Patmos Fifth Avenue Real Estate Inc. v. Mazel Building LLC, New York County Supreme Court Index No. 108421/2011.

Real Property Law § 320 restricts a lender’s ability to accept a conveyance of a deed where the conveyance is intended to be a security in the nature of a mortgage. Defaulting borrowers, however, sometimes will deliver a deed in escrow to a lender on the promise that the deed will remain in escrow as long as they make payments under a mortgage modification plan.  This case shows that this strategy can carry risks for the lender. 

In this action, the plaintiff alleged that it was fraudulently induced to make certain investments into a condominium project.  As part of the investment, the plaintiff purchased condominium units with a purchase money mortgage from one of the defendants.  After the plaintiff defaulted on the mortgage, the plaintiff executed an agreement pursuant to which it agreed to deliver an executed deed to the premises to two of the defendants.  The deed was to be held in escrow and only released to the defendants if the plaintiff failed to make certain payments.

 Real Property Law § 320 provides that where a deed “appears to be intended only as a security in the nature of a mortgage, although a conveyance in absolute terms, must be considered a mortgage. . . . .”  On the facts of this case, the court held that plaintiff had stated a claim that the deed in escrow was, in fact, intended only as a security in the nature of a mortgage.  Accordingly, the Court refused to dismiss the plaintiff’s claim under Real Property Law § 320.

The lesson of Patmos Fifth Avenue Real Estate then is that lenders must be extremely careful when taking a deed in escrow and document the transaction in such a manner that it does not appear as if the deed is being held in escrow as a mere substitute for a mortgage.