Opinion
018977/2003
06-13-2005
Washington Mutual Bank, FA, successor by merger to The Dime Savings Bank of New York, FSB, Plaintiff, v. Peak Health Club, Inc., East Coast Athletic Club, Inc., New York State Department of Taxation and Finance, Merrill Lynch Business Financial Services, Inc., A & N Planning Services, Inc., Golden Age Mortgage Corporation, Arnold Marshel, J.E.M. Health Enterprises, Inc., The Way of The Empty Hand, Inc., Port Food Corp. and "John Doe No. I" to "John Doe No. XXX" inclusion, the last thirty names being fictitious and unknown to plaintiff, the persons or parties intended being the tenants, occupants, persons or corporations, if any, having or claiming an interest in or lien upon the premises described in the complaint, Defendants. Merrill Lynch Business Financial Services, Inc.,Plaintiff, v. Peak Health Club, Inc., East Coast Athletic Club, Inc., Dennis Pilotti, Jr., Tracy J. Kelly, Washington Mutual Bank, FA, successor by merger to The Dime Savings Bank of New York, FSB, Arnold Marshel, Afgo Mechanical Services, Inc., New Eljam Products, New York State Department of Taxation and Finance, J.E.M. Health Enterprises, Inc., The Way of The Empty Hand, Inc., Port Food Corp. and "John Doe No. I" to "John Doe No. XXX" inclusion, the last twenty names being fictitious and unknown to plaintiff, the persons or parties intended being the tenants, occupants, persons or corporations, if any, having or claiming an interest in or lien upon the premises described in the complaint,Defendants.
, J.
The following papers read on this motion:
Notice of Motion dated 3/16/05 ............................................ 1
Memorandum of Law in Support dated 3/16/05 ................................ 2
Brief in Opposition dated 4/12/05 ......................................... 3
Memorandum of Law in Opposition dated 4/12/05 ............................. 4
Affirmation in Opposition dated 4/13/05 ................................... 5
Memorandum of Law in Reply dated 5/3/05 ................................... 6
Exhibit Volumes One and Two ............................................... 7 & 8
Notice of Motion for Partial Summary Judgment dated 3/16/05 ............... 9
Memorandum of Law in Support of Motion for Partial Summary Judgment dated
3/14/05 ................................................................. 10
Expert's Affidavit dated 4/12/05 .......................................... 11
Memorandum of Law in Opposition to Motion for Partial Summary Judgment
dated 4/13/05 ........................................................... 12
Reply Memorandum of Law in Support of Motion for Partial Summary Judgment
dated 5/3/05 ............................................................ 13
Exhibit Volumes II, III, IV and V ......................................... 14, 15, 16, 17
Notice of Motion dated 3/15/05 ............................................ 18
Memorandum of Law in Support dated 3/15/05 ................................ 19
Exhibits to Motion ........................................................ 20
Memorandum of Law in Opposition dated 4/13/05 ............................. 21
Affirmation in Response dated 4/11/05 ..................................... 22
Reply Memorandum of Law dated 5/2/05 ...................................... 23
Washington Mutual Bank Rule 19-A Statement dated 3/14/05 .................. 24
Merrill Lynch Statement Pursuant to Rule 19-A dated 3/16/05 ............... 25
Response of Defendants Arnold Marshel, Peak Health Club, Inc. and East
Coast Athletic Club, Inc. to Merrill Lynch's Statement Pursuant to Rule
19-A dated 4/12/05 ...................................................... 26
Response by Merrill Lynch to Rule 19-A Statement by Washington Mutual
Bank, FA dated 4/13/05 .................................................. 27
Response by Merrill Lynch to Rule 19-A Statement by Arnold Marshel, Peak
Health Club, Inc. and East Coast Athletic Club, Inc. dated 4/13/05 ...... 28
WaMu Response to Merrill Lynch Rule 19-A Statement dated 4/15/05 .......... 29
Washington Mutual Bank Rule 19-A Statement dated 4/15/05 .................. 30
This is a motion in Action No. 2 by plaintiff (Merrill Lynch) for summary judgment for foreclosure of its mortgage as to its first cause of action, for partial summary judgment on the issue of liability as to its second cause of action, severing the second cause of action against defendant Kelly, dismissing all counterclaims and defenses and amending the caption to substitute as defendants Carmela's Café, Metropolitan Physical Therapy, All Ages Swimming and Turkey Hills Karati in lieu of defendants John Doe One through Four.
