Opinion
29198/10
04-18-2019
NYCTL 1998-2 Trust and THE BANK OF NEW YORK MELLON as Collateral Agent and Custodian, Plaintiffs, v. D & A Equities LLC, Northside Development LLC, Cova Concrete Corp., City of New York Environmental Control Board, Defendants.
Attorney for Plaintiff The Law Offices of Thomas P. Malone, PLLC 60 East 42nd Street, Suite 553 New York, New York 10165 Attorney for Successful Bidder The Rosso Law Firm P.C. 190-21B Jamaica Avenue Hollis, NY 11423 Attorney for MILLNB LLC 521 RXR Plaza East Tower, Suite 521 Uniondale, NY 11556
Attorney for Plaintiff The Law Offices of Thomas P. Malone, PLLC 60 East 42nd Street, Suite 553 New York, New York 10165 Attorney for Successful Bidder The Rosso Law Firm P.C. 190-21B Jamaica Avenue Hollis, NY 11423 Attorney for MILLNB LLC 521 RXR Plaza East Tower, Suite 521 Uniondale, NY 11556 Mark I. Partnow, J.
The following papers numbered 1 to 7 read herein:
Papers Numbered
Notice of Motion/Order to Show Cause/Petition/Cross Motion and Affidavits (Affirmations) Annexed 1-2, 3 Opposing Affidavit (Affirmation) 4-5, 6 Reply Affidavit (Affirmation) 7
Upon the foregoing papers in this tax lien foreclosure action, plaintiffs, NYCTL 1998-2 Trust and The Bank of New York Mellon as Collateral Agent and Custodian (collectively, NYCTL), seek an order: (1) setting aside the July 26, 2018 foreclosure sale of the real property at 205-207 Wythe Avenue in Brooklyn (Block 2350, Lot 2) (Property), and directing Referee Joseph R. Vasile, Esq. (Referee Vasile) to turn over (from the $400,000.00 bid deposit) the sum of $10,000.00 to NYCTL's counsel and the remaining balance of $390,000.00 to Aflux LLC (Aflux), the successful bidder at the July 26, 2018 foreclosure sale, pursuant to a September 2018 stipulation of settlement between NYCTL and Aflux; (2) extending the time period within which to conduct a foreclosure sale of the Property, pursuant to RPAPL 1351 (1), for an additional ninety (90) days from the date of entry of an order herein; (3) directing Referee Vasile to place the Property back up for sale at public auction; and (4) directing the Kings County Clerk to accept a notice of sale for filing.
Background
The Tax Lien Foreclosure Action
On November 30, 2010, NYCTL, the owner and holder of a $10,001.79 tax lien encumbering the Property (Tax Lien), commenced this tax lien foreclosure action by filing a summons, a complaint and an initial notice of pendency. Successive notices of pendency were subsequently filed on November 4, 2013 and September 6, 2016.
Defendants D & A Equities LLC (D & A) and Northside Development LLC (Northside), the fee owners of the Property, defaulted by failing to answer or otherwise appear in this action. D & A and Northside did not move to vacate their appearance defaults in this action. Consequently, by a June 12, 2017 order, this court granted NYCTL's motion for a default judgment against D & A and Northside and an order of reference appointing Referee Vasile to compute the amount due and owing to NYCTL.
Referee Vasile subsequently issued a November 8, 2017 Referee's Report, in which he determined that $45,259.80 was due and owing on the Tax Lien as of September 20, 2017, and that the Property should be sold as one parcel. By an April 16, 2018 order and judgment, Referee Vasile's Report was confirmed, and NYCTL was awarded a Judgment of Foreclosure and Sale on default, pursuant to which Referee Vasile was authorized to conduct a sale of the Property. The Judgment of Foreclosure and Sale, which was entered on May 14, 2018, required that a sale must take place within ninety (90) days of the date of entry, pursuant to RPAPL 1351 (1).
Meanwhile, during the pendency of the foreclosure action, D & A transferred its 72% ownership interest in the Property to non-party MILLNB LLC (MILLNB) by a April 28, 2015 quitclaim deed, which was recorded with the City Register's office on May 12, 2015 under CRFN 2015000159439. At the time of the transfer, NYCTL had a valid notice of pendency filed against the Property.
