Opinion
9386/10.
Decided March 28, 2011.
Plaintiffs were represented by Robert L. Kahn, Esq. of Kaufman and Kahn, LLP. Defendants were represented by Salvatore E. Strazzullo of Strazzulo Law Firm, P.C.
There is no dispute that plaintiffs Kim Hung Tsang and Ghee Yee Ng as "Purchasers" and defendants Antonio Romano and Marianna Romano as "Sellers" executed a Contract of Sale "made as of" December 11, 2009 for the purchase and sale of real property at 2234 61st Street, Brooklyn. The stated purchase price was $898,000, with an initial deposit made of $89,800 with Salvatore E. Strazzullo, Sellers' counsel and Escrow Agent.
Plaintiffs' Verified Complaint purports to allege two causes of action: a First Cause of Action against Mr. and Ms. Romano, seeking "return of the Deposit" of $89,800 with interest from January 15, 2010; a Second Cause of Action against defendant Strazzullo Law Firm P.C., seeking the same relief. Plaintiffs' essential complaint is that they elected to cancel the Contract of Sale because they could not obtain financing for the purchase, requiring return of the $89,800 deposit. With this motion, Plaintiffs seek an order, pursuant to CPLR 3212, "granting summary judgment" against all Defendants "and directing that the Strazzullo Law Firm, P.C. return the contract deposit" to Plaintiffs. ( See Notice of Motion for Summary Judgment dated August 18, 2010.
The pertinent provisions of the Contract of Sale are:
"21. Mortgage Contingency. This contract is made upon the condition that, on or before the date which is 30 days from the date of this contract, a lending institution shall issue to Purchasers a written commitment to make a conventional first mortgage loan on the Premises in the principal amount of $530,000.00, for a term of 30 years, with monthly payments based on a 30 year payment schedule, and bearing interest at the prevailing rate for such loans. Purchasers promptly and diligently shall apply for the mortgage loan, and shall furnish all information and documents requested by the lending institution.
. . .
If such a commitment is not issued within 45 days after the date of this contract, this contract shall continue in full force and effect (but no longer subject to the contingency provided herein) unless Purchasers deliver to Sellers, within three business days after the expiration of said period, a written notice that they were unable to procure such commitment and therefor elect to cancel this contract. Sellers may extend said contingency period by written notice to Purchasers. If this contract is canceled as provided above, Sellers shall refund the down payment to Purchasers, without interest, whereupon this contract shall terminate and neither party shall have any further claim against the other.
22. Escrow Conditions. Purchasers have delivered to Salvatore E. Strazzullo, having an address at 7101 18th Avenue, Brooklyn, NY 11204 ("Escrow Agent") a down payment in the amount of $89,800.00 (the "down payment").
If this contract is not terminated pursuant to Article 21 above within the contingency period provided therein, Escrow Agent hereby is authorized to deliver the down payment to Sellers 48 hours after the expiration of said contingency period, without further notice to Purchasers.
Sellers and Purchasers acknowledge that Escrow Agent is merely a stakeholder, and that Escrow Agent shall not be liable for any act or omission unless taken or suffered in bad faith, in willful disregard of this contract or involving gross negligence. Escrow agent shall not be required to invest the down payment in an interest bearing account or other income producing investment.
. . .
24. Purchasers' Lien. All payments of Purchasers on account of the purchase price, and their reasonable expenses for examination of title, hereby are made a lien against the Premises. Said lien shall not continue or exist after any default by Purchasers hereunder.
25. Liquidated Damages. If Purchasers default under this contract, Sellers as their sole remedy shall be entitled to declare this contract null and void and to receive from Escrow Agent and to retain all sums paid by Purchasers hereunder as liquidated damages, whereupon this contract shall terminate and neither party shall have any further claim against the other."
The Court notes, in the first instance, that although the First Cause of Action in the Verified Complaint is designated "Return of Deposit and to Foreclose Vendee's Lien," Plaintiffs' Notice of Motion makes no reference to the lien, and they make no showing as to it. To the extent, therefore, Plaintiffs are seeking summary judgment on foreclosure, their motion is denied.
