Opinion
60249/2011
06-17-2015
BMM Four, LLC, Plaintiff, v. BMM Two, LLC and BMM THREE, LLC, JP MORGAN CHASE BANK, N.A., As successor in interests to WASHINGTON MUTUAL BANK, F.A., and WORKERS' COMPENSATION BOARD OF THE STATE OF NEW YORK, Defendants.
Hass & Gottlieb Attorney for Plaintiff 670 White Plains Road, Suite 121 Scarsdale, New York 10583 Stargiotti & Beatly, PC Attorney for Defendants BMM Two, LLC and BMM Three, LLC 48 Wheeler Avenue Pleasantville, New York 10570 Law Office of Christopher B. Turcotte, PC Attorney for Defendant JP Morgan Chase Bank, N.A.575 Madison Avenue, Suite 1006 New York, New York 10022 Factual and Procedural Background
Hass & Gottlieb
Attorney for Plaintiff
670 White Plains Road, Suite 121
Scarsdale, New York 10583
Stargiotti & Beatly, PC
Attorney for Defendants BMM Two, LLC and BMM Three, LLC
48 Wheeler Avenue
Pleasantville, New York 10570
Law Office of Christopher B. Turcotte, PC
Attorney for Defendant JP Morgan Chase Bank, N.A.575 Madison Avenue, Suite 1006
New York, New York 10022
Factual and Procedural Background
William J. Giacomo, J.
Plaintiff ("BMM Four") commenced this partition action with respect to certain real property and improvements located at 204 Union Avenue, Mt. Vernon, New York. BMM Four alleges it and the BMM defendants, BMM Two, LLC and BMM Three, LLC ("BMM Two" and "BMM Three") are owners of the property as tenants in common and have been in possession and control of the premises since the date they acquired it on April 5, 2004. The property is a multi-unit commercial and residential building. Defendant, JP Morgan Chase, Bank, N.A., as successor in interest to Washington Mutual Bank, F.A., is a party to this action because it holds a mortgage on the premises in the original principal sum of $2,587,500.00.
All defendants oppose BMM Four's request for partition. BMM Two and BMM Three argue that BMM Four has no right of possession in the premises nor an estate of inheritance, an estate for life, or an estate for years, which would allow it to bring a partition action. BMM Two and Three also claim that they and BMM Four agreed not to sell their interest in the premises without a super majority consent of all members of the BMM companies and that has not occurred. Finally, BMM Two and BMM Three argue that the complaint in this action was signed by Michael Otis, who is the husband of Myrna Otis, signor of the mortgage documents and operating agreements of BMM Four and BMM Two. They argue Myrna's interest was never transferred to Michael and, therefore, Michael is without authority to institute this action.
Defendant, JP Morgan Chase, also opposes the action for a partition. It asserts that BMM Two, BMM Three and BMM Four failed to comply with the terms of the mortgage which mandates, among other things, that absent JP Morgan Chase's consent there shall be no change of more than 25% of the membership interest in the mortgagor and no sale or conveyance of the property without repaying in full the underlying promissory note and all other sums secured thereby. JP Morgan Chase claims that Myrna Otis never received its approval for the transfer of her interest to Michael; therefore, such action is a violation of the mortgage.
A trial was held by this Court on December 16, 2014 at which time numerous witnesses testified including the principals of BMM Two, BMM Three, and BMM Four as well as a representative of JP Morgan Chase. Post trial submissions were requested and received and have been reviewed. After review, the Court renders the following decision:
Right to Partition
It is undisputed that plaintiff BMM Four, is a tenant in common of the property known as 204 Union Avenue, Mt. Vernon, New York, which is a mixed use commercial and residential building which contains approximately 41 tenants. It is also undisputed that the defendant JP Morgan Chase holds a mortgage on the premises, which mortgage was signed by the members of BMM Two, Three and Four, to wit, Mark Fonte and William Fonte with respect to BMM Two and Robert Fonte with respect to BMM Three and Myrna Otis with respect to BMM Four.
