FILED: NEW YORK COUNTY CLERK 03/09/2015 06:41 PM INDEX NO. 107802/2009 NYSCEF DOC. NO. 323 RECEIVED NYSCEF: 03/09/2015 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK CENTECH LLC, -against- Plaintiff, Index No.: 107802/09 (Hon. Ira Gammerman) YIPPIE HOLDINGS, LLC, NATIONAL AIDS BRIGADE, NATIONAL AIDS BRIGADE, INC., DEVAN HOLDINGS LLC, 9 BLEECKER LLC, IRVIN DANA BEAL a/k/a DANA BEAL, and JOHN DOE #1 through JOHN DOE #20, the last twelve names being fictitious and unknown to Plaintiff, the persons or parties intended being the tenants, occupants, persons or corporations, if any, having or claiming an interest upon the premises described in the Complaint, Defendants. DEFENDANT 9 BLEECKER LLC S MEMORANDUM OF LAW, PURSUANT TO THE COURT S LEAVE TO FILE ADDITIONAL BRIEFING, RELATING TO THE VALUE OF THE DEBT ON THE PROPERTY LOCATED AT 9 BLEECKER STREET, NEW YORK, NY 10012
Defendant 9 Bleecker LLC ( 9 Bleecker ), by its counsel, respectfully submits this memorandum of law and the accompanying March 9, 2015 Affirmation of David Alan Richards ( Richards Affirmation ) pursuant to this Court s leave to file additional briefing concerning the value of the debt owed on the real property located at 9 Bleecker Street, New York City, New York. PRELIMINARY STATEMENT Plaintiff Centech LLC ( Centech ) has sought to foreclose on a loan to Defendants Yippie Holdings, LLC ( Yippie ) and National Aids Brigade ( NAB ) (collectively, Yippie/NAB ), which was secured by a mortgage on the property located at 9 Bleecker Street (the Mortgaged Premises ). As part of the foreclosure process, this Court must approve an accounting by Centech of the amount owed on the mortgage. This memorandum and accompanying affirmation establish that the mortgage debt ceased to accumulate on December 1, 2007 at which time the outstanding balance was $1.4 million. The reason for this is that on that date Yippie/NAB no longer held title to the Mortgaged Premises. The specifics are as follows: In April 2007, Yippie/NAB having again defaulted on its loan payments after a series of extensions entered into an agreement with Centech ( Escrow Agreement ), under which Centech gave Yippie/NAB until December 1, 2007 to cure its default. If Yippie/NAB did not cure its default by that date, the deed to the Mortgaged Premises (9 Bleecker) would be physically transferred to Centech. At exactly that point, Centech would be the owner of the property and Yippie/NAB stripped of all ownership interest. 2
To be more specific: Under the April 2007 Escrow Agreement, the deed to the Mortgaged Premises was placed in escrow, and if Yippie/NAB did not make full satisfaction of its debt by December 1, 2007, the deed would be delivered out of escrow to Centech s nominee Devan Holdings LLC ( Devan ) and thereafter recorded in the New York City Land records as having been transferred to Devan. Such a deed is commonly referred to under real estate law (including the real property law of New York) as a Deed in Lieu of Foreclosure ( Deed in Lieu ). At this point, Centech would have absolute title to the property in exchange for full satisfaction of Yippie/NAB s debt. Once the Deed in Lieu was transferred in December 2007, any further liability of Yippie/NAB on the mortgage was thereby extinguished because Yippie/NAB could not have further accrued debt on property it did not own, whether as interest or as the lender s expenses. Any such categories of debt accumulating after December 1, 2007 therefore cannot be included in the amount owed on the mortgage. Centech, however, seeks to inflate the amount of debt encumbering the Mortgaged Premises by including amounts incurred after December 1, 2007. To avoid the effect of the Escrow Agreement and the transfer of the deed, Centech argues that the transfer to its own nominee, Devan, was void because Devan was not properly formed as a legal entity. But the transfer of title to a nonentity does not resurrect Yippie/NAB s already terminated liability on the mortgage. Centech relies on a declaratory judgment in March 2011, in which Justice Oing deemed the transfer null and void and directed that the judgment be effectuated by notation in the public records. Yet Centech, aware that the judgment was not self-effectuating that is, Centech was itself required to amend the public records made no effort to do so. As such, Devan 3