There appears to be some dispute as to the date from which the mortgage contingency period would run. As quoted, Article 21 specifies both 30 days and 45 days "from the date of this contract," but it is clear from a rider to the Contract of Sale that 45 days was intended, measured from the date "a fully executed contract is delivered to Purchaser's [ sic] attorney" ( see rider ¶ 1.) Although the Contract was signed by the parities no later than December 11, 2009, there were open issues about post-closing possession by Sellers that were not resolved until December 15, when Sellers' counsel faxed a signed Contract amendment to Purchasers' attorney. The mortgage contingency period ran, therefore, from December 15, 2009 until January 29, 2010.
Similarly, the closing date, stated in the Contract as January 30, 2010, was amended by the rider to "on or about sixty (60) days upon [ sic] delivery of a fully executed contract to Purchaser's [ sic] attorney" ( see rider ¶ 2.) That date, too, seems overly optimistic, but was not stated to be "of the essence."
Plaintiffs establish that they first sought a mortgage with the assistance of a mortgage broker named Nam H. Sung, who advised Plaintiffs on December 29, 2009 that he was unable to help them. On January 4, 2010, Plaintiffs applied for a mortgage loan from or through Summit Mortgage Bankers, Inc. The property was appraised on January 8, at Plaintiffs' expense, at $750,000, significantly less than the $898,000 purchase price. On January 13, Summit denied Plaintiffs' application, stating, "Excessive obligations," "Insufficient income for total obligations," and "We do not grant credit to any applicant on the terms and conditions you have requested." According to Summit's communication, those terms were a loan amount of $530,000 at 6% interest for 360 months.
By letter dated January 15, delivered by Federal Express, Plaintiffs' counsel provided to Salvatore E. Strazzullo (again, Sellers' counsel and Escrow Agent) a copy of Summit's denial, gave notice that Plaintiffs were canceling the Contract of Sale, and requested a return of the escrow deposit. By a letter dated January 22, Mr. Strazzullo rejected the cancellation notice and the request for return of the deposit, but requested further documentation "to determine if all contractual obligations have been met." Plaintiffs' counsel provided further documentation with a letter dated January 27, and again requested a return of the deposit.
Mr. Strazzullo responded as follows on February 17:
"In looking over the additional documents that were sent over and my investigation of the matter, my first analysis is that the first time your client attempted to apply for a mortgage he applied for a non conforming loan, which he was approved for but did not like the high interest rate. After he was approved for such loan he than [ sic] proceeded to apply for a full document loan, knowing full well that he would get a denial on such an application, that is on a full document loan.
Simply put, your client can apply for a non conforming loan and receive such loan; however, he has failed to do so under the terms of the contract which does not specify the type of loan he must apply for. This will by my FINAL letter in regards to the sale of the above referenced property. The above contract calls for a closing date of on or about January 30, 2010. The seller is ready, willing, and able to deliver title and close in accordance with the terms and conditions of the contract dated December 11, 2009. The seller has given sufficient and proper notice, in accordance with the terms of the contract. Accordingly, the seller does hereby set March 5, 2010 as a closing date, TIME BEING OF THE ESSENCE at the office of Strazzullo Law Firm, P.C., at 3PM located at 7101 18th Avenue, Brooklyn, NY 11204, wherein the seller will deliver and tender the deed and all other necessary closing documents pursuant to contract. ALL PARTIES WILL BE NOTIFIED."
This action was commenced on April 15, 2010.
In a Stipulation Canceling Lis Pendens, "Defendant Strazzullo Law Firm, P.C., agrees that it shall continue to hold and keep the Deposit in its IOLA account at Citibank until there has been a non-appealable, final determination" in this action "or until . . . the parties to the action have delivered a stipulation of settlement as to the Deposit" (Stipulation Canceling Lis Pendens dated September 14, 2010, ¶ 4); and "plaintiffs agree that the notice of pendency of this action . . . shall be cancelled and discharged of record" ( id. ¶ 5.) The property was sold to other buyers on September 15, 2010 for $895,000.
