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Weiss v. Phillips

Supreme Court of New York, First Department

November 21, 2017

Peter Weiss, Plaintiff-Respondent,
v.
Edward Phillips, Defendant-Appellant, Austin Smith, et al., Defendants.

         Defendant Edward Phillips appeals from the order of the Supreme Court, New York County (Gerald Lebovits, J.), entered November 4, 2016, which, among other things, granted plaintiff's motion for summary judgment on the first cause of action, to foreclose on an unsatisfied mortgage, and denied Phillips's cross motion for summary judgment dismissing the action.

          Shaw & Binder, P.C., New York (Stuart F. Shaw and Daniel S. LoPresti of counsel), for appellant.

          Dorf & Nelson LLP, Rye (Jonathan B. Nelson, Laura-Michelle Horgan and Jami L. Mevorah of counsel), and Cox Padmore Skolnik & Shakarchy LLP, New York (Solomon J. Borg of counsel), for respondent.

          Rolando T. Acosta, P.J., Dianne T. Renwick, Angela M. Mazzarelli, Judith J. Gische, Ellen Gesmer, JJ.

          OPINION

          RENWICK, J.

         In this case, plaintiff Peter Weiss seeks, among other things, a foreclosure and sale based on a Mortgage and Note Extension and Modification Agreement (CEMA) [1] executed by defendant Edward Phillips. Plaintiff lent $500, 000 to borrowers who purported to own the real estate property they sought to mortgage [2]. The borrowers signed a note, in which they promised to pay the loan, and a mortgage, in which they gave the plaintiff/lender a security interest in the property they purported to own. The borrowers, however, acquired the property by fraudulent means. After the rightful owner, Phillips, reacquired the property, he executed the CEMA with the individual lender, Weiss. Pursuant to the CEMA, Phillips acknowledged Weiss's rights under the note and mortgage; and, Weiss agreed to forbear from foreclosing on the subject property for a year, presumably to permit Phillips to obtain refinancing.

         We find that the motion court properly granted Weiss summary judgment. Unlike the dissent, under the circumstances of this case, we find that Weiss's interest in the property as a mortgagee was not rendered null and void because his borrowers, the mortgagors, had acquired the property by fraudulent means. In addition, we find that Weiss met his burden for summary judgment, on his claim for foreclosure and sale, by submitting the Mortgage and CEMA, along with undisputed evidence establishing both the existence of the note, which obviated the need to submit the note as proof that Weiss had the right to foreclose, and the nonpayment.

         Procedural and Factual History

         In the 1990's, Phillips bought two distressed properties in Harlem (8 West 130th Street and 10 West 130th Street). On September 15, 1999, Phillips deeded 10 West 130th Street to a relative, Arque McCarthy, for no consideration. Phillips transferred the property to McCarthy so that McCarthy could obtain a mortgage for him to make repairs and pay accumulated debt. McCarthy held legal title with the understanding that Phillips would pay the loan and McCarthy would transfer the deed back to Phillips at a later date.

         Four and one-half years later, in April 2004, Phillips's lawyer told him that he was sending his paralegal, Austin Smith, to obtain McCarthy's signature on a deed to transfer the property back to Phillips. Smith provided McCarthy with a blank deed.

         Rather than filling in Phillips's name on the deed as the transferee, Smith inserted his mother's name (Jeanetta Welch-Ford) as the grantee for no consideration. Then, on December 8, 2005, 18 months after the fraudulent transfer, Welch-Ford unlawfully deeded the property to herself and Smith.

         Also on or about December 8, 2005, Weiss lent $500, 000 to Welch-Ford and Smith pursuant to their signing a note and mortgage in favor of Weiss, encumbering the property for the subject loan amount [3]. Welch-Ford and Smith breached the terms and conditions of the note by failing to make the required payments due on the note. Subsequently, when Phillips learned of the fraudulent transfer, he sued McCarthy to recover his property. Phillips later abandoned his lawsuit against McCarthy when she agreed to sue Welch-Ford and Smith to recover the property from them. Eventually, the lawsuit settled when Welch-Ford and Smith agreed to transfer title to the property back to Phillips. This deed transfer took place on February 23, 2009. At the time, the original McCarthy loan (made by McCarthy on behalf of and at the request of Phillips) reportedly remained unpaid; the principal and accumulated interest totaled $450, 000.

