Real Property Law

Mortgagee States Cause of Action for Actual and
Constructive Fraud

Greystone Bank v. Neuberg

NYLJ 9/7/11

U.S. Dist. Ct., E.D.N.Y.

(Seybert, J.)

In a bank's action for constructive and actual fraud, mortgagors and their transferees moved to dismiss for failure to state a claim. The court denied the motion, holding that the complaint stated an adequate claim against all defendants.

The bank lent the Neubergs $3.7 million in 2008, secured by a note and mortgage on 15 Hoover Street in Inwood. The property was owned by an LLC of which the Neubergs were members. In applying for the loan, the Neubergs indicated that they owned two homes, one in Lawrence, NY, and another in Miami. In 2009, they asked the bank for permission to transfer 75% of their interest in 15 Hoover Street to Rubinstein. To secure permission, Rubinstein represented, in April 2009, that he owned a home in Woodmere, NY. In reliance on the statement and on Rubinstein's guarantee, the bank approved the transfer. In fact, however, Rubinstein's representation about the Woodmere home was false; two weeks before he made the representation, he had conveyed the property to his wife for no consideration. Also in April 2009, the Neubergs executed two deeds, one to the Lawrence property and the other to the Miami property, to a trust whose beneficiaries were their children. Those deeds were recorded in May and June 2009, respectively. In January 2010, the Neubergs defaulted on the note and mortgage, and the bank foreclosed. The foreclosure proceeding is pending. Meanwhile, the bank brought this action against the Neubergs and the Neuberg trust for actual and constructive fraud, and against the Rubinsteins for actual fraud. All defendants moved to dismiss.

In denying the Neubergs' motion to dismiss the constructive fraud claim (Debtor and Creditor Law, section 273), the court relied on two presumptions: the presumption that when information about the consideration paid for a transfer is exclusively within the knowledge of the parties to the transfer, those parties have the burden of establishing that the consideration was fair; and the presumption that a conveyance made without fair consideration rendered the transferor insolvent. Section 273 permits a creditor to invalidate a transfer made by a debtor without fair consideration if the transfer renders the debtor insolvent. Given the two presumptions, the Neubergs were not entitled to dismissal of the constructive fraud claim. The court then turned to the actual fraud claims (Debtor and Creditor Law, section 276). With respect to the claim against the Neubergs, the court concluded that the facts gave rise to a strong inference of fraudulent intent. The court then rejected the trust's contention that an actual fraud claim requires proof that both the transferor and the transferee act with fraudulent intent. The court held instead that only the transferor's intent is relevant on an actual fraud claim. Finally, the court rejected the Rubensteins' argument that Mr. Rubinstein's transfer to his wife could not have been fraudulent because it was made before Mr. Rubinstein had incurred any obligation to the bank. The court held that it was enough that Rubinstein knew that the bank was likely to become a creditor in the near future.

COMMENT

For a conveyance to be considered actual fraud under NY DEBT.& CRED. ' 276, the transferor need not be in a debtor/creditor relationship at the time of the conveyance, so long as the transfer is made with intent to defraud any present or future creditor. The plain language of Section 276 deems a conveyance to be fraudulent when made with actual intent to defraud present or future creditors. In Altman v. Finkel, 268 A.D. 666, the court held that the transfer of three parcels of real estate from husband to corporation owned by wife was fraudulent, even though plaintiff was not a creditor until two years later. The court relied on the lower court's determination that the transfer was designed purely to hide assets from husband's future creditors while still maintaining complete control of the assets. In United States v. Cohn, 682 F . Supp. 209, the mere fact that a transfer was made before any tax assessment against a defendant was not enough to defeat a claim of actual fraud. The court concluded that if a plaintiff can prove that a transfer was part of an asset avoidance scheme, it is fraudulent regardless of whether it was prior to any assessment against the property. Cohn suggests that any transfer to shield assets with the knowledge that a debtor will exist at any point in the future will suffice to allege fraud; the specific future creditor is not important.

When a transferor has fraudulent intent, a creditor may have the conveyance set aside under DEBT. & CRED. ' 278 unless the transferee provided adequate consideration and had no knowledge of the fraud. In In re Brosnahan, 324 B.R. 199, a mortgage was deemed fraudulent under ' 276 even though the debtor received adequate consideration from the bank because the transfer was meant to “hinder [or] delay” plaintiff's collection of a debt. The mortgagor-bank was stayed from foreclosing until after a factual determination about the bank's knowledge of defendant's intent. The court indicated, however, that if the facts revealed that the bank had knowledge of the fraud, the conveyance would be upset; conversely, if the bank was an innocent party with no knowledge, the transfer would stand. Even though section 278 protects a bona fide purchaser without knowledge of any fraud, courts still label such conveyances as fraudulent against the creditor. The label, however, confers on the creditor no additional rights against his debtor beyond those the creditor would have by virtue of the original debt.