Plaintiffs contend that they "made good faith attempts to obtain financing and are entitled to the return of the down payment" ( see Plaintiffs' Memorandum of Law in Support of Motion for Summary Judgment at 2), relying on the Second Department's decision in Long v Legg ( 264 AD2d 718 [2d Dept 1999]) for the proposition that "[a]s long as purchasers exert a genuine effort to secure mortgage financing and act in good faith, they are entitled to recover their down payment if the mortgage is not in fact approved through no fault of their own" ( id. at 719 [quoting Sciales v Foulke, 217 AD2d 693, 694 (2d Dept 1995)] [emphasis added]; see also Astrada v Archer , 51 AD3d 954, 955 [2d Dept 2008]; Garber v Giordano , 16 AD3d 454 , 455 [2d Dept 2005].)
The quoted "good faith" formulation has its origin in the Second Department in Sciales v Foulke ( 217 AD2d 693), which in turn cites prior authority that appears to limit the purchaser's duty under a mortgage contingency provision to "good faith" ( see id. at 694 [citing Lane v Elwood Estates, 31 AD2d 949, 950 (2d Dept 1969), aff'd 28 NY2d 620 (1971); Cone v Daus, 120 AD2d 788, 790 (3d Dept 1986)], or to "genuine effort" ( see id. at 694 [citing Bryne v Collins, 142 AD2d 661, 662 (2d Dept 1988)].)
Only two of the cited decisions, however, purport to describe the contract provision at issue: in one, the court states that the contract required the purchasers "to make a good faith application for a loan" ( see Sciales v Foulke, 217 AD2d at 693; see also Companion v Touchstone, 88 NY2d 1043); in the other, the court states that the contract required the purchasers "to use diligent efforts to obtain such loan" ( see Cone v Daus, 120 AD2d at 789.)
Without quoting the contract, some recent Second Department decisions speak only in terms of "good faith." ( See Balkhiyev v Sanders , 71 AD3d 611 , 612 [2d Dept 2010]; Hoft v Frenkel , 52 AD3d 779, 780 [2d Dept 2008]; 1951 Bedford Hills Corp. v Hardie , 34 AD3d 658 , 659 [2d Dept 2006]; Duffy v St. Germain , 21 AD3d 872 , 872-73 [2d Dept 2005].) Other recent Second Department decisions, also without quoting the contract, speak only in terms of "diligent efforts." ( See Samson v Sapphire Capital, Inc ., 74 AD3d 1172 , 1173 [2d Dept 2010]; Maor v Seamon , 79 AD3d 1105 , 1105 [2d Dept 2010]; Big Apple Meat Mkt. v Frankel, 276 AD2d 657, 659 [2d Dept 2000] ["diligent, prompt, and truthful application"]; Fallah v Hix, 268 AD2d 501, 502 [2d Dept 2000] ["due diligence"; "diligent, truthful, and proper" application].)
It may be that "good faith" and "diligent efforts" are being used interchangeably, with no difference in meaning suggested. ( See, for example, Long v Legg, 264 AD2d at 368.) But then what is to be made of "diligent, timely, and good faith efforts to secure a mortgage pursuant to the terms of the contract sale." ( See Buxton v Streany , 68 AD3d 1036 , 1037 [2d Dept 2009]; see also Buonocore v Dubois , 16 AD3d 359 , 359 [1st Dept 2005] ["diligently and in good faith"], aff'd 5 NY3d 706.)
"Good faith" and "diligent efforts" are not the same thing. Where the "contract at issue . . . requires [the purchasers] to use diligent efforts' to obtain a mortgage loan," the purchasers' "promise goes beyond a mere good-faith effort . . ., and dictates the purchasers pursue all reasonable sources of potential financing." ( See Blask v Miller, 186 AD2d 958, 959 [3d Dept 1992]; see also Hauppauge Country Club Assocs. v Kabro v Hauppauge, 226 AD2d 186, 186 [1st Dept 1996] ["reasonable and diligent efforts"]; Vitolo v O'Connor, 223 AD2d 762, 764 [3d Dept 1996].) More importantly perhaps, and though not explicitly recognized in the opinions, the distinction between "good faith" and "diligent efforts" is not merely one of degree, such as whether one mortgage application is sufficient or more than one is required ( see Blask v Miller, 186 AD2d at 959.)
