Opinion
601931/2009.
Decided September 20, 2010.
Alan D. Zuckerbrod, Esq., Siller Wilk, LLP, New York, NY, for plaintiff.
Frank Acocella, Esq., Acocella Associates, Purchase, NY, for defendants Amadeus B, LLC, Gerald Goldstein Claire Levine.
Nabeena C. Banerjee, Esq., Joshua T. Reitzas, Esq., Jaffe Asher, LLP, New York, NY, for defendants Jeffrey Goldstein Music, Inc. and Audio Visual Entertainment Inc.
Matthew M. Riccardi, Esq., Richard Kibbe Orbe LLP, New York, NY, for defendant Jesse Ro.
In this mortgage foreclosure action, plaintiff moves for summary judgment dismissing the answer and affirmative defenses of the defendants that have appeared in this action and appointing a referee to compute the amount due; for leave to amend the caption and adding Jesse Ro as a defendant; and for an order directing that all rents and security deposits collected or subsequently due from Jesse Ro be turned over to plaintiff.
Defendants Amadeus B, LLC, Gerald Goldstein, and Claire Levine oppose the motion. Defendants Jerry Goldstein Music, Inc. and Audio Visual Entertainment, Inc. also separately oppose the motion. Lastly, Jesse Ro opposes that part of plaintiff's motion that seeks dismissal of Ro's affirmative defense and counterclaim seeking a declaration that his tenancy is protected by the Federal Protecting Tenants in Foreclosure Act (Pub L 111-22 § 701-704, 123 US Stat 1632, 1660-62).
BACKGROUND
It is undisputed that defendant Amadeus B, LLC is the fee owner of condominium unit TH4 in a building located at 40 Bond Street, New York, New York 10012. Defendants Gerald Goldstein and Claire Levine are allegedly individual members of Amadeus B, LLC. By a mortgage and security Agreement dated as of March 7, 2008, Amadeus B, LLC allegedly granted plaintiff Patriot National Bank a mortgage upon the condominium unit.
By a promissory note dated March 7, 2008 (the Note), Amadeus B, LLC allegedly promised to pay to the order of Patriot National Bank the principal sum of $5.625 million pursuant to the provisions of the Note as well as the provisions of a mortgage securing the Note, plus interest as provided in the Note.
Jerry Goldstein Music, Inc. and Audio Visual Entertainment, Inc. (collectively, the corporate guarantors) each allegedly executed separate guarantees of liability of the Amadeus B, LLC's obligations. Gerald Levine and Claire Levine (collectively, the individual guarantors) allegedly executed similar guaranties.
Jesse Ro claims to have rented the condominium unit pursuant to a "Lease of a Condominium Unit" agreement dated June 8, 2009 with Amadeus B, LLC, which is set to expire on June 30, 2011. Ro claims that he paid all of the rent due under the two year lease up front to Amadeus B, LLC, and gave a $15,000 deposit.
DISCUSSION
Leave to Amend
Plaintiff seeks leave to amend the caption of this action by removing the "John Doe" defendants and naming Jesse Ro as a defendant. Because this branch of plaintiff's motion is unopposed, leave to amend the caption accordingly is granted.
Summary Judgment against Defendants
"A prima facie showing to warrant summary judgment foreclosure of a mortgage requires the movant to establish the existence of the mortgage and mortgage note, ownership of the mortgage, and the defendant's default in payment." Witelson v Jamaica Estates Holding Corp. I , 40 AD3d 284, 284 (1st Dept 2007). In support of its motion, plaintiff submits copies of the mortgage note issued by Amadeus B, LLC to the order of plaintiff (the Note), and the mortgage and security agreement dated March 7, 2008 between Amadeus B, LLC, as mortgagor, and plaintiff, as mortgagee (the Mortgage). Zuckerbrod Affirm., Exs A, B. According to Barbara M. Budnick, a Senior Vice President of plaintiff, Amadeus B, LLC failed to pay plaintiff the monthly interest installment payments due and payable under the Note on December 1, 2008, January 1, 2009, February 1, 2009, and March 1, 2009. Budnick Aff. ¶ 13. Given all the above, plaintiff has established a prima facie entitlement to foreclose on the mortgage and for the appointment of a referee to compute the amount due.
In opposition, Amadeus B, LLC and the individual guarantors maintain that several aspects of the loan to them were misrepresented, which were not discovered until the closing:
1) that the loan would be amortized over 25 years, but at closing Amadeus B, LLC was presented with a note to be amortized over 30 years, with a balloon payment in April 2038;
2) that the loan would not contain a pre-payment penalty, but Amadeus B, LLC discovered that the mortgage contained a two year pre-payment penalty at the closing, which Amadeus B, LLC and the individual guarantors "were duped into accepting" (Acocella Affirm. ¶ 34);
3) that plaintiff did not fully disclose the costs of the loan;
4) that the Truth In Lending Disclosure statement provided before closing showed that the loan carried an Annual Percentage Rate of 6.840%, but at closing the APR was 7.125%;
5) Amadeus B, LLC wanted a residential mortgage loan, but plaintiff "masked" the loan as a "commercial transaction."