It is also undisputed that some time in 2008 Myrna Otis transferred her interest in BMM Four to her husband, Michael Otis, without the execution of any formal documents, but by merely notifying her accountant that her husband was now the owner of 100% of the membership interest of BMM Four. The evidence discloses, and it was undisputed, that each of the BMM companies executed similar operating agreements, each one containing a paragraph preventing the transfer of substantially all the assets of that limited liability company without a super majority vote of the members. It is also undisputed that none of the BMM companies executed an agreement specifically with regard to the premises at issue.
BMM Four asserts that it has the absolute right to partition the property since it is an owner of the premises as a tenant in common. It claims that Real Property Action and Proceeding Law ("RPAPL") §901 allows a person holding and in possession of real property as a tenant in common to maintain an action for a partition of the property and, if said property is for sale, the sale must be at public auction pursuant to RPAPL §231(1) (see Lauriell v Gallotta, 70AD3d, 1009 [2nd Dept. 2010]). BMM Two and Three disagree. They assert that the action should be dismissed because: (1) BMM Four has no standing to bring this action since it has no right of possession to the premises; (2)that Michael Otis, signor of the complaint, has no authority to bring this action because Myrna Otis transferred her interest in BMM Four to her husband without a formal writing as required by the operating agreement: and (3)because prior to purchasing the property there was an agreement among the BMM company owners that it could not be sold without a super majority agreement of the parties and BMM Two and Three, who collectively own 51% of the premises, do not wish to sell.
Defendant, JP Morgan Chase, also opposes the partition action claiming it is undisputed that Myrna Otis, who executed the mortgage documents on behalf of BMM Four, transferred her membership interest to her husband, Michael, without receiving the approval of JP Morgan Chase. Thus, such transfer is illegal and without legal affect and without the consent of JP Morgan Chase the partition cannot proceed.
Discussion
BMM Four asserts that it is undisputed that the premises in question cannot be physically partitioned as it is a multi-story 41 unit apartment building thus, it must be sold. BMM Four also asserts that as a tenant in common of the real property pursuant to a deed dated April 5, 2004, and recorded on January 26, 2005, it has the right to maintain this partition action. BMM Two and Three disagree. They argue that BMM Four has no right to actually possess any part of the building by virtue of its ownership interest. They also argue that BMM Four, through its sole member, Myrna Otis, admitted at trial that the property was bought as an investment only and with no intent to occupy it. Thus, BMM Two and Three claim that BMM Four has no right of possession. They claim RPAPL §901 defines who may maintain a partition action and that only a person with a right of possession, an estate of inheritance, an estate for life or an estate for years to the premises can bring such an action. Thus, they claim plaintiff cannot do so although they cite no cases to support their legal argument.
RPAPL § 901. By whom maintainable, provides in relevant part:
1. A person holding and in possession of real property as joint tenant or tenant in common, in which he has an estate of inheritance, or for life, or for years, may maintain an action for the partition of the property, and for a sale if it appears that a partition cannot be made without great prejudice to the owners.
Here, BMM Four is a limited liability company and as such it may own real estate in its name (see Limited Liability Company Law §202[b]) and it may sell, convey, or assign such ownership interest in part or in all (see Limited Liability Company Law §202[c]).
Thus, BMM Four has the right to bring this partition action to sell its interest (see Limited Liability Company Law §202[c]).
Improper Transfer of BMM Four to Michael Otis
BMM Two and Three as well as JP Morgan Chase also argue that BMM Four may not maintain this action because Myrna Otis transferred her membership interest in it to her husband, Michael Otis, without executing a formal document as required by the operating agreement of BMM Four.
BMM Four argues that no formal written agreement is required to transfer a membership interest in an LLC. The undisputed evidence at trial disclosed that Myrna Otis was 100% owner of BMM Four at the time the property was purchased and the mortgage was executed and that she transferred her interest to her husband some time in 2008 which transfer was evidenced solely by a notation on the tax returns for plaintiff beginning that year. BMM Four notes that Limited Liability Company Law § 604 allows Myrna Otis, as a sole member of the limited liability company, to transfer her interest to anyone of her choosing. BMM Four argues that Limited Liability Company Law §603 provides that an operating agreement may provide for the assignment or transfer to be represented by a certificate but does not mandate it.
