Opinion
2007/01858.
Decided February 20, 2008.
Claiming, and establishing, that two covenants in the mortgage have been violated — the no alteration or demolition without consent clause and the no sale without consent clause — the plaintiff mortgagee sues the mortgagor and the mortgagor's transferee for a preliminary and permanent injunction enjoining any further alterations of the mortgaged premises and rescinding the sale to the transferee. Plaintiff also contends that the alterations of the premises have occurred in violation of a restrictive covenant in the underlying deed requiring continued use of the premises as a golf course with related restaurant facilities. Currently pending before the court is plaintiff's motion, brought on by order to show cause dated December 21, 2007, for a preliminary injunction (1) restraining the mortgagor's transferee, MCR Upstate Development, from further demolishing or altering the building, (2) enjoining MCR from using the property other than as a golf course with related restaurant facilities, (3) enjoining MCR from not keeping the premises in reasonably good repair, and (4) enjoining MCR from removing or disposing of any fixture on the premises. No relief on plaintiff's motion is requested against the mortgagor, Northern Golf.
Having some difficulty finding a conflict free attorney, Northern Golf appeared in opposition to the motion shortly before the return date. It appears that Northern Golf is in default. The day after oral argument, Northern Golf filed a motion for an extension of time to file an answer and a motion to dismiss. That motion is not considered here.
MCR filed a cross-motion to dismiss the complaint pursuant to CPLR 3211(a)(1), (a)(3), (a)(5), and (a)(7), together with affidavits and an undertaking in opposition to the motion for a preliminary injunction. MCR also seeks sanctions under 22 N.Y.C.R.R. § 130-1.1. MCR contends that the restrictive covenant was released by all owners of record of the premises, which was recorded in the county clerk's office, that MCR continues to run a golf course on the premises, although they expect to lease a portion of the building to the nearby hospital for medical offices, that MCR has done nothing to impair plaintiff's security interest and indeed has improved the value of the premises, that the restrictive covenant is not a part of or condition of the mortgage notwithstanding that its terms are recited therein, and that plaintiff has no standing to rescind the transfer from Northern Golf to MCR because plaintiff is confined either to a suit on the note to Northern Golf or an equitable foreclosure action against the land. RPAPL § 1301. At bottom MCR seeks discharge and vacatur of the lis pendens pursuant to CPLR 6514(b).
Plaintiff concedes that he has two remedies, either one in law on the note or an action to foreclose, and he assures the court that it is the latter that is involved here. For the reasons stated below, the court finds that plaintiff may not maintain a foreclosure action in the absence of an election to accelerate the mortgage debt, something plaintiff has taken pains to eschew, and that therefore it has no chance of success on the merits. But it is worthwhile to detail the result which would obtain if plaintiff accelerated the debt such that he could maintain the foreclosure action, if only to provide the backdrop for why plaintiff's action must be dismissed.
When Northern Golf conveyed to MCR "subject to" the mortgage between plaintiff and Northern Golf, "it will be presumed that the amount of the mortgage was deducted from the purchase price; from which fact the law will infer an obligation on the defendant [MCR] to discharge the mortgage." Andrews v. Wolcott, 16 Barb. 21 (Sup.Ct. NY Co. 1852) (subject to mortgage conveyance "cast on the defendant [transferee] the burden of paying off that mortgage" as between mortgagor and its transferee). However, as the mortgagor's transferee, MCR is not the primary obligor with respect to the mortgagee because it took "subject to" the mortgage and did not undertake to assume the mortgage obligations. "In this situation, the land becomes the primary fund for payment." Manilla Anchor Brewing Co., 163 App. Div. 30, 31 (2nd Dept. 1914). "As between the mortgagor [Northern Golf] and the mortgagee, the land is the principal obligation and the mortgage is security for the personal indebtedness," until "upon conveyance of the land to . . . [the mortgagor's transferee — MCR] the mortgaged premises became the primary fund for the payment of the mortgage as between . . . [the mortgagee] and the . . . [mortgagor's transferee — MCR]." Seamen's Bank for Savings in the City of NY v. Smadbeck, 293 NY 91, 95-96 (1944).