The corporate guarantors separately argue that, based on the above, plaintiff breached the implied covenant of good faith and fair dealing and that plaintiff has unclean hands.
The arguments of Amadeus B, LLC, the individual guarantors, and the corporate guarantors are unavailing. These defendants are not claiming that plaintiff misrepresented facts, but rather changed the terms of the financing before the agreement between plaintiff and Amadeus B, LLC was executed at the closing. These defendants do not cite any authority for the proposition that, under common law, plaintiff was not permitted to modify the terms at any time before the agreement was reached. These defendants cite no authority for the proposition that plaintiff had a common-law duty to disclose the costs of the loan. See Robinson v Crawford , 46 AD3d 252 , 253 (1st Dept 2007). ("an omission does not constitute fraud unless there is a fiduciary relationship between the parties").
Moreover, it is undisputed that Amadeus B, LLC was represented by an attorney in connection with the mortgage. Zuckerbrod Affirm., Ex E. "[W]hen a party is represented by counsel, subsequent allegations of fraud are generally unpersuasive." Shultis v Reichel Shultis , 1 AD3d 876 , 877 (3d Dept 2003). .
"[W]here a party has the means available to him of knowing by the exercise of ordinary intelligence the truth or real quality of the subject of the representation, he must make use of those means or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations'" Karsanow v Kuehlewein, 232 AD2d 458, 459 (2d Dept 1996). Here, the approval letter dated February 13, 2008 disclosed a "Prepayment Penalty: Two (2%) percent for two (2) years," and that the interest rate "shall be fixed for the initial five (5) years at 7.125%; thereafter, annual adjustments at 2.75% over the five (5) year Federal Home Loan Bank rate. First rate reset and lifetime caps of 6.0% over the start rate with subsequent adjustments limited to 2.0% per annum." Zuckerbrod Affirm., Ex C. The approval letter was purportedly signed by Amadeus B, LLC, the corporate guarantors, and the individual guarantors. Id. Thus, plaintiff's documents in support of its motion refute the arguments of Amadeus B, LLC, the corporate and individual guarantors that certain aspects of the loan were not disclosed until the closing. As mentioned above, Amadeus B, LLC was represented by an attorney in connection with the mortgage. Thus, Amadeus B, LLC fails to raise a triable issue of fact warranting denial of summary judgment, on the ground that it was "duped" into accepting the terms of the pre-payment penalty
Although Amadeus B, LLC and the individual guarantors allege that plaintiff violated the Truth in Lending Act [TILA] ( 15 USC 1601 et seq.) and the Real Estate Settlement and Procedures Act [RESPA] ( 12 USC § 2601 et seq.), TILA and RESPA do not apply here. TILA and RESPA do not apply to "credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes." 15 USC § 1603 (1); 12 USC § 2606 (a) (1). TILA's implementing regulations, known as Regulation Z, follow the statutory exemption ( 12 CFR 226.3 [a][1]). As set forth in its implementing regulations, RESPA does not apply to business purpose loans, i.e., "an extension of credit primarily for a business, commercial or agricultural purpose, as defined by Regulation Z." 24 CFR 3500.5 (b). TILA states that "The adjective consumer' used with reference to a credit transaction [under TILA], characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property, or services which are the subject of the transaction are primarily for personal, family, or household purposes." 15 USC § 1602 (h).
Here, the paragraph 7 of the Note states, in bold print and in all caps, " MAKER ACKNOWLEDGES AND REPRESENTS THAT THE LOAN EVIDENCED BY THIS NOTE IS A COMMERCIAL TRANSACTION AND THAT THE PROCEEDS OF THIS LOAN SHALL NOT BE USED FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES." Moreover, the Note was made to a limited liability company, not a natural person. TILA clearly does not apply, and Amadeus B, LLC and the individual guarantors fail to raise a triable issue of fact that the loan proceeds were not used for business purposes, for RESPA to apply. Even assuming that RESPA were to apply, nothing in RESPA "shall affect the validity or enforceability of any loan, loan agreement, mortgage or lien made or arising in connection with a federally related mortgage loan." 12 USC 2615. Thus, courts have ruled that a disclosure violation of RESPA does not constitute a valid defense to a mortgage foreclosure action. See Deutsche Bank Nat. Trust Co. v Campbell, 26 Misc 3d 1206(A) (Sup Ct, Kings County 2009) (collecting cases).
Claire Levine's argument that she "would not have readily agreed to this loan had I been so explicitly informed" is without merit. Claire Levine does not dispute that she signed the Note. Presumed to have read. . . and she was represented by counsel in connection with the mortgage.
The contention of Amadeus B, LLC and the individual guarantors that the mortgage broker, Manhattan Mortgage Company, is an agent of plaintiff is unsubstantiated. According to a Broker Indemnity agreement made as of March 7, 2008, Amadeus B, LLC and the individual guarantors acknowledged that they had engaged the services of a mortgage broker, the Manhattan Mortgage Company. Budnick Reply Aff., Ex A. According to a Mortgage Broker Agreement signed by Jerry Goldstein and Claire Levine, the mortgage broker stated "We are acting as an independent contractor and not as your agent." Acocella Opp. Affirm., Ex E. Nothing in the record indicates that Manhattan Mortgage Company acted as an agent of plaintiff.