BMM Four cites Bartfield v. RMT Associates, LLC , (11 AD3d 386 [1st Dept 2004]) in support of its position. However, in Bartfield there was no operating agreement and the court held that "[t]he trial court also properly concluded that the assignment of James Murphy's interest in RMTS to his wife, Jane, was valid. There was no operating agreement in place for RMTS prohibiting such an assignment, which is otherwise authorized by law" (id.). Therefore, Bartfield, is not applicable here since there are valid operating agreements which usurp Limited Liability Company Law §603.
BMM Four relies on Barkin Construction Corp. v. Goodman (221 NY 156 [2nd Dept 1931], for the proposition that irregularities, such as the lack of a written transfer agreement, may be overlooked if illegality would not result. BMM Four also relies on Leslie, Semple & Garrison, Inc. v. Gavit & Co., Inc., 81 AD2d 950, 439 N.Y.S.2d 707 [3rd Dept 1981]) wherein the Court stated "Moreover, in the management and affairs of a family corporation, irregularities not directly harmful in their nature will be overlooked, and invalidity will not be sought if the declaration of illegality could work injustice. Courts are not to shut their eyes to the realities of business life (citations omitted)."
In this case Article 3, Paragraph 3 of BMM Four's operating agreement states, "company shall keep books and records either in written form or in other than written form if easily convertible into such written form within a reasonable time." Thus, this Court finds that pursuant to the operating agreement, Myrna Otis, as 100% owner of all the membership interest, did assign her interest in BMM Four "in other than written form" which transfer was converted into writing beginning in 2002 when the tax return was completed and filed.
At trial the evidence disclosed that such assignment of interest was conveyed orally to the other members of BMM Two and BMM Three. However, notice of the transfer was never conveyed to JP Morgan Chase, the holder of the mortgage on the premises. Nevertheless, in light of the above case authority and pursuant to the terms of the operating agreement the Court finds that contrary to defendant BMM Two and BMM Three arguments, the failure to produce a written assignment or transfer of membership interest does not prevent BMM Four's current sole member, Michael Otis, from pursuing a partition action on behalf of BMM Four.
Requirement of a Two-Thirds Majority
BMM Four also argues that there is no agreement in existence, as claimed by BMM Two and Three, among the three tenants in common of the premises (BMM Two, Three and Four) that prevents BMM Four from seeking a partition action without a two-third majority of the members. BMM Two and Three disagree. They claim that the operating agreement of BMM Two, of which BMM Four owns a 49.6% membership interest, contains a provision that requires a vote of two-thirds of its members to sell the premises. The agreement in question contains the following provision in Article 3, paragraph 6:
The vote of at least two-thirds in interest of the members are entitled to vote thereon, shall be required to approve the sale, exchange, lease, mortgage pledge or other transfer or disposition of all or substantially all of the assets of the company.
That paragraph limits the sale of substantially all the assets of BMM Two but has no affect on the authority of BMM Four to seek a sale of its one-third interest. The parties acknowledged at trial that there was no agreement executed by BMM Two, BMM Three and BMM Four together to govern the disposition of the premises. Hence, since BMM Four did not sign any agreement with regard to the premises sought to be partitioned it is not bound by the limitation contained in the operating agreement of BMM Two.
Thus, based upon the foregoing, BMM Two and Three, have not submitted viable objections to BMM Four's right to a partition of the premises (see Manganiello v. Lipman,
74 AD3d 667, 905 N.Y.S.2d 153 [1st Dept 2010][Pursuant to both the common law and statute, a party, jointly owning property with another, may as a matter of right, seek physical partition of the property or partition and sale when he or she no longer wishes to jointly use or own the property]; Grossman v. Baker, 182 AD2d 1119, 583 N.Y.S.2d 92 [4th Dept1992][Right to partition is absolute in absence of countervailing conditions.]). Nevertheless, the right to seek partition is not absolute and may be precluded where the equities so demand, or where partition would result in prejudice ( see Manganiello v. Lipman,74 AD3d 667, 905 N.Y.S.2d 153 [1st Dept 2010]).
