Opinion
25525/09.
3-4-2010
U.S. BANK NATIONAL ASSOCIATION, A NATIONAL BANKING ASSOCIATION, Plaintiff, v. MOSHE LEIB LAX AND ZLATY SCHWARTZ AS EXECUTORS OF THE ESTATE OF CHAIM LAX, Defendants.
U.S. Bank National Association, a national banking association ("Plaintiff" or "U.S. Bank") moves pursuant to CPLR § 3213 for an Order granting summary judgment in lieu of complaint for payment allegedly owed on a promissory note. Moshe Leib Lax and Zlaty Schwartz ("Defendants" or "the Estate"), as executors of the Estate of Chaim Lax ("Lax"), cross-move for summary judgment dismissing this proceeding pursuant to § 1810 of the Surrogate's Court Procedure Act.
BACKGROUND
This case arises from a loan transaction between U.S. Bank and Chaim Lax, a real estate developer.Prior to his death, Chaim Lax was a 55% owner in Flatbush Extension, LLC ("Flatbush Extension"), which owned properties located at 67, 75, and 85 Flatbush Avenue in Brooklyn. On or about March 27, 2007, U.S. Bank and Flatbush Extension entered into a secured loan agreement (the "Loan Agreement") pursuant to which the parties agreed that Flatbush Extension could borrow up to $50,000,000 in connection with the development of a luxury condominium project ("Flatbush Extension Project").
On or about June 1, 2007, U.S. Bank extended a separate, unsecured loan ("Loan") to Lax, in his individual capacity, in the amount of $5,000,000. To evidence the loan, Lax executed a promissory note, dated June 1, 2007 (the "Note"), which matured on June 1, 2009. The nature of the credit line was outlined in the Summary of Terms and Conditions (the "Term Sheet"), dated May 22, 2007, which generally states that U.S. Bank made the loan to allow Lax to "provide a portion of the predevelopment costs associated with various real estate projects that Mr. Lax [was] involved with." See Wilson Aff. Ex. A., dated Oct. 7, 2009. The Term Sheet makes no specific reference to Flatbush Extension or the Flatbush Extension Project.
On November 3rd, 2008, prior to the maturation of the Loan, Lax passed away. On February 9, 2009, Moshe Leib Lax and Zlaty Schwartz, Lax's adult children, were appointed preliminary executors of the Estate by the Surrogate's Court, Kings County.
On or about March 11, 2009 and April 15, 2009, U.S. Bank sent letters to counsel for the Estate advising that Lax had failed to comply with non-monetary obligations set forth in the Note which constituted an "Event of Default" as defined under the Note. Specifically, the March 11, 2009 letter advised that Lax had failed to deliver information documenting his net worth, liquidity, and debt-to-asset ratio as required under the Note. The letter also advised the Estate of the cross-default provision contained in the Note, which provided that a default event under the Flatbush Extension Loan Agreement constituted a default event under the Note. The April 15, 2009 letter advised that U.S. Bank had accelerated the Loan as provided for in the Note and was demanding repayment. On or about March 11, 2009 and April 15, 2009, U.S. Bank also sent letters to Flatbush Extension advising of defaults under the Loan Agreement and demanding repayment of the loans related to the Flatbush Extension Project.
By letter dated April 24, 2009, Flatbush Extension rejected U.S. Bank's assertion that it had defaulted under the Loan Agreement and objected to U.S. Bank's decision to cease funding the Flatbush Extension Project, claiming that such alleged non-monetary acts of default had been waived in the course of a restructuring of the project from condominium to rental units. By letter dated May 1, 2009, the Estate rejected U.S. Bank's assertions that Lax had defaulted under the Note, claiming there had been neither a default under the Note nor a basis for cross-default based on the Loan Agreement.
Defendants did not repay the Loan on the June 1, 2009 Maturity Date, and on June 10, 2009, U.S. Bank served the Estate with a formal Notice of Claim pursuant to § 1803 of the Surrogate's Court Procedure Act. On June 24, 2009, U.S. Bank sent a "Second Demand for Repayment" letter to the Estate demanding repayment of the Loan based upon the occurrence of the Maturity Date. Defendants did not respond directly to the Notice of Claim, but, by letter dated July 17, 2009, rejected the Bank's claims under the Note as alleged in the June 24, 2009 letter, denying that there had been a default.