remained the legal owner, while Yippie/NAB s ownership interest was not reinstated at least until Defendant Irvin Dana Beal initiated the notation in July 2014. As a matter of equity, Yippie/NAB should not be saddled with additional and (by virtue of the transfer of the Deed in Lieu) unlawful debt as a result of Centech s error and subsequent failure to correct it. Further inequitable conduct by Centech includes Centech s actions to delay resolution with respect to the mortgage, so as to run out 9 Bleecker s 15-year right of first refusal ( ROFR ) on the Mortgaged Premises, and to hinder the exercise of the ROFR by forbidding sale without Centech s consent under the consolidated mortgage. As this is a foreclosure proceeding, Centech cannot come to the table with unclean hands and expect to be rewarded in equity. Accordingly, 9 Bleecker respectfully requests an Order fixing the debt encumbering the Mortgaged Premises at the amount owed on the mortgage as of December 1, 2007, including the principal ($1.4 million) and interest accrued as of that date; excluding all debts and lender s costs post-dating December 1, 2007, when legal title to the Mortgaged Premises transferred to Devan; and crediting 9 Bleecker for the amount of time exhausted on its ROFR by Centech. ARGUMENT I. The Value of the Debt Should be Fixed at the Amount Due and Owing as of December 1, 2007, when Centech s Nominee Took Legal Title to the Mortgaged Premises in Full Satisfaction of the Debt. Yippie/NAB cannot be liable for debt alleged to have accumulated on the Mortgaged Premises after December 1, 2007. By that date, it had already transferred fee simple title the highest and cleanest form of title to Centech s designee Devan by execution and delivery out of escrow of the Deed in Lieu, the purpose and effect of which was to satisfy fully the outstanding mortgage. 4
A deed in lieu of foreclosure is a situation where the lender agrees to accept title to the property from the mortgagor prior to the completion of the foreclosure process. By accepting title, the mortgagee agrees to release the mortgagor of any and all liability arising from the mortgage and the promissory note. Raiolo v. B.A.C. Home Loans, 920 N.Y.S.2d 244, at *1 n.4 (Civ. Ct. Nov. 8, 2010). 1 The First Department is distinguished a deed given as security for a mortgage debt from a deed in lieu of foreclosure that is, an absolute conveyance or sale of the property. Patmos Fifth Real Estate Inc. v. Mazl Bldg., LLC, 124 A.D.3d 422, 2015 WL 94793, at *3 (N.Y. App. Div. 1st Dept. Jan. 8, 2015). Such a transaction is an accord and satisfaction, [t]he quintessence of [which] is that, upon completed performance of the accord, there is a discharge of the contractual obligations spelled out in the original contract. Morrow, 875 P.2d at 414-15 & n.13. Here, Yippie/NAB agreed to and did transfer title in the Mortgaged Premises to Centech (or its designee) in exchange for relief from its outstanding obligations under the mortgage. The Escrow Agreement states, in pertinent part: [D]elivery of the Transfer Documents to Lender or its designee from the escrow pursuant to the terms hereof will constitute an absolute conveyance of all of Owner s rights, title and interest in and to the property described in the Transfer Documents so delivered and is not intended as a mortgage, trust conveyance or security of any kind. Richards Affirmation 14 & Ex. A 7. Centech s counsel, as well as its principal Bradley Gordon, both testified at the February 18, 2015 hearing 1 See Burke v. State Farm Fire & Cas. Co., 963 N.Y.S.2d 293, 294-95 (App. Div. 2d Dept. 2013) (holding the delivery of the deed [in lieu of foreclosure] and the release resulted in full satisfaction of the mortgage debt that was owed to the plaintiffs ); In re Hooker Investments, Inc., 155 B.R. 332, 339 (Bkrtcy. S.D.N.Y 1993) (noting the deposit of property placed in escrow creates in the grantee such an equitable interest in the property that upon full performance of the conditions according to the escrow agreement, title will vest at once in him. (citing 28 Am. Jur. 2d, Escrow 10 (1966))). See also Morrow Dev. Corp. v. Gordon Mgmt., Inc., 875 P.2d 411, 413 n.3 (Okla. 1994) (describing a deed in lieu as a transaction in which a borrower, after default, conveys to its lender by absolute deed title to real property pledged as security for the indebtedness. The consideration for this conveyance consists in relieving the borrower of all in personam liability for the loan. ). 5
