Deutsche Bank National Trust Co. v. Johnson, Kings County Supreme Court, Index 24867/2011

Standing continues to trip-up foreclosing lenders.  In this residential mortgage foreclosure case, a pro se defendant successfully cross-moved for summary judgment dismissing a mortgage foreclosure complaint based upon the plaintiff’s inability to demonstrate standing.  The original lender on the loan was New Century Mortgage Corporation.  Because the loan was to be securitized, the mortgagee on the loan was the Mortgage Electronic Registration System (“MERS”).

The court first determined that there was no evidence that the note, as opposed to the mortgage, had ever been assigned to MERS and therefore, MERS had no ability to assign the note to the plaintiff. Faced with this difficulty, the plaintiff argued that it was in physical possession of the note prior to the commencement of the action.  The court found, however, that there was insufficient evidence that the plaintiff possessed the note as of the date that the action was commenced.  Thus, the court held that “[b]ecause plaintiff did not submit a ‘written assignment of the note’ or any ‘evidence to establish physical delivery of the note’ defendant’s motion must be granted.”

The lesson of Deutsche Bank National Trust v. Johnson is that lenders must be sure they can demonstrate through admissible evidence that they own the note and mortgage before commencing a mortgage foreclosure action.

172 Madison (NY) LLC v. NMP-Group, LLC, New York County Supreme Court Index No 650087/2010

Springing non-recourse carve-out guaranties are a standard feature of many commercial mortgage loans.  Under such arrangements, the lender generally agrees to look only to the property and its single purpose entity fee owner to recover its loan in the event of a default.  In other words, the loan is generally non-recourse. But if the the borrower commits certain acts, sometimes referred to as “bad boy acts,” guaranty liability “springs” into existence.  A common bad boy act is the borrower filing for bankruptcy.

Those were the facts in 172 Madison (NY) where the borrower filed for bankruptcy on the day the foreclosure auction was scheduled. Justice Shirley Kornreich held for the lender.  On a motion for summary judgment against the guarantor, Justice Kornreich wrote: “Recourse carve-out guaranties are primarily created to deal with situations such as the one that has arisen here.  In exchange for agreeing to look only to the mortgaged property in the event of default, lenders typically require that the borrower or its guarantor promise to pay the entire debt if the impede foreclosure by filing for bankruptcy.  It can be said without exaggeration that the Guaranty was intended to apply to the exact circumstance currently confronting Lender.”

So far, Justice Kornreich’s opinion is straight-forward, but there was more.  The guarantor argued that it could not be liable because the complaint, which was filed well before the borrower filed for bankruptcy did not contain a cause of action against the guarantor for the debt.  Justice Kornreich made short shrift of that defense.  The court wrote that it  would “not allow the guarantor to put of her day of reckoning by insisting on a pointless supplemental pleading to formally bring the complaint up to date where there is no surprise and the underlying facts are not in dispute.”

The guarantor also argued that any judgment against it was barred by Real Property Actions and Proceedings Law section 1301, the election of remedies statutes.  The election of remedies statute provides that a lender can either (i) proceed on a claim for the debt it is owed and forego the equitable remedy of foreclosure; or (ii) the lender can foreclose and wait until after the property is sold at a foreclosure sale to seek to recover any monetary damages if the amount realized on the foreclosure sale is less than the debt (this is known as a “deficiency judgment”).  The lender cannot do both.  It must “elect” its remedy.  Here, the guarantor contended that the lender having chosen to foreclose, could not switch its sought after remedy by seeking to recover on the guaranty.

Justice Kornreich rejected this position and held the prior commencement of the foreclosure action did not prevent the lender from seeking to recover on the guaranty.  The court noted that when the lender made its election to foreclose, the borrower had not yet filed for bankruptcy.  Accordingly, at the time of the lender’s election of its foreclosure remedy, the lender had no right to proceed against the guarantor on the debt.

Justice Kornreich, however, recognized that once the borrower filed for bankruptcy “a choice between the two remedies must ultimately be made.”  Accordingly, Justice Kornreich required the lender to submit a new order and judgment that would either amend the existing judgment of foreclosure and sale to permit allow for a deficiency judgment against the guarantor or vacate the foreclosure judgment and substitute a money judgment against the guarantor for the entire amount of the debt.

