Opinion
0583-07.
Decided April 16, 2008.
Lemery Greisler LLC, Attorneys for Plaintiff, (Paul A. Levine, of counsel), Albany, New York.
Bosman, Jeffers Associates, PLLC, Attorneys for Defendant Aspen Hills II, LLC, (T. Padric Moore, of counsel), Albany, New York.
DeGraff, Foy Kunz, LLP, Attorneys for Defendant Luigi Cicero, (Andrew B. Amerling, of counsel), Albany, New York.
Plaintiff First Niagara Bank ("FNB") moves pursuant to CPLR 3212 for an order: (a) declaring that it has a superior right to certain funds held in escrow; (b) dismissing the counterclaim of defendant Aspen Hills II, LLC ("Aspen") for breach of contract; and (c) awarding it reasonable attorney's fees, costs and expenses. Plaintiff also moves pursuant to CPLR 3025 (b) and 1002 (b) for leave to serve an amended complaint adding certain individual loan guarantors as parties to this action.
Defendants Aspen and Luigi Cicero oppose FNB's motions. In addition, defendant Cicero moves for summary judgment, seeking a declaration that his lien on the escrowed funds has priority over FNB's lien.
BACKGROUND
Defendant Aspen is the developer of certain residential real property located in the County of Fulton, including the Aspen II subdivision ("the subdivision"). Aspen sold two lots in the subdivision (referred to as Lots 17 and 18) to certain purchasers for the sum of $187,000.
FNB has a first mortgage on Lots 17 and 18 (and certain other portions of the subdivision) in the original principal amount of $155,000. The FNB mortgage was recorded in the Fulton County Clerk's Office on January 18, 2005. The mortgage secures repayment of a note dated January 12, 2005 delivered by Aspen in connection with FNB's financing of certain infrastructure improvements to the subdivision.Aspen later borrowed funds from Cicero to finance the construction of homes on Lots 17 and 18. In connection therewith, Cicero obtained a mortgage dated March 25, 2005, in the original principal amount of $480,000. Cicero's mortgage was recorded on July 1, 2005 in the Fulton County Clerk's Office.
FNB is the successor to Hudson River Bank Trust Company. All references to FNB in this Decision Order shall also be deemed to refer to its predecessor.
On October 23, 2006, Aspen delivered a "Time Note" to FNB in the original principal amount of $100,000 to finance additional infrastructure improvements. FNB contends that due to a cross-collateralization provision, its first mortgage serves as collateral security for repayment of the Time Note. On that basis, FNB argues that repayment of the Time Note takes priority over Cicero's mortgage, which was recorded after FNB's mortgage but prior to the advance of funds pursuant to the Time Note.
In this action, FNB and Cicero each claim priority to the net proceeds of the sale of Lots 17 and 18. In order to allow the sale to go forward, the parties agreed to hold the disputed funds in escrow pending resolution of their competing claims. This action, and the instant motions, followed. Oral argument on the pending motions was held on April 2, 2008.
SUMMARY JUDGMENT
It is well established that summary judgment is a drastic remedy and should only be granted if there are no material issues of disputed fact ( Sillman v. Twentieth Century Fox Film Corp., 3 NY2d 395). In evaluating a motion for summary judgment, a court should simply determine whether material issues of disputed fact preclude the grant of judgment as a matter of law ( S. J. Capelin Assoc. v. Globe Mfg Corp., 34 NY2d 338). The party moving for summary judgment has the initial burden of coming forward with admissible evidence to support the motion, so as to warrant the Court directing judgment in movant's favor; the burden then shifts to the opposing party to demonstrate, by admissible evidence, the existence of any factual issue requiring a trial of the action ( see Zuckerman v. City of New York, 49 NY2d 557).
A. Time Note as Security for FNB's Mortgage
As an initial matter, the Court rejects defendants' contention that the Time Note is not secured by FNB's mortgage. Paragraph 25 of FNB's first mortgage provides as follows:
This mortgage is given as, and is expressly intended to be, continuing collateral security for not only the payment of the indebtedness first above set forth [$155,000], but also for any other indebtedness of the Mortgagor [Aspen] to the Mortgagee[FNB], now existing or hereafter arising, created directly or indirectly or acquired by assignment or arising from any endorsement, guaranty, mortgage or otherwise, whether primary, secondary, contingent and whether due or not.
