Foreclosures—Borrower Entered Into Settlement Agreement With Lender Which Called for Time of the Essence Closing—Borrower Obtained Loan Commitment to Refinance but Its New Lender Failed to Close on the Time of the Essence Date—Borrower’s New Lender Then Changed Its Position and Agreed to Close the Following Day—Rather Than Enforce the Settlement Agreement With Time of the Essence Provision, Court Vacated the Settlement Agreement and Restored the Matter to the Foreclosure Calendar

In about 2005, “A” executed and delivered a mortgage and note (mortgage) to a bank in the amount of $1.5 million. The mortgage was assigned to “B.” “B” thereafter commenced the instant action to foreclose the mortgage. While the foreclosure was pending, the parties entered into settlement negotiations and signed a written settlement agreement (agreement) whereby “A” was to pay “B” $1.1 million in exchange for “B’s” discontinuance of the foreclosure action. The agreement contemplated that “A” would obtain the $1.1 million settlement amount “through the refinancing of the premises with an outside lender.” The agreement provided that “A” “shall pay ['B']…in full and ['A'] shall close within 90 [ninety] days after this…agreement and Release is…fully executed, but in no event later than November 17, 2011.” The agreement further provided “that ‘[t]ime is of the essence for the closing’ and that [i]f ['A'] fail[s] to perform at closing, then ['A'] shall immediately sign over and deliver the subject deed to ['B']…but in no event later than November 17, 2011.”

“A” thereafter obtained a written commitment from a lender (“C”). Although the loan was scheduled to close on Nov. 17, 2011 and “representatives from ['A'], ['B'] and ['C'] did…appear for a closing on that date, the loan did not close at that time. Accordingly, ['A'] delivered the deed to the premises to ['B'].” “However, ['A'] refused to execute certain transfer documents which were necessary in order ['B'] to record the deed.” Moreover, shortly after the failed closing, “C” agreed to reschedule the closing.

“B” thereafter made the subject motion seeking an order directing that “A” execute all of the transfer documents necessary to record the deed. On the return date of the motion, “A’s” counsel indicated that “his client was prepared to comply with the terms of the [agreement] by delivering to ['B'] a check for $1.1 million.” The court adjourned the matter for a week “with the understanding that ['A'] would turn over to ['B'] a check for $1.1 million and execute the required transfer documents, thereby settling the matter. Due to a misunderstanding regarding the return date, ['B'] did not appear in court on” the adjourned date. Thereafter, ['B'] notified ['A'] that the…[agreement] specifically required that the closing take place no later than November 17, 2011, that ['A'] failed to comply with this requirement, and that therefore, ['B'] would not accept the $1.1 million check.” “A” then made a motion, seeking an order directing that “B” “accept the $1.1 million payment and that the action be discontinued with prejudice.”

“A” alleged that “B’s” principal knew the lender “C” and “[t]hey made sure they contact the lender and made sure that the loan didn’t close that day.” “A’s” counsel represented that “his client was fully prepared to close on November 17, 2011,” but “at the ’11th hour,’ ['C'] refused to go through with the closing, and that the next day (i.e., November 18th, 2011), ['C'] contacted him and indicated that it would go through with the closing.” The court set the matter down for “a hearing on the issue of whether or not ['B'] had colluded with ['C'] so as to frustrate ['A's'] ability to perform under the…[agreement].”

At the hearing, “A’s” commercial finance broker (broker) testified that “A” had provided “C” with “the various financial records and documents including tax returns, authorizations for credit reports, and information regarding the building’s cash flow;” and such information had been provided on or about Nov. 10, 2011. He testified that “C” thereafter issued a commitment letter for the $1.1 million loan, that “A” had provided “C” with a $22,000 deposit as good faith security on the loan, that “C” had inspected the building and that a closing was scheduled for November 2011. The broker testified that at the closing “everything had been cleared up that needed to be.” When asked why the loan had not closed, the broker testified that there was “a credit issue regarding ['A's'] co-signing for a loan that was unrelated to the subject premises.” The broker further testified that after the failed closing, he was advised by “C” that “it was willing to move forward with the loan and to reschedule the closing.” “A’s” broker asserted that “he had no knowledge as to whether or not ['B's' principal had] interfered with the closing of the loan.”