The lessons of 172 Madison (NY) are several.  First, all commercial borrowers must be cautious not to file for bankruptcy and thereby inadvertently “spring” a springing, non-recourse carve-out guaranty.  Second, courts will not hesitate to permit lenders to add claims against guarantors even where such claims arise during the pendency of foreclosure actions.  Third, courts will still require lenders to elect there remedies and proceed either on the debt or in foreclosure.

Bank of America v. Lucido, Appellate Division, Second Department, Index No. 3769/2009

The Second Department has reversed Justice Jeffrey Spinner’s award of sanctions in a residential mortgage foreclosure case after a settlement conference failed to produce a settlement.  The sanction barred the lender from recovering more than the principal balance due on the loan plus any advances for taxes and insurance.  The sanction further awarded the borrower a $200,000 credit against the amount due on the mortgage  as “exemplary damages.”

In reversing Justice Spinner, the Second Department wrote that although the Court had the authority to award sanctions against a lender as a result of its failure to negotiate in good faith, such an award must be made on notice to the lender. The Second Department wrote that because “a reduction of the principal balance of the subject mortgage [] was done without notice to the plaintiff that the court was contemplating such sanctions [it] thereby deprived the plaintiff of its right to due process.”  The court further wrote that the lender’s conduct was “not so egregious as to merit the imposition of sanctions.”

The lesson of Bank of America v Lucido is that borrowers seeking sanctions against lenders for failure to participate in mandatory mortgage foreclosure settlement conferences must be sure to do so on notice to the lender.  Courts, similarly, must insure that the lender has an opportunity to be heard before they awards sanctions.

Independence Bank v. Valentine, Appellate Division, Second Department 08136/2012

Must a CPLR 3408 settlement conference be conducted in an action to foreclose a mortgage on a primary residence where the mortgage collateralizes a personal guaranty of a commercial loan?  The Second Department has held no.

foreclosure imageIn this action, a corporation formed and owned by the defendant obtained a commercial loan to fund start-up costs of opening a Quizno’s Sub shop.  To obtain the loan, the defendant was required to personally guaranty the loan and collateralize that loan by giving a subordinate mortgage on her personal residence.  The business failed. The lender, attempting to collect on the guaranty, commenced a mortgage foreclosure action. When the lender moved for summary judgment, the defendant contended that summary judgment was premature as she had never received the opportunity to participate in a CPLR 3408 settlement conference.  The motion court granted the lender summary judgment and the defendant appealed.

The case turned on the correct interpretation of the relevant statutes.  CPLR 3408, the settlement conference statute, provides it applies to “any residential foreclosure action involving a home loan as such term is defined in section thirteen hundred four of the real property action and proceedings law, in which the defendant is a resident of the property subject to foreclosure.”  Real Property Actions and Proceedings Law section  1304 defines a “home loan” as one in which the borrower is a natural person who incurs the debt “primarily for personal, family or household purposes.”  The Second Department concluded that the borrower corporation was not a natural person and the loan’s purpose was to fund business start-up costs and was not incurred for “personal, family, or household purposes.”  Accordingly, the Second Department affirmed the motion court’s grant of summary judgment for the lender.

The Second Department wrote that “[w]hile it is unfortunate that here, a primary residence may be lost in foreclosure, not everyone under every circumstance is entitled to reap the protections afforded to victims of the mortgage crises by the New York Legislature pursuant to CPLR 3408.”  The lesson of Independence Bank v. Valentine, then, is that courts will interpret the statutes enacted in the aftermath of the mortgage foreclosure crisis according to their plain meaning.  The scope of relief available under those statutes is, accordingly, limited.

34th Street Penn Association, LLC v. Payless Shoesource, Inc., New York County Landlord-Tenant Index No. 075998/2012

This commercial landlord-tenant case involved a straight-forward issue of contract interpretation.  The tenant, a retailer,  was, allegedly, concerned about leasing space in a building that had no tenants for its other retail space.  Thus, the lease contained a clause providing that the tenant would receive a fifty percent reduction in Minimum Rent until “DSW and Walgreens” were “open and operating in the Building.” or a year had passed from the rent commencement date.

DSW opened in the building and Duane Reade/Walgreens thereafter sublet its space to Party City which opened in the building. (The Court does not address this issue, but the “Duane Reade/Walgreens” formulation likely arises from Walgreens acquisition of Duane Reade.)