The mortgagor may not, "by any dealing or contract with . . . [MCR], change the rights of the creditor to proceed on the bond, or [to] compel him [i.e., the mortgagor] to resort in the first instance to the land." Calvo v. Davies, 28 Sickles 211, 73 NY 211 (1878). See Wilbur v. Estate of Warren, 104 NY 192, 197 (1887) (when Northern Golf conveyed out to MCR, the "plain meaning of the transaction between the parties is that the land shall pay the mortgage debt in exoneration of the personal liability of the mortgagor on his bond, and in equity on such a conveyance, the land is treated as the principal debtor, and the mortgagor as surety for the mortgage debt"). That is why it was held in Northeast Savings, F.A. v. Rodriquez, 159 AD2d 820 (3rd Dept. 1990) that the mortgagee's relief was "limited to the value of the mortgaged property." Id. 159 AD2d at 821. See 2 Rasch, NY Law Practice of Real Property § 33:144 (2nd ed.) ("grantee, although not in a strict sense the principal debtor, stands in the quasi relation of principal debtor only in respect to the land as the primary fund, and then only to the extent of the value of the land"). Compare, in the context of a mortgage assumption, Northeast Savings, F.A. v. Sennet, 161 AD2d 867 (3rd Dept. 1990).
The important point is that, with the mortgagee's decision to sue in foreclosure, assuming that the suit may be maintained (but see, below) the mortgagor would have the right to pay off the indebtedness and obtain an equitable assignment of the mortgage from the mortgagee so that it might proceed against the land in the hands of its transferee. Northern Golf's "relation to the debt was not changed by the conveyance so as to prevent . . . [it] from paying the debt and proceeding against the land for . . . [its] indemnity." Seamen's Bank, 293 NY at 96. See Calvo v. Davies, 73 NY 211 (mortgagor's "relation to the debt was not changed by his conveyance so as to take away his right as debtor, to pay the debt at any time after it became due, and upon his paying the debt, either voluntarily or by compulsion, he would, upon the doctrine of equitable subrogation, be entitled to be substituted to the mortgage security as it originally existed, with the right to proceed immediately against the land for his indemnity") (emphasis supplied). In other words, upon payment of the debt by the mortgagor (as indeed Northern Golf has tendered in this case), "the mortgagee may be compelled to make an assignment of his security" to the mortgagor. Manilla Anchor Brewing Co. v. Rawsilk Trading Co., 163 App. Div. 30, 32 (2nd Dept. 1914). Finally, "[t]o afford a complete relief, the precedents also justify substituting the assignee as dominus litus in the pending foreclosure suit, or in directing that such suit be discontinued upon the assignment being executed." Id. 163 App. Div. at 33. See Howard v. Robbins, 170 NY 498 (1902)(mortgagor's right to an equitable decree compelling the mortgagee to make a written assignment of the mortgage to the mortgagor who pays the debt); Johnson v. Zink, 6 Sickels 333, 51 NY 333 (1873); Robert H. Bowmar, Mortgage Liens in New York, § 13:2 ("conveyance to a subject-to grantee does not affect the mortgagee's election, upon default, to sue upon the debt or to foreclose the mortgage" — the mortgagor "has the right" to "pa[y] it voluntarily" and thereby the mortgagor, "as surety,' may be subrogated to the mortgagee's right against the premises — that is, his right to foreclose"); A.L.I., Restatement (Third) of Property § 5.2, comment c (1997).
By tendering the net pay off figure prior to the closing of the judicial sale, the mortgagor would not be making an otherwise prohibited prepayment, either under the law prohibiting the same in the absence of acceleration ( see cases cited below), or any prepayment penalty clause of the mortgage. Matter of D.I.S., LLC, 38 AD3d 543 (2nd Dept. 2007).