On September 29, 2009, U.S. Bank commenced a foreclosure action against Flatbush Extension in Supreme Court, Kings County, seeking to recover the amount allegedly due under the Loan Agreement. See US Bank National Association, v Flatbush Extension LLC, et al., Index No. 26434/09. On October 8, 2009, U.S. Bank filed this action by motion for summary judgement in lieu of complaint pursuant to CPLR § 3213, claiming that the Note qualifies as a stand-alone instrument for the payment of money only and is in no way related to the Loan Agreement. Defendants have cross-moved to dismiss pursuant to SCPA § 1808, claiming that the Surrogate's Court is the proper forum to address the validity of Plaintiff's claims, as Plaintiff failed to commence the instant action within 60 days of rejection of its claim pursuant to SCPA § 1810.
I. Statute of Limitations
The Surrogate's Court Procedure Act § 1810 provides that:
Nothing in this article shall prevent a claimant from commencing an action on his claim at law or in equity, provided that where a claim has been presented and rejected or deemed rejected pursuant to 1806 in whole or in part the action must be commenced within 60 days after such rejection.
To trigger the statute of limitations, a "claim" must therefore be presented and rejected. Section 1803 of the SCPA sets forth the required form of a claim as follows:
1. Every claim against the estate of a decedent . . . must be in writing, contain a statement of the facts upon which it is based and the amount thereof. In addition, the fiduciary may require the claimant to present proof by affidavit that the amount of the claim is justly due, that all payments thereon, if any, have been credited, that the claimant knows of no offsets and no evidence of indebtedness and holds no security, except as specifically described in the affidavit. 2. The notice of a claim required by this section shall be presented by delivering a copy thereof to a fiduciary personally or by certified mail return receipt requested addressed to the fiduciary at the place of residence stated in the designation . . . or upon the clerk of the court . . . whenever the fiduciary cannot be found or served within the state after due diligence. 3. No claimant shall be entitled to enforce payment of a claim in any proceedings in the court unless the claim be presented in accordance with the provisions of this section or unless it shall be based upon a decree or order of the court or a valid judgment rendered by a court of competent jurisdiction.
Once a Notice of Claim is made, SCPA § 1806[1-2] requires the executors of an estate to "promptly give notice in writing to the claimant of the allowance of the claim or of its rejection or of the rejection of some part thereof," as well as "the reasons therefor." If "the fiduciary shall fail to allow the claim within 90 days from the date that it has been presented to him, the claim shall be deemed to have been rejected." SCPA § 1806[3].
The parties dispute the date on which the statute of limitations began to run. Plaintiff argues that: (1) a Notice of Claim sufficient to satisfy the requirements of § 1803 was not served until June 10, 2009, nine days after the Loan matured; (2) the default and demand letters were sent to the attorneys for the Estate merely to notify the Estate of the default and the subsequent acceleration of the Loan; (3) Defendants never formally responded to the Notice of Claim and therefore it was deemed rejected on September 9, 2009, ninety days after service; and (4) a timely action was initiated in this Court on October 8, 2009, well within the sixty day limit to proceed outside of Surrogate's Court. Defendants disagree, arguing that: (1) the default and demand letters satisfied the requirements of SCPA § 1803; (2) they expressly rejected Plaintiff's assertion that the Estate had defaulted under the Note in the May 1, 2009 letter of counsel; (3) they expressly rejected Plaintiff's assertion again via letter of counsel on July 17, 2009; and (4) by filing on October 8, 2009, Plaintiff's action was initiated two months beyond the 60-day period of limitations and is therefore time-barred.
