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Consolidation and Assignment of Mortgages Does Not Affect Validity of Original Mortgages

The Second Department explained that the consolidation and assignment of mortgages did not affect the validity of the original mortgages:

In the instant matter, the plaintiff increased the outstanding balance of the first mortgage by borrowing the second mortgage loan and executing the CEMA [Consolidation, Extension and Modification Agreement].  Although the CEMA  created a single mortgage lien, “[a] consolidation of outstanding loans is a device intended for the convenience of only the contracting parties” and “cannot impair liens in favor of parties that are not the contracting parties, which retain their independent force and effect” … . Where, as here, balances of first mortgage loans are increased with second mortgage loans and CEMAs are executed to consolidate the mortgages into single liens, the first notes and mortgages still exist and may be assigned to other lenders … . Further, an assignment of a loan obligation means that the obligation has been transferred, not paid in full and, thus, contrary to the plaintiff’s allegation, does not render the obligation satisfied and discharged.  Benson v Deutsche Bank Natl Trust Inc, 2013 NY Slip Op 05606, 2nd Dept 8-14-13

 

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Question of Fact About Whether Private Entity Managing Public Funds Can Recoup Payments Which Were Above Minimum Fees Required by the Medicare Fee Schedule

Plaintiffs, emergency and ambulance service-providers, brought an action in response to defendant’s reduction in Medicare payments made to recoup alleged overpayments in prior years.  In finding plaintiffs had raised a question of fact about whether defendant was entitled to recoup the alleged overpayments, the Fourth Department wrote:

We agree with plaintiffs that the applicable Medicare fee schedule set a minimum payment, but not a maximum payment, for the services that plaintiffs provided (see 42 USC § 1395w-22 [a] [2] [A]).  On the one hand, if defendant had paid plaintiffs the minimum fees required by the applicable Medicare fee schedule, then plaintiffs would not be entitled to object to those payments as being insufficient (see 42 CFR 422.214 [a] [1]).  On the other hand, however, while defendant paid plaintiffs more than the minimum amount required by the fee schedule for a period of time, defendants have failed to establish that defendant is entitled as a matter of law to recoup any or all of those funds from plaintiffs.  Although the common law right of a governmental agency to recoup erroneously distributed public funds is well established … , that right does not necessarily extend to defendant, a private entity managing public funds… . Canandaigua Emergency Squad, Inc. … v Rochester Area Health Maintenance Organization, Inc…, 632, 4th Dept 7-19-13

 

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Action Properly Brought by Third Party Beneficiary of Indemnity Agreement

The Second Department affirmed Supreme Court’s denial of a motion to dismiss brought by a defendant who had entered an indemnity agreement with a judgment debtor.  The Second Department explained that plaintiff had stated a cause of action based upon plaintiff’s being a third-party beneficiary of the indemnity agreement:

Pursuant to CPLR 5227, a special proceeding may be commenced by a judgment creditor “against any person who it is shown is or will become indebted to the judgment debtor.” Such a proceeding is properly asserted against one who agreed to indemnify the judgment debtor in the underlying proceeding. The judgment creditor stands in the judgment debtor’s shoes, and may enforce the obligations owed to the judgment debtor by the indemnifying party… * * *.

Here …the judgment debtor … was not a party to the indemnification agreement. However, the Supreme Court properly determined that [the judgment debtor] was an intended third-party beneficiary of the indemnification agreement. Parties asserting third-party beneficiary rights under a contract must establish: (1) the existence of a valid and binding contract between other parties; (2) that the contract was intended for their benefit; and (3) that the benefit to them is sufficiently immediate, rather than incidental, to indicate the assumption by the contracting parties of a duty to compensate them if the benefit is lost…. Where performance is rendered directly to a third party, it is presumed that the third party is an intended beneficiary of the contract….