Foreclosing Mortgagee Provided Adequate Notice of Acceleration

Prompt Mortgage Providers of North America, LLC v.
Direct Realty, LLC

NYLJ 9/12/11, p. 17, col. 3

Supreme Ct., N.Y. Cty.

(Oing, J.)

In a foreclosure action, mortgagee sought a judgment of foreclosure and the mortgagor moved to dismiss for failure to state a claim. The court awarded summary judgment to mortgagee, holding that mortgagee had provided adequate notice of acceleration of the mortgage debt.

In 2007, mortgagor borrowed $1 million from mortgagee, and executed a note requiring monthly interest payments of $10,000. The note also provided that in the event of default, mortgagor would be required to repay the principal and interest at the rate of 24%, commencing on the day of default. Mortgagor executed a mortgage to secure the debt. Mortgagor defaulted on the Mach 1, 2009 payment and on subsequent payments. Pursuant to an acceleration clause in the note, mortgagee prepared a notice of default stating that the loan would be accelerated in mortgagor did not pay the outstanding interest and late fees before July 29, 2009. One of mortgagee's principals submitted an affidavit that he served the notice of default on June 24. Mortgagor failed to cure the default, and mortgagee contended that as a result, $1,426,675 was due and owing, justifying a judgment of foreclosure. Mortgagor contended that it never received the notice of acceleration, and that mailing or personal delivery of the notice was a prerequisite to foreclosure.

In awarding judgment to mortgagee, the court rejected mortgagor's contention that mailing or personal delivery was necessary. The court relied on the language of the mortgage, which provided that “the whole or said principal sum and interest shall become due at the option of the mortgagee: After default in the payment of any installment of principal or of interest for fifteen days ' ” The court noted the absence of the words “ after notice and demand,” which were found in two other default clauses of the mortgage, and held that a written notice was not a condition precedent for accelerating the loan and commencing a foreclosure action.

COMMENT

In the absence of an acceleration clause in a mortgage, a mortgagee may not be entitled to accelerate the entire debt due upon the mortgagor's default in payment, but can foreclose based on default of each installment payment as it comes due. N.Y. Real Property Actions and Proceedings Law (“RPAPL”) ' 1351(2) provides that “If it appears that the mortgaged property is so circumstanced that a sale of the whole will be most beneficial to the parties, the final judgment ' may, at the option of the mortgagee, direct that the whole property be sold to satisfy the debt then due with the costs of the action and expenses of the sale, subject to the continuing lien of the mortgage for the amount of the debt not then due and unpaid according to its terms..” As the court explained in Golden v. Ramapo Improvement Corp., 78 A.D.2d 648, the statute authorizes partial foreclosure of mortgaged property and provides that the whole property can then be sold to satisfy the debt, subject to the continuing lien of the mortgage for the amount of the debt not then due. However, the need to rely on the statute rarely arises today since nearly all mortgages contain an acceleration clause.

If a mortgage contains an acceleration clause, notice of default is not a condition precedent to accelerating the loan unless the mortgage explicitly makes notice a requirement to acceleration. The mortgage document in Pizer v. Herzig, 120 A.D. 102, contained an acceleration clause but did not contain a notice clause. Thus, the First Department held that the mortgagee was entitled to commence the foreclosure action without providing notice to the mortgagor. By contrast, in HSBC Mortgage Corp. v. Erneste, 22 Misc. 3d 1115A, the acceleration clause in the mortgage provided that the “[l]ender may require Immediate Payment in Full ' only if all of the following conditions are met.” Since the clause unambiguously provided that notice given by the mortgagee to the mortgagor was one of the required conditions for acceleration, the court stated “that notice [was] essential to acceleration of the loan as the basis for foreclosure.”