The provisions of the SCPA carefully prescribe the procedures required for the administration of an estate, including the order of the payment of debts. See e.g. SCPA Art. 18. "Certainty in the administration of estates" requires that "the statutes on the presentation of claims" be "strictly construed." See In re Hammer, 184 Misc. 233, 237-38 [Sur. Ct. Monroe Co. 1945] (quoting Ulster County Savings Inst. v Young, 161 NY 23, 33 [1899]). As such, the SCPA should be "complied with in all its essential particulars," and "nothing short of a written claim exhibited to the representative, as the statute plainly requires, and absolutely rejected by him, will have the effect of establishing the time for the commencement" of the statute of limitations. Ulster County Savings Inst., 161 NY at 33-34 [1899].Although no prescribed form of a Notice is Claim is mandated under SCPA § 1803, the statute does require that the Notice be written, contain a statement of the facts upon which the claim is based, and the sum claimed (1 Harris 5th NY Estates: Probate Admin & Litigation § 12.89), and be served personally upon the representative of the estate (2A Carmody-Wait 2d § 159:14). There is no question that the Notice of Claim served by Plaintiff on June 10, 2009, following the failure to pay the Note on its Maturity Date, qualifies as a Notice of Claim pursuant to SCPA § 1803. However, this Court finds that Plaintiff's March 11, and April 15, 2009 letters cannot be construed as § 1803 Notices of Claim on the Estate because each lacked essential elements as required by the SCPA. First, neither letter was served on the fiduciaries personally. See SCPA § 1803[2]. To the contrary, they were addressed and delivered only to counsel for the Estate by mail. Second, the March 11, 2009 default letter, which provided notice only of non-monetary reporting defaults under the Note and the default of Flatbush Extension under the Loan Agreement, failed to contain an amount due (see SCPA § 1803[1]), but merely advised the Estate of the events of default and provided the Estate with an opportunity to cure. While containing a notice of acceleration and a demand for payment of a sum certain, the April 15, 2009 letter related only to the non-monetary curable defaults previously noticed, which are not the basis of the present action.
Not until June 10, 2009 did the Plaintiff deliver a proper § 1803 Notice of Claim addressed to the fiduciaries of the Estate personally, setting forth, in writing, the amount due and a statement of facts upon which the claim was based, supported by an affidavit. Despite the earlier "rejection" by counsel to the Estate of the "claims" made in the May 11, 2009 and April 15, 2009 letters, the Estate was required to respond to Plaintiff after receipt of the June 10, 2009 Notice of Claim, which was expressly premised, as indicated in the supporting affidavit, upon the obligation to make payment in full, according to the terms of the Note, on June 1, 2009. Plaintiff's "Second Demand for Payment," dated June 24, 2009, which followed the actual Notice of Claim, is superfluous to the issue of Notice of Claim, but it is to that letter that Defendants responded in counsel's letter of July 17, 2009. The critical issue is whether the July 17 letter constituted a response to the June 10 Notice of Claim, as required under SCPA § 1806, so as to commence the running of the 60-day statute of limitations under SCPA § 1810, as Defendants contend, or did not, thereby effectuating the provision of SCPA § 1810[3] that the claim would only be deemed rejected after 90 days. Defendants' attorney's letter of July 17 expressly states that it is "in response to the letter dated June 25, 2009 [sic] sent by your client" and references the prior letter of counsel dated May 1, reiterating the prior denial of default "based on Mr. Lax's alleged failure to provide financial documentation from November 2007." Mr. Haddad, Defendants' attorney, further states:
Contrary to the Bank's allegation, the Note has not "matured" simply by the passage of time since the Bank's misconduct. The Estate's performance of the Note was suspended as a matter of law by reason of the Bank's prior breach of that agreement. The Bank cannot take umbrage in the Note's provisions as if it had performed and complied with its obligations thereunder.
While it is clear from this language that Defendants are disputing Plaintiff's claim of default, the letter is not a rejection of the claim, per se, as required pursuant to SCPA § 1806. Because Defendant never responded directly to the Notice of Claim, it is deemed rejected on September 8, 2009. See SPCA § 1806[3]. Thus, Plaintiff filed this action well within the sixty day limit under SCPA § 1810 and this action is both timely and properly venued.
