Opinion
[692 N.Y.S.2d 70]Todd C. Steckler, of counsel (Richard S. Fries, on the brief, Bachner, Tally, Polevoy & Misher, L.L.P., attorneys) for plaintiff-appellant,
Claude Castro, of counsel (Castro & Karten, attorneys) for defendants-respondents.
ERNST H. ROSENBERGER, J.P., EUGENE NARDELLI, PETER TOM and RICHARD T. ANDRIAS, JJ.
TOM, J.
Plaintiff-appellant seeks foreclosure on a consolidated $700,000 mortgage which was to be secured by premises located at 289 Seventh Avenue in Manhattan. However, due to a scrivener's error, the deed tendered as security for the mortgage misidentified the premises by reference to the adjacent premises. Hence, when the lender called the note on the consolidated loan, which had incorporated two prior mortgages correctly referencing the secured premises, the present owner asserted as a defense that it did not own the secured premises. On this basis, the IAS court declared the mortgage to be a nullity and dismissed the complaint, and lender's successor appeals.
The narrative facts of this appeal are complicated by the multiple transfers of the same property, oftentimes between interests controlled by the same principal, and the multiple loans taken out against the same property. The property was originally owned by Kenneth Moses. Moses executed a mortgage, duly recorded, for $250,000 in favor of MRH Estates, Inc., in 1982. The MRH mortgage was assigned to one Michael Ettinger in 1983, who then assigned his interest in the mortgage to American Savings and Loan Association on April 4, 1984. At this time, the indebtedness remaining on the MRH mortgage was $222,000. On or about April 4, 1984, Moses transferred title to Dromin [692 N.Y.S.2d 71] Realty, Inc., an entity controlled by him. Dromin then refinanced the property, borrowing approximately $213,000 from American Savings, which was consolidated with the prior loan, totaling $435,000. Also on April 4, 1984, Dromin executed a mortgage in the consolidated loan, now as a single lien, in favor of American Savings, identifying 289 Seventh Avenue as the secured premises. This mortgage, too, was duly recorded. Then, Dromin immediately transferred title to the premises, by deed, back to Moses, subject to the Dromin mortgage of $435,000. It is undisputed that this loan correctly identified and secured the appropriate premises.
Moses sought to refinance the property again in 1987. To accomplish this, Moses formed Garav Realty, Inc. On May 22, 1987, Moses purported to transfer title to the property to Garav. However, this deed mistakenly identified the premises to be 291-293 Seventh Avenue, adjacent to his premises at 289 Seventh Avenue, and further described the premises by the metes and bounds describing 291-293 Seventh Avenue which, of course, Moses did not own, and therefore, was powerless to convey. In furtherance of this refinancing, he had entered a March 24, 1987 commitment agreement, again with American Savings, in which the lender agreed to a total indebtedness of $700,000 on the property, secured by a first mortgage. Moses executed the agreement on behalf of Garav. Dromin was not a party to the agreement. As a practical result, Moses was borrowing an additional $278,074.20, which, when consolidated with the outstanding indebtedness on the Dromin mortgage, totaled $700,000, but there still remained separate obligors. The closing for the mortgage occurred on May 22, 1987, after Moses purported to convey the premises, incorrectly described in the deed, to Garav, after which the new funds were released to Garav as premises owner. Garav executed and delivered a note and simultaneously a mortgage to American Savings. The Garav mortgage, also duly recorded, correctly described the mortgaged premises. Garav then executed and delivered a deed, also recorded, back to Moses, but this deed contained the same error in address and description as had the deed previously passed from Moses to Garav. Technically, then, Moses still owned the property--which had not successfully been conveyed from him to Garav,--but Garav was the indebted party, with the indebtedness secured by property not owned by either party.
The Garav mortgage instrument specifically provided that the parties (i.e. Garav, by Moses, and the lender) agreed that the liens from the prior three mortgages were "combined, consolidated and coordinated so that together they shall thereafter constitute in law but one (1) mortgage and a single lien, securing this principal sum of seven hundred thousand ($700,000) and 00/100 dollars and interest upon the property first set forth above ...". Dromin was not a party. The mortgage correctly identified the mortgaged premises. The mortgage was recorded as a lien against that parcel, whereas the deeds were recorded against the adjacent, incorrect, parcel.
In 1990, Moses, still the owner, borrowed again, this time from one Edward Edelman, presently a defendant-respondent on this appeal. This loan, for $499,900, was secured by a second mortgage on the property. The Edelman mortgage was specifically made "subject and subordinate to the lien of the existing first mortgage[s] in the sum of $700,000 [the Garav mortgage] ... and to any mortgage or consolidated mortgage which may be placed upon the premises in lieu thereof ...". The Edelman mortgage was executed on February 15, 1990. By letter dated August 15, 1990, Edelman demanded payment. Moses defaulted. In lieu of foreclosure, Edelman agreed to take title to the premises, subject to the Garav mortgage. By letter dated July 25, 1991, American Savings consented to the conveyance if it were to be made subject to that lender's first mortgage. By deed dated August 9, 1991, Moses [692 N.Y.S.2d 72] transferred the premises to defendant-respondent Five Star Management, Inc., an entity created and controlled by Edelman. Subsequently, either Edelman or Five Star made monthly payments under the Garav mortgage.