         Once Phillips learned of Weiss's intention to foreclose on Phillips's reclaimed property, Phillips executed the CEMA with Weiss, on April 8, 2009, extending and modifying the terms of Weiss's mortgage [4]. The CEMA stated that Smith and Welch-Ford were conveying the property to Phillips, and that Weiss agreed to extend and modify the terms of the note and mortgage that were executed by Smith and Welch-Ford. Paragraph 2(a) of the CEMA stated that Phillips consented to the conveyance of the property and understood that he was not personally assuming payment of the note executed by Smith and Welch-Ford. Paragraph 4 stated that Phillips warranted that the principal outstanding balance under the note was $500, 000; that Smith and Welch-Ford had no deductions, counterclaims, defenses, or offsets to the note or mortgage; and that the note and mortgage remained in full force and effect and were fully enforceable in accord with their terms and the modification in the CEMA.

         In paragraph 5, Phillips "ratifie[d] and reaffirm[ed]" that the terms and revisions of the note and mortgage remained in effect, and were true and correct, without modification, "except as necessary to implement" the CEMA. Paragraph 6 provided that Phillips warranted that the CEMA was a "valid, enforceable and binding obligation of [his]." In paragraph 7, Phillips "represent[ed] and warrant[ed] that there [we]re no deductions, counterclaims, defenses, or offsets of any nature whatsoever to any of [his] obligations under the Note or Mortgage, as... modified [by the CEMA]."

         Paragraph 15 stated that the note and mortgage as modified by the CEMA remained in full force and effect. Paragraph 16 provided that "[n]o extension, change, modification or amendment of any kind" of the CEMA, note, or mortgage would be effective unless it was in writing and signed by Weiss and Phillips. Paragraph 19 provided that all prior agreements between the parties with respect to the subject matter of the CEMA were merged into the CEMA.

         Finally, Weiss agreed to forbear from foreclosing on the property for a year to permit Phillips to obtain refinancing. Specifically, paragraph 3 of the CEMA extended the due date for a year until April 1, 2010; it also capped the interest due at 9.6%, and required Phillips to make interest payments accruing each month in the amount of $4, 000. Phillips paid $4, 000 of accrued interest toward Weiss's mortgage on the first of each month for four consecutive months following the CEMA's execution, but he ceased doing so in September 2009.

         Upon the expiration of the CEMA's extension period in April 2010, Weiss commenced this action against Phillips, Welch-Ford, and Smith. Subsequently, Weiss moved for summary judgment on the first cause of action of the complaint against Phillips. Along with his motions papers, Weiss provided a copy of the CEMA and the mortgage contract, but he did not provide a copy of the promissory note. Phillips both opposed the motion and cross- moved for summary judgment dismissing the complaint, arguing that the mortgage was unenforceable as it was based on a void deed. The motion court granted Weiss's motion for summary judgment on the first cause of action of the complaint for foreclosure on the mortgage and denied Phillips's cross motion for summary judgment dismissing the complaint. The motion court found that Weiss satisfied his prima facie burden of demonstrating his entitlement to judgment as a matter of law, and that Phillips offered insufficient evidence to raise a triable issue of fact.

         Discussion

         As a threshold consideration, given Phillips's execution of the CEMA and other unique facts of this case, we reject the dissent's argument that the failure to produce the note prevents plaintiff from establishing a prima facie case for foreclosure.

         The basis of a foreclosure is that an actionable breach of the mortgage has occurred entitling the plaintiff/mortgagee to sell the property to satisfy the debt the mortgage secured (see e.g. Fortress Credit Corp. v Hudson Yards, LLC, 78 A.D.3d 577');">78 A.D.3d 577 [1st Dept 2010]; Red Tulip, LLC v Neiva, 44 A.D.3d 204, 209 [1st Dept 2007], lv dismissed 10 N.Y.3d 741');">10 N.Y.3d 741');">10 N.Y.3d 741');">10 N.Y.3d 741 [2008]). The complaint must allege statements that will ultimately establish a judgment of foreclosure and sale (id.). Accordingly, a motion for summary judgment requires the plaintiff to prove the allegations of the complaint which, absent a viable defense or efficacious counterclaim, would entitle a plaintiff to the relief requested (see Alvarez v Prospect Hosp., 68 N.Y.2d 320 [1986]; Winegrad v New York Univ. Med. Ctr., 64 N.Y.2d 851 [1985]).

         In this case, the complaint seeks a foreclosure and sale based on the CEMA and the mortgage encumbering the subject property. As indicated, under the CEMA, as the "new owner, " Phillips ratified and affirmed all the terms of the note and mortgage and warranted that there were no deductions, counterclaims, defenses, and/or setoffs to any obligations under the note. When the CEMA's extension period expired, without complete payment, Weiss commenced this action. Under these circumstances, Weiss established the allegations of the complaint by submitting the CEMA and the mortgage contract, along with unchallenged deposition testimony of the existence of the note and nonpayment.

