Real Property Law

Supreme Ct., N.Y. Cty

(Fried, J.)

In an action by a remainderman for declaratory relief and damages, the mortgagee and holders of present possessory interests sought summary judgment. The court denied the summary judgment motion, holding that the remainderman enjoyed surety status even though the remainderman was not personally liable on the mortgage obligation.

In 1984, Lynx Properties acquired the subject parcels from Kmart, with moneys borrowed from Kmart, which issued non-recourse notes secured by mortgages. The parcels were then leased back to Kmart, which then assigned the notes and mortgages to Bank One. Then, in 1984, Lynx conveyed an estate for years in the parcels to the Partnership, together with a fee interest in the buildings on the parcels. Lynx simultaneously conveyed a remainder interest in fee in the land to RM 14 FK, with a provision excluding RM 14 FK from any obligation to pay the mortgage debt. Lynx also conveyed a master lease, covering the Kmart leases, to Malease. The Partnership expressly agreed to primary liability for the mortgage indebtedness. Subsequently, the partnership refinanced the notes and mortgage, without the knowledge of RM 14 FK. After default on the mortgages, RM 14 FK brought this action, alleging nine causes of action, all of which alleged that RM 14 FK is a surety. The defendants sought summary judgment, contending that RM 14 FK is not a surety.

In denying the summary judgment motion, the court held that even though the Partnership was primarily liable on the mortgage obligations, the remainder interest in the land itself was secondarily liable, at least to the extent of its value. In that circumstance, the owner of that remainder interest, RM 14 FK, qualifies as a surety even though RM 14 FK is not personally liable on the mortgages.

COMMENT

A modification of a contract by principal obligor and obligee that either amounts to a substituted contract or imposes risks on a secondary obligor fundamentally different from those imposed prior to the modification will discharge secondary obligor from liability. In Antisdel v. Williamson, 165 NY 373 (1901), the court held that a mortgagee, who was assigned a mortgage guaranteed by a secondary obligor, materially altered the contract by providing a payment extension of three years to the mortgagor. Due to the material modification of the terms of the original contract, the court found that the guarantors were no longer secondarily liable for the debt and were discharged from any obligation. Similarly, in RM 14 FK, Lynx Partnership's unilateral refinance of the mortgage with the bank could discharge the surety of liability. The refinancing of a mortgage materially alters the original agreement and essentially creates a new obligation. In addition, as argued by RM 14 FK, the re-financed loan payments increased the risk of default, placing the remainder interest in the land at greater risk of foreclosure than under the original mortgage.

Even if a secondary obligor bears no personal liability, when a future property interest acts as partial collateral for an obligation and is put at risk by the primary obligor, the property interest itself acts as a surety. Restatement (Third) of Suretyship and Guaranty ' 1(1)(a).

Despite an agreement expressly providing that a party was to act as a primary obligor and not merely as a surety, courts will attach a surety status to a party where an obligation is secondary irrespective of its form. Chemical Bank v. Meltzer, 93 N.Y.2d 296 (1999). In Chemical Bank v. Meltzer, the court held that a company's president was in substance a surety even though he had executed a guaranty providing that he would be primarily liable for a debt. The court reasoned, that despite the language and form of the agreement, the president's underlying obligation was only secondary and, therefore the substance of the transaction warranted the attachment of surety status. Id. at 303. Therefore, as a result of Meltzer's suretyship status, he was discharged from liability under the original mortgage as his company's re-finance created a new primary obligation. Id. The principle emphasized in Meltzer is equally applicable here. Although a future interest in property does not bear the typical personal obligation of a secondary obligor, nevertheless the interest is put at risk by the default of the primary obligor and in substance is equivalent to any personal obligation to pay on behalf of another.

Undisclosed Payoff Fees Create Potential TILA Violation

McAnaney v. Astoria Financial Corp.

NYLJ 2/24/05, p. 2., col. 3

U.S. Dist Ct., EDNY

(Spatt, J.)