II.Summary Judgment
A motion for summary judgment in lieu of complaint is appropriate where "an action is based upon an instrument for the payment of money only." CPLR § 3213. A promissory note qualifies as an instrument eligible for treatment under CPLR § 3213 if the plaintiff provides proof of the note and a failure to make the payments called for by its terms. See CPLR § 3213; see also Seaman-Andwall Corp. v Wright Mach. Corp., 31 AD2d 136, 137, 295 NYS2d 752 [1st Dept 1968], aff'd 29 NY2d 617, 273 NE2d 138, 324 NYS2d 410 [1971]; Gateway State Bank v Shangri-La Private Club for Women, 113 AD2d 791, 493 NYS2d 226 [2d Dept 1985]; Quest Commercial, LLC v Rovner, 35 AD3d 576, 825 NYS2d 766 [2d Dept 2006].
The usual standards for summary judgment apply to CPLR § 3213 motions. See Gateway, 113 AD2d at 791 [2nd Dept 1985]. In order to obtain summary judgment, the movant must establish its cause of action or defense sufficiently to warrant a court's directing judgment in its favor as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact. See Zuckerman v City of New York, 49 NY2d 557, 562 [1980]; see also CPLR § 3212[b]. Where the proponent of the motion makes a prima facie showing of entitlement to summary judgment, the burden shifts to the party opposing the motion to demonstrate by admissible evidence the existence of a factual issue requiring a trial of the action. See Vermette v Kenworth Truck Co., 68 NY2d 714, 717 [1986].
In support of its motion, Plaintiff has proffered a copy of the Promissory Note signed by Lax in his individual capacity. The Note provides that Lax, in exchange for $5,000,000, or as much of that sum as advanced under the terms of the Note, promised to pay back that amount "in full," together with interest, on June 1, 2009. Plaintiff has made a prima facie showing of entitlement to judgment as a matter of law by proving the existence of the Note and nonpayment according to its terms. The burden is therefore on the Defendants to establish the existence of triable issues of fact.
Defendants contend that, because of Lax's 55% ownership of the LLC, the Note at issue is so related to the loan made over two months earlier to Flatbush Extension to refinance an existing loan and for construction costs that issues related to the Flatbush Extension loan preclude summary judgment on the instant Note. As a general rule, "the breach of a related contract cannot defeat summary judgment on a promissory note", however, where a genuine question exists as to whether a contract between the parties "can be viewed as being distinct and separate from the note, summary judgment must be denied." River Bank America v Daniel Equities Corp., 205 AD2d 476, 476 [1st Dept 1994] (quoting Fopeco, Inc. v General Coatings Technologies, 107 AD2d 609, 609-10 [1st Dept 1985]); see also Cohen v. Marvlee, 208 AD2d 792 [2nd Dept 1994]; Regal Limousine, Inc. v Allison Limousine Service, Ltd., 136 AD2d 534, 535 [2d Dept 1988]. Thus, whether Plaintiff breached the Loan Agreement with Flatbush Extension is material to this action only if the instant Note is inextricably related to that Agreement. See Tibball v. Catalanotto, 269 AD2d 386, 387 [2d Dept 2000].
Two agreements may be "inextricably intertwined" if they involve the same parties and are part of the same transaction. For example, in Cohen, the note sued upon related to a contract containing a non-compete provision which was the subject of separate litigation seeking to enforce the contractual provisions. Similarly, in Regal Limousine, the promissory note was given upon the sale of a business which the defendant claimed had been fraudulently induced upon misrepresentations concerning a customer list which formed part of the consideration for the note. Here, the Note and the Loan Agreement clearly involve different parties and are in no way interdependent. The Note was entered into by U.S. Bank and Chaim Lax in his individual capacity. The Loan Agreement, on the other hand, relates to a loan made by two banks, U.S. Bank and National City Bank, one of which is not a party here, to Flatbush Extension, which is not a party to the Note sued upon. That Lax had a majority stake in Flatbush Extension does not alone create a relationship between the two contracts. See Reynolds v Argush, 238 AD2d 151 [1st Dept 1997] [finding a partnership agreement entered into by corporate entities wholly owned by the parties was "not so intertwined with the note, entered into by the parties in their individual capacities, as to warrant the withholding of judgment on the note," despite the fact that the two agreements arose from the same general transaction]. The Note is completely unrelated to the Loan Agreement, the Note being an unsecured, general line of credit, made to Lax to fund his various unidentified commercial activities, and the Loan Agreement, a secured agreement entered into for the purpose of financing the construction and development of the Flatbush Extension Project.
