Opinion
20417/08.
Decided May 22, 2009.
Richard A. Rosenzweig, Esq., Menicucci Villa Associates PLLC, Plaintiff Attorney.
Norma P. Smith-Hill, Esq, Baldwin, NY, Defendant Attorney.
As a result of allegedly failed monthly mortgage payments as of April 1, 2008 and thereafter, plaintiff's counsel commenced this action to foreclose a two-hundred and sixty thousand dollar mortgage on 561 Albany Avenue, Brooklyn, NY, otherwise known as Block 4800, Lot 3, executed to the plaintiff, John Palmiero, from Norma Cayenne and Cletus Joseph, the only defendants to have timely appeared in the matter sub judice. Counsel now requests summary judgment on behalf of the said plaintiff inasmuch as the defendants' affirmative defenses and counterclaims alleging improper service, non-compliance with Federal and State Law, usury, and predatory lending are insufficient and meritless.
In opposition, defendants' counsel notes that the subject mortgage was, by its terms, usurious; to wit, interest only for the first two years, at an interest rate of twelve percent, followed by a balloon payment of the principal on January 1, 2011, with a proviso that the interest rate would rise to sixteen (16%) percent upon any default, then to twenty-four percent upon the institution of any enforcement action. Counsel asserts that inasmuch as the loan did not exceed one-million dollars and the lender was a private individual, New York General Obligation Law, § 5-501 regulates the maximum rate of return permissible. In addition, Article 4, § 173 of the Banking Law provides that "the knowingly taking, receiving, reserving or charging a greater rate of interest shall be held and adjudged a forfeiture of the entire interest which the note. . .or other evidence of the debt carries with it. . ." Counsel asserts on the basis of the preceding that although the defendants are in default, the usurious nature of their loan would only make them liable to repay the principal which is not due until January 1, 2011. In addition, counsel argues that the court should not overlook the fact that the plaintiff is guilty of predatory lending; i.e, loan flipping perpetuated as follows, when the gainfully employed defendants, who own two houses, were being foreclosed on their one-hundred and ninety-four thousand ($194,000.00) dollar mortgage (paid at approximately sixteen hundred ($1,600.00) dollars per month) on the subject property (then valued at four-hundred thousand ($400,000.00 dollars), with credit scores in excess of six-hundred (600), applied for a fifty-thousand ($50,000.00 dollar equity loan, they were told that they could only get a loan from a private lender — the plaintiff — "on significantly worse terms and at higher costs than loans offered to individuals with similar assets, income and credit scores." Consequently, not only were the defendants' made to incur closing costs totaling ten percent of the loan, they were induced into undertaking a two-hundred and sixty thousand ($260,000.00) dollar loan resulting in monthly payments of twenty-six hundred ($2,600.00) dollars. When they queried as to how they would be able to make payments of twenty-six hundred ($2,600.00) per month when they were being foreclosed on sixteen hundred ($1,600.00) per month, they were assured that they could maintain the payments until they could refinance the loan in two years. The Defendants closed on December 19, 2007, made the February and March payments but missed April and May. On May 16, 2008, the plaintiff accelerated the entire amount due and raised the interest rate to sixteen (16%) percent, and thereafter instituted suit on July 14, 2008 thereby triggering an additional increase to twenty-four (24%) percent in the interest rate as per the loan terms which effectively made it impossible for the defendants to make payment.