If the acceleration clause in a mortgage includes language about notice procedures, but does not explicitly require notice as a prerequisite to acceleration, then notice is not a condition precedent for a mortgagee to accelerate the loan. For instance, in Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472, the acceleration clause in the mortgage followed the statutory form provided in Schedule M of Real Property Law section 258, which stated, “[t]hat the whole of said principal sum shall become due after default in the payment of any installment of the principal ' or after default in the payment of any tax ' for thirty days after notice and demand.” Although “notice” is mentioned in the clause, it is not a requirement to acceleration of the principal. The Court of Appeals held that notice of default was not a condition precedent for the mortgagee to elect to accelerate the mortgage. Rather, in that circumstance, the mortgagee's filing of the lis pendens, summons and complaint clearly setting forth the election, serve as a sufficient overt act in electing to accelerate the mortgage. Similarly, in Fifty-second Operating Corp. v. Regus Realty Corp., 236 A.D. 497, the bond and mortgage contained clauses similar to those in Prompt Mortgage Providers, which stated that “notice and demand or request may be in writing and may be served in person or by mail.” Since the mortgage was in statutory form, the First Department held that the written notice given to the mortgagor was sufficient, since it was “[not] a prerequisite that the mortgagor be given any notice of the mortgagee's election to deem the mortgage accelerated.”

Concerns About Insurability of Title Did Not Justify
Cancellation of Sale Contract

Empire 33rd LLC v. The Forward Association Incorporated

NYLJ 8/15/11, p. 23, col. 5

AppDiv, First Dept.

(memorandum opinion)

In an action by contract vendee to recover a $5,350,000 down payment for the purchaser of real property, contract vendee appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, concluding that contract vendee's concerns about the insurability of title were premature and did not justify cancellation of the contract or return of the down payment.

Contract vendee entered into the contract to purchase the subject property from a nonprofit corporation. The property was substantially all of the seller's corporate assets, and Supreme Court authorized the nonprofit's board to sell the property pursuant to section 511 of the Not-For-Profit Corporation Law. Contract vendee later brought this action for a judgment declaring the contract void, arguing that seller had falsely represented that the non-profit's membership did not have to approve the sale, and expressing concern that a title insurer would declare title uninsurable because of the failure to obtain membership approval. Supreme Court dismissed the complaint, and contract vendee appealed.

In affirming, the Appellate Division emphasized that the record included no indication that any exception had been raised by any title insurer to the insurability of the property. The court noted that one of two events would occur: Sellers will be able to convey good and insurable title by the closing date, obligated contract vendee to complete the purchase, or sellers will not be able to do so, entitling contract vendee to return of its down payment. The court saw no reason to pass on a hypothetical defect in title at a date before closing.

Mortgagee States Cause of Action for Actual and
Constructive Fraud

Greystone Bank v. Neuberg

NYLJ 9/7/11

U.S. Dist. Ct., E.D.N.Y.

(Seybert, J.)

In a bank's action for constructive and actual fraud, mortgagors and their transferees moved to dismiss for failure to state a claim. The court denied the motion, holding that the complaint stated an adequate claim against all defendants.

The bank lent the Neubergs $3.7 million in 2008, secured by a note and mortgage on 15 Hoover Street in Inwood. The property was owned by an LLC of which the Neubergs were members. In applying for the loan, the Neubergs indicated that they owned two homes, one in Lawrence, NY, and another in Miami. In 2009, they asked the bank for permission to transfer 75% of their interest in 15 Hoover Street to Rubinstein. To secure permission, Rubinstein represented, in April 2009, that he owned a home in Woodmere, NY. In reliance on the statement and on Rubinstein's guarantee, the bank approved the transfer. In fact, however, Rubinstein's representation about the Woodmere home was false; two weeks before he made the representation, he had conveyed the property to his wife for no consideration. Also in April 2009, the Neubergs executed two deeds, one to the Lawrence property and the other to the Miami property, to a trust whose beneficiaries were their children. Those deeds were recorded in May and June 2009, respectively. In January 2010, the Neubergs defaulted on the note and mortgage, and the bank foreclosed. The foreclosure proceeding is pending. Meanwhile, the bank brought this action against the Neubergs and the Neuberg trust for actual and constructive fraud, and against the Rubinsteins for actual fraud. All defendants moved to dismiss.

In denying the Neubergs' motion to dismiss the constructive fraud claim (Debtor and Creditor Law, section 273), the court relied on two presumptions: the presumption that when information about the consideration paid for a transfer is exclusively within the knowledge of the parties to the transfer, those parties have the burden of establishing that the consideration was fair; and the presumption that a conveyance made without fair consideration rendered the transferor insolvent. Section 273 permits a creditor to invalidate a transfer made by a debtor without fair consideration if the transfer renders the debtor insolvent. Given the two presumptions, the Neubergs were not entitled to dismissal of the constructive fraud claim. The court then turned to the actual fraud claims (Debtor and Creditor Law, section 276). With respect to the claim against the Neubergs, the court concluded that the facts gave rise to a strong inference of fraudulent intent. The court then rejected the trust's contention that an actual fraud claim requires proof that both the transferor and the transferee act with fraudulent intent. The court held instead that only the transferor's intent is relevant on an actual fraud claim. Finally, the court rejected the Rubensteins' argument that Mr. Rubinstein's transfer to his wife could not have been fraudulent because it was made before Mr. Rubinstein had incurred any obligation to the bank. The court held that it was enough that Rubinstein knew that the bank was likely to become a creditor in the near future.