The Garav mortgage matured on June 1, 1992, but the outstanding loan was not satisfied. By letter dated December 31, 1993, American Savings notified Edelman that it would not extend the loan, and that payment was required within 90 days. By letter dated November 28, 1994, Edelman, nevertheless, requested an extension not to exceed one year so that he could secure new financing, which he claimed to have been actively pursuing, to satisfy the mortgage in full. American Savings granted Five Star/Edelman a forbearance until November 28, 1995. During this forbearance period, though, American Savings was placed in receivership with the Resolution Trust Corporation ("RTC"). Upon RTC's termination on December 31, 1995, the FDIC was appointed receiver. By two letters dated November 21, 1996, the FDIC, as assignee of the Garav mortgage, demanded payment from Garav, though directed to Edelman, as mortgagor, and from Five Star as owner of the mortgaged premises. Upon default, the FDIC commenced the present action.
In their answer, defendants asserted as an affirmative defense that the Garav mortgage was a nullity insofar as Garav was never the record owner of 289 Seventh Avenue as evidenced by the deed, and lacked authority to mortgage those premises to American Savings. Parenthetically, this defense, asserted for the first time in the pleadings, does not account for defendants-respondents' assumption, and satisfaction, of monthly mortgage payment obligations. Defendants' answer to the complaint triggered the FDIC's own subsequent investigation, which uncovered the transcription error in the Moses and Garav deeds and the failure to record them against 289 Seventh Avenue. The FDIC then amended the complaint to add a claim seeking reformation of the Garav deed to reflect the correct property description. In the answer to the amended complaint, the defendants asserted the Statute of Limitations as barring reformation, challenged the FDIC's standing to seek reformation and contended that the Garav mortgage did not effectively encumber the mortgaged premises.
Defendants then moved for summary judgment on these grounds, and the FDIC cross-moved, seeking the striking of the affirmative defenses, the grant of a default judgment against Garav and the non-respondent defendants, and the relief demanded in the complaint. FDIC argued that all transactions made clear that Moses had intended to transfer 289 Seventh Avenue to Garav, and that the incorrect description in the deed resulted from a scrivener's error by an associate in the law firm retained to draw the deed, constituting mutual mistake. FDIC also argued that the limitations period for reformation was the later of within six years of the mistake or two years after discovery. FDIC asserted the right to equitable relief entitling it to recover the entire amount of the Garav mortgage, or at least the legal right as a bona fide mortgagee to recover the outstanding debt of $422,000 under the pre-existing consolidated Droman mortgage which remains valid.
The Statute of Limitations for a claim of reformation based upon mistake is six years, accruing on the date of the mistake (CPLR 213 ); (National Amusements v. S. Bronx Dev. Corp., 253 A.D.2d 358, 676 N.Y.S.2d 166). That limitations period applies to scrivener's errors (Wallace v. 600 Partners Co., 86 N.Y.2d 543, 634 N.Y.S.2d 669, 658 N.E.2d 715). The IAS court found the action to be time-barred, a conclusion that we do not disturb. Although we have recognized, though did not apply, a two-year date of discovery accrual for reformation claims based on mistake (Davis v. Davis, 95 A.D.2d 674, 463 N.Y.S.2d 462), under CPLR 203(g), the requisite diligence necessary [692 N.Y.S.2d 73] to thus toll the limitations period is not present here, when the lender possessed the very document containing the mistake.
The court also noted that as among Moses, Garav and American Savings, the parties had "almost certainly" intended to reference 289 Seventh Avenue and to mortgage those premises, that the defective description on the deed was a scrivener's error rather than fraud, and that the application of the Statute of Limitations to bar reformation on the basis of mutual mistake "leads to a seemingly unfortunate and unfair advantage" to the defendants. In granting defendants summary judgment, the court addressed neither the grounds for recovery under the prior liens incorporated into the Garav mortgage nor the request for equitable relief. The IAS court overlooked the enforceability of the liens arising from the properly secured prior mortgages incorporated into the consolidated mortgage in issue, which provides a basis for at least partial recovery. Moreover, the IAS court had a basis to exercise its equitable jurisdiction to enforce the terms of the consolidated mortgage despite the technical defect in documentation, but failed to do so. On these latter two grounds we now reverse and deny summary judgment to defendants and grant summary judgment as to foreclosure to plaintiff.