         Unlike the dissent, we do not view this action as a typical mortgage foreclosure action. In a typical mortgage foreclosure transaction, a prima facie case is based on production of the unpaid note and mortgage, which establishes that the plaintiff is entitled to foreclose on the unpaid note. A prima facie case is established here, however, by plaintiff's submission of the mortgage and the CEMA, in which Phillips acknowledges the existence and validity of the unpaid note and mortgage, as well as the deposition testimony in which the existence of the note is unchallenged (see Seaway Capital Corp. v 500 Sterling Realty Corp., 94 A.D.3d 856 [2d Dept 2012]).

         We are not persuaded by the dissent's argument that UCC 3-804 mandates a different result. As fully explained below, the dissent takes UCC 3-804 out of context. UCC 3-804 allows one to maintain an action as a "holder" on a promissory note even though the instrument has been lost or destroyed. The section does not apply here where it is established that plaintiff has the right to sue on the note as the undisputed "holder" of the note. [5]

         UCC article 3 defines "a holder in due course" as one who lawfully possesses a negotiable instrument (UCC 3-302). A holder in due course has the presumption that it is the proper party to enforce or negotiate the instrument (see UCC § 3-301, 3-302). Consistent with article 3, mortgage obligations are owed to the "[p]erson entitled to enforce the note" (see UCC § 3-301 ; see also Aurora Loan Servs., LLC v Taylor, 25 N.Y.3d 355, 361-362 [2015]; Bank of N.Y. v Silverberg, 86 A.D.3d 274, 279 [2d 2011]). The concept of entitlement to enforce the note is designed to protect the mortgagor against having to pay twice or defend against multiple claims on the note. If the mortgagor pays in full the person entitled to enforce the note, the note is discharged and the mortgage that secures it is extinguished (see FGB Realty Advisors, Inc. v Parisi, 265 A.D.2d 297');">265 A.D.2d 297 [2d Dept 1995]).

         UCC 3-804 comes into play because article 3 of the UCC does not necessarily equate the person entitled to enforce the note with the person who owns the negotiable instrument (see UCC 3-3a). UCC 3-804 is intended to provide a method of recovery on instruments that are lost, destroyed or stolen. The plaintiff who claims to be the owner of such an instrument is not a holder as that term is defined under article 3, if the plaintiff is not in possession of the paper, and the plaintiff does not have the holder's prima facie right to recover under the section (see generally, 3 Anderson, Uniform Commercial Code, § 3-804 [3d ed. 1998]). Thus, under UCC 3-804, the plaintiff must establish the terms of the instrument and his ownership, and must account for its absence.

         In this case, because of the CEMA, standing is not an issue [6]. The note's absence is accounted for by the CEMA and there is no legitimate question that Weiss is the party entitled to enforce under the note, as evinced by the mortgage contract and the CEMA, in which Phillips acknowledges Weiss's right under the note and mortgage, and the deposition testimony indicating the existence of the note. When he entered into the CEMA, Phillips was represented by counsel and he knew that Weiss remained the lawful holder of the note and mortgage. Indeed, Phillips waived lack of standing as a defense by failing to raise it in the answer, or by a pre-answer motion (CPLR 3211[e]; 3211[a][3]; see also Security Pac. Natl. Bank v Evans, 31 A.D.3d 278, 279-281 [1st Dept 2006], appeal dismissed 8 N.Y.3d 837, 862 [2007]).

         Our holding here is consistent with a prior holding from the Second Department in Seaway Capital Corp. v 500 Sterling Realty Corp. (94 A.D.3d 856');">94 A.D.3d 856');">94 A.D.3d 856');">94 A.D.3d 856). In Seaway, the foreclosure action contained the added element of a forbearance agreement (id. at 856). The Second Department found that the plaintiff established a prima facie case for foreclosure "by submitting proof of the existence of the mortgage and note made by and executed on behalf of [the defendant], certain forbearance agreements and [the defendant's] default." In such a situation, the submission of the forbearance agreement, like the CEMA here, served to establish the plaintiff's entitlement to foreclosure, along with proof of the note and mortgage, thus the failure to submit the note was not a fatal defect.

         The dissent expresses unfounded concerns that our holding is inconsistent with the purpose of article 3 of the UCC, which, as indicated, dictates that only a holder in due course can sue on a note so that an obligor is not subject to double liability if the note later turns up in the possession of another claiming to be a holder in due course. Such a risk does not exist in this case where Phillips has assumed no personal liability for the note and the mortgage would be extinguished upon foreclosure.

         The dissent seems to be operating under the misconception that Weiss can only enforce his rights under the subject note and mortgage if Phillips had assumed the mortgagors' (borrowers) personal obligations under the note. To be sure, a mortgage instrument is not independently enforceable as a debt (see FGB Realty Advisors v Parisi, 265 A.D.2d 297, 298 [2d Dept 1999] ["A mortgage is merely security for a debt or other obligation and cannot exist independently of the debt or obligation"]). This simply means that a mortgage may be enforced only by the person who is entitled to enforce the note's obligations that the mortgage secures (see Aurora Loan Servs., LLC v Taylor, 25 N.Y.3d 355, 361 [2015]).