JP Morgan Chase's Opposition to the Partition Action
JP Morgan Chase holds the mortgage lien on the real property as successor in interest to Washington Mutual Bank in the original principal sum of $2,587,500.00 pursuant to an amended and restated mortgage security agreement, assignment of leases and rents and fixture filing dated April 4, 2004 ("the mortgage"). JP Morgan Chase argues that when the mortgage was executed BMM Three and BMM Four were wholly owned by Robert Fonte and Myrna Otis, respectively, both of whom signed the mortgage on behalf of those respective entities. BMM Two is owned by Mark Fonte 17%, William Fonte 17%, BMM Three 17% and BMM Four 49%. Accordingly, BMM Four owns 49.6% of the premises.
JP Morgan Chase claims that pursuant to section 4.13 of the mortgage:
Mortgagor shall not without the prior consent of mortgagee further encumber the property or any interest therein, cause or permit directly or indirectly whether beneficial or legal any change in the entity ownership or control of mortgagor or agree to do any of the foregoing without first retain in full the note and all other sums secured thereby.
Mortgagor shall not without the prior written consent of mortgagee (which consent shall be subject to the condition set forth below), sell, transfer, or otherwise convey the Property or any interest therein, directly or indirectly, whether beneficial or legal, voluntarily or involuntarily, or agree to do any of the foregoing without first repaying in full the note and all other sums secured thereby.
* * *
Notwithstanding the foregoing and notwithstanding Section 4.15 Mortgagee's consent will not be required, and neither the Consented Transfer Fee nor the Unconsented Transfer Fee will be imposed, for the transfer of not more than twenty-five percent (25%) in the aggregate during the term of the Note of partnership interest in Mortgagor, if Mortgagor is a partnership, or of member interest in Mortgagor, if Mortgagor is a limited liability company, or shares of stock of Mortgagor, if Mortgagor is a corporation, provided that none of the persons or entities liable for the repayment of the note is released from such liability.
At trial Myrna Otis testified that she agreed to each and every one of the foregoing terms of the mortgage when she signed the mortgage and corresponding note. Notwithstanding the foregoing, Myrna Otis testified that she transferred all of her interest in BMM Four to her spouse, Michael Otis, in about 2008 without obtaining or seeking the consent of JP Morgan Chase in breach of the mortgage. Moreover, the Otis' accountant, Louis Orgera, also testified that in connection with effecting the transfer of BMM Four from an accounting standpoint he never sought JP Morgan Chase's consent for the transfer.
JP Morgan Chase argues that the aforementioned provisions are clear and that it is undisputed that they have been violated by the transfer of BMM Four membership from Myrna to Michael. Thus, JP Morgan Chase opposes the partition. JP Morgan Chase notes that although the mortgage documents have been breached it is not seeking to foreclose on the loan due to the uncertainty of a sale of the premises at public auction and the fact that the mortgage is not in default.
JP Morgan Chase asks the Court to deny BMM Four's request for a partition. JP Morgan Chase claims no sale should be allowed until its note is paid in full and absent its permission, which it denies, JP Morgan Chase has a right to the protection of its lien by this Court (see Harlem Savings Bank v. Larkin, 156 A.D. 666 [1st Dept 1913]).