Indemnity contracts are to be strictly construed to avoid reading into them duties which the parties did not intend to be assumed…. Here, however, the intent … to benefit [the judgment debtor] is apparent from the face of the indemnification agreement… . Matter of White Plains Plaza Realty LLC, 2013 NY Slip Op 05220, 2nd Dept 7-10-13

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Criteria for Fraudulent Conveyance

In reversing Supreme Court, the Second Department determined the plaintiff was entitled to summary judgment in a fraudulent conveyance action.  The court explained the relevant legal principles as follows:

Pursuant to Debtor and Creditor Law § 276, [e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors'” …. “Direct evidence of fraudulent intent is often elusive. Therefore, courts will consider badges of fraud,’ which are circumstances that accompany fraudulent transfers so commonly that their presence gives rise to an inference of intent”…. A plaintiff that successfully establishes actual intent to defraud is entitled to a reasonable attorney’s fee under Debtor and Creditor Law § 276-a …. * * *

The plaintiff presented evidence of badges of fraud, including, inter alia, a close relationship between the parties to the transaction, inadequate consideration for the transaction, and the retention of the benefit of the property by Elyahou, who continued to reside in the premises following the transfer… .  5706 Fifth Ave LLC v Louzieh, 2013 NY Slip Op 05187, 2nd Dept, 7-10-13

 

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Criteria for Causes of Action Discussed in Extensive Modification of Supreme Court’s Orders

In extensively modifying Supreme Court’s rulings in an action to foreclose a mechanic’s lien, to set aside alleged fraudulent conveyances pursuant to Debtor and Creditor Law section 273, and to recover damages for diversion of trust assets pursuant to article 3-a of the Lien Law, the Second Department explained (1) the effect of obtaining a bond on the Debtor/Creditor and Lien Law causes of action; when the Lien Law cause of action accrues; and (3) the Lien Law has an exception designed to protect purchasers of realty:

The Supreme Court improperly awarded judgment … to set aside conveyances of the property as fraudulent pursuant to Debtor and Creditor Law § 273. Once [defendant] “obtained a bond to discharge the mechanic’s lien, the debt no longer existed for the purposes of Debtor and Creditor Law § 273″… .

However, contrary to the appellants’ contention, the discharge of a mechanic’s lien by the filing of a bond is not equivalent to payment or discharge of a trust claim pursuant to Lien Law article 3-A … Further, contrary to the appellants’ contention, those causes of action were not time-barred by Lien Law § 77(2), which provides that no action to enforce a trust under article 3-A of the Lien Law “shall be maintainable if commenced more than one year after the completion of such improvement.” “The one-year period does not begin to run from the date of substantial completion, but from the date of completion of all work”… .

“While the Lien Law is generally designed to protect contractors, material providers and other classes of workers who supply labor or furnish materials, subdivision (5) of section 13 is an exception which is specifically designed to protect purchasers of realty”… . Holt Constr Corp v Grand Palais LLC, 2013 NY Slip Op 05189, 2nd Dept 7-10-13

 

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Criteria for Fraudulent Inducement and Attachment

In a full-fledged opinion by Justice Feinman, the First Department outlined the criteria for fraudulent inducement where the parties are “sophisticated entities,” as well as the strict criteria for attachment:

The elements of fraud are a misrepresentation or a material omission of fact which was known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or omission, and injury …. In this case, the buyers have not sufficiently alleged justifiable reliance. “[R]eliance must be found to be justifiable under all the circumstances before a complaint can be found to state a cause of action in fraud”…. What constitutes reasonable reliance is “always nettlesome” because it is so fact-intensive…. Sophisticated investors must show they used due diligence and took affirmative steps to protect themselves from misrepresentations by employing what means of verification were available at the time … . * * *

We conclude that, on the extant record which consists of competing affidavits, the grant of an attachment and its confirmation was an abuse of discretion. “[T]he mere fact that defendant is a non-domiciliary residing without the State of New York is not sufficient ground for granting an attachment”…. The sellers have shown no evidence that the buyers lack sufficient assets, or that they will choose to hide or otherwise dispose of their assets. We note that no hearing was held at which the credibility of the buyers’ averments regarding their financial status and resources could be evaluated. At most, the sellers’ affidavits establish that there is potentially a significant amount of bureaucracy involved in obtaining the assets as converted funds. This is not, in itself, sufficient to order an attachment. The orders of the motion court granting and confirming the orders of attachment, and granting discovery to aid in attachment, as well as the order that the buyers transfer assets into New York State, should therefore be reversed.  VisionChina Media Inc v Shareholder Representative Servs, LLC, 2013 NY Slip Op 04298, 1st Dept, 6-11-13

 

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Failure to Demonstrate When Plaintiff Should Have First Become Aware of Fraudulent Conveyance Precluded Dismissal on Statute of Limitations Grounds​

The Second Department determined that causes of action alleging fraudulent conveyances pursuant to Debtor & Creditor Law 276 should not have been dismissed on statute of limitations grounds because the defendants failed to establish when plaintiff should have first become aware of the alleged fraud:

