutone defendants through the exercise of reasonable diligence since the Mutone defendants "had the opportunity to obtain an environmental assessment of the Mortgaged Premises before Bram acquired ownership. . . ." and "neither Nanuet nor [BONY] owed the defendants any legal duty to perform environment investigation of the Mortgaged Premises prior to extending mortgage financing to Bram." (Id. at ¶¶ 30-31).

BONY also argues that the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") 42 U.S.C. § 9601, et seq. provides no basis to shift liability to BONY in this regard since BONY has not foreclosed on the property nor is there any credible evidence that BONY participated in the management or operation of the property. Accordingly, BONY argues that "CERCLA confers no private right of action to a property owner to shift his liability to his mortgage lender who does not take title to the property or become actively involved in the management of the premises." (O'Neill Reply at ¶ 31; citing In re DuFrayne, 194 BR 354).

Finally, BONY argues that the Mutone defendants' request that the motion be stayed so that they may engage in discovery is without merit since they had ample time before the motion was made to conduct such discovery. Thus, BONY argues that in accordance with relevant case law, the Mutone defendants' cross-motion which seeks discovery should be denied. (O'Neill Reply at ¶ 32).

In reply and in further support of its cross-motion, the Mutone defendants respond to the timing issue raised by BONY in its opposition/reply. Thus, they aver that "BONY's counsel has failed to place the January, 2000 final transaction in the context of the multiple transactions referenced in those documents. . . . [and] those final January, 2000 documents were a `consolidation' of the fraud and deceit evidently practiced by BONY in the prior multiple transactions due to its superior and exclusive evident knowledge of and failure to disclose the serious toxic waste problems." (Affidavit of Edward Mutone, sworn to March 17, 2005 at ¶¶ 5-6; Affidavit of Barbara Mutone, sworn to March 17, 2005 at ¶¶ 5-6). The Mutone defendants further aver that "[a]t the point where the Phase I had occurred, followed by a Phase II, when [we] couldn't sell the property or even give it away, we had no choice but to `agree' to consolidate the prior transactions and guarantees where BONY, evidently, knew but failed to disclose, the serious environmental problems at the property. On top of deceit [we] believe there was clear-cut economic coercion." (Id. at ¶ 8). Thus, the Mutone defendants argue that "the essence of the consolidation, was the evident concealment and failure to disclose by BONY of the toxic waste problem." (Reply Affirmation of Jacob Ginsburg at ¶ 9).

While the Mutone defendants allude to economic coercion as a defense, they have failed to set forth any evidentiary facts or case law to support their contention that Bram entered into the Restated Mortgage and that they entered into the guarantee in 2000 under economic coercion exerted by BONY. Furthermore, the Mutone defendants have not sought leave to add economic coercion as a defense to this action. Accordingly, the Court has not addressed the Mutone defendants' passing reference to economic coercion in deciding this summary judgment motion.

The Mutone defendants continue with their argument that a secured lender may be liable for environmental cleanups even prior to taking title if they have exercised a certain degree of control over the property. (Id. at ¶ 10; citing United States v. Fleet Factors Corp., 901 F2d 1550, cert. denied, 498 US 1046). Finally, the Mutone defendants argue that BONY's motion should be denied insofar as no officer of BONY has "proffered an affidavit from a corporate officer stating that BONY had no knowledge and concealed no knowledge of the toxic waste at the property and in connection with the multiple transactions with Mutones which were the essence of the January, 200 final transaction." (Id. at ¶ 34).

LEGAL DISCUSSION

The Court views that the resolution of this motion for summary judgment must turn on the following questions: (1) whether the disclaimer vitiates any defense of fraudulent inducement/concealment as a matter of law; and if not (2) whether BONY had superior knowledge (such that the special facts doctrine is applicable) or was under some other legal obligation to perform an environmental investigation prior to entering into the guarantees with the Mutone defendants.

The Disclaimer Bars The Mutone Defendants'

Defense of Fraudulent Inducement/Concealment

In an action to recover payment under a guarantee or promissory note, the New York Court of Appeals has held that it is appropriate to grant summary judgment where there is evidence that there exists an instrument for the payment of money that was duly executed by defendant and under which defendant has defaulted by failing to pay in accordance with the instrument's terms. ( Interman Indus. Prods., Ltd. v. R.S.M. Electron Power, Inc., 37 NY2d 151). Thus, a plaintiff in such an action establishes a prima facie case of his entitlement to summary judgment when the Court finds that the note or guarantee in question was duly executed and that defendant has defaulted thereunder. (See Westminster Bank v. Barrier Tech. Corp., 131 AD2d 552; O'Brien v. O'Brien, 258 AD2d 446; see also Ihmels v. Kahn, 126 AD2d 701; Dvoskin v. Prinz, 205 AD2d 661). Based on this standard, the Court finds that plaintiff has met the prima facie showing necessary to be granted summary judgment.

