Opinion
2002-165.
Decided February 5, 2005.
Hancock Estabrook (Ashley D. Hayes, Esq., of counsel), attorneys for Plaintiff; Robin R. Merrill, Defendant, pro se; Hughes Stewart, P.C. (Bryan J. Hughes, Esq., of counsel), attorneys for Defendant Alice Hyde Medical Center.
In this mortgage foreclosure action, Plaintiff (or "the bank") moves for summary judgment following discovery. Defendant Merrill ("Defendant" or "Merrill"), representing himself pro se, opposes the motion, alleging he has raised sufficient questions of fact which require resolution by a fact finder. It should be noted that by Decision and Order, dated October 1, 2003, this Court vacated Plaintiff's earlier default judgment appointing a Referee to compute, permitting Defendant to interpose a late Answer. During the intervening time, the parties have engaged in voluminous discovery. Relying on, among other things, Defendant's own testimony from his Examination Before Trial (EBT), Plaintiff contends it is entitled to judgment as a matter of law.
The following submissions have been considered: Plaintiff's Notice of Motion, dated December 10, 2004, together with affirmation of counsel, Ashley Hayes, Esq., dated December 10, 2004, with attached exhibits and a memorandum of law, dated December 10, 2004, and the affidavits of J. Richard Baker, sworn to December 9, 2004 with attached exhibits, and Thomas F. McDonald, sworn to December 9, 2004; Defendant's affidavit in opposition, sworn to January 5, 2005 with attached exhibits; Plaintiff's counsel's Reply Affirmation, dated January 12, 2005 with attached exhibit, Reply Affidavits of Thomas F. McDonald, sworn to January 12, 2005 with attached exhibit, J. Richard Baker, sworn to January 12, 2005 with attached exhibits, and John T. Morgan, sworn to January 12, 2005 with attached exhibits; and, Defendant's Sur-Reply Affidavit, sworn to January 19, 2005. The Court entertained oral arguments at its January 14, 2005 Special Term and thereafter received correspondence in relation to the parties' submissions in late January 2005.
Defendant and Plaintiff established a business relationship in late June 1999 when Merrill sought and was granted financing to purchase a local dairy farm in Franklin County with two separate $120,000.00 loans. One loan represented the real estate purchase ("1999 Note" and "1999 Term Loan Credit Agreement"), while the other represented the purchase of the equipment and dairy herd ("Second 1999 Note" and "Second 1999 Term Loan Credit Agreement"). In connection with the real property purchase, Merrill executed a Collateral Security Mortgage in the original principal sum of $120,000.00, mortgaging to Plaintiff his interest in real property. This mortgage secured:
". . . payment of any and all Indebtedness . . . the maximum principal amount of Indebtedness secured. . . . is the amount stated above . . . if the amount of Indebtedness outstanding at any one time exceeds said maximum amount secured, all payments in reduction of the Indebtedness shall be applied first to such excess not secured hereby and a lien of this Mortgage shall continue until Indebtedness secured hereby, including outstanding contingent liabilities, is finally and irrevocably paid in full."
The Mortgage further defined the indebtedness' secured thereby as constituting any and all ". . . other liability of Mortgagor to Mortgagee of every kind and character and all extensions, renewals and replacements thereof: (i) now existing or hereafter incurred." Moreover, ". . . non-payment, when due, of any part of the Indebtedness or any sum payable according to the terms of this Mortgage . . ." constitutes "an event of default" thereunder. The validity of these two originating loans is not in dispute. Plaintiff's February 2002 complaint alleges Merrill's default under the 1999 Note, the 1999 Term Loan Credit Agreement, the Mortgage, the Agricultural Loan Agreement, the Second 1999 Note, the Second 1999 Term Loan Credit Agreement, the Second Agricultural Loan Agreement owing to his failure to pay the full installment of principal and interest on those obligations due on December 1, 2000, and thereafter. In this regard, the 1999 Note and the Second 1999 Note permit declaration of the Notes as being "immediately due and payable" upon ". . . non-payment when due of principal or interest or any indebtedness evidenced by this Note. . . ." Similarly, the 1999 Term Loan Credit Agreement and Second 1999 Term Loan Credit Agreement specify an event of default as "nonpayment when due, whether by acceleration or otherwise, of principal of or interest on any indebtedness created hereunder. . . ." [ sic].