All of this assumes, of course, that the mortgagee has accelerated the mortgage indebtedness by reason of the default and either sues on the note for the accelerated debt or institutes a judicial foreclosure action. The plaintiff maintains that he has instituted the latter, but insists that a foreclosure occur without an election to accelerate the mortgage indebtedness. Instead, he seeks via foreclosure an injunction against future defaults of the restrictive covenant, the alteration and demolition clause, and he seeks rescission of the transfer from mortgagor to MCR. Not incidentally, by electing not to accelerate, plaintiff seeks to take advantage of the rule in this state that the "mortgagor has no right to pay off his obligation prior to its stated maturity date in the absence of a prepayment clause in the mortgage or contrary statutory authority,'" both of which are absent here. Friends Realty Associates, LLC v. Wells Fargo Bank, N.A.P, 40 AD3d 287 (1st Dept. 2007) (quoting Matter of Arthur v. Burkich, 131 AD2d 105, 107 (3rd Dept. 1987)). See Missouri, Kansas Texas Ry Co. v. Union Trust Co., 156 NY 592, 599 (1878); Russo Enterprises, Inc. v. Citibank, N.A., 266 AD2d 528, 529 (2nd Dept. 1999); Troncone v. Carelli, 147 AD2d 633 (2nd Dept. 1989). The court finds that such an action is entirely foreign to our law outside the context of waste, which all parties agree is not at issue here, because the improvements contemplated will enhance the value of the property by the provision of rentable commercial office space, and there is no allegation by plaintiff that the premises themselves are, or will be in their improved state after contemplated alterations, an inadequate security for the satisfaction of the mortgage. Cf., RPAPL § 211; Travelers Ins. Co. v. 633 Third Associates, 973 F.2d 82, 85 (2nd Cir. 1992), on subsequent appeal, 14 F.3d 114, 122-23 (2nd Cir. 1994); Dime Savings Bank v. Beecher, 23 AD2d 297, 301 (2nd Dept. 1965); Vandemark v. Schoonmaker, 9 Hun. 16, 21-22 (3rd Dept. 1876); Syracuse Savings Bank v. Onondaga Silk Co., Inc., 171 Misc. 993 (Sup.Ct. Onondaga Co. 1939) (Kimball, J.).
"The foundation of an action for waste by a mortgagee is the impairment of the security of the mortgage with knowledge of the lien ( see Ogden Lumber Co. v. Busse, 92 App. Div. 143)." Band Realty Co. v. North Brewster, Inc., 59 AD2d 770, 771 (2nd Dept. 1977).
Because "[a] mortgage is recognized to be a lien remedy," and "foreclosure of the mortgage is the legal process for realizing upon the lien," the foreclosure action is the process "[where]by the encumbered property is sold under the supervision and control of the court and the proceeds of sale applied to the satisfaction of the mortgage." Wyoming County Bank Trust Co. v. Kiley, 75 AD2d 477, 480 (4th Dept. 1980). Ordinarily, when the mortgage lacks a clause specifically providing for acceleration by reason of the default in question, the mortgagee is unable to maintain a foreclosure action, which by its nature presupposes a valid acceleration of the debt, and instead is relegated to a damage remedy by reason of breach of contract. Bodwitch v. Allen, 91 AD2d 1177, 1178 (4th Dept. 1983); Brayton v. Pappas, 52 AD2d 187 189-90 (4th Dept. 1976); Bergman on New York Mortgage Foreclosures § 4.14[4]. Where, as here, the mortgage gives the mortgagee the right to accelerate for each of the defaults claimed by plaintiff (save the restrictive covenant, discussed below), such acceleration clauses have been upheld. Levine v. Infidelity, Inc., 285 AD2d 629, 630 (2nd Dept. 2001) (demolition without consent); Bonady Apartments, Inc. v. Columbia Banking Federal Savings and Loan Association, 99 AD2d 645 (4th Dept. 1984)(due-on-sale acceleration clause is enforceable). Compare Home Savings Bank of Upstate New York v. Baer Properties, LTD, 92 AD2d 98, 99-100 (3rd Dept. 1983)("under certain circumstances it may be inequitable to enforce a due-on-sale provision . . . and . . . each case must be decided on its own particular facts"); Silver v. Rochester Savings Bank, 73 AD2d 81 (4th Dept. 1988)(same). As drafted, the mortgage default provisions regarding sale of the property must be read together with the acceleration clause to yield a valid and enforceable due-on-sale provision. The same is true of the demolition and alteration without consent provisions.
