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JA-MO ASSOCIATES v. 56 FULTON ST. GARAGE CORP. (06/20/68)

SUPREME COURT OF NEW YORK, APPELLATE DIVISION, FIRST DEPARTMENT 1968.NY.42212 <http://www.versuslaw.com>; 291 N.Y.S.2d 62; 30 A.D.2d 287 June 20, 1968 JA-MO ASSOCIATES, INC., RESPONDENT,v.56 FULTON ST. GARAGE CORP., DEFENDANT-APPELLANT AND THIRD-PARTY PLAINTIFF; DANIEL GREENBERG ET AL., THIRD-PARTY DEFENDANTS Appeal from an order of the Supreme Court at Special Term (Alfred M. Ascione, J.), entered January 9, 1968 in New York County, which granted plaintiff's motion for summary judgment as to the first cause of action, and directed an assessment of damages thereon and denied defendant's motion for summary judgment. Melvin A. Albert of counsel (Philip Robbins with him on the brief; Gordon, Brady, Keller & Ballen, attorneys), for appellant. Max Steinberg for respondent. Eager, J. P. Steuer, Capozzoli, McGivern and Rabin, JJ., concur. Author: Eager


Appeal from an order of the Supreme Court at Special Term (Alfred M. Ascione, J.), entered January 9, 1968 in New York County, which granted plaintiff's motion for summary judgment as to the first cause of action, and directed an assessment of damages thereon and denied defendant's motion for summary judgment.

Eager, J. P. Steuer, Capozzoli, McGivern and Rabin, JJ., concur.

Author: Eager

 In an action by a former tenant against its landlord, the defendant appeals from an order which granted plaintiff's motion for summary judgment on its first cause of action to recover the amount of an alleged security deposit and which denied defendant's cross motion to dismiss the complaint as to the several alleged causes of action.

The parties entered into a written lease on January 31, 1967 for the renting by the tenant from the landlord of a garage and car parking building, for a term to commence February 1, 1967 and to end January 31, 1988, at a net annual rental of $96,000, payable in equal monthly installments. Simultaneously, the parties executed a rider to the lease containing, among others, a provision as follows: "Tenant agrees to, and does, lend Landlord the sum of $40,000. This loan is evidenced by a mortgage note, and secured by a mortgage on the demised premises, which said mortgage and mortgage note provide for repayment by Landlord to Tenant of the sum of $4,000 on the first day of the eleventh (11th) year following the date of the commencement of this lease * * *. As security for the performance of this lease, Tenant agrees to, and does, assign said mortgage note and said mortgage to the Landlord".

It was further provided that in the event of a default in a payment of interest or principal due under the mortgage, the tenant would have the right to deduct the amount of any such payment from the current or next ensuing monthly installment of rent; also, that, in the event of a default by the tenant under the lease, any balance then payable under the mortgage might be applied against any damages suffered by the landlord.

The mortgage to cover the alleged loan was executed and delivered by the landlord to the tenant. It provided that the principal indebtedness was to be paid in annual installments of $4,000 commencing on February 1, 1978, with further provision that interest at 4% per annum was to be paid annually on the unpaid principal balance. The mortgage was assigned by the tenant to the landlord with the provision that the assignment should not merge with the fee and that it "is being delivered by the assignor to the assignee as security for the performance of obligations under a lease dated as of February 1, 1967".

The tenant took possession of the premises on February 1, 1967 and remained in possession until May 17, 1967. Rent was paid for the months of February and March notwithstanding the tenant, upon taking possession, immediately discovered the existence of alleged latent defects in the elevator and vehicle transfer equipment of the building. The tenant, however, refused to pay the rent for April, and summary proceedings were instituted against it by the landlord in Civil Court. Thereafter, on stipulation of settlement by the parties, the landlord obtained possession of the premises on May 18, 1967 pursuant to a warrant of dispossess. The said stipulation in relevant part provided: "This agreement of settlement is subject to the further agreement between the parties that the final judgment to be entered hereon shall be without prejudice or waiver or adjudication of the rights of the landlord or tenant; not res judicata to any issue, defense or counterclaim that may be raised by either party in this proceeding or any other action or any defense that may have been raised or asserted in this court".