The facts of this case present a basis to accord FDIC the right in equity to seek foreclosure on the Garav mortgage. Equity generally "will keep an encumbrance alive, or consider it extinguished, as will best serve the purposes of justice. When the holder of a mortgage discharges it, and contemporaneously with the discharge thereof takes a new mortgage ... if it appears that the legal rights of the parties were changed by a mistake, and that such rights can be restored ... without doing injustice to other parties, a court of equity will cancel the discharge and reinstate the mortgage to its prior position" (Rasch, New York Law and Practice of Real Property [2d Ed.], § 33:120, at 559). New York has long recognized that "[a]n equitable mortgage may be constituted by any writing from which the intention so to do may be gathered, and an attempt to make a legal mortgage, which fails for want of some solemnity, is valid in equity, ... a specific lien upon land ... and that an equitable mortgage thus created, is entitled to a preference over subsequent judgment creditors" (Hamilton Trust Co. v. Clemes, 163 N.Y. 423, 428, 57 N.E. 614). Moreover, when the transaction is the lending of money, to be secured by a mortgage, but "the mortgage ... is so defective or informal as fail in effectuating the purposes of its execution, equity will impress upon the land ... a lien in favor of the creditor" (Sprague v. Cochran, 144 N.Y. 104, 111, 38 N.E. 1000). The equitable lien arises from the loan, rather than from the formality of the instrument, and it continues in effect until satisfied or waived. In the latter event, waiver historically was not implied "from the fact that the creditor received a mortgage, which, by reason of fraud, inadvertence or mistake, is not effectual to secure a specific lien upon the lands ... nor is the lien merged in any such instrument" (id. at 112, 38 N.E. 1000). Further, reformation was an unnecessary remedy to effectuate the lien; rather, the creditor was entitled to foreclose against the property (id.). More recently, the Court of Appeals has correlated the enforceability of an equitable lien with the existence of an agreement, either express or implied, identifying the property that is the security for the loan (Teichman v. Community Hosp. of W. Suffolk, 87 N.Y.2d 514, 520, 640 N.Y.S.2d 472, 663 N.E.2d 628). The documentary evidence in this case, notwithstanding a glitch in a deed, sufficiently establishes the existence of the loan, the intent that it be secured by certain premises, the identification of those premises as 289 Seventh Avenue, and Moses's obligation, despite his shell game in connection with refinancing, to satisfy the debt by a date certain, so as to preclude summary judgment. The record also sufficiently explains how, if not why, the [692 N.Y.S.2d 74] glitch in the deed occurred, providing further support for the court's exercise of equity. The focus of the analysis must be on the loan, and proof thereof, supported in this case by the mortgage instrument correctly identifying the mortgaged property and by additional documentation. Hence, the fact that a defective deed was recorded in connection with the mortgage becomes considerably less significant and does not justify awarding defendants summary judgment.
Even if we did not reverse as to recovery of the entire mortgage amount, we still would have done so in connection with the pre-Garav debt. The rights of a mortgagee are generally fixed at the time the mortgage is executed, and can be neither enlarged nor impaired by subsequent acts of the mortgagor (V.R.W. Inc. v. Klein, 68 N.Y.2d 560, 566, 510 N.Y.S.2d 848, 503 N.E.2d 496). A consolidation of outstanding loans is a device intended for the convenience of only the contracting parties. A consolidation agreement cannot impair liens in favor of parties that are not the contracting parties, which retain their independent force and effect (see generally, Dime Sav. Bank v. Levy, 161 Misc.2d 480, 615 N.Y.S.2d 218; Dominion Financial Corp. v. 275 Washington Street Corp., 64 Misc.2d 1044, 316 N.Y.S.2d 803). Hence, the consolidation of the Dromin loan with the Garav loan, both secured by their respective mortgages, leaves unaffected the priority of the Dromin lien over subsequent interests. Despite reference in the Garav mortgage instrument to merging all liens, Dromin and Garav, after all, were different entities, notwithstanding that they acted as Moses' alter egos. Stated another way, whether or not the Garav transaction was flawed does not affect the viability of the first borrower's obligation, or that of its successor-in-interest, to repay the Dromin loan to the lender or to its successor-in-interest. By this logic, the Dromin mortgage, although purportedly consolidated with the Garav mortgage, nevertheless did not affect the priority of the Dromin lien over the latter-created Edelman/Five Star interests. The assignee of the Droman interests, then, in this case FDIC as assignee of American Savings, has the right to foreclose as to the $422,000 remaining Droman debt. The propriety of this result is underscored by the explicit agreement by Five Star to subordinate its interests to the pre-existing liens. To strictly construe the defective description in the Moses/Garav deeds to allow Moses to receive back the property free and clear of the consolidated debt, assumed, unsecured, by Garav, for which Moses acted as principal, also would unjustly enrich Moses and his successors-in-interest, in this case Five Star.
The ample documentary record evidence requires not only that summary judgment be denied to defendants, but also that it be granted to plaintiff.
Accordingly, the order of Supreme Court, New York County (Helen Freedman, J.), entered on or about October 16, 1998, granting defendants' motion for summary judgment dismissing the complaint and denying plaintiff's cross-motion, should be reversed, on the law, without costs, defendant's motion denied, the complaint reinstated, and the cross-motion granted to the extent of awarding plaintiff summary judgment on the first cause of action for foreclosure and remanding the matter for further proceedings, including the calculation of the amount due.
Order, Supreme Court, New York County (Helen Freedman,J.), entered on or about October 16, 1998, is reversed, on the law, without costs, defendant's motion for summary judgment dismissing the complaint denied, the complaint reinstated, plaintiff's cross-motion granted to the extent of awarding it summary judgment on the first cause of action for foreclosure and the matter remanded for further proceedings, including the calculation of the amount due.
All concur.