“A cause of action based upon actual fraud under Debtor and Creditor Law § 276 must be brought within six years of the date that the fraud or conveyance occurs, or within two years of the date the fraud should have been discovered, whichever is longer” …. Here, it is undisputed that the verified complaint did not allege the occurrence of any fraudulent conveyances within six years prior to the commencement of the action. However, since it is unclear when the plaintiff should have first been aware of the alleged fraud, the defendants failed to establish that the causes of action alleging actual fraud under Debtor and Creditor Law § 276 should be dismissed as time-barred ….  Felshman v Yamali, 2013 NY Slip Op 03632, 2nd Dept, 5-22-13

 

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Bank Account in Name “Ann … or Thomas…” Could Be Turned Over to Pay Debt Owed by Thomas 

In finding that the funds held in a bank account in the name of “Ann Sledjeski or Thomas Sledjeski” should have been turned over to pay Thomas Sledjeski’s debt, the Second Department wrote:

The Supreme Court should have granted the unopposed petition pursuant to CPLR 5225(b) to direct Hudson City Savings Bank to turn over the funds of an account it held in the name of “Ann Sledjeski or Thomas Sledjeski,” to partially satisfy a judgment entered in favor of the petitioner and against Thomas C. Sledjeski. ” [T]he opening of a joint bank account creates a rebuttable presumption that each named tenant is possessed of the whole of the account so as to make the account vulnerable to levy of a money judgment by the judgment creditor of one of the joint tenants'” (…see Banking Law § 675[b]). Therefore, the petitioner was not required to establish that the judgment debtor was the sole contributor of funds to the account. Moreover, since none of the respondents appeared or answered the proceeding, they failed to rebut the presumption …  Matter of JRP Old Riverhead, Ltd v Hudson City Sav Bank, 2013 NY Slip Op 03484, 2nd Dept, 5-15-13

 

 

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Two Options to Recover on Note and Mortgage; One in Law (Note); One in Equity (Foreclosure)

In finding that CPLR 5236(b) did not apply in the case, the Second Department described the two options a mortgagee has with respect to recovery based on a note and mortgage:

CPLR 5236(b) provides, in relevant part, that “[r]eal property mortgaged shall not be sold pursuant to an execution issued upon a judgment recovered for all or part of the mortgage debt.” Typically, a mortgagee has the choice of “two remedies: one at law in a suit on the debt as evidenced by the note, the other in equity to foreclose the mortgage” …. A mortgagee who elects to proceed on the note becomes “subject to the statutory restrictions which direct that when a judgment is recovered for all or part of the mortgage debt, the execution shall direct that no part of the mortgage[d] property shall be levied upon or sold thereunder” (Goddard v Johnson, 96 Misc 2d 230, 231). Matter of Ivy Hill Commodities Corp v Beekharry, 2013 NY Slip Op 03483, 2nd Dept, 5-15-13

 

 

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Prepayment Service Agreement Does Not Constitute a Debt that is Subject to a Restraining Notice Pursuant to CPLR 5222 (b)

The Court of Appeals, in a full-fledged opinion by Judge Rivera, determined that “an at-will, prepayment service agreement, which lacks any obligation to continue services or a commitment to engage in future dealings, [does not] constitute[] a property interest or debt subject to a CPLR 5222 (b) restraining notice:”

The Appellate Division here affirmed the Supreme Court’s findings of fact, which are supported by the record (see Karger, Powers of the New York Court of Appeals § 13:10, at 489 [3d ed. rev.][facts affirmed by the Appellate Division with evidentiary support are “conclusive and binding on the Court”]). The affirmed findings established that [defendant] prepaid for its service, and as such, there was no debt past due or yet to become due under the definition of CPLR 5201 (a). The only remaining issue is whether [defendant’s] oral agreement with GNAPs [a telephone switch service agreement which defendant decided weekly whether to continue] is an attachable property interest subject to restraint.  …[B]ecause [defendant] prepaid for services to be provided by GNAPs on a week-to-week basis, without any commitment or promise for additional services, or any assurance of a continued purchase of services, [defendant] neither owed any debt to, nor possessed any property of, GNAPs that could be subject to a restraint notice. Similarly, because [defendant’s] payments to GNAPs constitute neither a debt nor a present or future property interest, CPLR 5201 (a) and (b) are not applicable.  Verizon…v Transcom…, No 70, CtApp, 5-2-13