The distinction between "good faith" and "diligent efforts" is one of kind, not merely of degree. "Good faith" is a subjective concept." [G]ood faith' connotes an actual state of mind — — a state of mind motivated by proper motive." ( Polotti v Flemming, 277 F2d 864, 868 [2d Cir 1960]; see also Credit Suisse First Boston v Utrecht-American Fin. Co. , 80 AD3d 485 , 487 [1st Dept 2011] ["good faith . . . necessitates examination of a state of mind"].) "It encompasses, among other things, an honest belief, the absence of malice and the absence of a design to defraud or to seek an unconscionable advantage." ( Doyle v Gordon, 158 NYS2d 248, 259-60 [Sup Ct, NY County 1954]; see also Adler v 720 Park Ave. Corp., 87 AD2d 514, 515 [1st Dept 1982].) "The fact that a person could have adopted a more prudent course than the course taken does not prevent him from establishing that the course taken was one taken in good faith." ( Polotti v Flemming, 277 F2d at 868; see also Credit Suisse First Boston v Utrecht-American Fin. Co., 80 AD3d at 487.)
"Implicit in all contracts is a covenant of good faith and fair dealing in the course of contract performance." ( Dalton v Educational Testing Serv., 87 NY2d 384, 389.) The implied duty to act in "good faith" is linked, therefore, with a duty of "fair dealing" that "embraces a pledge that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract'." ( Moran v Erk , 11 NY3d 452, 456-57 [quoting 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 153 (2002), in turn quoting Dalton v Educational Testing Serv., 87 NY2d 384, 389 (1995)].) A prospective purchaser's duty under a mortgage contingency provision, therefore, includes the obligation to act fairly, so as not to deprive the seller of the contractual right to the sale.
"Diligence," like "reasonableness," is an objective standard; indeed, "diligence" has been defined in terms of reasonableness. "Diligent efforts" to obtain a mortgage requires pursuing "all reasonable sources of potential financing." ( See Blask v Miller, 186 AD2d at 959; see also Boyd v Haritidis, 239 AD2d 820, 822 [3d Dept 1997]; Social Services Law § 384-b [f] [" diligent efforts' shall mean reasonable attempts"].) "Ordinary diligence means that degree of care, attention, or exertion which under the circumstances a man of ordinary prudence and discretion would use." ( See Newman v Clayton F. Summy Co., 133 F2d 465, 467 [2d Cir 1943].)
Whatever the rule more generally, where, as here, the contract provides that "Purchasers promptly and diligently shall apply for the mortgage loan" (Contract of Sale Article 21), Plaintiffs were required to make diligent efforts in good faith to obtain a mortgage with the terms described in the "mortgage contingency" provision. ( See Samson v Sapphire Capital, Inc., 74 AD3d at 1173; Elghanyan v Mundy, 225 AD2d 654, 655-56 [2d Dept 1996]; Blask v Miller, 186 AD2d at 959.) Again, those terms were that "a lending institution" issue a commitment to make "a conventional first mortgage loan on the Premises in the principal amount of $530,000.00 for a term of 30 years, with monthly payments based on a 30 year payment schedule, and bearing interest at the prevailing rate for such loans" (Contract of Sale Article 21 [emphasis added].)
Plaintiffs' two applications to separate possible sources for financing were rejected because their income was deemed insufficient, a reason that has allowed other prospective purchasers to cancel a contract and recover the down payment. ( See Hoft v Frenkel, 52 AD3d at 780; Fallah v Hix, 268 AD2d at 502; see also Duffy v St. Germain, 21 AD3d at 872-73.) There is no evidence that Plaintiffs failed to provide information or documentation necessary to the application process. ( Compare Balkhiyev v Sanders, 71 AD3d at 612 ["[u]nable to verify income"].)
Since Plaintiffs did not sign the Contract of Sale until after they were assured by a mortgage broker, to whom they were sent by the real estate broker who had the Sellers' listing on the property, that Plaintiffs would be able to obtain a mortgage ( see Affidavit in Support of Summary Judgment ¶¶ 7-8), no "factual issue . . . exists concerning plaintiffs' good faith in contracting to purchase property they may not have been able to afford." ( Compare Blask v Miller, 186 AD2d at 959-60.) Although there is no evidence in admissible form that Plaintiffs applied to any institutional lender either directly ( see letter dated January 27, 2010 from Zhen Huang, Esq. to Strazzullo Law Firm, Exhibit I to Affidavit in Support of Summary Judgment), or through a mortgage broker ( compare Fallah v Hix, 268 AD2d at 502), there is nothing in the record to suggest that a formal, written application to a lending institution would not have been futile ( see Elghanyan v Mundy, 225 AD2d at 656.) It appears, moreover, that Summit Mortgage Bankers, Inc. was itself the source of the loan applied for, and Plaintiffs could have waived the "lending institution" term of the mortgage contingency provision, intended for its benefit, assuming that Summit Mortgage Bankers, Inc. would not qualify.