COMMENT

For a conveyance to be considered actual fraud under NY DEBT.& CRED. ' 276, the transferor need not be in a debtor/creditor relationship at the time of the conveyance, so long as the transfer is made with intent to defraud any present or future creditor. The plain language of Section 276 deems a conveyance to be fraudulent when made with actual intent to defraud present or future creditors. In Altman v. Finkel, 268 A.D. 666, the court held that the transfer of three parcels of real estate from husband to corporation owned by wife was fraudulent, even though plaintiff was not a creditor until two years later. The court relied on the lower court's determination that the transfer was designed purely to hide assets from husband's future creditors while still maintaining complete control of the assets. In United States v. Cohn, 682 F . Supp. 209, the mere fact that a transfer was made before any tax assessment against a defendant was not enough to defeat a claim of actual fraud. The court concluded that if a plaintiff can prove that a transfer was part of an asset avoidance scheme, it is fraudulent regardless of whether it was prior to any assessment against the property. Cohn suggests that any transfer to shield assets with the knowledge that a debtor will exist at any point in the future will suffice to allege fraud; the specific future creditor is not important.

When a transferor has fraudulent intent, a creditor may have the conveyance set aside under DEBT. & CRED. ' 278 unless the transferee provided adequate consideration and had no knowledge of the fraud. In In re Brosnahan, 324 B.R. 199, a mortgage was deemed fraudulent under ' 276 even though the debtor received adequate consideration from the bank because the transfer was meant to “hinder [or] delay” plaintiff's collection of a debt. The mortgagor-bank was stayed from foreclosing until after a factual determination about the bank's knowledge of defendant's intent. The court indicated, however, that if the facts revealed that the bank had knowledge of the fraud, the conveyance would be upset; conversely, if the bank was an innocent party with no knowledge, the transfer would stand. Even though section 278 protects a bona fide purchaser without knowledge of any fraud, courts still label such conveyances as fraudulent against the creditor. The label, however, confers on the creditor no additional rights against his debtor beyond those the creditor would have by virtue of the original debt.

Foreclosing Mortgagee Provided Adequate Notice of Acceleration

Prompt Mortgage Providers of North America, LLC v.
Direct Realty, LLC

NYLJ 9/12/11, p. 17, col. 3

Supreme Ct., N.Y. Cty.

(Oing, J.)

In a foreclosure action, mortgagee sought a judgment of foreclosure and the mortgagor moved to dismiss for failure to state a claim. The court awarded summary judgment to mortgagee, holding that mortgagee had provided adequate notice of acceleration of the mortgage debt.

In 2007, mortgagor borrowed $1 million from mortgagee, and executed a note requiring monthly interest payments of $10,000. The note also provided that in the event of default, mortgagor would be required to repay the principal and interest at the rate of 24%, commencing on the day of default. Mortgagor executed a mortgage to secure the debt. Mortgagor defaulted on the Mach 1, 2009 payment and on subsequent payments. Pursuant to an acceleration clause in the note, mortgagee prepared a notice of default stating that the loan would be accelerated in mortgagor did not pay the outstanding interest and late fees before July 29, 2009. One of mortgagee's principals submitted an affidavit that he served the notice of default on June 24. Mortgagor failed to cure the default, and mortgagee contended that as a result, $1,426,675 was due and owing, justifying a judgment of foreclosure. Mortgagor contended that it never received the notice of acceleration, and that mailing or personal delivery of the notice was a prerequisite to foreclosure.

In awarding judgment to mortgagee, the court rejected mortgagor's contention that mailing or personal delivery was necessary. The court relied on the language of the mortgage, which provided that “the whole or said principal sum and interest shall become due at the option of the mortgagee: After default in the payment of any installment of principal or of interest for fifteen days ' ” The court noted the absence of the words “ after notice and demand,” which were found in two other default clauses of the mortgage, and held that a written notice was not a condition precedent for accelerating the loan and commencing a foreclosure action.