In order to defeat plaintiff's motion for summary judgment, defendant had to come forward with proof in admissible form of the existence of "`a bona fide defense against the note [or guarantee] to defeat the motion.'" ( Ring v. Jones, 13 AD3d 1078; quoting Couch White L.L.P. v. Kelly, 286 AD2d 526, 527; see also Mallad Constr. Corp. v. County Federal Savings and Loan Association, 32 NY2d 285; North Fork Bank v. Hamptons Mist Mgt. Corp., 225 AD2d 595). Here, the Mutone defendants have raised the defense of fraudulent inducement/concealment in opposition to the motion for summary judgment. It is well settled that "[a] guarantor may raise a triable issue of fact concerning whether he or she was induced to execute a guarantee in reliance upon fraudulent representations made by the opposing party. . . . However, no triable issue of fact is raised where `an express provision of the written contract contradicts the claimed oral representations in a meaningful fashion' and the conflict between the two `negates the claim of reliance upon [the claimed oral representations].'" ( AFG Indus., Inc. v. Empire Glass Co., 226 AD2d 487, 487; quoting Bango v. Naughton, 184 AD2d 961, 963).

Thus, a disclaimer found in a guarantee, depending on its language, may have the effect of denying a party the right to assert the defense of fraudulent inducement/concealment in connection with the execution of a guarantee. For example, in Preferred Equities Corp. v. Ziegelman, 190 AD2d 784, app. dismissed, 82 NY2d 706), the guarantee in that case provided that it was "`unconditional and irrevocable, irrespective of * * * and * * * circumstances which might * * * constitute a legal or equitable discharge or release of guarantor or surety.'" ( Preferred Equities Corp., supra, 190 AD2d at 784). Based on this disclaimer language, the Appellate Division, Second Department held that the guarantor had "waived the defense of fraud in the inducement, and the court should have dismissed that affirmative defense, and granted summary judgment in its entirety, in favor of the defendants on their counterclaims." ( Preferred Equities Corp., supra, 190 AD2d at 784; see also Citibank, N.A. v. Plapinger, 66 NY2d 90 [disclaimer provided defendants' liability to be absolute and unconditional irrespective of any lack of validity of the loan agreement or any other agreement or any other circumstance which might otherwise constitute a defense to the guarantee]; Manufacturers Hanover Trust v. Yanakas, 7 F3d 310 [mere recitation that a guarantee is "absolute and unconditional" is not sufficient to bar a defense of fraudulent inducement since it did not contain a disclaimer as to the validity, regularity or enforceability of the guarantee itself and no blanket disclaimer as to any other circumstance that might constitute a defense]; Bando v. Achenbaum, 234 AD2d 242, 244, app. denied, 90 NY2d 920 ["`While a general merger clause will not operate to bar parol evidence of fraud in the inducement . . . where the parties expressly disclaim reliance on the representations alleged to be fraudulent, parol evidence as to those representations will not be admitted'"; citations omitted]; BNY Fin. Corp. v. Clare, 172 AD2d 203, 205 [lower court erred in denying summary judgment on guarantee based on defense of fraudulent inducement/concealment since guarantee was "absolute, unconditional, unlimited and could not be altered or discharged orally"]; Marine Midland Bank, N.A. v. CES/Compu-Tech, Inc., 147 AD2d 396, 397, aff'd, 74 NY2d 751 [fraudulent inducement defense barred by disclaimer which stated that defendant "waive[d] . . . the right to assert defenses . . . in any action . . . arising on, out of, under . . . or in any way relating to this Note or the transactions contemplated hereby"]).

In this case, BONY relies on the following disclaimer language in support of its argument that the Mutone defendants are barred as a matter of law from raising the defense of fraudulent inducement/concealment:

"This guarantee contains the entire agreement and understanding between the Bank and the undersigned with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof. This guarantee may not be amended and compliance with its terms many not be waived, orally or by course of dealing, but only by a writing signed by an authorized officer of the Bank."

In addition to this language, there are additional provisions relevant to the Court's analysis. Thus, the guarantee also provides that the Mutone defendants

"unconditionally guarantee to the Bank the prompt payment when due . . . of all present or future obligations and liabilities of any kinds of the Borrower to the Bank . . . irrespective of the genuineness, validity, regularity, discharge, release or enforceability of such Obligations."

