Opinion
103209/05.
Decided on July 10, 2006.
The plaintiffs in this action are formerly residents of 45 Christopher Street, Unit 7B, in Manhattan. In 1986, West Village Equities ("Sponsor"), the owner of the building, sponsored a plan to convert the building into condominiums. The plaintiffs were given the opportunity to purchase Unit 7B ("Condominium") from the Sponsor, and on or about January 7, 1987 the plaintiffs purchased the Condominium for $217,631.00. The plaintiffs now seek to invalidate and cancel their agreement with the Sponsor as usurious.
Under the terms of the "Fourth Amendment to Offering Plan For Condominium Ownership", plaintiffs were given the opportunity by the Sponsor to finance the purchase of their apartment through one of several options, including a "Sponsor Mortgage" or the "Equity Financing Plan" ("EFP").
Under the "Sponsor Mortgage", the Sponsor agreed to loan money to the purchaser at a fixed rate of 10% per annum for a period of seven years. Under the EFP, the option which plaintiffs utilized, the Sponsor agreed to loan up to 50% of the value of the apartment to a creditworthy purchaser on the condition that upon resale the borrower pay the Sponsor (or Note holder) the same proportionate percentage of the sale price as the Sponsor's loan was to the purchase price.
The plaintiffs financed the purchase with a loan of $104,500.00 from Citibank and a loan of $108,815.50 from the Sponsor. The Citibank loan was secured by a first mortgage on the Condominium, and the Sponsor's loan was secured by a second mortgage. The terms of the financing arrangement with the Sponsor were evidenced by two documents — the Purchase Money Mortgage ("Mortgage"), detailing the terms of the lien given to the Sponsor, and the Purchase Money Mortgage Note ("Mortgage Note") detailing the terms for repayment of the loan.
The plaintiffs, thus, paid only about $5,000.00 in cash to purchase the Condominium.
The Mortage Note provides that in the event the plaintiffs sell the Condominium, the holder of the Note shall be entitled to "an amount equalling the Net Resale Price multiplied by the Equity Percentage."
The Equity Percentage is defined as "the percentage which the Principal Amount bears to the Original Purchase Price". Since the plaintiffs borrowed $108,815.50 and the original purchase price was $217,631.00, the effective Equity Percentage is 50%.
The Mortgage Note also provides that if the plaintiffs repay the loan before the Maturity Date, the holder of the note will be entitled to "an amount equalling the Net Fair Market Value multiplied by the Equity Percentage."
The Maturity Date of the loan was set as the 30th anniversary of the date of the Mortgage Note.
The plaintiffs were not required to make any interest payments on the Mortgage. In fact, in neither the Mortgage or Mortgage Note is there any mention of a fixed, default or implied rate of interest. The Mortgage Note only defines "Interest" as "all sums which [the plaintiffs] must pay to [the Note Holder] in repayment of the loan which are in excess of the Principal Amount."
On or about August 11, 1988 the Sponsor transferred the Note to the defendant for value.
On or about February 10, 2005, the plaintiffs entered into a contract to sell the Condominium for $2,025,000.00. After the defendant sought to collect the $1,012,500.00 it claims to be owed under the terms of the Note, the plaintiffs brought this action to invalidate the agreement as a usurious loan and moved for a preliminary injunction.
By Modified Order dated April 20, 2005, this Court directed, inter alia, that (i) defendant or its counsel deliver to plaintiffs' counsel at the closing of the sale of the Condominium a duly executed satisfaction of the Sponsor Mortgage in recordable form and the original Sponsor Note, and (ii) "that all sums delivered by or on behalf of plaintiffs to or on behalf of defendant at the closing (the "Payoff Funds") shall be paid to defendant and held by defendant in an account located in a banking or financial institution located in New York, New York, pending further Order of this Court or a written agreement of the parties and their counsel which directs the disposition of such Payoff Funds."
The closing took place on April 28, 2005. Plaintiffs then served a First Amended Verified Complaint seeking a judgment: (i) cancelling the Sponsor Note and Sponsor Mortgage as a matter of law, (ii) directing the Clerk of the County of New York to cancel and/or discharge the Mortgage on his books and records, and (iii) directing defendant to pay over to plaintiffs all sums held by defendant (plus accrued interest) pursuant to and in accordance with this Court's April 20, 2005 Order.
Defendant now moves to dismiss the First Amended Complaint in its entirety on various grounds.
Defendant argues in the first instance that the subject agreement represents an equity participation agreement and not a traditional "loan or forbearance" as contemplated by General Obligations Law (GOL) § 5-501 and Penal Law § 190.40, New York's Civil and Criminal usury statutes, respectively, and thus is not subject to the usury laws. See, Orvis v. Curtiss, 157 NY 657 (1899); Seidel v. 18 East 17th Street Owners, Inc., 79 NY2d 735 (1992).