In January 2001, Merrill reaffirmed his indebtedness on the1999 Note, reducing his interest rate.
In January 2001, Merrill reaffirmed his indebtedness on the Second 1999 Note, reducing his interest rate.
Merrill takes exception to certain allegations in Plaintiff's February 2002 complaint: the validity of the December 1, 2000 Optional Advance Time or Demand Grid Note ("2000 Note") wherein the maximum principal amount of advances was not to exceed $54,000; and, the validity of the January 11, 2001 Variable Interest Time or Demand Note ("2001 Note") in the original principal sum of $47,000.00. It is alleged that the principal amount due and owing, $5,609.95 plus interest, under the 2000 Note remains due and owing despite Plaintiff's demands. Similarly, it is alleged that, in accordance with the specific terms of the 2001 Note, its $47,000.00 principal balance was declared due and payable upon Merrill's failure to pay the full installment of principal and interest due on February 1, 2001, also constituting an event of default as defined by the 2001 Term Loan Credit Agreement.
In connection herewith a January 11, 2001, Term Loan Credit Agreement ("2001 Term Loan Credit Agreement") was executed.
" . . . non-payment when due, whether by acceleration or otherwise, of principal of or interest on any indebtedness created hereunder . . ." [ sic].
Plaintiff also seeks to foreclose on the parties' June 25, 1999 Security Agreement covering cattle, supplies and equipment. Further, Plaintiff requests a ". . . money judgment in an amount equal to the Indebtedness pursuant to the Notes, Term Loan Credit Agreements, and Agricultural Loan Agreements . . . less the amount secured by the Mortgage." This latter relief is premised upon the Mortgage language which specifically states ". . . Mortgagor hereby waives any defense based upon a claim that . . . Mortgagee is splitting its cause of action if it seeks to foreclose this Mortgage for part of the Indebtedness and recover at law for another part."
Merrill previously sold his cattle at auction and the proceeds were applied to his outstanding debt.
The following pertinent facts are gleaned from Merrill's EBT. Merrill testified that the two 1999 loans (representing his purchase of the farm's real property; and, cattle/equipment) were paid directly from his milk check (received every two weeks) by assignment and that he never disputed these deductions made by the accounting personnel at the dairy co-operative to which he sold the entirety of his milk production. Although Merrill does not dispute that he received some advances' from Plaintiff, two for the purchase of cattle ($15,0000 and $12,000) and one for tractor repairs ($9,500 paid directly to the repair shop), representing approximately $36,000, he disputes the advances totaled approximately $54,000, so as to form the basis for the 2000 Note. In this regard, he stated that he made monthly payments to the bank on the "line of credit to buy the cows . . . out of [his] personal farm account at around the 20th of each month" [Merrill EBT p. 72 13-15], relying on the bank's staff to tell him how much to pay. While he does not dispute the signature on the 2000 Note as being his, he denies knowing the document's purpose or having seen the document in its entirety: "There's no saying what paper it is or anything. Anybody could write one of them up and stick it in some place." (Merrill EBT p. 51 lines 21-23).
Merrill testified at his EBT that his financial problems were a result of his dairy cattle's breeding pattern during the Summer of 2000, resulting in a significant decline in milk production during the approximate five to seven months thereafter. He ascribes the necessity to breed the cows during this three-month window to the fact that "they were all backwards cows when I had them, bought them." Id. p. 64 lines 24-25. He further testified that "backwards" meant the cows hadn't been bred for "two years" and as a result ". . . were all going to stop producing [milk] at the same time [Fall of 2000]." He further stated that since his cows were going to be dry' (non-milk producing), he needed additional funds. To this end, he states that the bank, through its employee Tom MacDonald, told Merrill to go ". . . get a guarantee to buy some more cows." Id. p. 93 lines 3-12; p. 66 lines 3-4.