The facts of this case are set forth in the court's decisions dated September 17, 2003, July 26, 2004 and April 22, 2005 in a related action Marshel v. Farley, et al., Index No. 007625/2003. However, a brief summary of the facts follows.
Merrill Lynch made a loan of $5,125,000 to defendant Peak guaranteed by defendants East Coast, Pilotti and Kelly. The loan was secured by a mortgage of property known as 3 Harbor Park Drive, Port Washington, New York (the Premises) and evidenced by a note in such amount. The mortgage was recorded in Nassau County on February 10, 2003. Peak defaulted in its repayment obligations in January 2004 and this action ensued.
In July 1998, the then owner of the Premises, defendant Peak, executed and delivered a deed to the Premises to defendant East Coast, who in turn executed and delivered to Dime Savings Bank (now Washington Mutual Bank, FA and hereinafter referred to as WAMU) a mortgage of the Premises securing a loan to East Coast of $3,250,000. Neither the deed to East Coast nor the mortgage to WAMU was recorded until after the mortgage to Merrill Lynch was recorded. The mortgage to WAMU and the deed to East Coast were ultimately recorded in December 2003.
The moving papers summarize and explain the procedures, practices and policies undertaken by Merrill Lynch in connection with its processing of the loan application and its funding of the loan.
WAMU has also moved for partial summary judgment in Action No. 1 wherein it is the plaintiff declaring that its mortgage has priority over the Merrill Lynch mortgage. In Action No. 1 defendants Marshel, East Coast and Peak have moved for partial summary judgment declaring that the Merrill Lynch mortgage is either void or subordinate to the WAMU mortgage.
On these motions the interests of Marshel, East Coast and Peak are united in their request that the WAMU mortgage should have priority over the Merrill Lynch mortgage, notwithstanding that the Merrill Lynch mortgage was recorded prior to the recording of the WAMU mortgage.
RPL § 291 provides that a conveyance of real property may be recorded in the office of the County Clerk of the county where the real property is located. Every conveyance not so recorded is void as against any person who subsequently acquires the same real property in good faith and for a valuable consideration from the same grantor and whose conveyance is first duly recorded.
Here, it is not disputed that the conveyance to East Coast and the mortgage to WAMU were not recorded at the time of the Merrill Lynch mortgage, that Peak was the common grantor to East Coast and Merrill Lynch, and that Merrill Lynch gave valuable consideration for its mortgage. Thus, the sole issue is whether Merrill Lynch obtained its mortgage lien in "good faith" and recorded its mortgage before the East Coast conveyance and WAMU mortgage.
The recording statute charges a grantee with notice only of matters in the record and matters outside the chain of title do not constitute notice. Doyle v. Lazarro, 33 AD2d 142 (3rd Dept. 1970) affirmed 33 NY2d 981.
The burden is on the subsequent grantee to prove its status as a purchaser in good faith and for valuable consideration. Hood v. Webster,271 NY 57 (1936).
The Recording Act was enacted to serve two purposes. First, to protect the rights of innocent purchasers who acquire an interest in property without knowledge of prior encumbrances. Second, it was designed to establish a public record which would furnish potential purchasers with notice or at least constructive notice of previous conveyances and encumbrances that might affect their interests. Reynolds v. Springer Service Station, Inc., 151 AD2d 466, 467 (2d Dept. 1989). In this age of complex legislation the statute which was first enacted in 1909 is elegant for its simplicity and a party seeking to negate the effect of failing to record its conveyance must demonstrate with evidentiary facts and not mere conclusory assertions that the party who recorded first had actual or constructive knowledge of a prior unrecorded conveyance. Supra, 467.
