Opinion
Index No. 650289/2022
10-26-2022
21647 LLC, Plaintiff, v. MTGLQ INVESTORS, L.P.; US Bank Trust National Association, as Trustee of the Tiki Series IV Trust; and US Bank Trust National Association, as Trustee of the Cabana Series IV Trust, Defendants.
Rosenberg Fortuna & Laitman, LLP, Garden City, NY (Anthony R. Filosa of counsel), for plaintiff. Friedman Vartolo, LLP, New York, NY (Zachary Gold of counsel), for defendants US Bank Trust National Association, as Trustee of the Cabana Series IV Trust and as Trustee of the Tiki Series IV Trust. Aldrige Pite, LLP, Melville, NY (Kenneth Sheehan of counsel) for defendant MTGLQ Investors, L.P.
Rosenberg Fortuna & Laitman, LLP, Garden City, NY (Anthony R. Filosa of counsel), for plaintiff.
Friedman Vartolo, LLP, New York, NY (Zachary Gold of counsel), for defendants US Bank Trust National Association, as Trustee of the Cabana Series IV Trust and as Trustee of the Tiki Series IV Trust.
Aldrige Pite, LLP, Melville, NY (Kenneth Sheehan of counsel) for defendant MTGLQ Investors, L.P.
Gerald Lebovits, J. This is an action for attorney fees and costs under Real Property Law (RPL) § 282. Plaintiff, 21647 LLC, purchased a condominium apartment unit at a lien-foreclosure sale, and then successfully defended a separate, mortgage-foreclosure action brought by the predecessor in interest of defendant MTGLQ Investors L.P. In this action, 21647 LLC seeks attorney fees against defendants MTGLQ Investors and US Bank Trustee National Association under RPL § 282 ’s reciprocal-fee covenant.
The original holder of the note and mortgage was nonparty HSBC Mortgage Corporation (USA) N.A. HSBC eventually assigned the note and mortgage to MTGLQ. After 21647 successfully defended the mortgage-foreclosure action, MTGLQ assigned the note and mortgage to defendant US Bank Trust National Association in its capacity as Trustee of the Tiki Series IV Trust. US Bank Trust Tiki Series IV then assigned the mortgage to defendant US Bank Trust National Association in its capacity as Trustee of the Cabana Series IV Trust.
MTGLQ and US Bank separately move to dismiss under CPLR 3211 and for sanctions under 22 NYCRR 130-1.1. 21647 LLC cross-moves to convert these motions into summary-judgment motions under CPLR 3212, and for the grant of summary judgment in its favor. The branches of the motions seeking dismissal of 21647 LLC's claims—which present an issue of first impression about the scope of § 282 ’s implied attorney-fee covenant—are granted. The branches of the motions seeking sanctions are denied. 21647 LLC's cross-motions are denied. BACKGROUND
The underlying property is a condominium unit in a residential building in Manhattan. In 2007, nonparties Anna Davolio Meldal and Mellisa Eaton executed a promissory note, secured by a mortgage on the apartment. The mortgage agreement contained a provision under which the borrowers covenanted to pay the mortgagee's reasonable attorney's fees in the event the mortgagee prevailed in any action to foreclose the mortgage. (See NYSCEF No. 38 [Mortgage].)
Meldal and Eaton defaulted on the loan on June 1, 2010. In 2013, HSBC Bank, which then held the note and mortgage, brought an action to foreclose on the mortgage. (See HSBC Bank (USA) v. Meldal , Index No. 850025/2013 [Sup Ct, NY County] [Arlene Bluth, J.].) In 2016, while the mortgage-foreclosure action was pending, the condominium board of managers brought a lien -foreclosure action, based on the apartment's unpaid condominium common charges. (See Board of Managers of Christodora House Condominium , Index No. 153490/2016 [Sup Ct, NY County] [Robert R. Reed, J.].)