It is well settled that a lease is a contract which is subject to the same rules of construction as any other agreement.

The court held for the tenant.  First, it observed that “It is well settled that a lease is a contract which is subject to the same rules of construction as any other agreement.” It ruled that the language of the lease “was clear and unambiguous in providing that the responded need only pay 50 percent of the rent until both DSW and Walgreens opened.” Under these circumstances, the Court found “no need to resort to the parol or extrinsic evidence offered by the parties. . . . ”  The court continued that parol and extrinsic evidence was particularly inappropriate where the lease was negotiated by sophisticated business people.

The lesson of 34th Street Penn Association is that when a court believes that a lease is clear, it will enforce the lease according to its terms and not consider parol or extrinsic evidence as to the lease’s meaning.


Waithe v. Citigroup, Inc., Kings County Supreme Court, Index No. 24434/2012

As most real estate lawyers understand, co-0p owners do not own real estate.  They own stock in a cooperative apartment corporation and an appurtenant proprietary lease.  Therefore a co-op is not technically “mortgaged,” but rather a co-op loan is secured by a lien on the stock and proprietary lease. Typically, the lien is evidenced by the filing of a form UCC-1.  Thus, when a borrower does not pay on its co-op loan, the lender may commence a non-judicial UCC sale.


That was the backdrop to Waithe. In Waithe the co-op owner lost the co-op at a non-judicial foreclosure sale and commenced a special proceeding to reverse the sale.  (The lender was the successful credit-bidder at the sale).  Justice David Schmidt rejected most of the borrower’s claims, but ordered a hearing on a single issue: whether the lender provided the seller with proper notice of the non-judicial sale pursuant to UCC 9-611(f).  The New York legislature added sub-section (f) to UCC 9-611 in response to the foreclosure crisis to protect co-op owners.  The subsection is headed “Additional pre-disposition notice for cooperative interests” and requires the lender to send to the defaulting borrower, an “additional pre-disposition notice” at least 90 days before the sale.  The subsection, however does not specify the methodology pursuant to which the additional pre-disposition notice must be sent.

In an attempt to demonstrate compliance with UCC 9-611(f), the lender submitted an affidavit from a “Business Operations Analyst” stating that she reviewed  certain unspecified records  that  reflected  that the lender had  sent the  90 day notice  to the borrower  by certified  and registered mail.  Justice Schmidt ruled  that the  affidavit was not a sufficient affidavit of service of the actual mailing  and, accordingly,  ordered a hearing  on the issue  of whether the  additional predisposition notice  was actually served.   Justice Schmidt noted that  for real property,  Real Property Actions and Proceedings Law section 1304(2) requires that  pre-foreclosure notices be served by first class mail in addition to certified and registered mail.  First class mailing of the additional predisposition notice is not required to commence a non-judicial foreclosure on a co-op.

The lesson of Waithe is that  foreclosing lenders,  even in non-judicial co-op foreclosures,  should  provide  affidavits of mailing  from the  actual person  depositing  the mailings with the Postal Service  rather than rely upon records  allegedly prepared  by someone else.

Princess Point L.L.C. v. AKRF Eng’g, P.C., New York County Supreme Court Index No. 601849/2008

In this Commercial Division case, Justice Charles Ramos ruled that a seller was not required to demonstrate that it was ready, willing, and able to perform a contract where the purchaser has anticipatorily repudiated the contract in order to retain the contract deposit.  Justice Ramos implied that the result would have been different had the seller sought expectancy damages.

This case arose out of a contract to purchase a 23 acre hazardous waste waterfront site.  The contract was to close within thirty days of notice that the Seller had obtained all development approvals, but in all events, not later than an outside closing date. Although the parties agreed to extend the outside closing date, timely development approvals were not forthcoming.  This action was commenced just prior to the expiration of the outside closing date as extended by the parties.

The ready, willing, and able requirement only applies when the non-breaching party is seeking to recover lost profits or expectation damages and does not apply where, as here a party merely seeks to recover a down payment.

The court had previously ruled that the buyer anticipatorily breached the contract by commencing the action prior to the outside closing date. The seller moved for a judgment entitling it to keep the contract deposit and certain other payments.  The buyer argued that because the seller could not demonstrate it was ready willing and able to close, it could not recover the contract deposit.