In a class action by mortgagors contending that lenders violated the federal Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), and the Fair Debt Collection Practice Act (FDCPA), defendant banks sought summary judgment. The court denied the motion with respect to the TILA claims, holding that the mortgagors had alleged facts sufficient to state a claim for violation of the statute.

The mortgagors took out mortgage loans from Astoria Federal and its predecessors. Astoria Federal then sold the loans into the secondary mortgage market. The standard form mortgage contract received by each of the mortgagors states that the mortgagor will not be required to pay the lender for discharge, and that the mortgagor will pay the cost of recording the discharge. A rider provides that the mortgagor will have to pay all reasonable fees related to the mortgage, but also provides that the rider is void if the security instrument is sold to FNMA, GNMA, or FHLMC. When the mortgagors sought to prepay their loans, they were confronted with fees and charges associated with satisfying the mortgage, including an attorney document preparation fee, a facsimile fee, and a recording fee. Some of the mortgagors were confronted with an additional satisfaction fee and county clerk fee. The mortgagors paid these fees in order to satisfy their mortgage loans, and then brought this action, contending that the disputed fees constitute undisclosed finance charges, prepayment penalties, refinancing fees, and payoff fees. They contend that these fees violated the three federal statutes. The court granted summary judgment to lender banks with respect to the RESPA and FDCPA claims, but denied summary judgment with respect to the TILA claim.

In particular, the court noted that questions of fact remained about the fees charged. In particular, the court noted that discovery was necessary to determine whether many of the fees were required for extinguishment of the loan (in which cases they would qualify as finance charges) or whether they were fees for a service requested by borrower. The court also concluded that the allegations in mortgagors' complaint sufficiently alleged that the disputed fees and charges were “necessary” to pay off the mortgage, and that they were therefore prepayment penalties with the meaning of TILA.

Remainderman a Surety Even Though Not Personally Liable on Mortgage Obligation

RM 14 FK Corp. v. Bank One Trust Co.

NYLJ 2/16/05, p. 21, col. 3

Supreme Ct., N.Y. Cty

(Fried, J.)

In an action by a remainderman for declaratory relief and damages, the mortgagee and holders of present possessory interests sought summary judgment. The court denied the summary judgment motion, holding that the remainderman enjoyed surety status even though the remainderman was not personally liable on the mortgage obligation.

In 1984, Lynx Properties acquired the subject parcels from Kmart, with moneys borrowed from Kmart, which issued non-recourse notes secured by mortgages. The parcels were then leased back to Kmart, which then assigned the notes and mortgages to Bank One. Then, in 1984, Lynx conveyed an estate for years in the parcels to the Partnership, together with a fee interest in the buildings on the parcels. Lynx simultaneously conveyed a remainder interest in fee in the land to RM 14 FK, with a provision excluding RM 14 FK from any obligation to pay the mortgage debt. Lynx also conveyed a master lease, covering the Kmart leases, to Malease. The Partnership expressly agreed to primary liability for the mortgage indebtedness. Subsequently, the partnership refinanced the notes and mortgage, without the knowledge of RM 14 FK. After default on the mortgages, RM 14 FK brought this action, alleging nine causes of action, all of which alleged that RM 14 FK is a surety. The defendants sought summary judgment, contending that RM 14 FK is not a surety.

In denying the summary judgment motion, the court held that even though the Partnership was primarily liable on the mortgage obligations, the remainder interest in the land itself was secondarily liable, at least to the extent of its value. In that circumstance, the owner of that remainder interest, RM 14 FK, qualifies as a surety even though RM 14 FK is not personally liable on the mortgages.