“A’s” principal testified that he had been advised that the loan had not closed because of a personal judgment against him on his credit record. He further testified that he had provided documentation at the closing which indicated that the judgment had been satisfied. “A’s” principal acknowledged that “he did not know whether or not ['B's' principal] prevented the loan from closing.”

A representative of “C” testified that the closing had not gone through because “C” had obtained several credit searches on the day of the closing which indicated numerous judgments against individuals with the same name as “A’s” principal. “C’s” counsel also testified that “['C'] had concerns regarding the fact that the court appointed receiver had not been discharged at the time of the closing and the fact that ['A's principal] provided ['C'] with copies of tax returns that had not been filed.” Finally, “B’s” principal testified that “he did not interfere in any way with ['A's'] attempt to obtain a loan from ['C']” and at no point had he told “ A’s” principal that “C” would not fund the loan.

Both “A” and “B’s” motions sought to enforce the agreement. However, they disagreed as to how the agreement should be enforced. “B” contended that the agreement clearly contemplated that “A’s” failure to close on Nov. 17, 2011 would result in the transfer of title of the premises to “B” and that such necessarily included the requirement that “A” execute all transfer documents necessary for the recording of the deed. Since the loan did not close on Nov. 17, 2011, “B” argued that the agreement should be enforced and “A” should be required to execute all transfer documents necessary for the recording of title. In the alternative, “B” requested that the agreement be disregarded and that the matter be permitted to proceed to foreclosure.

“A” sought to enforce that part of the agreement which called for it to pay and for “B” to accept $1.1 million in exchange for “B’s” discontinuance of the lawsuit and all claims and liens against “A.” Although “A” conceded that it could not prove that “B’s” principal interfered with its ability to close on Nov. 17, 2011, “A” nevertheless asked the court to “draw its own conclusions from the suspicious circumstances surrounding the closing including ['C's'] willingness to give the loan as evidenced by its commitment letter and the scheduling of the closing, the failure for the closing to go through on November 17, 2011, and ['C'] agreeing to loan the money and to schedule a new closing the day after the failed closing.” Alternatively, “A” argued that its principal “did all that was required of him in terms of securing the loan and scheduling a timely closing, and that the failure of the loan to close on November 17, 2011 was not the fault of ['A's' principal] or ['A'].” “A” asserted that the “balancing of the equities weighs in favor of enforcing the [agreement] so as to allow it to settle the matter for the $1.1 million set forth in the [agreement].”

The court explained that “[s]tipulations of settlement are favored by the courts and not lightly cast aside.… Thus, ‘[o]nly where there is cause sufficient to invalidate a contract, such as fraud, collision, mistake or accident, will a party be relieved from the consequences of a stipulation made during litigation’….”

Here, it was “undisputed that the loan did not close in a timely manner. Further, by its own admission, ['A'] cannot prove that ['B's' principal] colluded with the lender ['C'] so as to frustrate ['A's'] ability to close on November 17, 2011.” Accordingly, the court denied “C’s” motion for an order “directing that the matter be discontinued with prejudice upon its tendering and payment of $1.1 million to ['B'].”

The court then stated that “A’s” principal had been “diligent in his attempts to secure the loan and that ['A's' principal and 'A'] were not responsible for the failed closing.” Although no evidence indicated that “B’s” principal interfered with the closing, “the circumstances surrounding the failed closing are troubling.” In particular, “C” had “committed to making the loan and scheduled the closing.” Moreover, although witnesses offered different explanations as to why the loan failed to close on Nov. 17, 2011, the day after the failed closing, “C” “suddenly and inexplicably changed its position and was willing to proceed with the loan and schedule a new closing. However, by that time, the deadline set forth in the [agreement] had passed.” Under the circumstances, the court found that “the equities weigh against ordering the transferring of title to ['B'] through the execution of the transfer documents.” Accordingly, the court denied “A” and “B’s” motions. The agreement was vacated and the deed was to be returned to “A” and the matter is to proceed on the court’s foreclosure calendar.