The Foreclosure Sale
On July 26, 2018, Referee Vasile conducted a public auction of the Property, at which Aflux emerged as the successful bidder with a bid of $4,000,000.00. At the conclusion of the auction, in accordance with the Terms of Sale, Aflux paid Referee Vasile a $400,000.00 deposit representing 10% of Aflux's winning bid. Aflux also executed a memorandum of sale, pursuant to which Aflux was required to deliver the balance of the purchase price on or before the September 11, 2018 closing date.
Importantly, Article "Third" of the Terms of Sale specifically provide that the purchaser's deposit will be forfeited as liquidated damages if the purchaser fails to proceed to closing:
" TIME IS OF THE ESSENCE as to the purchaser with respect to the Closing Date and any adjourn date thereof, with no further notice being required by the Referee or Plaintiffs' attorney. By signing the Memorandum of Sale annexed hereto, the purchaser understands and agrees to the time is of the essence requirement and that the purchaser must appear at the time and date specified herein with the balance of the purchase price and be in all respects ready, willing and able to complete the sale transaction. The failure of the purchaser to appear ready, willing, and able to pay the balance of the purchase[ ] price at the time and place specified herein is a default under these Terms of Sale [and] will result in the purchaser's Deposit being forfeited as liquidated damages for failing to complete the purchase of the premises as provided herein" (emphasis added).Article "Seventh" of the Terms of Sale sets forth the procedure to be followed in the event that the successful bidder fails to proceed to a closing:
"The biddings will be kept open after the property is struck down in case any purchaser shall fail to comply with any of the above conditions of sale, the premises so struck down to the purchaser will again be put up for sale, under the direction of said Referee, under these same Terms of Sale, without application to the court, unless the Plaintiffs' attorney shall elect to make such application; and such purchaser shall be held liable for any deficiency there may be between the sum for which said premises shall be struck down upon the sale and that which they may be purchased or upon resale, and also for any and all costs and expenses occurring upon such resale. A purchaser who defaults under these Terms of Sale shall not be entitled to a refund of any amount deposited with the Referee or to any excess resulting from any resale of the premises. Upon default of the purchaser under these Terms of Sale, the Referee shall deliver to the Plaintiffs, without notice to the purchaser, the amount deposited by the purchaser as liquidated damages for failing to complete the purchase of the premises as provided herein." (emphasis added).MILLNB's Notice of Appearance
On July 31, 2018, five days after the auction, non-party MILLNB filed a notice of appearance in this action. Two days later, on August 2, 2018, Northside and MILLNB filed a "Notice of Claim to Surplus Monies."
By an August 7, 2018 letter, counsel for NYCTL advised MILLNB's counsel that "[w]hile receipt of your Notice of Appearance is acknowledged, it only entitles MILLNB to notice of all subsequent proceedings after the date it was received." NYCTL's counsel further advised that:
"MILLNB as successor in interest to Defendant D & A, is bound by all proceedings taken in this action to the same extent as a party pursuant to CPLR § 6501. Accordingly, Defendant D & A was served with the Summons, Complaint, and Notice of Pendency of
this action on December 14, 2010 and did not request or obtain an extension of time, and defaulted in answering, appearing, or otherwise moving with respect to the Complaint in this action. This letter and our response should in no way be construed as a waiver of said default of Defendant D & A or a waiver of the time for MILLNB to answer or move with respect to the Complaint."In an August 10, 2018 responsive letter, MILLNB's counsel advised NYCTL's counsel that "[t]he Notice of Appearance was intended solely for the purposes of surplus monies proceedings" and "[w]e have no intention of making any application effecting the underlying foreclosure and sale or the sale that occurred on July 26, 2018."
Aflux's Default and the Stipulation of Settlement
Aflux subsequently defaulted under the Terms of Sale by refusing to proceed with the September 11, 2018 closing because Aflux discovered that D & A and Northside had recorded an easement against the Property in May 2015. Aflux thus requested that the sale be set aside and that Referee Vasile return its $400,000.00 deposit.