The only ground on which Defendants rejected Plaintiffs' cancelation of the Contract of Sale was that Plaintiffs initially applied for, and were approved for, a "non conforming loan," which they refused because of the "high interest rate"; that Plaintiffs were not approved for a "full document loan," as anticipated; and that "the contract . . . does not specify the type of loan [Plaintiffs] must apply for." (Letter dated February 17, 2010 from Salvatore E. Strazzullo to Huang Associates, P.C., Exhibit J to Affidavit in Support of Summary Judgment.)
It is not fully correct, however, to say that the Contract of Sale "does not specify the type of loan" that Plaintiffs would apply for, since the mortgage contingency provision clearly specifies a "conventional first mortgage loan . . . bearing interest at the prevailing rate for such loans" (Contract of Sale Article 21.) Plaintiffs were not required to accept different terms. ( See 1951 Bedford Hills Corp. v Hardie, 34 AD3d at 659; Macho Assets, Inc. v Spring Corp., 128 AD2d 680, 682 [2d Dept 1987].) The Contract of Sale does not define either "conventional mortgage" or "prevailing rate."
This Court has not found an opinion that defines "conventional" mortgage loan or "prevailing rate." In Chavez v Eli Homes, Inc . ( 7 AD3d 657 [2d Dept 2004]), the Second Department stated that the commitment obtained by the plaintiff "was not for a conventional' mortgage loan," and cited to a treatise ( see id. at 659 [citing 1 Mortgages and Mortgage Foreclosure in NY §§ 3:4, 15:3, 15:6]), which states that "[c]onventional mortgage" "indicate[s] a mortgage loan made by a lending institution without government guarantees, as distinguished from one made with such guarantees, and therefore not subject to the specific requirements and regulations appertaining to government — guaranteed mortgages" (at § 3:4; see also Retirement and Social Security Law § 176; Johnson v Werner, 63 AD2d 422, 425 [1st Dept 1978].)
There is nothing in Plaintiffs' submission that shows that a "non conforming loan" at a "high interest rate," and that is not a "full document loan," would qualify as a "conventional first mortgage loan . . . bearing interest at the prevailing rate for such loans" ( see Contract of Sale Article 21.) There is no evidence that, in canceling the Contract of Sale, Plaintiffs acted in bad faith, motivated by a desire to get out of the deal, or even to renegotiate the purchase price after the unfavorable appraisal. Assuming that Mr. Strazzullo's unsupported statement that Plaintiffs could have obtained a "non conforming loan," not a "full document loan," at a "high interest rate" is correct, Plaintiffs' papers do not reveal that reasonable, prudent purchasers in similar circumstances would have accepted such a loan and proceeded with the transaction.
Plaintiffs have shown prima facie that under the Contract of Sale they were permitted to provide written notice of cancelation, which they did within the time period specified in the mortgage contingency provision; and that Sellers did not extend the contingency period or "refund the down payment to Purchasers." ( See Contract of Sale Article 21.)
Although Plaintiffs have, therefore, made the requisite showing on their motion as against defendants Antonio Romano and Marianna Romano, they have not shown prima facie that they are entitled to judgment as a matter of law against defendant Strazzullo Law Firm, P.C. An escrow agent in connection with the purchase and sale of real property may limit its liability to circumstances in which it acts in bad faith or willful disregard of the contract. ( See Fitzgerald v Eaton, 265 AD2d 374, 376 [2d Dept 1999]; Ansonia Realty v Ansonia Assocs., 142 AD2d 514, 518 [1st Dept 1988]; Macho Assets, Inc. v Spring Corp., 128 AD2d at 682; Geroulanos v Maynard, 24 Misc 3d 1232[A], 2009 NY Slip Op 51712 [U], * 5 [Sup Ct, Kings County 2009].) Here, as quoted above, the Contract of Sale provides that "Escrow Agent shall not be liable for any act or omission unless taken or suffered in bad faith, in wilful disregard of this contract or involving gross negligence." (Contract of Sale Article 22.)