Finally, the guarantee provides "[t]he undersigned hereby waives any right to claim or interpose any defense, counterclaim or offset of any nature and description which it may have or which may exist between and among the Bank, the Borrower, and/or the undersigned. . . ." The Court finds that the disclaimer language found in the guarantee to be virtually indistinguishable from the language found to bar the claims and defenses of fraudulent inducement/concealment in the cases cited above. Accordingly, the Court denies the Mutone defendants' cross-motion for leave to assert the defense of fraudulent inducement/concealment, and further grants plaintiff's motion for summary judgment as there are no triable issues of fact regarding BONY's entitlement to be paid pursuant to the terms of the guarantee.

It is appropriate to deny a motion to amend a pleading where the proposed amendment is insufficient as a matter of law. (See, e.g., Monteiro v. R.D. Werner Co., 301 AD2d 636; Leszczynski v. Kelly McGlynn, 281 AD2d 519; Fandy Corp. v. Lung-Fung Chen, 265 AD2d 450).

The Mutone Defendants' Defense of Fraudulent Inducement/

Concealment Fails Under the Special Facts Doctrine

Even if the disclaimer did not bar the Mutone defendants' defense of fraudulent inducement/concealment, the Court would nevertheless grant plaintiff's motion for summary judgment since there are no triable issues of fact concerning the Mutone defendants' asserted defense of fraudulent inducement/concealment.

The Mutone defendants have admitted that their defense of fraudulent inducement/concealment is not based on any affirmative misrepresentations by BONY concerning the condition of the property. Thus, the fraudulent inducement/concealment defense is based on the Mutone defendants' contention that given their status as secured lenders, BONY and Nanuet must have performed an environmental investigation of the property and, therefore, knew of its contaminated status prior to lending the money to BRAM. Accordingly, the Mutone defendants argue that BONY's failure to advise them of the condition of the property fraudulently induced them into entering into the guarantees which they would not have entered into if they had been apprised of the contaminated condition of the property. The Mutone defendants also appear to be arguing in the alternative that even if BONY and Nanuet had not performed any environmental investigation, that they were nevertheless obligated to do so and that their failure to do so relieves the Mutone defendants from liability under the guarantee.

It would appear that the primary problem is that the Mutone defendants never anticipated that they would be required to pay on their personal guarantee since it was their belief that the indebtedness was sufficiently collateralized by the mortgage on the property. This belief is grounded in the fact that in the predominant number of cases ( i.e., involving properties that are not contaminated) the banks foreclose on the mortgages and recover the monies owed from the sales of the properties without having to resort to the personal guarantees.

In business transaction, a party is ordinarily under no duty to disclose material facts unless (1) there is a fiduciary relationship between the parties or (2) one party has superior knowledge that is not readily accessible to another and that party knows the other party is acting on the basis of mistaken knowledge. ( Stevenson Equip., Inc. v. Chemig Constr. Corp., 170 AD2d 769, 771, aff'd, 79 NY2d 989 [defendants liable for fraudulent concealment based on their sale of equipment to plaintiff they knew had been stolen]). Here, the Mutone defendants do not contest that there was no fiduciary relationship between the parties and the only basis for their assertion of fraudulent inducement/concealment is their claim that the special facts doctrine is applicable to this case. "Under that doctrine, a duty to disclose arises `where one party's superior knowledge of essential facts renders a transaction without disclosure inherently unfair.'" ( P.T. Bank Central Asia v. ABN Amro Bank, N.V., 301 AD2d 373, 378; quoting Chiarella v. United States, 445 US 222, 248). However, as noted by the New York Court of Appeals:

"[i]f the facts represented are not matters peculiarly within the party's knowledge, and the other party has the means available to him of knowing by the exercise of ordinary intelligence, the truth, or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations."