A recorded Easement Agreement, dated May 12, 2015, reflects that Northside and D & A encumbered the Property (a vacant lot) with an easement granting air and light rights to the adjacent property, which is owned by affiliates of Northside and D & A.
In September 2018, NYCTL and Aflux entered into a stipulation of settlement, pursuant to which NYCTL agreed to set aside the sale and return all but $10,000.00 of Aflux's deposit "representing, but not limited to, inter alia [NYCTL's] unreimbursed costs and legal fees associated with the Sale, in addition to the fees and costs associated with this Stipulation."
By a September 20, 2018 letter, MILLNB's counsel demanded that "the terms of sale be enforced," "the Deposit forfeited by the Bidder" and "[t]he forfeited Deposit should be paid into Court for disposition at the surplus money hearing now scheduled for January 3, 2019." MILLNB's counsel further advised that "Claimant objects to any agreement whereby the deposit is refunded, in whole or in part, to the Bidder and the Bidder is relieved of its default pursuant to the terms of sale."
In a September 24, 2018 responsive letter, NYCTL's counsel advised MILLNB's counsel that, according to Article "Third" of the Terms of Sale, "the successful bidder's failure to close in accordance with the terms thereof results in forfeiture of the deposit as liquidated damages for failing to complete the purchase." NYCTL's counsel further advised that "[t]he deposit does not constitute surplus monies, and your client is not entitled to any portion thereof."
NYCTL's Instant Motion
On October 23, 2018, NYCTL moved for an order: (1) setting aside the July 26, 2018 foreclosure sale, and directing Referee Vasile to release $10,000.00 of the $400,000.00 deposit to NYCTL's counsel and the remaining $390,000.00 to Aflux, in accordance with the parties' stipulation of settlement; (2) extending the time to conduct a sale of the Property, pursuant to RPAPL 1351 (1); (3) directing Referee Vasile to place the Property up for sale at another public auction; and (4) directing the County Clerk to accept a notice of sale for filing.
NYCTL argues that New York courts have long recognized the validity of liquidated damage clauses. In the context of a tax lien foreclosure, NYCTL cites to NYCTL 1996-1 Trust v Viola, ___ Misc 3d ___, 2003 NY Slip Op 51272 (U) (Sup Ct, Kings County 2003), in which the court denied a defendant's request for an order directing that the successful bidder's down payment be applied to their tax lien, with any surplus amounts returned to them or their creditors. According to NYCTL, "[t]o have permitted such a distribution would be in complete disregard of the purpose of liquidated damages and would be rewarding the defaulting defendants for their own recalcitrance." NYCTL further argues that "[t]he defaulting property owners . . . may not seek to recover all or part of the Bid Deposit since these entities do not have standing to challenge the terms of sale or any subsequent agreement; nor may they recover all or part of the Bid Deposit on a third-party beneficiary theory."
Aflux submitted an affirmation in support of NYCTL's motion arguing that "the Owner, who defaulted in the payment of real estate taxes after rendering title unmarketable by encumbering the property with an easement, now seeks to hold the bidder in default with the hope of 'generat[ing] a surplus for Owner.'" Aflux contends that "[t]he Easement is a blatant effort by Defendants to maintain control over a Property on which they knowingly failed to pay any taxes for years . . . during which time Defendants made no effort to redeem the Property by paying the delinquent taxes."
Northside and MILLNB, in opposition, assert that "there are no liens on the Property other than subsequent tax liens of approximately $300,000-$350,000 [and] the [$400,000.00] Bid Deposit is sufficient to extinguish all tax liens and generate a surplus for [them]." In addition, Northside and MILLNB contend that there is no legal basis to refund Aflux's deposit or relieve it of its obligations under the Terms of Sale, since the Terms of Sale and the Judgment provide that the Property is being sold "as is" and subject to easements. Northside and MILLNB argue that NYCTL's motion "makes a mockery of the auction process and disregards the plain terms of the Judgment and Terms of Sale" and that "[t]he Terms of Sale are effectively a contract between the defaulting bidder and the Court and the Referee is bound to enforce the Terms of Sale." Although MILLNB did not file its Notice of Appearance in this action until after the auction, its manager, Jordan Wexler, submits an affidavit attesting that he attended the foreclosure auction. Wexler asserts that Northside and MILLNB are "substantially prejudiced by the proposed stipulation to refund the Deposit to Bidder for no apparent reason."