Subsequently and within the 60-day period as provided by subdivision 2 of section 747 of the Real Property Actions and Proceedings Law, the tenant instituted this action against the landlord.

The first cause of action seeks recovery of the sum of $40,000 (represented by the mortgage) alleged to have been deposited by the tenant with the landlord as security for the performance of the terms of the lease. The second alleged cause of action seeks rescission and cancellation of the lease upon the ground of alleged fraudulent concealment of latent defects in the vehicle elevator and vehicle transfer apparatus, including mechanical and structural defects. The third alleged cause of action seeks rescission and cancellation of the lease on the ground that the letting was in violation of the approved plans and amendments to said plans, filed with the Department of Buildings of the City of New York, with reference to the elevator and transfer apparatus. It is conclusively established, however, by the documentary evidence and the undisputed facts that all three causes of action are devoid of any merit.

The first cause of action to recover the sum of $40,000 as a security deposit is clearly unsupportable. The provisions of section 7-103 of the General Obligations Law are inapplicable to the transaction alleged and as established by the agreement of the parties. The parties abandoned the original purpose, as proposed in the tenant's letter of intent, for a deposit of money as security for the performance of the obligations of the lease. The landlord made known to the tenant that it required a loan of $40,000 to pay off various debts and obligations in order to enable it to acquire title to the premises and to be in a position to enter into the proposed lease. The unambiguous terms of the written instruments make undisputably clear that the loan was actually a part of the consideration for the lease and that the sum was not deposited as security. Certainly, the tenant is bound by, and may not contradict or evade the plain effect of, the provisions of the rider to the lease, the mortgage and assignment of mortgage. Those documents conclusively establish that the landlord was not required to hold the sum loaned as security in trust pursuant to the provisions of section 7-103.

"While the court is not bound by the label which the parties applied to the payment and may examine the true nature of the transaction (Matter of New York World-Telegram Corp. v. McGoldrick, 298 N. Y. 11; Cutler Mail Chute Co. v. Crawford, 167 App. Div. 246), the payment here bore none of the distinguishing characteristics which would render section 233 [of the Real Property Law -- now section 7-103 of the General Obligations Law] applicable." (Prudential Westchester Corp. v. Tomasino, 5 A.D.2d 489, 493, affd. 6 N.Y.2d 824.) There was no intention that the landlord hold the money as security.

Although the mortgage securing the tenant's loan was assigned by it to the landlord as security for the performance of the lease, the true nature of the transaction was not thereby converted into one for the deposit of money as security. The assigned mortgage was not cash security which could be commingled by the landlord with his other assets. The mortgage transaction was itself a means of furnishing the landlord with security in lieu of that provided by section 7-103 aforesaid.

We have not overlooked the provisions of the statute which prohibit a lease "provision" that "waives any provision of this section" (ยง 7-103, subd. 3). There is no evidence that the loan by the tenant to the landlord, including the mortgage arrangement, was other than a bona fide loan, with the right of the landlord to use the proceeds thereof "for the very purpose of enabling him to bring the leasehold into existence". Thus, it may not be said that this was a "subterfuge" or a device to circumvent the non-waiver provisions of the statute. (See dissenting opn. of Fuld, J. in Mallory Assoc. v. Barving Realty Co., 300 N. Y. 297.)

Mallory Assoc. v. Barving Realty Co. (supra), cited by Special Term as supporting a recovery by plaintiff on its first cause of action, is clearly distinguishable. The question presented in Mallory was whether the complaint stated facts sufficient to constitute a cause of action, and it was noted in the opinion of the court (Conway, J.) that the alleged facts supporting the contention that (p. 302) "the so-called security deposit was really a loan * * * do not appear in the complaint and that is the only document with which we are here concerned." In the case at bar, ...


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