before this Court that the Agreement was additional security for Yippie/NAB s obligations under the mortgage, and was never intended to effect a complete conveyance of the Mortgaged Premises. Richards Affirmation 18 & Ex. B, at 18, 19, 31. Centech s representation contradicts both the plain language of the Escrow Agreement and the parties conduct thereafter. Put simply, Yippie/NAB retained no ownership or other possessory rights in the Mortgaged Premises beyond December 1, 2007. Richards Affirmation 14, 16, 20. Yippie/NAB had no ability to sell, transfer, or lease the Mortgaged Premises. Id. 20. Centech (or its designee, Devan) had the sole right to do so, free and clear of all rights of Owner, according to the terms of the Escrow Agreement. Id. 16 & Ex. A 7. In fact, Devan (or its principal Bradley Gordon) exercised its ownership rights by negotiating a lease with Yippie for use of the Mortgaged Premises which it could not have done as simply a lender. Richards Affirmation 20. Devan also had the corresponding duty to pay taxes (which it did not do). Id. 23 & Exs. E1, E2, E3. 2 There can be no reasonable dispute that the parties intended the Deed in Lieu to transfer absolute title to Devan upon Yippie/NAB s ultimate default, and that, when Yippie/NAB could not cure its deficiency by December 1, 2007, the transfer was completed. The subsequent Order and Judgment by Justices Diamond and Oing, in which the Deed in Lieu was declared null and void, did not automatically resurrect Yippie/NAB s legal ownership or ability to alienate the Mortgaged Premises. See Richards Affirmation 25, 27-29 & Exs. F & G. Pursuant to Justice Oing s judgment, the public record would still have to have been annotated to reinstate Yippie/NAB s ownership; the judgment had no such effect without 2 Centech s principal, Bradley Gordon, testified at the February 18 hearing that he had paid taxes, in the amount of $40,061.15, on the Mortgaged Premises and sought to include them in the debt calculation. Richards Affirmation 23 & Ex. B, at 14. However, on three separate occasions (in November 2011, August 2013, and August 2014), the City of New York held tax liens on the Mortgaged Premises in a total amount of over $70,000. Id. 23 & Exs. E1, E2, E3. Each of the tax lien records the most recent in August 2014 identified Devan as the owner of the Mortgaged Premises. Id. 6
implementation. See Richards Affirmation 27-29 & Ex. G, at 4. See also Dixon v. Barksdale, 235 N.Y.S.2d 464, 465 (N.Y. Super. 1962) (suggesting conveyance to nonexistent entity does not re-vest title in mortgagor). Centech never did so, and therefore the judgment did not become effective and Yippie/NAB s ownership was not reinstated not until another party, Defendant Irvin Dana Beal, caused the public records to be annotated in July 2014. See Richards Affirmation 27-30 & Ex. G, at 4; Ex. H. Anyone viewing the public records before then would have seen Devan not Yippie/NAB listed as the holder of title to the Mortgaged Premises. Indeed, as of August 2014 and in prior years, the City of New York considered Devan to be the owner for tax lien purposes. Richards Affirmation 23 & Ex. E3. As a result, Yippie/NAB still could have done nothing as far as selling, leasing to another, or using the Mortgaged Premises to secure a loan. Richards Affirmation 20. Centech refers to payments made by Yippie (not NAB) after December 1, 2007 pursuant to a separate Forebearance Agreement as proof that the mortgage survived the Deed in Lieu. Id. 21. But the Forebearance Agreement acknowledged that the Mortgaged Premises already had been transferred to Devan and that the Agreement did not affect the prior transfer. Id. & Ex. D. NAB, moreover, was not a party to the Forebearance Agreement and could not have been bound by it in any event. Richards Affirmation 21 & Ex. D. Any debt incurred by Yippie under that Agreement therefore was personal to Yippie and could not have been secured by the Mortgaged Premises, nor could NAB be held responsible. Accordingly, this Court should rule that the debt owed on the Mortgaged Premises is the debt as of December 1, 2007 that is, the principal ($1.4 million) and interest as of that date, and nothing more. 7