         Since Weiss's failure to submit the note, under the circumstances of this case, does not negate his entitlement to summary judgment of foreclosure, the burden shifted to Phillips to produce admissible proof sufficient to raise a triable issue of fact. In this case, as noted, the CEMA contains a provision whereby Phillips waived interposition of defenses or counterclaims in any foreclosure action. Courts have held that the waiver of the right to assert defenses, counterclaims or set offs is enforceable and thus not violative as against public policy (see e.g. Parasram v DeCambre, 247 A.D.2d 283');">247 A.D.2d 283 [1st Dept 1998]; KeyBank N.A. v Chapman Steamer Collective, LLC, 117 A.D.3d 991');">117 A.D.3d 991 [2d Dept 2014]). Similarly, where the agreement of the parties, like the CEMA here, clearly recites that the indebtedness must be paid without set offs, deduction, defense or counterclaim, such claims are barred (see Federal Land Bank of Springfield v Saunders, 108 A.D.2d 838, 839 [2d Dept 1985], lv denied 64 N.Y.2d 611');">64 N.Y.2d 611 [1985]). Accordingly, waived defenses "may not be maintained" (Bank of New York v Cariello, 69 A.D.2d 805, 805 [2d Dept 1979]).

         Phillips, however, argues that the mortgage is not enforceable because it was based on a "fraudulent/forged deed." We reject this argument. Essentially, Phillips asserts that because McCarthy and Smith never had title in the first place, they never had anything to mortgage. Thus, the mortgage was invalid. Phillips's argument, however, conflates the distinction between a void deed and a voidable deed.

         To be clear, a deed may be cancelled because it is void or because it is voidable. The difference, however, between a void deed and a voidable deed is important under the law because it affects a party's ability to defend against a future purchaser or encumbrancer for value. A void real estate transaction is one where the law deems that no transfer actually occurred (Faison v Lewis, 25 N.Y.3d 220, 225 [2015]). Accordingly, if the deed is void, it does not pass title and cannot be enforced even if title is later acquired by a bona fide purchaser (id.; ABN AMRO Mtge. Group, Inc. v Stephens, 91 A.D.3d 801, 803 [2d Dept 2012]). Similarly, a lender who takes a mortgage to a property subject to a void deed does not have anything to mortgage, so the lender's mortgage is invalid as well (Cruz v Cruz, 37 A.D.3d 754');">37 A.D.3d 754 [2d Dept 2007]; Yin Wu v Wu, 288 A.D.2d 104, 105 [1st Dept 2001]). In contrast, a voidable real estate transaction is one where a transfer is deemed to have occurred, but can be revoked. In that situation the deed is only voidable (Faison v Lewis, 25 N.Y.3d at 225).

         The question becomes whether the deed by which Welch- Ford and Smith acquired the subject real estate was a void deed or a voidable deed. Forged deeds and/or encumbrances are those executed under false pretenses, and are void ab initio (see Marden v Dorthy, 160 NY 39 [1899]; GMAC Mtge. Corp. v Chan, 56 A.D.3d 521, 522 [2d Dept 2008]; Cruz v Cruz, 37 A.D.3d 754');">37 A.D.3d 754). The interests of subsequent bona fide purchasers or encumbrancers for value are thus not protected under Real Property Law § 266 [7] when their title is derived from a forged deed or one that is the product of false pretenses (see Ameriquest Mtge. Co. v Gaffney, 41 A.D.3d 750');">41 A.D.3d 750 [2d Dept 2007]; LaSalle Bank Natl. Assn. v Ally, 39 A.D.3d 597, 599-600 [2d Dept 2007]). In contrast, a fraudulently induced deed is merely voidable, not void (see Marden v Dorthy, 160 NY at 150; Dalessio v Kressler, 6 A.D.3d 57, 61 [2d Dept 2004]; Yin Wu v Wu, 288 A.D.2d at 105).

         In this case, Phillips improperly labels the instrument by which the improper transfer took place as both a "fraudulent/forged deed." The undisputed facts establish, however, that the deed was the result of fraudulent inducement, rather than the result of a forged deed or one executed under false pretenses. As fully explained above, the tortfeasor (at the time, a paralegal assigned to procure the deed transfer) obtained the owner's signature on the deed purportedly to transfer the property back to its original owner, Phillips. The paralegal presented the owner with a blank deed, which she signed. The subsequent deed transfer was the result of a classic fraudulent inducement, because the owner believed that she was signing the deed in order to transfer the property back to its original owner, ...


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