NYCTL, in reply, argues that its motion should be granted because Northside and MILLNB's "rights to the subject Property, including the right of redemption, terminated when [Aflux's] bid . . . was accepted"; "[t]he Defaulting Owners may not reinstate their ownership rights to the Property or their equity of redemption"; and "they may not treat [Aflux's] Bid Deposit . . . as part of the purchase price of the Property to be used by the Referee in accordance with RPAPL § 1354." NYCTL contends that "the Defaulting Owners have no standing to challenge the Terms of Sale entered into by [Aflux], or to interfere with [NYCTL's] subsequent agreement with [Aflux] as set forth in the stipulation" and "the Defaulting Owners are not parties to the Terms of Sale, are not intended third party beneficiaries and, accordingly, they have no right to enforce the Terms of Sale against [Aflux]." NYCTL asserts that "[s]ince the Defaulting Owners failed to redeem the Property prior to the fall of the gavel at the Sale, they are no longer the owners of the Property . . ." and their "equity of redemption was extinguished by the Sale . . . regardless of whether a deed has been delivered to the successful purchaser."
According to NYCTL, "[w]hether or not there is a surplus against which the Defaulting Owners may file a claim will not be known until after the Referee's Deed is transferred and the Referee's Report of Sale is filed with the Court." However, NYCTL explains that "the consummation of the sale cannot occur unless and until authorized by the Court, as more than ninety (90) days has passed since the date of entry of the Judgment of Foreclosure and Sale . . ."
Discussion
In NYCTL 1996-1 Trust v Viola, the court held that a 10% deposit by a successful bidder at a tax lien foreclosure auction may be retained by the lien holder as liquidated damages, pursuant to the terms of sale, and should not be applied toward the defaulting defendants' outstanding tax lien with any surplus amounts returned to defendants (2003 NY Slip Op at *7). The Viola court held that the liquidated damage provision contained in the terms of sale "essentially entitles plaintiffs to retain the down payment as liquidated damages when the purchaser defaults, a remedy upheld by the Court of Appeals in Maxton Bldrs v. Lo Galbo, 68 NY2d 313 [1986]" (id. at *3). Since NYCTL is entitled to retain Aflux's deposit as liquidated damages, as a matter of law, NYCTL had the right to negotiate the stipulation of settlement regarding its retention of Aflux's deposit to avoid the time and expense of further litigation, and "[s]tipulations of settlement are judicially favored and will not lightly be set aside" (Maspeth Fed. Sav. & Loan Ass'n v Sloup, 123 AD3d 672, 674 [2014]).
Northside and MILLNB's reliance on NYCTL 1998-2 v Kee Kiong Kwah (21 Misc 3d 1123 [A] [Sup Ct Kings County 2008]) to argue that Aflux's down payment must be applied to their tax lien and included as surplus monies is misplaced because, unlike Viola and this action, the terms of sale in Kee Kiong Kwah did not provide for liquidated damages upon a default by the successful bidder.