This broad language plainly encompasses the additional indebtedness of Aspen to FNB represented by the Time Note. While defendants correctly observe that the Time Note does not itself contain an express representation that it is secured by the first mortgage, nothing in the future advance clause of the FNB mortgage requires (or contemplates) such a representation. Further, any failure on the part of FNB to pay mortgage recording tax on the Time Note would not affect the validity of its mortgage; it simply would mean that FNB would have to satisfy its tax obligation prior to obtaining a final judgment enforcing its mortgage interest ( see Tax Law § 258; see Commonwealth Land Tit. Ins. Co. v. Lituchy, 161 AD2d 517 [1st Dept 1990]).
B. Default
Next, the Court addresses Aspen's argument that it has succeeded in raising triable issues of fact with respect to its alleged default under the Time Note. In its opposition papers, Aspen concedes, as it must, that plaintiff has demonstrated a prima facie entitlement to judgment as a matter of law by offering proof of the mortgage, note and evidence of default ( see Hoffman v. Kraus, 260 AD2d 435 [2d Dept 1999]). However, Aspen relies on affirmative defenses sounding in waiver, estoppel and unconscionable conduct. These defenses relate to Aspen's contention (and counterclaim) that FNB wrongfully accelerated its debt under the Time Note. In this connection, Aspen offers the affidavit of Robert A. Bosman, a member of the company, who avers that FNB represented that if Aspen's account was made current, the note would not be accelerated. Bosman further avers that Aspen relied upon this representation to its detriment.
The Court concludes that these defenses, even if proven, are not material to the determination of whether Aspen is in default. By its terms, the Time Note matured on "May 1, 2007 when the Borrower [Aspen] shall pay the Holder[FNB] the Outstanding Principal Amount and all other amounts payable pursuant to this Note and remaining unpaid." The failure to pay the note upon maturity clearly is an event of default. Thus, even if FNB were foreclosed from pursuing the March 29, 2007 default under principles of r waiver or estoppel, the Time Note has since matured without payment. Thus, there can be no genuine dispute regarding Aspen's default.
In light of this conclusion, there is no need, at least at this juncture, to consider the details of Aspen's affirmative defenses or the other alleged events of default identified by FNB. Further, contrary to Aspen's contention, even if FNB's acceleration constitutes a breach of contract, Aspen would not be relieved of its obligation to repay sums due under the Time Note (though such sums may be offset by damages awarded to Aspen on its counterclaim).
In reaching this conclusion, the Court necessarily rejects Aspen's argument that it was obliged to repay, at most, only $20,000 of the principal balance of the Time Note from the proceeds of the sale of Lot 17. In making this argument, Aspen relies upon a proviso in the Time Note stating that "an additional paydown of $20,000, $50,000 and $30,000 will be required when the homes on lot No. 17, #26 and #27, respectively are sold . . ." (emphasis added). It is apparent that Aspen's obligation to make these additional principal payments is relevant only to the period prior to May 1, 2007, when the note did not call for any repayment of principal. To hold otherwise would render the express maturity date of the Time Note superfluous. Further, under Aspen's construction, such payments would not be "additional" repayments of principal; rather, they would represent the only repayment of principal called for in the Time Note.
C. Alleged Invalidity of Cicero's Mortgage
Before reaching the priority issue that lies at the heart of this case, the Court will address FNB's contention, made for the first time in its reply papers, that the Cicero mortgage is invalid for two independent reasons: (1) the mortgage was for construction financing, and Cicero does not contend that he recorded a building loan contract as required by Lien Law § 22; and (2) at the time the mortgage was recorded, Cicero had not loaned any money to Aspen and the mortgage does not contain a future advance clause.