In 2018, the board of managers obtained a judgment in the lien-foreclosure action, pursuant to which the apartment was sold at foreclosure by a referee. 21647 LLC purchased the apartment at a foreclosure sale held later in 2018, taking the property subject to the 2007 mortgage. In June 2019, the board and 21647 LLC obtained an order in the lien-foreclosure action granting a writ of ejectment against Meldal and Eaton and putting 21647 LLC in possession. (See Index No. 153490/2016, NYSCEF No. 51.)
The note and mortgage were then held by MTGLQ, which had been assigned them by HSBC in 2017.
Also in June 2019, MTGLQ obtained a judgment of foreclosure and sale in the mortgage-foreclosure action. 21647 LLC appealed. In January 2021, the Appellate Division, First Department, reversed the judgment below and dismissed the complaint on the ground that HSBC had not properly served Meldal and had not moved for default judgment within one year of Eaton's default. (See MTGLQ Invs., L.P. v. Shay , 190 A.D.3d 527, 528-529, 140 N.Y.S.3d 496 [1st Dept.2021]. )
MTGLQ moved in the First Department for reargument or leave to appeal. The First Department denied that motion in April 2021. (See MTGLQ Investors, L.P. v. Shay , 2021 N.Y. Slip Op. 64228[U], 2021 WL 1257508 [1st Dept. Apr. 6, 2021].) MTGLQ then moved directly in the Court of Appeals for leave to appeal. The Court of Appeals denied leave in September 2021. (See MTGLQ Invs., L.P. v. Shay , 37 N.Y.3d 908, 2021 WL 4164320 [2021].)
21647 LLC brought this action against MTGLQ and the two US Bank trusts that were assignees of the mortgage, seeking the attorney fees that 21647 LLC had incurred in defending the mortgage-foreclosure action in Supreme Court, appealing to the First Department, and opposing MTGLQ's two leave motions. (See NYSCEF No. 1.)
In motion sequence 001, the US Bank defendants move to dismiss the claim against them under CPLR 3211 (a) (7) and for sanctions under 22 NYCRR part 130 (NYSCEF No. 4 ); 21647 LLC cross-moves to convert the motion to dismiss into a CPLR 3212 summary-judgment motion and for the grant of summary judgment in its favor against the US Bank defendants (NYSCEF No. 9 ). On motion sequence 002, MTGLQ also moves to dismiss under CPLR 3211 (a) (7) and for sanctions under 22 NYCRR part 130 (NYSCEF No. 27 ); and 21647 LLC again cross-moves to convert the motion into one for summary judgment and for the grant of summary judgment in its favor against MTGLQ (NYSCEF No. 55 ). Motion sequences 001 and 002 are consolidated here for disposition. The branches of defendants’ motions seeking dismissal are granted; the branches of defendants’ motions seeking sanctions are denied; plaintiff's cross-motions to convert and for summary judgment are denied.
DISCUSSION
Plaintiff's claims against defendants are based on RPL § 282. That statute provides that "a covenant contained in a mortgage on residential real property" that permits the mortgagee to recover attorney fees in a foreclosure action gives rise to an implied reciprocal covenant by the mortgagee in favor of the mortgagor. ( RPL § 282 [1].) Under that implied covenant, the mortgagee shall "pay to the mortgagor the reasonable attorneys’ fees and/or expenses incurred by the mortgagor ... in the successful defense of any action or proceeding commenced by the mortgagee against the mortgagor arising out of the contract." (Id. ) It is undisputed that the mortgage in this case contains a clause permitting the mortgagee to recover attorney fees in a foreclosure action—thus implicating § 282 ’s reciprocal attorney-fee covenant. It is also undisputed that 21647 LLC obtained dismissal of the mortgage-foreclosure action brought by MTGLQ. Interpreting this aspect of § 282 as a matter of first impression, though, this court concludes that 21647 LLC's attorney fees incurred in that foreclosure action were not "incurred by the mortgagor" within the meaning of RPL § 282.