The corporate guarantors' argument of unclean hands is unavailing. See Jo Ann Homes at Bellmore, Inc. v Dworetz, 25 NY2d 112, 122 (1969). The remaining arguments of Amadeus B, LLC, the individual guarantors, and the corporate guarantors are without merit.
Therefore, plaintiff is entitled to summary judgment against defendants, and entitled to the appointment of a referee to compute the amount of indebtedness due and owing.
As to Ro's defenses, the only defense raised in opposition to plaintiff's motion is the Federal Protecting Tenants in Foreclosure Act, which Ro argues prevents plaintiff from evicting Ro from the premises for the remainder of Ro's lease.
As plaintiff indicates, whether Ro is entitled to remain as a tenant under the federal statute is not a defense to plaintiff's right to foreclose on the mortgage, but rather affects whether any leasehold interest would be extinguished when the ownership interest of Amadeus B, LLC is cut off by the judgment of foreclosure, which would normally be the case. See e.g. UMB Bank Trust Co. v S.H.M. West Parking Corp., 181 AD2d 577 (1st Dept 1992). At this stage of the foreclosure action, i.e., computation of the amount due on the mortgage, Ro's right to remain in the premises need not be decided, but must be determined in connection with plaintiff's eventual application for a judgment of foreclosure and sale and to confirm the report of the referee to compute.
On this motion, plaintiff has not established that the Federal Protecting Tenants in Foreclosure Act does not apply to Ro. Therefore, it is not entitled to summary judgment dismissing that defense or the counterclaim seeking a declaration that Ro is entitled to remain in the premises after the foreclosure sale.
Turnover of all rents and security deposits
Section 2.01 (II) of the Mortgage provides, in pertinent part, that, if an Event of Default occurs, then
"During the continuance of any such Event of Default . . . the Mortgagee shall be entitled to collect and receive all earnings, revenues, rents, issues, profits and income of the Mortgage Property and every part thereof, all of which shall for purposes constitute property of the Mortgagor; and in furtherance of such right, the Mortgagee may collect the rents payable under all leases of the Premises directly from the lessees thereunder upon notice to each such lessee than an Event of Default exists hereunder accompanied by a demand on such lessee for the payment to the Mortgagee of all rents due and to become due under its lease. . . ."
Zuckerbrod Affirm., Ex B.
Section 2.01 of the Mortgage cannot be interpreted to apply to security deposits. A security deposit is not rent. See General Obligations Law § 7-103 (1). "A security deposit remains the property of the tenant, and must be returned at the conclusion of the tenancy." Srinivasan v Silvi, 19 Misc 3d 138(A) (App Term, 2d 11th Jud Dists 2008). Therefore, plaintiff is not entitled to collect and receive the security deposit that Ro tendered to Amadeus B, LLC.
Plaintiff is not entitled to an order directing Amadeus B, LLC to turn over all the rent that Ro paid up front to Amadeus B, LLC. "An owner of property is entitled to the rents until there is a default under the mortgage; then the mortgagee has an equitable claim to the rents that are unpaid."
New York Life Ins. Co. v Fulton Dev. Corp., 265 NY 348, 351 (1934). Here, it is undisputed that Ro paid up front all of the rent to Amadeus B, LLC, which was permissible under the lease. Paragraph 52 of the Rider to Ro's lease with Amadeus B, LLC, which provides that "Rent must be paid on or before its due date." Riccardi Opp. Affirm., Ex 1. Thus, plaintiff cannot pursue rents that Ro had already legitimately paid to the owner. See Chemical Bank v Evans Hughes Realty, L.P., 205 AD2d 573, 575 (2d Dept 1994) (receiver therefore had no authority to pursue rents that had already been legitimately paid to the owner before he became "qualified" to collect them). Section 2.01 of the Mortgage cannot be reasonably interpreted to require Amadeus B, LLC all rent that was paid prior to its default on the note and mortgage. Accordingly, this branch of plaintiff's motion is denied.
CONCLUSION
Plaintiff is granted leave to amend the caption to name Jesse Ro as a defendant in lieu of "John Does' Tenants, whose identities are presently unknown." Plaintiff is entitled to summary judgment in their favor against defendants Amadeus B, LLC, Gerald Goldstein, Claire Levine, Jerry Goldstein Music, Inc., and Audio Visual Entertainment, Inc., and is entitled to the appointment of a referee to compute the amount of the indebtedness owed.
Plaintiff is denied summary judgment dismissing the fifth affirmative defense and counterclaim by Jesse Ro.
The branch of plaintiff's motion for an order directing Amadeus B, LLC (or any other recipient of prepaid rent for the premises) to turn over the prepaid rent and security deposit collected from Ro is denied.
Settle order.