But plaintiff here is insisting that these default provisions are severable from the acceleration clause which incorporates them, and that he has a right in an equitable foreclosure action to a rescission/injunction remedy to either undo the defaults or restrain further defaults. For the reasons stated above, plaintiff is right that the terms of the mortgage permit him to accelerate without requiring him to do so. But he is wrong in his view that a mortgage foreclosure action may be maintained without the mortgagee having accelerated the mortgage debt in some affirmative way. Cresco Realty Co. v. Clark, 128 App. Div. 114 (2nd Dept. 1908)("right to maintain the suit depends on such election [to accelerate] being seasonably made"). Cf., Walsh v. Henel, 226 App. Div. 198, 200-01 (4th Dept. 1929); Northport Trust Co. v. Richardson, 245 App. Div. 733, 734 (2nd Dept. 1935); 78 NY Jur.2d Mortgages § 525 ("mere filing of a summons and complaint and notice of pendency of action, where the complaint does not state such an election, and in fact states no cause of action, does not constitute an election"). And he is wrong to suggest that he has, in the context of the mortgage foreclosure action not involving waste, a right to an injunction or other equitable relief not called for by the terms of the mortgage. As well stated, "the mortgagor cannot be deprived of any rights which he possesses as owner or the mortgagee allowed rights greater than those granted by the terms of the mortgage." Holmes v. Gravenhorst, 263 NY 148, 154 (1933).
Title remains in the mortgagor and those claiming under or through the mortgagor until the lien is foreclosed. Foreclosure of the lien does not take place upon the commencement of a foreclosure action, but upon a sale under a judgment of foreclosure. Though, during the pendency of the action, a court of equity has power to issue interlocutory orders for the protection of an asserted lien, such orders must be auxiliary to the right to foreclose the lien, and cannot deprive any party of a title or a right, which though subordinate to the lien of the mortgage, survive and are valid until the lien is foreclosed by a sale under a judgment of foreclosure.
Id. 263 NY at 154-55 (quoting Prudence Co. v. 160 W. Seventy-Third St. Corp., 260 NY 205, 211 (1932)). The injunction here requested is not in any sense "auxiliary to the right to foreclose the lien," because plaintiff does not seek foreclosure despite his attempted maintenance of an action to foreclose. As to the demolition and alteration of the premises by MCR, plaintiff has no remedy against MCR, the entity making the changes, unless waste is alleged, and he is relegated to a damage remedy against Northern Golf if plaintiff chooses not to accelerate, but only to the extent of the value of the land. Brayton v. Pappas, 52 AD2d at 189-90.
At bottom, however, as to both mortgagor and transferee, plaintiff has sued in foreclosure against the land itself, a suit which presupposes an acceleration and an ultimate judicial sale of the property. Not having elected to accelerate, and not seeking a judicial sale, plaintiff has not demonstrated a likelihood of success on the merits against either defendant and is not entitled to a preliminary injunction directed to either. In addition, no case has been called to the attention of the court, nor has the court's own research turned up a case, which grants rescission of a mortgagor's transfer of the mortgaged premises to a third party on the ground that the transfer occurred in violation of a mortgage covenant requiring the motgagee's consent to the transaction in circumstances which did not call into question the adequacy of mortgaged premises to satisfy the monetary obligations incurred under the mortgage. Compare Esplendido Apartments v. Metropolitan Condominium Association, 161 Ariz. 325, 329, 778 P.2d 1221, 1225 (Ariz. 1989)(due-on-sale clause runs with the land and binds nonassuming grantee; mortgagee's remedy in that situation is acceleration and foreclosure, not damages against the grantee), with, In re Ormond Beach Associates Limited Partnership, 184 F.3d 143, 157 (2nd Cir. 1999) (mortgage due-on-sale clause did not run with the land under Florida law; mortgagor's grantee, which did not assume the existing mortgage when it acquired the property, was therefore not bound by, and did not breach, the clause adding: "we have found no authority for holding a grantee liable under a due-on-sale clause in the grantor's mortgage"). Furthermore, not having established the likelihood of irreparable harm, either by reference to the inadequacy of plaintiff's remedy at law if he had elected that route, or by reference to the inadequacy of the land to satisfy the primary mortgage obligation, plaintiff would not be entitled to a preliminary injunction in any event.
