State of New York
Supreme Court : County of Monroe

- against -

ANDREW V. SIRACUSE, J.

These nine foreclosure cases, here before the court on summary judgment motions, present identical issues, which were first treated by this court in a memorandum decision dated June 7, 2000. After that decision, but prior to the entry of a judgment thereon, counsel for plaintiffs discovered that certain tax liens existed upon the properties, and that both New York State and the State Tax Commission were necessary parties. The plaintiff therefore withdrew his summary judgment motion and moved to add these parties. That motion having been granted, issue was again joined, the new defendants having filed only limited notices of appearance, and the parties have stipulated to those papers filed in connection with the first proceeding that will be deemed to have been submitted for the present one. The court now reissues its decision, modified to reflect a further issue first raised in two related foreclosures submitted for decision after these nine, and decided by letter decision dated July 28, 2000.

The houses in question were all being built by Robert Amico, whose business practices have been the subject of numerous newspaper articles in the past few months. Plaintiff Roberts is in the business of making construction loans, and he loaned Amico monies on these nine properties and took mortgages as security. The note and mortgage for each loan set out the maximum amount that could be secured by the mortgage ($300,000 was usual) and also provided that the mortgage also stood as security for any subsequent debts owed by Amico/Cobblestone Homes to Roberts. Attached to each mortgage, which was duly filed, was a building loan contract and a draw schedule. The term of each mortgage was a matter of months, and Amico was responsible for interest payments during the mortgage and the entire principal at the close, when presumably the buyer would obtain a mortgage and allow the building loan mortgage to be paid off. On certain of the loans a friend of Mr. Roberts, Nicholas D'Angelo, participated in the arrangement by purchasing a portion of the loan and mortgage and acting as Roberts' partner.

Defendant Morse is a supplier of lumber and other construction material, and furnished supplies to Amico throughout the construction period. It apparently became evident that Morse would have difficulty being paid, because there exists a confusingly-drafted "assignment of proceeds and security agreement" dated January 21, 2000, well after the loans became due. The language of this document is confusing in the extreme. It provides that (1) Amico--as Hanover Square and/or Cobblestone--assigned to Morse the first $60,000 of proceeds from the sale of the houses that are the subject of this action, as well as several others; (2) Roberts assigned to Morse "the sale or loans proceeds from any and all draws and or any other sums of money due up to $60,000 by Hanover and/or Cobblestone from Roberts"; and (3) Amico granted Morse "a security interest in Š money, proceeds of sales agreements, notes, loans and mortgages arising from or related to the sale of the properties."

After the execution of this document, which acknowledges that Amico owed Morse some $415,000, Morse filed mechanics' liens affecting the subject properties. Roberts now seeks to foreclose on the nine mortgages, and the defendants, which include numerous parties besides those listed in the captions above, have all defaulted except for Morse. Morse raises many affirmative defenses, but its obvious concern is priority. Because of substantial apparent irregularities in the appraisal and evaluation of Amico's houses a foreclosure sale, even of these new properties, will not be likely to yield enough money to cover the construction loans; unless Morse can stand first in line it will be seriously harmed.

There has been an extraordinary amount of paperwork generated in this case, eve ƒ allows for the fact that each document is multiplied by nine, one for each of the properties in question. For consistency's sake the court will address the defenses raised by Morse in the order in which they appear in the defendant's final memorandum in opposition.

Following the general rules of the Lien Law Morse's mechanics liens are secondary to the mortgages, because the construction loan agreements and the mortgages were properly recorded. Morse's first defense, one of his major points, is that the mortgage loans were "cross-collateralized" by subsequent loans. As mentioned above, the mortgages were all stated to be collateral for all subsequent loans to Amico. Morse claims that this made each property collateral for up to $2,700,000 in lending, and that this was a material modification in a building loan contract which under Lien Law § 22 required a new filing. Without that filing, Morse argues, the lien takes precedence over the mortgages.

Morse, however, fails to cite the entire clause, which, as noted above, limits the collateralization to $300,000 of loans in total. This happens to be the total of scheduled draws under each building loan. The maximum potential indebtedness on any mortgage is thus set forth on its face, and so, too, is the possibility of exposure over and above any draws made for the specific property secured by the mortgage. Subsequent loans do not materially affect the mortgage and thus there was no requirement that the mortgages or building contracts be amended and refiled. This defense should be dismissed.

As to one action only (Index Number 2000/2636), Morse asserts that the Note and Mortgage were not duly executed by Cobblestone. It appears from the papers submitted by Roberts, however, that he both signed the documents in his corporate capacity and obtained the necessary corporate resolution.

In its third defense Morse claims that there also needed to be a new filing (which would make the mortgage secondary to the liens) because Roberts stated he had $700,000 that he was going to keep for his own purposes rather than pay over to Amico. Roberts denies he made this statement, and there is no proof that he did "divert" funds. Moreover, in building loan contracts draws are dependent on the conduct of the borrower, and the lender can withhold monies in any event. Morse now argues that this amount represents funds subject to the lien. Lien Law § 70 makes it clear, however, that a trust is imposed on monies received by the owner, not monies in the hands of a lender; the Fourth Department long ago ruled thus (Caledonia Lumber & Coal Co. v Chili Heights Apartments, 70 AD2d 766).