( Danann Realty Corp. v. Harris, 5 NY2d 317, 322). It is based on this principle that courts dismiss claims/defenses of fraudulent inducement/concealment in connection with real estate transactions that involve defects that could have been discovered through an investigation of the property. (See CJF Assoc. of New York Inc. v. Hanson Indus., 274 AD2d 892 [summary judgment properly granted in action involving plaintiff's claim that defendants fraudulently concealed the actual estimated cost of cleaning-up the contaminated property that plaintiff had purchased from defendants]; MT Mtge. Corp. v. Alleyne, 7 AD3d 761, 762 [court erred in failing to grant summary judgment to lender suing on mortgage note since defendant's claims that plaintiff's predecessor-in-interest fraudulently induced her to purchase contaminated property could not stand "since the matters allegedly represented, namely, the value and the condition of the property, were not within the peculiar knowledge of [plaintiff], and [defendant] could have discovered the true nature of the representations through the exercise of her ordinary intelligence or reasonable diligence"]). The cases upon which the Mutone defendants rely are readily distinguishable and do not control the disposition of this issue. (See Stambovsky v. Ackley, 169 AD2d 254, 258 [purchaser of haunted house could seek rescission since "the most meticulous inspection and search would not reveal the presence of poltergeists. . . ."]; Rudolph v. Turecek, 240 AD2d 935, app. denied, 90 NY2d 811 [fact question whether purchaser could have ascertained through an inspection that seller had previously drilled four separate wells none of which produced potable water]; Young v. Keith, 112 AD2d 625 [fraudulent concealment cause of action was stated since it was alleged that the deficiencies in the water and sewer lines could not have been discovered through an ordinary inspection]; Cleangen Corp. v. Filmax Corp., 3 AD3d 468 [seller of laundry business brought motion for summary judgment on its claim of breach of promissory note underlying transaction; summary judgment was denied because there was a question of fact whether seller knew that business was inoperable due to condition of filtration system and whether the problem in the filtration could have been discovered through means of ordinary intelligence]).

Here, the facts are even worse for the Mutone defendants since they were the owners of the property for one year and seven months prior to any money being loaned by Nanuet or BONY. It is somewhat disingenuous for plaintiff to argue that Nanuet and, later, BONY, had obligations to perform environmental investigations on the property that plaintiff already owned and that their failure to do so renders them liable ( i.e., that BONY should be left with no recourse because the Mutone defendants were unaware that the property had virtually no value). The Mutone defendants have cited no case law which supports their position i.e., that a bank is under a duty to perform an environmental investigation on property already owned by the mortgagee prior to issuing a mortgage, and that the failure to do so renders the bank culpable for fraudulent inducement/concealment in the event the property turns out to be contaminated. The only cases cited by the Mutone defendants for this proposition have to do with a bank's potential liability under CERCLA. However, under that statute and the relevant case law, it is clear that a bank is only liable for the cleanup costs if the bank forecloses on the property, or if there is evidence that the bank was involved in the property's management. Here, there have been no facts asserted to suggest that either scenario applies, and, therefore, BONY would be under no obligation under CERCLA to contribute to the cleanup costs. The Mutone defendants have not offered any evidence that Nanuet or BONY undertook any environmental investigation and even if BONY had conducted a Phase I investigation, BONY is not liable under the special facts doctrine since the Mutone defendants had equal access to conduct their own investigation of the property to ensure that BONY would be able to recover the full amount due under loans through a mortgage foreclosure, rather than having to resort to payment pursuant to the guarantee.

Given the Mutone defendants were in possession of the property at all relevant times, the Court has to assume that the Mutone defendants would have had knowledge of a Phase II study should Nanuet or BONY had conducted one at the several times loans were made and the mortgages/guarantees were executed.

Finally, the Mutone defendant's cross-motion for a stay so that they may engage in discovery is denied. As outlined above, the disclaimer language bars this action. Therefore, regardless of whether the Mutone defendants were successful in uncovering a paper trail evidencing BONY's knowledge of the contaminated condition of the property prior to the Mutone defendants' execution of the guarantees, BONY may not be found liable for fraudulent inducement/concealment. Accordingly, the Court denies the Mutone defendants' cross-motion seeking a stay of this motion for summary judgment pending further discovery. ( First City National Bank Trust Co. v. Heaton, 165 AD2d 665).

Based upon the foregoing, it is hereby

ORDERED, that plaintiff's motion for summary judgment is granted; and it is further

ORDERED, the Mutone defendants' cross-motion for leave to amend their answer to assert the defense of fraudulent inducement/concealment and to stay the motion for summary judgment pending discovery is denied; and it is further

ORDERED, that parties with their counsel are directed to appear before the undersigned for an inquest on damages to be held on September 8, 2005 at 10:00 a.m.

The foregoing constitutes the Opinion, Decision, and Order of the Court.


Summaries of

BANK OF NY v. BRAM MFG. CORP.

Supreme Court of the State of New York, Rockland County
Jul 20, 2005
2005 N.Y. Slip Op. 51130 (N.Y. Misc. 2005)
Case details for

BANK OF NY v. BRAM MFG. CORP.

Case Details

Full title:BANK OF NEW YORK, Plaintiff, v. BRAM MANUFACTURING CORPORATION, EDWARD…

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

Date published: Jul 20, 2005

Citations

2005 N.Y. Slip Op. 51130 (N.Y. Misc. 2005)