Summary judgment may also be improper where two agreements are entered into at the same time and the instrument sued upon is subject to the terms and conditions in the other agreement. See Hirsch v Rifkin, 166 AD2d 293, 293-94 [1st Dept 1990]. In the instant action, the Loan Agreement was entered into more than two months before U.S. Bank extended the Loan to Chaim Lax. Defendants have mischaracterized the Note as part of the same transaction as the Flatbush Extension Project based in part on the general cross-default provision set forth in the Note. The provision in question, Paragraph P(iii) of the Note, states that "the occurrence of an Event of Default' or default beyond applicable notice and cure periods under any loan by Lender to any affiliate of Maker (including without limitation Flatbush Extension, LLC)" shall constitute an Event of Default under the Note. This is a standard provision included in the agreement to protect Plaintiff's interests and does not indicate in any way that the Note and Loan Agreement are interdependent by their terms.
Defendants also rely on the May 1, 2009 letter which states that Events of Default "have existed for some time under both the loan to Flatbush Extension and the loan to Chaim Lax," as an acknowledgment that the loans are tied together. Defendants contentions are misplaced. At no point in the May 1, 2009 letter, or in any communication between the parties, does the Plaintiff assert that the two agreements are interdependent. Rather, each debtor clearly had an independent duty to pay his/its loan. Furthermore, the Events of Default described in the letters of March and April between the parties are not the basis for this action. The basis for the current action is Defendants' failure to repay the Lax Loan on the Maturity Date. The "plain language of the promissory note at issue establishes as a matter of law defendant's absolute, unconditional obligation to pay," despite the existence of the cross-default provision, which in no way mitigates Defendants' obligation. See Embraer Fin. Ltd. v Servicios Aereos Profesionales, S.A., 42 AD3d 380, 381 [1st Dept 2007]; see also Afco Credit Corp. v Boropark Twelfth Ave. Realty Corp., 187 AD2d 634 [2d Dept 1992].
Alternatively, Defendants contend that Plaintiff acted in bad faith by attempting to "create" a default based on Lax's alleged failure to provide financial documentation. See Letter to Michael J. Feinman, dated July 17, 2009. Paragraph M of the Note provides that the borrower was to provide financial information to Plaintiff at the end of each 120 day period beginning on or around July 31, 2007. Plaintiff has asserted numerous times that such documentation was never provided. Defendants have not provided any evidence to counter this assertion. As Lax's present commitment to pay the Note on the Maturity Date is unaffected by these conditions, Defendants' allegations are insufficient to create triable issues of fact. See Boucher v Eastern Sav. Bank, 145 AD2d 520, 522 [2d Dept 1988].
Finally, Defendants assert the defense of recoupment, which would also defeat summary judgment, if applicable. Specifically, Defendants assert that U.S. Bank acted in bad faith by not extending the full $50,000,000 limit under the Loan Agreement with Flatbush Extension. This may or may not be true. But New York law "requires recoupment to arise out of the same set of transactions as the claim." In re McMahon, 129 F3d 93, 97 [2d Cir. 1997]; see also National Cash Register Co. v Joseph, 299 NY 200, 203 [1949]. As the instant suit is premised upon an unsecured loan made by Plaintiff personally to Chaim Lax, "recoupment" of any claim of Flatbush Extension is therefore unavailable to Defendants in this action.
CONCLUSION
Accordingly, Plaintiff's motion for summary judgment in lieu of complaint is granted. Defendant's cross-motion to dismiss is denied.
The foregoing constitutes the decision and order of the Court.
The Note contains a provision for extension for six months upon written election by Lax not less than 30 days prior to maturity on June 1, 2009, subject to compliance with various conditions. As no election was made, this provision is not relevant.