In addition, counsel notes that Bk Law § 14-a limits the maximum per annum interest rate that a lender may charge to sixteen percent. Gen. Oblig. Law § 5-501(2) makes it additionally clear that "the amount charged, taken or received as interest shall include any and all amounts paid or payable directly or indirectly, by any person, to or for the account of the lender in consideration for making the loan. . ." In the case at bar, not only did the plaintiff eventually charge a twenty-four (24%) percent interest rate, eight points above that permitted by law, counsel submits that the initial rate was usurious via the direct and indirect benefits garnered by the plaintiff; to wit, four (4) points or ten-thousand, four hundred ($10,400.00) dollars, payment of his attorney's fees in the amount of twelve hundred ($1,200.00) dollars, processing fees of six-hundred and ninety-five ($695.00) dollars, plus costs and expenses totaling thirteen-thousand, two-hundred and seven ($13,207.00) dollars, including the defendant's real estate taxes, which the plaintiff required paid from the loan proceeds, resulting in the accrual of interest payments on said fees to the plaintiff. To further clarify the preceding, counsel notes that the Appellate Division, in Hammelburger v. Foursome In Corp., 76 AD2d 646, 437 NYS2d 357 (2d Dept., 1980), made it clear that the traditional method for calculating the true interest of a loan from the principal, where certain discounts were made to the lender, is to divide the discount by the years in the mortgage term and add the discount to the amount of interest due in one year, and then compare same to the difference between the principal and the discount to determine the true interest rate. Applying that formula, counsel divided the closing costs paid to or on behalf of the plaintiff, twenty-six thousand, six-hundred and thirteen ($26,613.23) dollars and twenty-three cents by two (the initial mortgage term) and added that figure, thirteen-thousand, three-hundred and six ($13,306.62) dollars and sixty-two cents to the interest due in the first year, thirty-one thousand two-hundred ($31,200.00) dollars (twelve [12%] percent of two-hundred and sixty thousand [$260,000.00] dollars), resulting in forty-four thousand, five-hundred and six ($44,506.00) dollars, a figure exceeding the highest permissible rate of sixteen (16%) percent or forty-one thousand, five-hundred and six ($41,506.61) dollars and sixty-one cents. That same computation applied to the twenty-five thousand, five-hundred and two ($25,502.00) dollars above itemized by defense counsel as plaintiff's benefits at closing, results in a figure of forty-three thousand, nine-hundred and fifty-one ($43,951.00) dollars, which is still more than the permissible legal percentage. It is counsel's position that the subject mortgage is therefor usurious and void (Gen. Oblig. Law §§ 5-501 and 5-511; Seidel v. 18 East 17th Street Owners Inc., 79 NY2d 735, 586 NYS2d 240 [1992], citing Meaker v. Fiero, 145 NY 165). Counsel concludes that all of the foregoing creates issues of fact that require additional discovery and bars the granting of summary judgment. Finally, counsel requests that the court deem his clients' amended answer without prior court approval as de minimus inasmuch as the plaintiff sustained no prejudice, and has had ample opportunity to address the issues herein raised.
Plaintiff's counsel, in his reply, submits that the defendants' amended answer is impermissible since it was not allowed by court order or made by cross motion. In addition, he asserts that their allegations of fraud are deficient in that they have not established any false representation which was either known to be false or made with reckless disregard of its truth and made with intent to deceive and induce the defendants, and did so, causing injury to them in connection with the loan. So too, defendants contentions of pre-loan oral representations are inadmissible, unenforceable under the statute of frauds, GOL §§ 15-301 and 5-1103, and undocumented. In any event, counsel asserts that usury occurs only when a loan, prior to default, exceeds sixteen (16%) percent or reaches twenty-five (25%) percent or more on default.
In Abir v. Malky, Inc., 59 AD2d 646, 873 NYS2d 350 , the Appellate Division, Second Department, held that "[w]hen determining whether a transaction constitutes a usurious loan it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it' (id. at 895, 814 NYS2d 551, quoting Lester v Levick, 50 AD2d 860, 376 NYS2d 619). . .whether a transaction constitutes a cover for usury is a question of fact (see Ujueta v. Euro-Quest Corp., 29 AD3d 895, 814 NYS2d 551) . . . "It must appear that the real purpose of the transaction was, on the one side, to lend money at usurious interest reserved in some form by the contract and, on the other side, to borrow upon the usurious terms" (Donatelli v. Siskind, 170 AD2d 433, 565 NYS2d 224). A transaction is usurious under civil law when it imposes an annual interest rate exceeding 16% (see General Obligations Law § 5-501 [1]; Banking Law § 14-a[1]), and is usurious