In a supplemental affidavit, Cicero has produced the recorded Building Loan Agreement ("the Agreement"). Having examined such Agreement, FNB now asserts that Cicero's mortgage is not secured by Lots 17 and 18. Plaintiff bases this argument on portions of the Agreement that refer to the "property commonly known as Lots 2, 5 and 28", state that the Aspen "desires to build three houses on the property described above" and grant to Cicero the right under the companion mortgage to sell "the property described earlier in this agreement and any building on it" in the event of default. Accordingly, plaintiff contends that the Cicero mortgage, into which the Agreement is incorporated, constitutes a lien only on the three specific lots described in the Agreement.
However, the Agreement states that it was intended to "establish guidelines for the use of money that is being borrowed for the construction of three houses in the Aspen Hills Subdivision." Further, it provides a legal description of "the property" that includes the entire subdivision, including Lots 17 and 18. This legal description is identical to the property description set forth in the mortgage instrument. Reading the Agreement as a whole, the Court concludes that the references to Lots 2, 5 and 28 in the Agreement were intended only to ensure that the proceeds of the construction loan were used to construct homes on the specified lots and that these references were not intended to trump the legal description of the property set forth in both the mortgage and Agreement.
While FNB argues in its moving papers that Cicero could not have intended to take a lien on the entire subdivision, including lots sold or otherwise dedicated prior to the mortgage, the Court does not agree. A more plausible reading of the Agreement and mortgage is that Cicero intended to secure the broadest lien possible over Aspen's interest in the entire subdivision to secure its construction loan.
With respect to FNB's argument that the mortgage is invalid because Cicero had not loaned any money to Aspen at the time it was recorded and the mortgage does not contain a future advance clause, the Court concludes that summary judgment must be denied. This argument turns on factual issues that were not fully developed in the instant motion practice, and it would therefore be inappropriate to grant summary judgment on that basis.
D. Mortgage Priorities
In State Bank of Albany v. Fioravanti ( 51 NY2d 638, 643-644), the Court of Appeals addressed the use of a clause in a mortgage that provides continuing security for future loans:
Mortgages for future advances or obligations, recognized by English law since at least 1716, have likewise been long recognized in New York. Generally such mortgages fix the amount up to which future loans are secured though they may be equally valid when no amount is fixed or limit set. Of importance also, concerning priority of the mortgage as against subsequent encumbrancers is whether the making of future advances is obligatory or optional, the mortgagee being given priority as to all advances up to the stated sum under an obligatory provision but only as to those advances made prior to receipt by him of notice of the subsequent lien when the making of advances is at his option. . . .
Though distinguishable from the future advance provisions above referred to in that the parties usually have neither a plan of future advances nor a fixed sum in mind when the mortgage is executed, a provision of the type in question in the present case is conceptually also a mortgage for future advances because it will cause the mortgage to secure not only the note or bond to which it refers but also other notes executed or indebtednesses incurred by the mortgagor or mortgagors. Such provisions, inserted by the lender to give itself first call upon the security for future loans are couched in different language than the future advance provisions above referred to and are often referred to as "dragnet" clauses. Though looked upon with disfavor in some States and never referred to in our decisions by the term "dragnet" or previously distinguished by us from future advance provisions of the type first discussed above, we have in Farr v Nichols ( 132 NY 327) enforced such a provision against a later mortgagee of the same. . . . (internal citations omitted and emphasis added).
It is undisputed that the advances made by FNB pursuant to the Time Note were optional. Therefore, under the framework described in State Bank of Albany, it is clear FNB has priority as to advances made prior to notice of Cicero's mortgage. The parties disagree, however, as to whether actual notice is required or whether constructive notice will suffice, since the decision speaks only of "notice".
However, as Cicero correctly observes, earlier authorities, including Farr v. Nichols, which the Court of Appeals cited and relied upon in State Bank of Albany, confirm that "notice, actual or constructive, of the existence of the [subsequent] mortgage" is sufficient, as a general matter, to divest the first mortgagee of priority ( Farr, supra, at 330; see also Ackerman v. Hunsicker, 85 NY 43, 46 [no claim of actual notice; recording of judgment lien held insufficient to establish constructive notice]).