In support of their position JP Morgan Chase cites TreeLine Garden City Plaza v. UBS Warburg Ral Estate, Inc., (3 Misc 3d 1109 NY Sup Ct 2004]). In Treeline, the mortgagor, Treeline GCP, and guarantor, Treeline Whitman Associates, sought a declaration that they may proceed with a proposed financial transaction which changed ownership interest in the mortgage in order to get an infusion of cash for the mortgagor's business. Pursuant to the mortgage between the mortgagor and mortgagee, the mortgagor was required to get mortgagee's permission for any transfer of ownership. The mortgagor and guarantor sought permission from the mortgagee's servicer, Wachovia, for this proposed transaction. Permission was ultimately denied pursuant to Section 13(b)(v) of the mortgage which provides that a transfer includes "any pledge, hypothecation, assignment, transfer or other encumbrance of any direct or indirect ownership interest in the Mortgagor." The mortgagor commenced the Treeline action seeking a declaration that the mortgagee's consent was not needed pursuant to the language of the mortgage documents. However, if it was, they sought reformation or rescission of the documents on the ground of mutual or unilateral mistake with respect to the need for the mortgagee's consent for a transfer of ownership. They also sought damages from the original lender on the grounds of fraudulent inducement.
The Treeline court found that the mortgagee's consent was required for any transfer of ownership, that there was no mutual or unilateral mistake, and that the mortgage documents were enforceable, and dismissed their claim for fraudulent inducement.
Here, like in Treeline, BMM Four agreed that the mortgagor's consent was required for any transfer of ownership. BMM Four did not get JP Morgan Chase's consent for the transfer from Myra to Michael.. Further, JP Morgan Chase is not consenting to the partition which is also a transfer of ownership without first being paid in full. Pursuant to the mortgage terms, JP Morgan Chase can condition it's consent upon payment of its note in full. Accordingly, the Court finds that JP Morgan Chase is acting entirely within the contractual rights agreed upon by the parties. Moreover, as the mortgage also provides, JP Morgan Chase's failure to take action upon BMM Four's default upon the transfer from Myra to Michael does not prevent it from acting to prevent another type of transfer of ownership in this partition sale.
Paragraph 5.6 Remedies Cumulative; Subrogration of the mortgage provides in relevant part:
The failure of on the part of the Mortgagee to promptly enforce any right hereunder shall not operate as a waiver of such right and the waiver of any default shall not constitute a waiver of any subsequent default.
Thus, contrary to BMM Four's argument that JP Morgan Chase's remedy is to commence a foreclosure action due to BMM Four's default when Myrna transferred ownership to Michael, JP Morgan Chase was free to waive it's right to recognize that as an event of default. Furthermore, by the language of the contract in this partition action, JP Morgan Chase has the right to withhold its consent to BMM Four's attempt to "sell, transfer, or otherwise convey the Property or any interest therein, directly or indirectly, whether beneficial, legal, voluntary, involuntary or agree to any of the foregoing without first repaying the Note and all other sums secured hereby." (See Mortgage Paragraph 4.13).
It cannot be disputed that the commencement of a partition action is an attempt to "sell, transfer, or otherwise convey" an interest in the premises and BMM Four agreed that any such action cannot be taken without the consent of JP Morgan Chase. Here, JP Morgan Chase is withholding its consent from the partition/conveyance and BMM Four is bound by the terms of the mortgage contract.
Nevertheless, based upon the arguments made by BMM Four on page 12 of its Post Trial Memorandum of Law and those made on page 9 of JP Morgan Chase's Post-Trial Memorandum of Law, the parties agree that a sale of the property, a partition sale at public auction or any other form of sale, may be permitted so long as the sales prices protects JP Morgan Chase's lien. In essence BMM Four and JP Morgan Chase agree that the sale of the premises can be conditioned upon the payment in full of the outstanding loan including any costs and fees related to it.
In view of the tacit agreement, the Court directs the premises to be sold, however, a minimum bid/price must be fixed prior to the sale to protect JP Morgan Chase's interest in the property.
Based upon the foregoing, this action for partition is GRANTED only to the extent that JP Morgan Chase and BMM Four can agree upon a minimum acceptable bid/price to ensure JP Morgan Chase's loan and mortgage is satisfied in full.
BMM Four and JP Morgan Chase shall submit a joint proposed order of reference and stipulation setting forth the sales procedure, public auction or otherwise, as well as the minimum acceptable bid/price, within 30 days of the date of this order for the Court's review.
Dated: White Plains, New York
June 17, 2015
HON. WILLIAM J. GIACOMO, J.S.C.