under criminal law when it imposes an annual interest rate exceeding 25% (see Penal Law §§ 190.40, 190.42). A usurious contract is void and relieves the plaintiff of the obligation to repay principal and interest thereon (see General Obligations Law § 5-511; Seidel v. 18 E. 17th St. Owners, 79 NY2d 735, 586 NYS2d 240; Stanley Weisz, P.C. Retirement Plan v. NCHD Assoc., 237 AD2d 276, 655 NYS2d 381). The court went on to make two express finds, one, that defendant Malky failed to meet the foregoing burden inasmuch as ". . .the various agreements constituted a loan, as their principal purpose was to provide the Abirs with interim relief from foreclosure by substituting high-interest, short term debt for the bank loan (see Del Rubio v. Duchesne, 284 AD 89, 130 NYS2d 572). . .; and, two, that the Abir/Malky agreement was usurious, as the annual interest rate imposed therein was in excess of 25% (see General Obligations Law § 5-501 [1]; Banking Law § 14-a[1]; Penal Law §§ 190.40, 190.42), and thus void and unenforceable (see General Obligations Law § 5-511; Seidel v. 18 E. 17th St. Owners, 79 NY2d 735, 586 NYS2d 240; Stanley Weisz, P.C. Retirement Plan v. NCHD Assoc., 237 AD2d 276, 655 NYS2d 381 ). However, and most significantly, the court found that the judgment of foreclosure and sale flowed solely from the Abir's default on the non-usurious antecedent bank loan, and therefore was enforceable (see Eikenberry v. Adirondack Spring Water Co., 65 NY2d 125, 490 NYS2d 484; Stein v. Nellen Dev. Corp., 65 AD2d 789, 410 NYS2d 321; Gross v. Lichtman, 55 AD2d 670, 390 NYS2d 182)." This conclusion is in keeping with the Seashells, Inc. v. Bridge Art Productions, Inc., et. Al., 172 AD2d 353, 568 NYS2d 617 case which provides that ". . .the defense of usury is simply not applicable to interest charged upon default or after maturity of a loan" (citing, Klapper v. Integrated Agricultural Management Co., Inc., 149 AD2d 765, 539 NYS2d 812; Bloom v. Trempal Construction Corp., 29 AD2d 951, 289 NYS2d 447, aff'd 23 NY2d 730, 296 NYS2d 372).
While the Appellate Division, in Hammelburger v. Foursome In Corp., 76 AD2d 646, 437 NYS2d 357 (2d Dept., 1980), clearly stated that the traditional method for calculating the true interest of a loan from the principal, where certain discounts were made to the lender, is to divide the discount by the years in the mortgage term and add the discount to the amount of interest due in one year, and then compare same to the difference between the principal and the discount to determine the true interest rate, the Meaker v. Fiero, supra, 145 NY 165 , case cited by the defendants, found that the mortgagee exacted a payment in order to proceed with the transaction, which payment the court viewed as extortionate, not usurious or to constitute additional interest.
"A party seeking summary judgment must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" (Ayotte v. Grevasioi, 81 NY2d 1062, 601 NYS2d 463; Alvarez v. Prospect Hosp., 68 NY2d 320, 508 NYS2d 923). Once a prima facie showing has been made, the burden shifts to the opposing party to produce evidentiary proof in admissible form sufficient to establish the existence of material questions of fact (see Alvarez v. Prospect Hosp., supra).
Finally, it is hornbook law that prior oral or written or any contemporaneous oral agreement is inadmissible to refute a written agreement (see Richardson On Evidence, § 601, et. seq., and GOL §§ 15-301 and 5-1103), except in instances where no contract in fact exists (see Richardson On Evidence, § 606 to 613) or is incomplete ( see Richardson On Evidence, § 614).
The defendants have not convincingly established in their pleadings any of the Richardson On Evidence, § 606 to 613 grounds; to wit, want of consideration, want of genuineness of consent, by reason of fraud, mistake, duress, or undue influence; illegality of subject matter or consideration; material alteration; or delivery upon a condition precedent, where the parol condition does not contradict the writing, to disprove the validity of the parties' agreement. However, to the extent that usury is alleged in the matter sub judice, it remains to be determined whether the fees allegedly paid by the defendants in favor of the plaintiff constitute "discounts" to be sifted through the Hammelburger formulaic interest rate sieve or constitute some other legitimate or illegitimate type of payment. In other words, although the plaintiff alleges that the defendants defaulted during the term of the initial 12% interest rate, and that the higher interest rates (16% then 24%) were generated pursuant to their contractual terms upon said default, issues of fact have arisen as to whether the payments allegedly made on plaintiff's behalf constitute discounts that usuriously augmented that initial or subsequent rates, were extortionate, or legally permissible. In light of the foregoing, the plaintiff's motion for summary judgment and for the appointment of a referee to compute the amount due it on account of the note and mortgage must be denied at present. This constitutes the decision and order of this Court.