Although it has been held that a person cannot be a bona fide purchaser for value through a forged deed, which is void and conveys no title, there was no forgery here because Peak, the grantor of the Merrill Lynch mortgage and those acting on its behalf, signed their own names to all relevant documents. Compare Public Administrator of Kings County v. Samerson, 298 AD2d 512 (2d Dept. 2002), where someone signed the grantor's name after he had become deceased, and Wu v. Wong, 288 AD2d 104 (1st Dept. 2001) where the name of the true owner was signed on a deed by the true owner's brother without the owner's knowledge or consent, and with Emerson Hills Realty, Inc. v Mirabella, 220 AD2d 717 (2d Dept. 1995) priority of purchaser subsequent to prior fraud, not affected in the absence of knowledge or reason to know of the seller's alleged prior fraud. Thus, it appears that where the prior conduct is a forgery, the recording act affords no protection, but where the prior conduct was fraudulent it must be shown that the subsequent grantee who recorded first knew or should have known of the fraud. Supra.
To establish that it was a bona fide purchaser for value Merrill Lynch has the burden of proving that it gave valuable consideration (which is not disputed) and that it did not have knowledge of facts that would lead a reasonably prudent purchaser to make inquiries. Here, there is insufficient evidence to establish that Merrill Lynch had notice or knowledge of the conveyance to East Coast and the mortgage to WAMU. Berger v. Polizzotto, 148 AD2d 651 (2d Dept. 1989). Although executed prior in time, the mortgage to WAMU lost its priority because Merrill Lynch, a good faith lender for value recorded its mortgage first and lacked notice and knowledge of facts which placed it under a duty to make further inquiry of the facts and circumstances of the transaction. Household Finance Realty Corporation of New York v. Emanuel, 2 AD3d 192 (1st Dept. 2003) cf. Morrocoy Marina, Inc. v. Altengarten, 120 AD2d 500 (2d Dept. 1986) (purchaser who was advised that there was some other buyer that could tie up the property with litigation should have made further inquiry).
In sum, Merrill Lynch has established a prima facie right to foreclosure and no other party has established the existence of a triable issue of fact. While there may have been elements of fraud in connection with the transactions, Merrill Lynch was justified in relying on the protection of the Recording Act and as between Merrill Lynch and the other parties to these actions Merrill Lynch was in no better position than any other party to prevent the perpetration of such a fraud. LLP Mortgage, Ltd. v. The Card Corp., 17 AD3d 103 (1st Dept. 2005).
The court has considered all of the numerous arguments advanced by the parties arrayed in opposition to the Merrill Lynch motion and finds that Merrill Lynch acted in a reasonable and commercially prudent manner in connection with its loan and mortgage. Specifically, it obtained a title search and a mortgage insurance policy and it required certificates and resolutions of corporate officers. Merrill Lynch also requested and received financial statements and income tax returns, all of which were consistent with other information which it had received. Most important in the foregoing is that Merrill Lynch relied on expertise of a title insurance company to certify to it that its borrower had the ability to deliver a first mortgage.
While occupancy of the Premises by East Coast may have been notice of its rights, Vitale v. Pinto, 118 AD2d 774 (2d Dept. 1986), Merrill Lynch required East Coast to approve and guaranty the loan thus satisfying any duty of inquiry as to the rights of East Coast. The court has also considered the opinion of an expert on mortgage loan financing submitted by WAMU and finds that it is insufficient to raise a triable issue of fact. The mere failure to obtain an opinion of a borrower's counsel is not evidence of negligence or of a failure to make proper inquiry absent the presence of some other factors which would have suggested that something was amiss. None of the deficiencies noted by WAMU's expert either singularly or collectively rise to this level.
The expert's premise, that a closing of the sale to Paragon never took place because the stock was placed in escrow, is out of harmony with this court's decision of April 22, 2005 which in directly considering that issue found based on the language of the documents that the closing of the sale of the Peak and East Coast stock took place on May 17, 2001.
With the wisdom of hindsight there may be many safeguards that can be invoked by a lender, but to justify such further inquiry there should be some fact or circumstance arising out of a lender's initial good faith practices and procedures which would lead a reasonably prudent lender to make such an inquiry. Here, no such additional facts or circumstances were presented which would have required further investigation and thus the motion of Merrill Lynch is granted in all respects and all cross motions or other motions are denied.
Merrill Lynch is directed to submit an Order of Reference which reflects this decision.
J.S.C.