Golden Gate Holdings v. PS Buildings, 3215/10, NYLJ 1202561635822, at *1 (Sup., KI, Decided May 29, 2012), Hinds-Radix, J.

Rent Stabilization—Illegal Activity—RPAPL 711(5) and 715—No Evidence That Tenant Knew or Should Have Known About Son’s Illegal Drug Activities

The petitioner commenced a holdover proceeding, seeking possession of an apartment pursuant to RPAPL 711(5) and 715. The petitioner alleged that the “respondents were using or permitting the subject premises” to be “used for the illegal trade or business of narcotics.” The proceeding had been prompted by the petitioner’s receipt of a letter from a District Attorney’s office directing them to initiate this proceeding pursuant to the aforementioned statutes.

At trial, the “petitioner proved the prima facie elements” of its case. A police officer testified that the “named residents were arrested inside the [apartment] for possession of controlled substances. Specifically, bags of marijuana and one bag of cocaine, along with drug paraphernalia…, as well as prescription pain medication.” A detective testified that “the majority of the illegal substances were found in the bedroom belonging to…, son of the prime tenant…, while a container of 12 prescription painkillers was found in [the prime tenant's] possession.”

The prime tenant testified that “she was unaware that her son…[had been] involved in any alleged illegal drug activity or trade. She claimed that his room was under his control and was usually closed and locked.” She further testified that “she did not see any evidence of this alleged activity nor did she permit him to conduct such activity” and that she had “prescription pain medication that was not prescribed to her.” However, the medicine was “given to her by a friend for her own personal use for a recent injury related to a car accident.” The son had pled guilty to a nonviolent drug felony which, pursuant to a plea agreement, had been dismissed upon his completion of a drug treatment program. Approximately eight months after such dismissal, the petitioner had been directed to initiate the subject proceeding by the District Attorney.

The petitioner had not alleged or testified that the prime tenant “herself was involved with the alleged illegal drug activity. She was not prosecuted for the possession of the prescription pain medication or the other substances.” She had testified “credibly that the pain medication was for her personal use and has since obtained her own prescription for its proper usage.” The court explained that “[p]ersonal use of a controlled substance is not grounds to evict a rent stabilized tenant.” The court noted that the petitioner had the burden to demonstrate that, “under the particular circumstances, the tenant knew of and allowed the illegal activity to take place and had either constructive knowledge of or passively acquiesced to the illegal activity.”

The petitioner had not testified or alleged “any incidences which would satisfy their burden that respondent knew or should have known that her son was involved in the alleged illegal activity, such as persistent complaints from management or surrounding neighbors and community, excessive short term visitors to and from the premises, open display of contraband within the premises, etc. They did not produce evidence of ongoing business activity that was conducted within the premises as required by NYCHA v. Lipscomb-Arroyo, 19 Misc.3d 1140(A), 866 NYS2d 93 (Civ.Ct. Kings Cty.).”

The prime tenant testified that “she was unaware of any drug possession or activity within the premises or elsewhere involving her son.” The petitioner did not dispute this. Moreover, the prime tenant had lived in the subject premises for over 30 years, “apparently without incident with the exception of the events that led to this proceeding.” Under these circumstances and given the lack of evidence, the court held that the petitioner had failed to meet its “burden of proof to justify a judgment of possession and warrant of eviction.” Thus, the court dismissed the petition with prejudice.

Comment: These illegal activity cases often involve the balancing of important competing interests. The courts seek to protect the owner and neighbors from the dangers that arise from illegal activities carried on inside or near a residential apartment. Unfortunately, some long term tenants have faced eviction proceedings because a relative or friend used their apartment in connection with illegal activity.

Some of these cases are extremely sad because they result in the eviction of a large family because of the conduct of one member of the family or one licensee and the family is thereby rendered homeless. The need to protect the neighbors and other citizens simply outweighs the personal consequences to a tenant who knowingly permits their apartment to be used for an illegal purpose.