MTGLQ asserts that 21647 LLC's successful defense of the foreclosure action is irrelevant for RPL § 282 purposes because (i) the dismissal obtained by 21647 LLC was based on CPLR 3215 (c) ; (ii) a CPLR 3215 (c) dismissal is not a dismissal on the merits or with prejudice; (iii) RPL § 282 ’s reciprocal covenant only permits recovery of attorney fees for obtaining a foreclosure dismissal on the merits. (See NYSCEF No. 52 at 6-7.) This assertion erroneously conflates two senses of "on the merits." MTGLQ relies on (Bank of America, N.A. v, Destino, 138 A.D.3d 654, 654-655, 29 N.Y.S.3d 56 [2d Dept. 2016] ). But Destino held merely that RPL § 282 is intended to benefit only prevailing parties—and that a mortgagor is not a prevailing party when a mortgagee voluntarily discontinues its action without prejudice, absent a judicial determination on the merits of the mortgagee's claims or the mortgagor's defenses. Destino did not also hold that the judicial determination for the mortgagor must be "on the merits" in the preclusion sense of the term; and it is that sense in which a CPLR 3215 (c) dismissal is not on the merits. (See Shepard v. St. Agnes Hosp. , 86 A.D.2d 628, 630, 446 N.Y.S.2d 350 [2d Dept. 1982].)
As discussed above, 21647 LLC is not the original mortgage borrower with respect to the condominium apartment at issue. Instead, 21647 LLC purchased the condominium, subject to the original mortgage, at an arms-length public sale following a lien foreclosure. 21647 LLC, relying on a range of principles derived from the common law and other statutes, contends that it thereby succeeded to all of the rights and interests of the original borrowers, including their (then-inchoate) attorney-fee claims against defendants. (See NYSCEF No. 12 at 9-15 ; NYSCEF No. 59 at 3-6.) But 21647 LLC's claims against defendants are grounded in one particular statute—namely RPL § 282. Whether those claims state a cause of action, in turn, depends on whether a party in 21647 LLC's situation is a "mortgagor" for purposes of RPL § 282 (1) ’s implied attorney-fee covenant.
The statutory text's reference to "mortgagor" is ambiguous about whether the statute's implied covenant confers an attorney-fee claim on parties beyond the original borrowers on the note, such as purchasers at a foreclosure sale. And this court's research has not found any prior decision addressing this question. The court must therefore construe the statute for itself.
RPL § 282 ’s departure from the "common-law rule disfavoring any award of attorney's fees to the prevailing party in a litigation ... favors a narrow interpretation" of the implied covenant created by the statute. ( Gottlieb v. Kenneth D. Laub & Co. , 82 N.Y.2d 457, 464, 605 N.Y.S.2d 213, 626 N.E.2d 29 [1993].) That narrow interpretation must, in turn, track "the mischief to be remedied" by the statute. ( Morris v. Snappy Car Rental, Inc. , 84 N.Y.2d 21, 28, 614 N.Y.S.2d 362, 637 N.E.2d 253 [1994] ; accord Chianese v. Meier , 285 A.D.2d 315, 322, 729 N.Y.S.2d 460 [1st Dept. 2001]. [same].)
RPL § 282 ’s bill jacket provides valuable insight into the mischief the Legislature intended the statute to address. Section 282 was enacted in December 2010, in the depths of the post-2008 foreclosure crisis. (L 2010, ch 550.) The bill's Senate and Assembly sponsors explained in letters to the Governor that the bill is intended to ensure that "people with meritorious defenses to foreclosure who currently cannot afford to pay a private attorney to defend themselves will now be able to do so." (Sponsors’ Letter, Bill Jacket at 5, L 2010, ch 550; see also id. at 8 [Senate Introducer's Mem. in Support] [explaining that the "purpose of this bill is to allow borrowers in a foreclosure proceeding access to legal representation"].) The bill sponsors explained that the bill "creates parity between the lender and borrower" in the foreclosure context by providing "borrowers the same ability banks have to collect reasonable attorney's fees when the borrowers are successful in a foreclosure proceeding," similar to the reciprocal landlord-tenant provisions of RPL § 234. (Sponsors’ Letter, Bill Jacket at 5; accord Assembly Sponsor's Letter, Bill Jacket at 7 [same]. ) The sponsors also provided supportive letters and memos from several advocacy organizations, all emphasizing the importance of the bill to "borrowers" and "homeowners." (See Bill Jacket at 15-26.)