Plaintiff alleges it assisted Merrill, through its employee Tom MacDonald, in applying for a guarantee from the Farm Service Agency ("FSA"). Merrill did not recall filling out the paperwork, stating ". . . it's pretty simple to get a guarantee from a government agency, not much involved to it." Id. p. 80 lines 3-4. When shown the FSA guarantee application which was completed on his behalf by Tom MacDonald, Merrill denied seeing any other page of the application other than the signature page, but acknowledged the authenticity of his signature. Id. pp. 85-86. For this reason, Merrill denied having seen page 3 which stated the loan's purpose: "Refinance [the bank], U.S.A. Department, previously used for cattle purchases, barn, tractor repair, F.S.A. U.S.D.A. fee, repair pipe line, milking system." Nor did Merrill question the whereabouts or contents of the FSA guarantee application pages 1, 3, and 4 despite the fact that the top right corner of the signature page noted it was "page two of five," demonstrating what may have constituted a disorganized paper shuffle: "I mean, I can hand you anything and say, here, this is for this over here, and throw this in here in the middle, sign these all, we'll thrown them together (demonstrating)." Id. p. 90 pp. 10-13. Merrill testified that no one at either the FSA or the bank made any representations to him as to how much money he was to receive. Id. p. 117.
In early December of 2000, Merrill was advised by letter from FSA that his application was approved, and again approached the bank for funds to go buy cows. Merrill testified that Tom MacDonald stated "Not yet, we're still in the process." Id. p. 97. He flatly denied having ever signed the January 11, 2001, $47,000 FSA-guaranteed 2001 Note, nor the Term Note attached to it, testifying the first time he learned the guaranteed $47,000 had been applied to his prior $54,000 debt, as evidenced by the 2000 Note, was when he was served with the foreclosure papers by the Deputy Sheriff the following month. Id. p. 98. On this point, Merrill testified that an FSA Representative, Bob McCarthy, told him the FSA funds were being used to refinance an existing note Merrill had with the bank, disclosing this only after the funds were used for such refinancing.
Together with the alleged forgery of his signature on the $47,000, January 2001 Note, Merrill further disputes the propriety of the refinancing action taken by the bank: "That's not what it was for." [ Id. p. 105 line 2], objecting to the fact that the funds were intended to go directly to him to purchase new cows. Merrill does not dispute, however, that the proceeds from the guaranteed $47,000, 2001 Note were used to pay down the $54,000, 2000 Note. Id. pp. 115-116. There were no representations made to Merrill as to any particular amount of money being sought. Id. p. 133. It is Merrill's testimony that he did not receive the benefit of the funds because he didn't physically receive the funds or see them [ Id. pp. 109-112]: "I was never issued forty-seven thousand, it says here, but I was never issued that. I never had it in my hands, physically, for my benefit, to buy cows." Id. p. 113 lines 5-8. In connection with the 2001 Note, Merrill was questioned as to whether his signature appeared on the attached purpose statement. While he admitted to having signed the purpose statement, it is his contention that it was blank at the time he signed it and, thus, did not indicate the intended purpose for the funds. In support of his testimony, he again offered testimony, demonstrating actions which amounted to a confusing paper shuffle:
". . . yes, this was put in after the fact, you know. Then again, I can go like this and bring you a stack of papers, not to be rude or anything, but I'm just, you know, look, sign this, you know, you've got something going on here (demonstrating). I think that might have been also the time that I was going to be receiving a farm deferred payment from the Farm Service I'd have to sign for. So, there's a lot of different little irrelevant papers that you have to sign."
Id. p. 120.
With respect to his other defenses to this foreclosure action, Merrill testified that he should have been notified of his default prior to the lawsuit's commencement. Id. p. 131. Although he was unable to offer testimony in support of his affirmative defense, it is his contention that the bank's application of the $47,000 loan proceeds to his $54,000 debt violated New York Banking Law § 673. He supported his unclean hands doctrine' defense with similar testimony, characterizing the bank's use of the proceeds from the $47,000 note to pay down the previously-existing debt as unconscionable conduct. When asked about his Daisy Chain or Ponzi scheme defense, he noted that the previous owner of the farm ". . . was almost ready to falter . . . throwing me in there, letting me operate this place and do stuff [misappropriate $47,000 in funds] without my knowledge . . . they misappropriated [the $47,000 funds], put them here, put them there, I had no say. That's a Daisy Chain to me and I'm not the only victim in this matter . . . I had no say, whatsoever, I'm the grunt. . . ." Id. pp. 136-137. Merrill further testified to fraudulent practices — that the farm was not worth the appraised amount and that fact supported his Daisy Chain defense. He bases this conclusion on the fact that the appraisal done near in time to the foreclosure was $12,000.00 less than when he purchased the farm ". . . and I did all these upgrades." Id. p. 141. He also uses this testimony about the pre-foreclosure 2001 appraisal to support his seventh defense of fraudulent documentation, testifying that the farm was going to be sold for less than for which it was appraised. He also alleged that the potential purchaser was someone who had banked with Tom McDonald for years and was also McDonald's neighbor.