The foregoing has dealt with the defaults under the mortgage that were made a part of the mortgage agreement. Plaintiff also seeks relief by reason of MCR's alleged violation of a restrictive covenant designed to preserve the property as a golf course and associated restaurant for the benefit of the Dansville community until another such facility is built nearby. Plaintiff is, however, merely a mortgagee, not in possession, who otherwise owns no land in Dansville which might benefit from enforcement of the restrictive covenant; plaintiff as a mere mortgagee not in possession has not established possession of a dominant estate with respect to the restrictive covenant entitling him to bring an enforcement proceeding. The Nature Conservancy v. Congel, 253 AD2d 248, 250-51 (4th Dept. 1999)("such covenants will be enforced only where the dominant landowner has established their existence by clear and convincing evidence") (emphasis supplied). For example, in Vogeler v. Alwya Import Corp., 247 NY 131 (1928), the owner of an adjoining parcel for whose benefit the restrictive covenant was created by the grantor was held entitled to seek enforcement. Id. 247 NY at 135-36 ("intent to establish the restriction for the benefit of the owner of the adjoining parcel is clear"). There must be privity of estate. Orange Rockland Utilities v. Lakewood Estates, 52 NY2d 253, 262 (1981); Neponsit Prop. Owners' Assn. v. Emigrant Ind. Savings Bank, 278 NY 248, 255 (1938). "In order to establish the privity requisite to enforce a restrictive covenant, a party need only show that his property derives from the original grantor who imposed the covenant and whose property was benefitted thereby, and concomitantly, that the party to be burdened derives his property from the original grantee who took the property subject to the restrictive covenant." Malley v. Hanna, 65 NY2d 289, 291 (1985) (emphasis supplied). Even in the third party beneficiary context, plaintiff must own property intended to be benefitted by the covenant.
The mortgagee in a state such as New York, which generally vests the incidents of title in the mortgagor, and relegates the interest of the "mortgagee as having a lien upon it for his security," Mygatt v. Coe, 97 Sickels 78, 142 NY 78, 89 (1894), cannot claim the benefit of a deed's covenants unless he should "enter, to hold under his mortgage and actually foreclose, [in which case] he would hold the whole benefit of the covenant." White v. Whitney, 3 Metcalf 81, 44 Mass. 81, 88 (1841), cited with approval, Mygatt v. Coe, 142 NY at 89. In other words, a mortgagee may enjoy privity of estate upon taking possession, but cannot claim that status before. Levy v. Long Island Brewery, 26 Misc. 410 (Sup.Ct. App. Term NY Co. 1899)("it is only when a mortgagee takes possession that he has the estate cum onere"); Title Guaranty Trust Co. v. Maloney, 165 N.Y.S. 280, 281 (Sup.Ct. App. Term 2nd Dept. 1917). The mortgagee can only claim that status until the purchaser at the foreclosure sale closed, at the happening of which, "[b]y the foreclosure of the mortgage the purchasers at the sale . . . become, alone, entitled to sue upon the prospective covenants contained in the deed . . . and, . . . can successfully maintain the action upon the ground that there does exist between them and the covenator a privity of estate." Mygatt v. Coe, 142 NY at 89.
Because for the reasons stated above, plaintiff cannot maintain a foreclosure action sufficient to put him in possession of the premises, and he cannot establish a likelihood of success on his claim to enforce the restrictive covenant against MCR sufficient to support a preliminary injunction. By like reasoning, MCR's motion to dismiss is granted. To the extent plaintiff seeks to enjoin a violation of the restrictive covenant on the theory that its mere inclusion in the mortgage makes it a separately enforceable mortgage covenant, assuming that inclusion of the terms of the restrictive covenant was meant to make it a separately enforceable mortgage covenant quite without regard to the privity analysis discussed above, plaintiff fares no better than on his request for an injunction in connection with the alteration/demolition, and the due on sale, clauses of the mortgage.
The cross-motion of MCR to dismiss the complaint as against it is granted. Northern Golf's motion to dismiss has not yet ripened for decision. Plaintiff's Supplemental Memorandum of Law, dated February 19, 2008, has been considered.
SO ORDERED.