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UNITED STATES v. JOE MURRAY'S POINT LOOKOUT

March 20, 1972

UNITED STATES of America, Plaintiff,
v.
JOE MURRAY'S POINT LOOKOUT, INC., et al., Defendants


Croake, District Judge.


The opinion of the court was delivered by: CROAKE

MEMORANDUM

CROAKE, District Judge.

 This action, filed on December 7, 1970, seeks judgment for plaintiff United States of America ("the Government") on two mortgages and notes, and foreclosure of the property pledged thereunder. The only non-defaulting defendant, Skellyway Construction Co., Inc. ("Skellyway") has asserted the priority of its mechanic's lien. The peculiarity of the case is that the Government, besides being the foreclosing mortgagee, is also the apparent owner of the fee interest in the proprty. The action, then, is not brought to collect a debt so much as to remove a cloud on the Government's title.

 There are two motions pending; Skellyway seeks summary judgment dismissing the complaint, and the Government by "application" which the Court will treat as a cross-motion, albeit improperly noticed, seeks judgment foreclosing the property and distributing the proceeds to itself as senior lienor. This "application" is thus in essence another motion for summary judgment in so far as the complaint alleges an equitable cause of action for foreclosure.

 According to the undisputed factual allegations, the Government possessed two mortgages on the same property, consisting of four apparently contiguous parcels located in the Town of Durham, Greene County, New York, within the Southern District. The mortgages were both granted by co-defendant Joe Murray's Point Lookout, Inc. ("Murray's Point"), the then owner of the fee interest, in return for loans from the Small Business Administration ("SBA"), a governmental instrumentality. One loan, in the amount of $100,000, evidenced by a note and mortgage both dated July 31, 1967, and duly recorded on August 2, 1967, was made directly by SBA to Murray's Point. The other loan, in the amount of $56,000, and evidenced by a note and mortgage both dated June 27, 1968, was made by SBA to co-defendant Hunter Area Development Company, Inc. ("Hunter") in the first instance. Hunter contemporaneously reloaned the money to Murray's Point, and assigned its mortgage from Murray's Point to SBA by an assignment also dated June 27, 1968, the date as well of the recording of the mortgage, note, and assignment. The money was presumably intended for use in payment for some or all of the expenses involved in the acquisition of the real estate and the construction thereon and initial operation of a motel-restaurant-rathskeller complex.

 Very shortly thereafter, Murray's defaulted on its loan payment obligations of approximately $1,500 per month, and SBA was brought to the realization that the venture was not going to be successful. Therefore, in order to avoid the necessity for a foreclosure, at least against Murray's Point, it was agreed that Murray's Point would convey the property encumbered by the mortgages to SBA in full satisfaction of the debt. An affidavit signed by Murray's Point's president on a form prepared by SBA explicitly so provided.

 SBA was willing to accept the property rather than the full amount in cash apparently because it realized that the prospect of obtaining any significant amount of cash from Murray's Point was slight, whereas the property as improved was considered to be at least equal in value to the amount of the outstanding debt. SBA appraised its value in November of 1969 at $175,000 as of April 1, 1970; at the time of the agreement to convey, the total unpaid loan liability was $164,701.66. SBA estimated that, taking account of the costs of the conveyance, the net value of the property would exactly equal the outstanding indebtedness.

 The conveyance was effected by a duly recorded warranty deed dated October 20, 1969, which recited inter alia that:

 
"The parties hereto intend that the fee herein granted shall not merge with the mortgages . . ."

 Thus it would appear that no satisfaction piece has ever been executed or requested. See Real Property Actions & Proceedings Law § 1921(1) (McKinney's Consol. Laws, c. 81, 1963) ("R.P.A.P.L.").

 The Government claims that this clause was inserted at its request in order to protect itself against the precise situation which has occurred herein: the concurrent appearance of a new junior creditor and the insolvency of the primary debtor. The question remains, however, whether this device was effective.

 Within several days after the conveyance, Skellyway filed a Notice of Mechanic's Lien alleging an unpaid and overdue debt of $11,263.12 arising out of its performance of extra work related to a construction contract dated November 14, 1967. The Government disputes both the validity of the lien, on the ground of untimely filing under applicable state law, Lien Law § 10 (McKinney's Consol. Laws, c. 33, 1966), see also N.Y.U.C.C. § 9-104(j) (McKinney 1964) (fixtures), and its enforceability as against the United States, presumably because of the Supremacy Clause of the Constitution, Article VI, cl. 2, see R.P.A.P.L. § 1461, cf. § 1541. Skellyway subsequently brought an action in Greene County Court for the foreclosure of this lien; the United States, a defendant in that action (the State is the other) removed it to this Court, where it is now pending as a separate action (Docket No. 70-Civ. 5092).

 Finally, the Government, on or about November 17, 1970, entered into an agreement with co-defendant Point Lookout Motel, Inc. ("Motel") whereby Motel leased and occupied the premises, and agreed eventually to purchase them for $103,000 cash. The conditions of the sale were otherwise undisclosed, but presumably were subject to the vicissitudes of this litigation. According to Motel's president, the contract of sale has been signed, but had not as yet been closed as of the date of argument of these motions.

 Skellyway contends that this agreement is contrary to the terms of a public auction held on September 26, 1970, since the terms of the auction required that the closing occur within thirty days of the sale. Cf. R.P.A.P.L. § 1407. Motel's president was high bidder at the auction; whether he bid as an individual or directly on Motel's behalf is unclear. Consequently, the true holder of equitable title is presently undeterminable with certainty. But the United States does hold legal title, and all parties who ...


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