Importantly, however, in Kee Kiong Kwah, the court specifically recognized that "[a]n owner or foreclosed lienor has no standing to enforce the terms of the Terms of Sale Agreement against a defaulting bidder . . . because it is not a party to the agreement or a third party beneficiary" (id. at *3). In so holding, the court relied on two factually analogous Second Department holdings in mortgage foreclosure actions, both of which held that a mortgagor lacked standing to challenge the terms of sale, and that a defaulting bidder's deposit should not be applied to the mortgagor's underlying debt or as surplus monies (see Bardi v Estate of Morgan, 61 AD3d 624, 624 [2009] [holding that plaintiff in mortgage foreclosure action was entitled to retain successful bidders' deposit as liquidated damages under terms of sale, the deposit should not be applied to reduce the amount due on the mortgage and defendant lacked standing to challenge the terms of sale]; Scheckter v Emigrant Sav. Bank, 237 AD2d 273, 274 [1997] [holding that mortgagor lacked standing to enforce terms of sale when the successful bidder at a foreclosure sale defaulted, and mortgagor was not entitled to an order applying deposit to surplus money award]; see also Katzeff v Cohn, 139 Misc 2d 1076, 1078 [Sup Ct, Nassau County 1988] [holding that mortgagor lacks legal capacity to enforce the terms of sale against defaulting successful bidder at foreclosure sale]).
Based on the foregoing precedent, Northside and MILLNB lack standing to enforce the liquidated damage provision in the Terms of Sale, and have no legal right to demand that Aflux's 10% deposit be applied to their outstanding tax delinquency and any surplus money award. Northside and MILLNB also lack standing to challenge the allocation of Aflux's deposit in the stipulation of settlement, since they are not parties or third-party beneficiaries to the settlement.
In any event, Northside is precluded from opposing the relief that NYCTL seeks in this tax lien foreclosure action because it never moved to vacate its 2010 appearance default (Deutsche Bank Nat. Trust Co. v Bye, 2018 NY Slip Op 33334 [U], *4 [Sup Ct, Suffolk County 2018] [holding that "(a)s there is no motion to vacate Defendants' default, the Court will not consider the claims raised by Defendant's opposition"]; Citimortgage, Inc. v Scarpinato, 2018 NY Slip Op 32705 [U], *2 [Sup Ct, Suffolk County 2018] [holding that "(a)s there is no motion to vacate defendant's default, the court will not consider the claims raised by defendant's opposition]; Money Source, Inc. v Dell'Aquila, 60 Misc 3d 1232 [A], *3 [(Sup Ct, Suffolk County 2018] [holding that "(a)bsent a vacatur of his default, a defendant is without authority to oppose or otherwise seek affirmative relief of a non-jurisdictional nature"]).
Similarly, MILLNB, which obtained its interest in the Property from D & A in April 2015, sat back idly while this tax lien foreclosure action proceeded to an April 2018 default judgment. MILLNB's manager even attended the July 26, 2018 foreclosure sale before filing a notice of appearance five days later. MILLNB is bound by the proceedings in this action, since "[a] notice of pendency is constructive notice to any person who purchases from any defendant named in the notice [and] a person whose conveyance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party" (Green Point Sav. Bank v St. Hilaire, 267 AD2d 203, 203 [1999]).
Finally, the "Seventh" Article in the Terms of Sale provides, in relevant part, that "the premises so struck down to the purchaser will again be put up for sale, under the direction of said Referee, under these same Terms of Sale, without application to the court, unless the Plaintiffs' attorney shall elect to make such application" (emphasis added). NYCTL's instant application for an order directing Referee Vasile to place the Property back up for sale at public auction, in accordance with the Terms of Sale, is granted. Accordingly, it is
ORDERED that NYCTL's motion is granted in its entirety; and it is further
ORDERED that the July 26, 2018 foreclosure sale of the Property is hereby set aside; and it is further
ORDERED that, in accordance with the September 2018 stipulation of settlement, Referee Vasile must turn over from Aflux's $400,000.00 deposit: (1) $10,000.00 to NYCTL's counsel, Thomas P. Malone, Esq. of The Law Office of Thomas P. Malone, PLLC, and (2) the balance of $390,000.00 to Aflux; and it is further
ORDERED that the period within which to conduct a foreclosure sale of the Property, pursuant to RPAPL 1351 (1), is hereby extended for ninety (90) days after service of a copy of this decision and order with notice of entry; and it is further
ORDERED that Referee Vasile place the Property up for sale at a duly noticed public auction; and it is further
ORDERED that the Kings County Clerk accept a notice of sale for filing of the Property (Block 2350, Lot 2).
This constitutes the decision and order of the court. E N T E R, _______________________ J. S. C.