Morse's fifth defense (there is no point four in the memorandum) is founded upon the funding arrangement between First Union, the trustee for D'Angelo's IRA funds which were invested in the mortgages, and appears to argue that the cross-collateralization of the mortgages renders D'Angelo's interest junior to Morse's. Since the cross- collateralization in and of itself has no effect on the priority of the lien, this point is without merit. The sixth defense argues that First Union has not properly consented to be joined as a plaintiff. Such authorizations have in fact been given. Morse objects to language therein that suggests that First Union has only a nominal interest in the action.

As trustee only of D'Angelo's IRA funds, however, First Union in fact has no direct interest in the case. The true party of interest is D'Angelo. There is no basis for concluding that First Union has not consented to its status as plaintiff or to the jurisdiction of the court.

The seventh defense was raised after oral argument on the original motions, and also arises from the D'Angelo transactions. Morse claims that these interests fail as against Morse because they were not in compliance with UCC Article 9, which deals with the perfecting of a security interest.

The court is mindful of the exceptional amount of research and thought that both attorneys have devoted to this point, but cannot fully understand what relevance the UCC has to a question of mortgage priority as against a party whose standing depends on a lien interest. The D'Angelo investment was in the nature of a contract between himself and Roberts, and while D'Angelo obtains no rights in excess of Roberts's there seems to be no reasonable interpretation that would allow Morse, a stranger to that contract, to limit Roberts' rights insofar as they are assigned to a third party. The court agrees with Roberts that Morse has no standing to attack the arrangement. The eighth point raised in the memorandum is similarly flawed.

Morse, in its final point, argues that it is entitled to summary judgment on its first three affirmative defenses in its second amended answer, because they were not responded to in the plaintiff's reply to the second amended answer. To the extent that these were not responded to, the plaintiff has more than adequately addressed the issues in its other papers. The defenses are largely treated above; they are the alleged modification of the mortgage by withholding of draws (the $700,000), the cross-collateralization claim, the failure to secure corporate approval--a defense which elsewhere in the memorandum defendant states is withdrawn--and the alleged diversion of trust funds.

The fourth defense in the second amended answer, which is not addressed in the memorandum (perhaps it is the missing fourth point) is the only meritorious defense raised by Morse. Contrary to what Roberts argues, the January 21, 2000, assignment does give rights to Morse. Roberts contends that it only obligates Roberts to pay Morse the first $60,000 of any additional draws. This is a strained interpretation at best, in part because of the timing of the agreement--it was made after the default--and because it effectively gives Morse no rights whatsoever, as the draws were within Roberts's discretion. The first cited clause gave Morse the right to the first $60,000 of the monies paid to Amico upon the sale of the houses, and the second clause obligated Roberts to pay the proceeds from the draws. The only conceivable interpretation of this phrase is that it refers to the repayment of the draws; this is the only way that a draw has proceeds.

Thus, Morse has a right to the first $60,000 of the monies received by Roberts in recovery from those loans. This is, however, only a right to the first $60,000 in foreclosure proceeds from all the properties--a single $60,000 payment.

The court rejects Mr. Solomon's claim that the $60,000 owed to Morse must be reduced by monies paid by others. (This is the point first raised in the July proceeding on the other two foreclosures.) As the court has already stated, "Morse has a right to the first $60,000 of the monies received by Roberts in recovery from those loans" (emphasis added). Payments made by third parties do not fall under this definition. Roberts is, however, entitled to be subrogated to the $60,000 recovery, and may seek it from Cobblestone in any deficiency proceeding. Furthermore, the $60,000 sum does not accrue interest. The agreement contemplates that this sum is to be paid at an undetermined time in the future, and makes no provision for interest in the interim. The parties thus appear to have excluded considerations of interest from what is essentially a liquidated damages sum, and it would be inconsistent with their evident intention if the court were to require interest on it. As the obligation matures upon the first foreclosure sale, however, interest at the statutory rate would accrue from that point thereafter.

Summary judgment should be granted in all nine cases, and Morse is entitled to the first $60,000 realized. The defendant stands behind Roberts as to the rest. The court has great sympathy for the defendant, as Morse was an innocent materialman; Roberts, as lender, was in a better position to appraise the properties and discover that they were overvalued. Sympathy, however, cannot overcome clear contractual provisions and statutory directives.

DATED: Rochester, New York

September 1, 2000

Andrew V. Siracuse, J.S.C.

This decision was reversedon February 1, 2002, by the Appellate Division, Fourth Department, which held that "the purported assignment by Roberts amounts only to his agreement to honor the assignment and security interest crerated in favor of Morse by the mortgagor in the remainder of the instrument."

Design © 1997 Michael Steinberg. No copyright subsists in the decision texts, which are government documents.

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