Merrill supports his conversion counterclaim with testimony that the bank didn't make the $47,000.00 loan proceeds accessible to him for use as he saw fit, lamenting "I'd still be farming." Id. p. 154 line 4. His fraud counterclaim is premised upon his banking relationship with McDonald pointing to a "Daisy Chain" or "Ponzi scheme" which resulted in the farm changing ownership hands from its prior owner (Fred Fleury) to himself based on fraudulent appraisals. Merrill testified that he had not taken any appraisal courses nor had any similar experience, nor did he have any documents which supported his claim for fraudulent procurement of appraisals, basing his allegation on the fact that the property was subsequently appraised for less than its original appraisal.
Merrill's allegation of misrepresentation of loan products is based on his claim that the bank's preparation of his financial statements in support of the original 1999 loan and FSA guaranty misstated his assets by inflating them: ". . . saying I had a bunch of cows that I didn't have and had a bunch of this that I didn't have, equipment that I didn't have, to get that. " Id. p. 163, lines 19-21. It is further averred that Tom McDonald, at the bank, filled out Merrill's financial statements including assets that didn't belong to Defendant: a trailer next door to the farm, Merrill's mother's car, and his step-father's tractor. Merrill testified that he didn't know how McDonald came into possession of that information and denied being the source. Although he admits to signing such documents, he testified that they were blank' when executed, the information being filled in by McDonald later.
Plaintiff has fulfilled its burden in establishing a prima facie case upon presentation of its documentary proof — producing the mortgage documents and proof of default, so as to entitle it to foreclosure. For the reasons that follow, Defendant's counterclaims and defenses are insufficient to defeat the relief requested. Metropolitan Distribution Services v. DiLascio, 176 AD2d 312 (2nd Dep't 1991); Snyder v. Potter, 134 AD2d 175 (3rd Dep't 1987). Defendant takes issue with any representation of his testimony that he does not dispute he was in default of his loan obligation. To this end, he argues that the application of the May 2001 cattle auction proceeds ($48,447.51) to his account reduced his principal balance ($182,000.10). Defendant further questions how he can be in default if he did not receive the benefit of the vast majority of advances. Documentary evidence belies both claims. Not only was his account credited with the auction proceeds in May 2001, but the periodic advances appeared on each of his bank statements, having been deposited into his account with the bank. The underlying Mortgage waives the bank's obligation to provide Defendant with notice of his default and the bank's acceleration. Plaintiff commenced a mortgage foreclosure action, it did not elect to sue for breach of contract on the underlying Notes. The Mortgage document specifically envisions seeking a deficiency judgment within a mortgage foreclosure action by its own language, effecting a waiver of any such defense premised upon "splitting a cause of action."
Merrill is held to have read and, thus been bound by the $54,000 Note as evidenced by his signature. James Talcott, Inc. v. Wilson Hoisery Co., Inc., 32 AD2d 524, 525 (1st 1969). There are no allegations he was tricked into signing the Note or prevented from reading the Note in its entirety prior to its execution. Moreover, the unrefuted account statements provided by Plaintiff in support of its motion provide proof of such deposits of the periodic advances into Defendant's bank account. Coupled with Merrill's EBT testimony that the bank also directly paid approximately $9,500 for tractor repairs, there is abundant proof that Merrill did, in fact, receive the benefit of funds extended under the $54,000 Grid Note. Similarly, there is no argument that the proceeds from the FSA-guaranteed $47,000 Note were used to pay down Merrill's debt under the earlier $54,000 Grid Note.
Under this Grid Note, the bank advanced $51,782.45 to pay off the accumulated debt from periodic advances.