Plaintiff, however, seeks to distinguish these authorities by directing the Court's attention to paragraph 24 of the FNB mortgage, which provides as follows: "No secondary financing shall be permitted without the prior written consent of the Mortgagee[FNB] and the creation of any such lien without the prior written consent of the Mortgagee shall be an event of default." It is undisputed that Aspen entered into the Cicero mortgage in violation of this covenant and that Cicero had constructive knowledge of this covenant (at a minimum), since it is was included in the recorded mortgage instrument. On this basis, FNB argues that Cicero's mortgage should be denied priority or, at the very least, that FNB should not be charged with constructive knowledge of the subsequent mortgage.
The Court cannot agree that Cicero should be deprived completely of its lien rights under these circumstances. The covenant itself provides only that Aspen's breach constitutes an event of default under the mortgage (to which Cicero is not party). If FNB elected to make an optional advance with actual knowledge of Cicero's mortgage (and thus of Aspen's breach), it cannot maintain a legitimate claim of priority to the escrowed funds.
The Court does, however, see merit in FNB's contention that it should not be chargeable with constructive knowledge of Cicero's mortgage. Given Aspen's recorded covenant against obtaining additional financing without FNB's prior consent, it is apparent that: (a) Aspen had actual knowledge that it was violating FNB's mortgage by obtaining financing from Cicero; (b) Cicero had, at the very least, constructive knowledge that its mortgage was given in contravention of Aspen's obligation to FNB; and (c) FNB had no occasion to inquire into subsequent liens on the property when making the additional advance, having previously bargained for a commitment from its borrower that no such liens would be forthcoming without its prior written consent.
Based on these considerations, the Court concludes that FNB's first mortgage has priority over Cicero's mortgage unless FNB had actual notice of Cicero mortgage when it advanced funds to Aspen under the Time Note.
In support of FNB's contention that it lacked actual notice, Richard Roberts, a bank officer, avers that FNB did not learn of Cicero's mortgage or his involvement in the project at least until July 2005. In opposition, Bosman avers that he "expressly told Richard Roberts that there was a construction loan and mortgage on Phase I" prior to obtaining an advance of funds from FNB under the Time Note. Based on the sharp factual dispute between the Roberts and Bosman affidavits, it is clear that summary judgment on the issue of actual notice is inappropriate.
LEAVE TO AMEND
Plaintiff also moves for leave pursuant to CPLR 3025 (b) and 1002 (b) to serve an amended complaint adding individual loan guarantors as defendants in this action. Aspen opposes the motion.
Leave to amend pleadings "shall be freely given upon such terms as may be just . . ." (CPLR 3025 [b]). "Leave to amend a pleading is discretionary and trial court orders generally will not be disturbed where there is no prejudice or surprise to the nonmoving party resulting from the delay and the proposed amendment is not plainly lacking in merit" ( Turner v. Caesar , 2 AD3d 1086 , 1087 [3d Dept 2003]).
The Court finds that Aspen has failed to offer any persuasive justification for denying FNB leave to amend its complaint. Aspen's claim that it would be prejudiced by plaintiff's delay in naming these additional parties is without merit. This action was commenced on July 26, 2007 less than nine months ago and in view of the Court's denial of the parties' cross-motions for summary judgment, the case remains at a relatively early stage. Further, Aspen has failed to demonstrate how it would be prejudiced by the theories of liability that plaintiff seeks to assert against the alleged guarantors. Finally, the interest of judicial economy would be served by having an action against the guarantors adjudicated in the same action as the claims against the principal.
CONCLUSION
Accordingly, it is
ORDERED that plaintiff's motion for summary judgment is denied in accordance with the foregoing; and it is further
ORDERED that defendant Cicero's motion for summary judgment is denied in accordance with the foregoing; and it is further
ORDERED that plaintiff's motion for leave to serve an amended complaint adding individual loan guarantors as defendants is granted.
This constitutes the Decision and Order of the Court. All papers, including this Decision and Order are returned to counsel for plaintiff. The signing of this Decision and Order shall not constitute entry or filing under CPLR Rule 2220. Counsel is not relieved from the applicable provisions of that Rule respecting filing, entry and Notice of Entry.