COMMENT

A modification of a contract by principal obligor and obligee that either amounts to a substituted contract or imposes risks on a secondary obligor fundamentally different from those imposed prior to the modification will discharge secondary obligor from liability. In Antisdel v. Williamson, 165 NY 373 (1901), the court held that a mortgagee, who was assigned a mortgage guaranteed by a secondary obligor, materially altered the contract by providing a payment extension of three years to the mortgagor. Due to the material modification of the terms of the original contract, the court found that the guarantors were no longer secondarily liable for the debt and were discharged from any obligation. Similarly, in RM 14 FK, Lynx Partnership's unilateral refinance of the mortgage with the bank could discharge the surety of liability. The refinancing of a mortgage materially alters the original agreement and essentially creates a new obligation. In addition, as argued by RM 14 FK, the re-financed loan payments increased the risk of default, placing the remainder interest in the land at greater risk of foreclosure than under the original mortgage.

Even if a secondary obligor bears no personal liability, when a future property interest acts as partial collateral for an obligation and is put at risk by the primary obligor, the property interest itself acts as a surety. Restatement (Third) of Suretyship and Guaranty ' 1(1)(a).

Despite an agreement expressly providing that a party was to act as a primary obligor and not merely as a surety, courts will attach a surety status to a party where an obligation is secondary irrespective of its form. Chemical Bank v. Meltzer, 93 N.Y.2d 296 (1999). In Chemical Bank v. Meltzer, the court held that a company's president was in substance a surety even though he had executed a guaranty providing that he would be primarily liable for a debt. The court reasoned, that despite the language and form of the agreement, the president's underlying obligation was only secondary and, therefore the substance of the transaction warranted the attachment of surety status. Id. at 303. Therefore, as a result of Meltzer's suretyship status, he was discharged from liability under the original mortgage as his company's re-finance created a new primary obligation. Id. The principle emphasized in Meltzer is equally applicable here. Although a future interest in property does not bear the typical personal obligation of a secondary obligor, nevertheless the interest is put at risk by the default of the primary obligor and in substance is equivalent to any personal obligation to pay on behalf of another.

Undisclosed Payoff Fees Create Potential TILA Violation

McAnaney v. Astoria Financial Corp.

NYLJ 2/24/05, p. 2., col. 3

U.S. Dist Ct., EDNY

(Spatt, J.)

In a class action by mortgagors contending that lenders violated the federal Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), and the Fair Debt Collection Practice Act (FDCPA), defendant banks sought summary judgment. The court denied the motion with respect to the TILA claims, holding that the mortgagors had alleged facts sufficient to state a claim for violation of the statute.

The mortgagors took out mortgage loans from Astoria Federal and its predecessors. Astoria Federal then sold the loans into the secondary mortgage market. The standard form mortgage contract received by each of the mortgagors states that the mortgagor will not be required to pay the lender for discharge, and that the mortgagor will pay the cost of recording the discharge. A rider provides that the mortgagor will have to pay all reasonable fees related to the mortgage, but also provides that the rider is void if the security instrument is sold to FNMA, GNMA, or FHLMC. When the mortgagors sought to prepay their loans, they were confronted with fees and charges associated with satisfying the mortgage, including an attorney document preparation fee, a facsimile fee, and a recording fee. Some of the mortgagors were confronted with an additional satisfaction fee and county clerk fee. The mortgagors paid these fees in order to satisfy their mortgage loans, and then brought this action, contending that the disputed fees constitute undisclosed finance charges, prepayment penalties, refinancing fees, and payoff fees. They contend that these fees violated the three federal statutes. The court granted summary judgment to lender banks with respect to the RESPA and FDCPA claims, but denied summary judgment with respect to the TILA claim.

In particular, the court noted that questions of fact remained about the fees charged. In particular, the court noted that discovery was necessary to determine whether many of the fees were required for extinguishment of the loan (in which cases they would qualify as finance charges) or whether they were fees for a service requested by borrower. The court also concluded that the allegations in mortgagors' complaint sufficiently alleged that the disputed fees and charges were “necessary” to pay off the mortgage, and that they were therefore prepayment penalties with the meaning of TILA.