Court Imposed an Equitable Mortgage—Proceeds of the Mortgage Were Used to Renovate the Subject Building and Evidence Indicated That Each Owner Believed That the Mortgage Lien Encumbered Their Ownership Interest.
A plaintiff moved for an order, inter alia, imposing an equitable mortgage against the interests of defendants ‘A’ and ‘B.’ The plaintiff had commenced an action to foreclose a mortgage. The property was owned by four defendants (‘A,’ ‘B,’ ‘C’ and ‘D’). However, ‘the mortgage and note,’ (mortgage), ‘identified only [two defendants, ‘C’ and ‘D’] as the mortgagors and borrowers’ and were signed only by ‘C’ and ‘D.’ Thus, the interests of the ‘A’ and ‘B’ were not encumbered by the mortgage.
The complaint alleged that ‘C’ and ‘D’ had failed to make a payment due under the mortgage. In addition to seeking foreclosure on the mortgage, the plaintiff sought ‘the imposition, and foreclosure of, an equitable mortgage against the interests of [‘A’ and ‘B’],’ and sought ‘damages against [a law firm] for legal malpractice, breach of fiduciary duty and breach of contract based on its failure to assure that the mortgage…included the names of and were signed by all owners of the…property.’ The plaintiff also sued a title company for breach of contract based on the title company’s denial of plaintiff’s claim under the title policy and an entity that had performed a title search and its principal.
The law firm previously ‘moved for summary judgment dismissing plaintiff’s claims…or, alternatively, severing and staying’ those causes of action. The title company had cross-moved for summary judgment, dismissing plaintiff’s claims. The law firm had moved to dismiss the title company’s cross claims for indemnification and contribution.
The court had previously granted the law firm’s motion ‘to the extent of severing and staying’ the legal malpractice claim and ‘dismissing the [claims] for breach of contract and breach of fiduciary duty as duplicative of the malpractice claim.’ The court also granted the law firm’s motion to dismiss the title company’s ‘cross claims for indemnification and contribution insofar as plaintiff’s sole claim against [the title company] was for breach of contract and claims for indemnification and contribution require the existence of tort liability.’ The court denied the title company’s cross motion for summary judgment, with leave to renew following completion of discovery. The court severed the claim against the law firm and stayed such claim pending resolution of the foreclosure action.
The court explained:
New York law allows the imposition of an equitable lien if there is an express or implied agreement that there shall be a lien on specific property. While [a] court will impose an equitable mortgage where the facts surrounding a transaction evidence that the parties intended that a specific piece of property is to be held or transferred to secure an obligation, it is necessary that an intention to create such a charge clearly appear from the language and the attendant circumstances…. The availability of an equitable mortgage is dependent upon the existence of a ‘clear intent between the parties that [certain] property be held, given or transferred as security for an obligation…. The intention of the parties is to be determined ‘from a consideration of the whole transaction and not from any particular feature of it’…. The basis for an equitable mortgage ‘is founded upon [the] cardinal maxim of equity which regards that as done which has been agreed to be done, and ought to have been done’….
In an examination before trial (EBT), ‘C’ testified that the other three owners had discussed taking out a loan and ‘all agreed to the transaction.’ He further testified that part of the loan proceeds were used for the renovations of the subject property. ‘D’ testified that ‘A’ and ‘B’ had consented to the loan and proceeds from the loan were used for renovations to the entire building. The plaintiff cited the testimony of ‘B’ that the loan was to be used by ‘C’ ‘to place a deposit on a house in Staten Island and that the balance was to be used for maintenance and renovation to the subject property.’
Based on EBT testimony, the court found that it was undisputed that part of the loan proceeds ‘was used to renovate the subject property in order to generate rental income.’ Moreover, ‘B’s’ testimony evinced ‘his understanding that the entire building would be secured by the mortgage, not just the interests of [‘C’ and ‘D’].’ ‘B’ testified that ‘he believed the mortgage lien encumbered his interest’ and that if ‘rental income was insufficient to cover payments, ‘the building’ would pay the loan.’
The court opined that such testimony demonstrated that ‘proceeds from the loan were used for substantial renovations to the entire building to the benefit of all owners.’ The court held that ‘as a matter of equity that [‘A’ and ‘B’] be deemed to have agreed to pledge their interests as security for the loan and that plaintiff is entitled to a lien upon all ownership interests in the subject property.’ Thus, the court granted the plaintiff’s motion to impose an equitable mortgage on the interests of ‘A’ and ‘B.’
However, there was insufficient evidence that ‘at the time the instant action was commenced the plaintiff was still the holder of the mortgage and note.’ Thus, the court denied the plaintiff’s motion for summary judgment of foreclosure and for appointment of a referee, without prejudice to renew upon a proper showing of standing. The court adhered to its prior decision to sever the claims against the law firm ‘because some or all of the damages alleged by plaintiff may ultimately be resolved in the foreclosure and insurance proceedings….’
The court also severed and stayed claims asserted against the title company, the title search company and the managing member of the title search company, so that the court could try such claims simultaneously with the claims against the law firm. The court explained that severance permit the foreclosure to proceed expeditiously and will address ‘the concern raised by [the title company, the title search company and its managing member] that plaintiff’s tort claims against them be litigated along with the malpractice claim against [the law firm].’
Comment: Abraham B. Krieger, and Michael Antongiovanni of Meyer, Suozzi, English & Klein, attorneys for the title insurance company, explained that ‘the property was originally owned by a father and three sons but (mysteriously, and still without explanation), the mortgage and loan documents were signed only by two of the four parties.’ He further noted that the title company ‘insures the enforceability and foreclosability of the mortgage and would ordinarily be problematic in view of only two of the four owners having signed those documents.’
Lakeland Bank v. Neziri a/k/a Avdiju, Sup. Ct., Kings Co., Index No. 16627/11 decided May 14, 2015, Dabiri, J.