In most cases, there is substantial evidence that the tenant-of-record knew or should have known that the relative or friend was engaged in illegal activity. Such tenant may have received complaints from management or other neighbors, may have observed an excessive number of visitors coming to and from the apartment, or there had been an open display of drug paraphernalia or other evidence of illegal conduct in the apartment which the tenant should have seen. If a tenant knew or should have known that an apartment was being used for illegal purpose, the tenant is deemed to have acquiesced in such illegal use. Here, there was simply no evidence that the tenant knew or should have known that her son had engaged in illegal activity.

Central Astoria v. Klisures, L&T 63327/2011, NYLJ 1202558913064, at *1 (Civ., QU, Decided May 29, 2012), Waithe, J.

Foreclosures—Issue of Fact Existed as to Whether Loan to Corporate Entity Was in Reality a Personal Loan Which Was Usurious

A lender commenced an action to foreclose a mortgage. Mr. and Mrs. “A” had taken title to the property as tenants by the entirety. Following Mr. “A’s” death, Mrs. “A” conveyed the property to her sons, but expressly reserved a life estate in the property.

Several years later, Mrs. “A” signed a commitment letter for the subject loan in the amount of $285,393.30. The commitment letter provided that “there would be a ‘cash out’ of $230,000.00, with closing costs of $16,000.00, an interest reserve of $15,990.00 and an origination fee in the amount of $23,403.60. Although Mrs. “A” is identified in the commitment letter as an individual borrower, “the commitment was ‘transferable and assignable to a corporate entity of the borrower’s choosing.’” Thereafter, Mrs. “A’s” sons, as tenants in common and subject to Mrs. “A’s” life estate, conveyed the property to a corporate owner (“B” Inc.). On the same date that it took title to the property, “B” Inc. executed the subject mortgage in favor of the plaintiff. The mortgage secured a balloon note from the plaintiff in the amount of $285,394.00. The mortgage and note were both signed by Mrs. “A” “as ‘president’ of ['B' Inc.]” The note required “ B” Inc. to make monthly payments until the maturity date, at which time the balance of principal and interest would become payable in full.

The plaintiff alleged that “B” Inc. defaulted under the mortgage by failing to make the final balloon payment. The defendants asserted several affirmative defenses, including, inter alia, that the subject loan was usurious. The maximum rate of interest chargeable on a loan is 16 percent (Gen. Oblig. Law [GOL] §5-501; Banking Law §14-a). GOL §5-501(2) provides that “the amount charged, taken or received as interest shall include any and all amounts paid or payable directly or indirectly, by any person, to or for the account of the lender in consideration for making the loan….” On its face, the note provided for interest at the rate of 13 percent. However, when the origination fee of $23,403.60 was considered, the rate of interest on the loan exceeded the statutory maximum.

The plaintiff argued that the usury laws were inapplicable since the borrower is a corporate entity. “However, ‘[w]hile corporations generally cannot avail themselves of the protection of the usury statutes an exception exists where the corporate form is used to conceal a usurious loan to an individual to discharge his personal obligations’….” Further, “[w]here the loan was in fact, although not in form, made to an individual guarantor to discharge his or her personal obligations, and not in furtherance of a corporate or personal enterprise, the individual guarantor may interpose the defense of usury….”

Mrs. “A” had alleged that she had sought a personal loan to pay family debts and obligations. At the time when the commitment letter was issued, it specified Mrs. “A” as the borrower and the corporate borrower, “B” Inc. “was not in existence.” Mrs. “A” asserted that “near the time of closing, plaintiff required that a new entity must be formed in order for plaintiff to make the loan, and that plaintiff arranged the formation of the new entity.” “B” Inc. was formed thereafter.

The court held that in view of Mrs. “A’s” affidavit and considering the fact that the loan commitment had been made to Mrs. “A” prior to the formation of “B” Inc., there was an issue of fact as to “whether the loan was, in reality, a personal loan to [Mrs. 'A'] rather than a loan to ['B' Inc.] to further a corporate interest and, resultantly, may be deemed usurious on account of the true interest rate being in excess of 16 percent.” Accordingly, the court denied the plaintiff’s motion for an order granting it summary judgment, striking the defendants’ answer and appointing a referee.

206 Jericho Realty v. 7318 18th Avenue, 11979/11, NYLJ 1202562360069, at *1 (Sup., KI, Decided June 5, 2012), Hinds-Radix, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.