Pursuant to GOL § 5-501(2), "[n]o person or corporation shall, directly or indirectly, charge, take or receive any money, goods or things in action as interest on the loan or forbearance of any money, goods or things in action at a rate exceeding" the authorized rate.
Penal Law § 190.40 ("Criminal usury in the second degree") provides, in relevant part that [a] person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum (emphasis supplied) or the equivalent rate for a longer or shorter period.
The plaintiffs on the other hand, argue that the proper characterization of their agreement with the Sponsor is that of a traditional loan secured by a mortgage and not as an equity investment agreement or joint venture with the Sponsor.
The plaintiffs point to the express language of the Mortgage Note, wherein the terms "borrower" and "lender" are used to refer to the plaintiffs and Sponsor, respectively. The plaintiffs also contend that the use of the terms "mortgage" and "loan" to refer to the financing arrangement supports a construction of the agreement as a traditional loan and mortgage and, therefore, fits the definition of a "loan or forbearance" as intended by GOL § 5-501 and Penal Law § 190.40.
In addition, the plaintiffs contend that it was neither their intent nor that of the Sponsor to enter into any type of joint venture or partnership for the purposes of speculating on the potential appreciation of the Condominium, as evidenced by paragraph 24 of the Mortgage, which provides that:
Nothing contained in this Mortgage or the Note is intended, nor shall it be construed, to create a partnership, agency or joint venture between us or to render either of us liable or responsible for the debts or obligations of the other.
Based on the papers submitted and the oral argument held on the record on October 16, 2005, this Court finds that the proper characterization of the agreement is, in fact, that of a purchase-money mortgage'; namely, "[a] mortgage that a buyer [in this case, plaintiffs] gives the seller [in this case, the Sponsor], when the property is conveyed, to secure the unpaid balance of the purchase price." (Black's Law Dictionary 1029 [7th ed.]).
Defendant alternatively argues that even if the agreement is construed by this Court to be a purchase-money mortgage', the subject Mortgage and Note are exempt from the prescriptions of New York's civil usury statute because a purchase money mortgage does not constitute a loan or forebearance' within the meaning of GOL § 5-501. See, Mandelino v. Fribourg, 23 NY2d 145 (1968); Dallas v. Dallas, 182 AD2d 1039 (3rd Dep't 1992).
However, even though the note is "exempt from the defense of civil usury because given in connection with a purchase money mortgage, it remains subject to the defense of criminal usury ( see, CM Air Sys. v. Custom Land Dev. Group II, 262 AD2d 440, 440-441 . . . [1999])." Babinsky v. Skidanov, 12 AD2d 271 (1st Dep't 2004).
Thus, this Court finds that the subject agreement, although not subject to GOL § 5-501, remains subject to Penal Law § 190.40.
Finally, defendant argues that the Mortgage and Note can still not be found to be criminally usurious because plaintiffs cannot demonstrate the requisite criminal intent. See, Hammelburger v. Foursome Inn Corp., 54 NY2d 580, 594, which held that "[u]sury must be proved by clear evidence as to all its elements and will not be presumed (citations omitted)."
Specifically, defendant contends that in offering the subject financing plan to plaintiffs, the Sponsor merely intended to invest in the potential appreciation of the Condominium and to encourage sales, and that plaintiffs have failed to prove "by clear evidence" that the Sponsor "knowingly" charged, took or received money as interest on the loan exceeding the authorized rate, as required by Penal Law § 190.40
The plaintiffs, on the other hand, argue that usurious intent on the part of the Sponsor may be inferred from the fact that had plaintiffs sold the Condominium (which was offered to non-building residents for $365,000.00) on the same day that they bought it, they would have owed the Sponsor $182,500.00, a profit that would represent an annual interest rate of well over the legal rate. See, Norstar Bank v. Pickard and Anderson, 155 AD2d 911 (4th Dep't 1989), which held that "[u]surious intent may be implied from the charging or receiving of interest greater than the legal rate (citations omitted)."
However, "an agreement to pay an amount which may be more or less than the legal interest, depending upon a reasonable contingency, is not ipso facto usurious, because of the possibility that more than the legal interest will be paid." Hartley v. Eagle Ins., 222 NY 178, 184 (1918). See also, Leibovici v. Rawicki, 57 Misc 2d 141, 145 (Civ.Ct., NY Co. 1968), aff'd, 64 Misc 2d 858 (App. Term, 1st Dep't 1969).
Thus, this Court finds that there is a triable issue of fact with respect to the Sponsor's intent.
Accordingly, defendant's motion to dismiss the First Amended Complaint is denied.
Defendant shall served an Answer to the Amended Complaint within 30 days of service of a copy of this order with notice of entry.
A preliminary conference shall be held in IA Part 12, 60 Centre Street, Room 341 on September 13, 2006 at 9:30 a.m.
This constitutes the decision and order of this Court.