Merrill's own testimony falls short of proving either a conversion claim or fraud claim. Defendant, himself, testified that the loan proceeds from the $47,000 FSA-guaranteed Note were, in fact, applied to the prior outstanding Grid Note. Nor was he ever told the FSA-guaranteed loan proceeds of $47,000 would be disbursed directly to him to purchase more cows. Unfulfilled hopes based on unsubstantiated assumptions are neither actionable, nor a sufficient defense to a foreclosure action. Merrill's "understanding" that securing this new FSA loan would enable him to purchase more cows could, just as likely, have arisen from the bank's willingness to lend future proceeds once its earlier advances under the $54,000 Grid Note were replaced with the FSA's guaranteed loan proceeds of $47,000 (carrying a 90% guarantee), thereby assuring Plaintiff that a majority of the debt would be collected were Merrill to default. Defendant immediately learned of the bank's actions which he alleges support his conversion counterclaim. In fact, when he learned the $47,000 proceeds were not being distributed to him to purchase more cows, he determined to cease his farming activities. This counterclaim, having been asserted more than three years after disbursement of the moneys, is untimely as a matter of law.
Defenses premised on a so-called "daisy chain" or "ponzi scheme" are unsupported by the record. In fact, the only proof tendered on this defense is found within Merrill's deposition testimony. Merrill alleges that the Plaintiff's application of the $47,000 loan proceeds to his previously existing debt, without his consent, evidenced a course of conduct in which the bank " . . . took funds, they misappropriated it, put them here, put them there, I had no say. . . . I had no say, whatsoever, I'm the grunt." Merrill EBT 9/8/04 EBT p. 137 lines 11-13, 22. It is also Defendant's assertion that the bank sold the farm to both himself and his predecessor in title, using inaccurate appraisals. Merrill admitted during his deposition that he had no training nor any knowledge of the principles employed by the appraisal industry, nor has he submitted any such expert proof in the context of this motion. Instead, his claim is based upon the bare fact that despite performing upgrades to the property, his farm was worth $12,000.00 less than when the bank foreclosed.
Upon a full review of the record, the only issue which remains is whether Merrill, in fact, signed the $47,000 Note which carried an FSA guarantee. While Plaintiff comes forth with its employee's affidavit stating so, Merrill flatly denies the event. Severance is appropriate. As fact finder, the Court will be called upon to make this determination insofar as the 1999 loan documents and the $54,000 Grid Note contain jury waivers in proper form. Foreclosure actions are actions at equity and thus, triable without a jury. Cohn v. Adler, 139 AD2d 481. Notwithstanding a monetary prayer for relief or request for deficiency judgment — matters incidental to mortgage foreclosure, there is no entitlement to a jury trial as a matter of right in an action to foreclose a mortgage. Jamaica Savings bank v. M.S. Investing Co., 274 NY 215 (1937). Similarly, an assertion of fraud as an affirmative defense to a mortgage foreclosure action does not entitle a party to a jury trial as a matter of right. April M's Enterprises, Inc. v. Scott, 178 AD2d 572 (2nd Dep't 1991).
The foreclosure action should, however, be permitted to proceed insofar as Merrill's default is not solely premised on the $47,000 Note. Plaintiff has tendered proof in evidentiary form of the two original $120,000 Notes and Defendant does not contest the accuracy of the reconciliation sheets, demonstrating his default. Even if the Court were to assume (without deciding) forgery occurred on the $47,000 Note, there is' no dispute Merrill signed the underlying $54,000 Grid Note which was later "paid down" by using the funds received from the FSA guaranteed $47,000 Note. It would appear that Merrill's financial risk remained unchanged as a result of this transaction, whereas Plaintiff stood to better its position by replacing a $54,000 Grid Note with a 90% federally-guaranteed $47,000 FSA Note.
These two Notes were also guaranteed by the Farm Service Agency ("FSA").
Plaintiff's motion is granted insofar as the mortgage foreclosure shall proceed. To the extent Merrill disputes the advances he received under the $54,000 Grid Note, he is entitled to present contrary documentary evidence, if any, to the Referee at the Reference to Compute. Plaintiff is directed to submit a proposed Order of Reference wherein the Court intends to appoint James E. Maher, Esq., 81 Main Street, PO Box 627, Saranac Lake, NY 12983; 518/891-4671, as Referee to take testimony and compute the amount due and owing, unless there be made known any conflicts or objections to this appointment. The forgery issue relating to the $47,000 FSA Note shall be severed and tried by the Court on September 12, 2005, at 9:30 a.m. at the Franklin County Courthouse, Malone, New York.
The foregoing constitutes the Decision of the Court. Plaintiff is directed to submit an Order which conforms with the above.