COMMENT

In the absence of an acceleration clause in a mortgage, a mortgagee may not be entitled to accelerate the entire debt due upon the mortgagor's default in payment, but can foreclose based on default of each installment payment as it comes due. N.Y. Real Property Actions and Proceedings Law (“RPAPL”) ' 1351(2) provides that “If it appears that the mortgaged property is so circumstanced that a sale of the whole will be most beneficial to the parties, the final judgment ' may, at the option of the mortgagee, direct that the whole property be sold to satisfy the debt then due with the costs of the action and expenses of the sale, subject to the continuing lien of the mortgage for the amount of the debt not then due and unpaid according to its terms..” As the court explained in Golden v. Ramapo Improvement Corp., 78 A.D.2d 648, the statute authorizes partial foreclosure of mortgaged property and provides that the whole property can then be sold to satisfy the debt, subject to the continuing lien of the mortgage for the amount of the debt not then due. However, the need to rely on the statute rarely arises today since nearly all mortgages contain an acceleration clause.

If a mortgage contains an acceleration clause, notice of default is not a condition precedent to accelerating the loan unless the mortgage explicitly makes notice a requirement to acceleration. The mortgage document in Pizer v. Herzig, 120 A.D. 102, contained an acceleration clause but did not contain a notice clause. Thus, the First Department held that the mortgagee was entitled to commence the foreclosure action without providing notice to the mortgagor. By contrast, in HSBC Mortgage Corp. v. Erneste, 22 Misc. 3d 1115A, the acceleration clause in the mortgage provided that the “[l]ender may require Immediate Payment in Full ' only if all of the following conditions are met.” Since the clause unambiguously provided that notice given by the mortgagee to the mortgagor was one of the required conditions for acceleration, the court stated “that notice [was] essential to acceleration of the loan as the basis for foreclosure.”

If the acceleration clause in a mortgage includes language about notice procedures, but does not explicitly require notice as a prerequisite to acceleration, then notice is not a condition precedent for a mortgagee to accelerate the loan. For instance, in Albertina Realty Co. v. Rosbro Realty Corp., 258 N.Y. 472, the acceleration clause in the mortgage followed the statutory form provided in Schedule M of Real Property Law section 258, which stated, “[t]hat the whole of said principal sum shall become due after default in the payment of any installment of the principal ' or after default in the payment of any tax ' for thirty days after notice and demand.” Although “notice” is mentioned in the clause, it is not a requirement to acceleration of the principal. The Court of Appeals held that notice of default was not a condition precedent for the mortgagee to elect to accelerate the mortgage. Rather, in that circumstance, the mortgagee's filing of the lis pendens, summons and complaint clearly setting forth the election, serve as a sufficient overt act in electing to accelerate the mortgage. Similarly, in Fifty-second Operating Corp. v. Regus Realty Corp., 236 A.D. 497, the bond and mortgage contained clauses similar to those in Prompt Mortgage Providers, which stated that “notice and demand or request may be in writing and may be served in person or by mail.” Since the mortgage was in statutory form, the First Department held that the written notice given to the mortgagor was sufficient, since it was “[not] a prerequisite that the mortgagor be given any notice of the mortgagee's election to deem the mortgage accelerated.”

Concerns About Insurability of Title Did Not Justify
Cancellation of Sale Contract

Empire 33rd LLC v. The Forward Association Incorporated

NYLJ 8/15/11, p. 23, col. 5

AppDiv, First Dept.

(memorandum opinion)

In an action by contract vendee to recover a $5,350,000 down payment for the purchaser of real property, contract vendee appealed from Supreme Court's dismissal of the complaint. The Appellate Division affirmed, concluding that contract vendee's concerns about the insurability of title were premature and did not justify cancellation of the contract or return of the down payment.

Contract vendee entered into the contract to purchase the subject property from a nonprofit corporation. The property was substantially all of the seller's corporate assets, and Supreme Court authorized the nonprofit's board to sell the property pursuant to section 511 of the Not-For-Profit Corporation Law. Contract vendee later brought this action for a judgment declaring the contract void, arguing that seller had falsely represented that the non-profit's membership did not have to approve the sale, and expressing concern that a title insurer would declare title uninsurable because of the failure to obtain membership approval. Supreme Court dismissed the complaint, and contract vendee appealed.

In affirming, the Appellate Division emphasized that the record included no indication that any exception had been raised by any title insurer to the insurability of the property. The court noted that one of two events would occur: Sellers will be able to convey good and insurable title by the closing date, obligated contract vendee to complete the purchase, or sellers will not be able to do so, entitling contract vendee to return of its down payment. The court saw no reason to pass on a hypothetical defect in title at a date before closing.