Justice Ramos disagreed and held that “[t]he ready, willing and able requirement only applies when the non-breaching party is seeking to recover lost profits or expectation damages and does not apply where, as here a party merely seeks to recover a down payment.”  Because the seller was merely seeking to retain the contract deposit as liquidated damages based upon the seller’s anticipatory breach, the seller was entitled to recover the contract deposit.

The lesson of Princess Point is that where a purchaser materially breaches first, the seller’s performance will be excused and the seller will be able to retain the contract deposit as liquidated damages.

Graham Court Owner’s Corp. v. Taylor, Appellate DivisionFirst Department 70520/2010

In a 3-2 decision, the First Department has endorsed a broad reading of Real Property Law § 234.  That statute provides for an implied reciprocal right of a residential tenant to recover attorneys’ fees whenever the lease provides that a landlord may recover attorneys’ fees if the tenant fails to perform a lease covenant.    In Graham Court, the lease did not have a traditional landlord’s attorneys’ fees clause.  Rather, the lease provided that any rent the landlord received from re-renting the premises was first to be used to pay the landlord’s expenses.  Expenses was defined to include attorneys’ fees.

“As a remedial statute, Real Property Law § 234 should be accorded its broadest protective meaning. . . . .”

The court held that as a “remedial statute, Real Property Law § 234 should be accorded its broadest protective meaning consistent with legislative intent.” Accordingly, the court ruled that the tenant, who was ultimately successful in his defense of a claim of an unauthorized alteration (the landlord also lost a rent overcharge claim), was entitled to recover attorneys’ fees.  A thorough analysis of the opinion can be found in Warren Estis’s and Michael Feirstein’s New York Law Journal column here.

Because Graham Court was a 3-2 decision, the First Department, may not have the last word on the scope of RPL 234, but, for now, the lesson of Graham Court is that a residential lease that contains a landlord’s prevailing party legal fee clause, no matter how disguised, will likely be read to include an implied reciprocal tenant’s prevailing party legal fee clause.

Mins Court Housing Co., Inc. v. Wright, Bronx County L&T Index No. 013224/2013

In this residential holdover proceeding, the landlord alleged chronic delinquent rent payments and, on that basis, purported to terminate the tenant’s lease.  The Petition claimed that over a fifteen-year tenancy, the landlord brought twelve separate non-payment proceedings.  Nine of those proceedings, however,  were commenced more than six years prior to the landlord’s commencement of the holdover proceeding and, accordingly, the court ruled they could not be considered on statute of limitations grounds.  Two of the remaining three proceedings were eventually resolved in part by stipulation that required the landlord to make some repairs.

That left one prior non-payment proceeding in which the tenant had defaulted.  Justice Javier Vargas held the landlord “failed to allege enough frequency and number of prior proceedings” to form the predicate to a claim of chronic rent delinquency and granted the tenant’s motion to dismiss.

The lesson of Mins Court Housing is that landlords must establish a record of chronic delinquent rent payments based upon recent, frequent, and successfully resolved non-payment proceedings in order to lawfully terminate a residential tenant for chronic rent delinquencies.

383 Realty Corp. v. Young, New York County Landlord Tenant Court Index NO. 89487/2011

In this residential landlord-tenant case the tenant was able to prevail on a laches defense where the landlord did not commence a summary nonpayment proceeding for 42 months after the tenant stopped paying her rent.  The landlord offered testimony that the delay in commencing the summary nonpayment proceeding was due to her prior counsel who told the landlord that the proceeding had been commenced and provided her with false reports concerning the status of the action.  The landlord even claimed that a paralegal at her former lawyer’s office sent her a falsified bankruptcy petition that allegedly corroborated  the lawyer’s claims that legal action had been commenced.

The landlord however, offered no corroborating evidence to support her claims of her prior counsel’s failure.  Moreover, the trial court noted that if the landlord’s testimony concerning her prior counsel was true it “has a remedy at law against those attorneys”, clearly referring to a potential malpractice claim.  On this basis the court upheld the tenant’s affirmative defense of laches.

The lesson of 383 Realty Corp. is clear.  Landlords must obtain confirmation that their attorneys have timely commenced summary proceeding or be prepared to seek relief from their attorneys’ malpractice carrier.