Plaintiffs do not attempt to make any such showing against defendant Strazzullo Law Firm, P.C. or Salvatore E. Strazzullo, named as Escrow Agent in the Contract of Sale ( see id.), assuming that they were intended to be treated as one and the same for these purposes, or that the Stipulation Canceling Lis Pendens made them so. In any event, the Stipulation appears to limit or modify the Escrow Agent's obligation to Plaintiffs to "keep[ing] the Deposit in its IOLA account . . . until a non-appealable, final determination" or further agreement between the parties, as to the disposition of the Deposit. ( See Stipulation Canceling Lis Pendens ¶ 4.)
In opposition, Defendants contend ( see Affirmation in Opposition ¶¶ 7, 12-13) that Plaintiffs breached the Contract of Sale by failing to obtain a mortgage commitment as described in the mortgage contingency provision ( see Contract of Sale Article 21.) Strictly speaking, the failure to obtain a mortgage commitment could not constitute a breach of the Contract of Sale because the "mortgage contingency" was just that, a "condition" ( see id.) and not a promise, and contractual conditions that are not promises cannot be "breached." ( See Merritt Hill Vineyards, Inc. v Windy Heights Vineyards, Inc., 61 NY2d 106, 112-13.)
But, "[i]f a trier of fact were to conclude that the plaintiffs failed to exercise diligent efforts in attempting to obtain a mortgage commitment, then their cancellation of the Contract would have constituted an anticipatory breach." ( Sampson v Sapphire Capital, Inc., 74 AD3d at 1173.) "[A] vendee who defaults on a real estate contract without lawful excuse, cannot recover the down payment." ( Willsey v Gjuraj , 65 AD3d 1228 , 1230-31 [2d Dept 2009] [internal quotation marks and citations omitted].) Here, as quoted above, the Contract of Sale provides, in effect, that upon Purchasers' failure to use diligent efforts in good faith to seek a mortgage commitment and their cancelation of the Contract, Sellers may retain the down payment as liquidated damages. ( See Contract of Sale Article 25.)
Defendants provide no additional evidence that would raise a triable issue as to Plaintiffs' lack of diligent efforts or good faith in seeking a mortgage. Beyond the lack of any evidence that reasonable, prudent purchasers in Plaintiffs' circumstances would have accepted the "non conforming loan" at "high interest," not "fully documented," that Sellers' counsel alleges was available, it appears that such a loan is precisely of the type warranting regulatory scrutiny, and that played such an important role in the recent and continuing turmoil in financial and economic markets ( see generally Emigrant Mgte. Co. v Corcione , 28 Misc 3d 161 [Sup Ct, Suffolk County 2010]; Wells Fargo Bank, N.A. v Hughes , 27 Misc 3d 628 [Sup Ct, Erie County 2010]; Butler Capital Corp. v Cannistra , 26 Misc 3d 598 [Sup Ct, Suffolk County 2009].) Indeed, by the end of 2009 and beginning of 2010, it could easily be argued that reasonable, prudent purchasers would not accept such a loan.
Where a purchaser obtains a judgment for return of a down payment, an award of pre-judgment interest is generally required. ( See Astrada v Archer, 51 AD3d at 955.) The provisions in the Contract of Sale, quoted above, that Sellers' return of the down payment after Purchasers' cancelation would be "without interest" (Contract of Sale Article 21); and that "Escrow Agent shall not be required to invest the down payment in an interest bearing account or other income producing investment" (Contract of Sale Article 22) would not be applied upon Sellers' or Escrow Agent's breach. Here, however, Plaintiffs state, "Inasmuch as the parties agreed to have the Contract Deposit held in an IOLA account, any judgment in [their] favor . . . should not include legal interest." (Reply Affirmation ¶ 25.) The Court interprets the statement as waiving pre-judgment interest, but not post-judgment interest.
Plaintiffs' motion for summary judgment against defendants Antonio Romano and Marianna Romano is granted; Plaintiffs may enter judgment against them for $89,800, without interest, but with costs and disbursements.
Plaintiffs' motion for summary judgment against defendant Strazzullo Law Firm, P.C. is denied.