The State Banking Department opined, in providing the Governor with its assessment of the bill, that the bill might lead attorneys to be "more willing to represent borrowers with good defenses to foreclosure, since they will have a more creditworthy source from which to recover their fees if they prevail." (Banking Dept. Mem., Bill Jacket at 14, L 2010, ch 550.)
In other words, the mischief RPL § 282 was intended to address, and the means chosen to address that problem, focused on the need for mortgage borrowers—often suffering financially straitened circumstances—to have access to counsel. Having counsel, in turn, would enable those borrowers to mount a meaningful defense against foreclosure actions and improve their chances of staying in their homes. According a corresponding scope to "mortgagor" in § 282 places a party in 21647 LLC's circumstances outside the statute's coverage.
21647 LLC was not a borrower on the condominium mortgage loan. Instead, 21647 LLC purchased the condominium apartment at a public foreclosure sale after the mortgage borrowers had been foreclosed upon for failure to pay common charges. 21647 LLC chose to purchase the apartment subject not only to the mortgage but also to the pending mortgage-foreclosure action; and then had the mortgage borrowers ejected from the apartment. And 21647 LLC has not suggested that it would have had any difficulty obtaining counsel to represent it in the prior actions related to the apartment absent the potential for recovering fees under § 282.
Because 21647 LLC ejected the condominium apartment's occupants prior to its obtaining a favorable determination in the mortgage-foreclosure action, this court is skeptical that the mortgage remained "residential property" within the meaning of RPL § 282, as required under that statute to imply a reciprocal attorney-fee mortgage covenant.
In short, construing "mortgagor" in RPL § 282 to apply to parties in 21647 LLC's position would not remedy the mischief at which the statute is aimed, or otherwise fulfill the statutory purpose—it would simply afford parties in that position a windfall recovery. This court declines to take that step. The mortgage on the condominium apartment in this case does not contain a covenant permitting 21647 LLC to recover the attorney fees and expenses it incurred in successfully defending against the mortgage-foreclosure action brought by MTGLQ. 21647 LLC lacks a cause of action against MTGLQ (and the US Bank defendants) for attorney fees and costs.
Although this court agrees with MTGLQ and the US Bank defendants that 21647 LLC's claims against them are without merit, this court is not persuaded that those claims are frivolous. The court perceives no basis for awarding sanctions against 21647 LLC under 22 NYCRR 130-1.1.
Accordingly, it is
ORDERED that the branch of the US Bank defendants’ motion seeking dismissal under CPLR 3211 of the claims against them (mot seq 001) is granted; and it is further ORDERED that the branch of the US Bank defendants’ motion seeking sanctions against 21647 LLC (mot seq 001) is denied; and it is further
ORDERED that 21647 LLC's cross-motion to convert the motion into one for summary judgment under CPLR 3212, and upon conversion grant summary judgment in favor of 21647 LLC (mot seq 001) is denied; and it is further
ORDERED that the branch of MTGLQ's motion seeking dismissal under CPLR 3211 of the claims against it (mot seq 002) is granted; and it is further
ORDERED that the branch of MTGLQ's motion seeking sanctions against 21647 LLC (mot seq 002) is denied; and it is further
ORDERED that 21647 LLC's cross-motion to convert the motion into one for summary judgment under CPLR 3212, and upon conversion grant summary judgment in favor of 21647 LLC (mot seq 002) is denied; and it is further
ORDERED that the action is dismissed, and the Clerk shall separately award the US Bank defendants and MTGLQ costs and disbursements upon the submission of appropriate bills of costs; and it is further
ORDERED that 21647 LLC serve a copy of this order with notice of its entry on all parties and on the office of the County Clerk, which shall enter judgment accordingly.