II. Centech s Inequitable Conduct in Connection with the Mortgage and the Escrow Agreement Invalidates Its Right to an Equitable Remedy. Even if title to the Mortgaged Premises had not passed to Centech s designee as of December 1, 2007, Centech s unclean hands throughout and after the transaction eliminate its right to the equitable remedy of foreclosure. A party seeking equity must do equity, i.e., he [or she] must come into court with clean hands. Gilpin v. Oswego Bldrs., Inc., 87 A.D.3d 1396, 1399 (N.Y. 2011) (quoting Pecorella v Greater Buffalo Press, 107 A.D.2d 1064, 1065 (N.Y. App. Div. 1985)). Centech seeks to exaggerate the value of the debt encumbering the Mortgaged Premises by including interest and penalties accrued since December 2007. It relies on the argument that the transfer of title to Devan on December 1, 2007 was deemed null and void because Devan is a nonexistent entity. See Richards Affirmation 24, 25. In essence, Centech seeks to capitalize on its own error in forming Devan in order to collect near-usurious penalties and interest dating back to December 2007 under the terms of the original mortgage. Yippie/NAB, meanwhile, enjoyed no rights of ownership in the Mortgaged Premises since December 1, 2007 because Centech, having sought and received a judgment from Justice Oing that empowered it to restore Yippie/NAB s record title, kept the judgment quiet and took no steps to implement it in the public records. Equity dictates that Centech should not be allowed to profit from its own misconduct at Yippie/NAB s expense: To now punish Yippie/NAB for Centech s (or Gordon s) original mistake and subsequent refusal officially to correct it, over seven years after Yippie/NAB believed its title had ceased and liability terminated, would work a substantial injustice. This is but one in a series of inequities committed by Centech, preceding and including the Escrow Agreement. Courts will closely scrutinize [deed in lieu] transactions because the 8
deed in escrow will cut off the mortgagor s right of redemption when a subsequent default or other triggering event occurs. John C. Murray, Mortgage Workouts: Deeds in Escrow, 41 Real Prop. Prob. & Tr. J. 185, 186 (2006). For deed in lieu agreements to be fair, the outstanding debt should equal or exceed the market value of the property. See id. at 193-95; John C. Murray, Deed in Lieu of Foreclosure: Practical & Legal Consideration, 26 Real Prop. Prob. & Tr. J. 459, 468 (1991). Here, the reverse was likely true. Richards Affirmation 17. But Centech, although it failed to obtain an appraisal of the Mortgaged Premises before entering the Escrow Agreement (id. 17 & Ex. B, at 20-21), took steps to ensure that Yippie/NAB would receive nothing in the event the value of the property did exceed the debt. The Agreement provides that Lender shall have no obligation to account to Owner for the amount, if any, by which the value of the property transferred to Lender or its designee pursuant such [sic] Transfer Documents exceeds the amount of indebtedness secured by liens on such property. Richards Affirmation 17 & Ex. A 7. At the same time, the Escrow Agreement does not release Yippie/NAB from personal liability on the mortgage meaning it could still be sued for any deficiency even after relinquishing title to the Mortgaged Premises. See Richards Affirmation 15 & Ex. A 7. That defeats the purpose of a deed in lieu of foreclosure arrangement, and Centech should not benefit from its superior bargaining position. 9 Bleecker s interest in this proceeding is a right of first refusal ( ROFR ) that was granted to 9 Bleecker as part of the sale to Yippie/NAB in 2004. The ROFR gives 9 Bleecker the option to purchase the Mortgaged Premises for the lesser of $1.8 million or the sale price in the event Yippie/NAB seeks to transfer the Mortgaged Premises within fifteen (15) years of the original sale to Yippie/NAB in 2004. Richards Affirmation 6. Due in large measure to Centech s conduct, nearly eleven (11) years have elapsed on 9 Bleecker s ROFR on the 9
Mortgaged Premises without the ability to reasonably exercise it. 9 Bleecker should receive credit toward the ROFR for the amount of time exhausted by Centech. CONCLUSION For the foregoing reasons, 9 Bleecker respectfully requests that this Court enter an Order: (1) fixing the debt encumbering the Mortgaged Premises at the amount owed on the mortgage as of December 1, 2007, including the principal ($1.4 million) and interest accrued as of that date; (2) excluding all debts post-dating December 1, 2007, when legal title to the Mortgaged Premises transferred to Devan; (3) crediting 9 Bleecker for the amount of time exhausted on its ROFR by Centech; and (4) granting such other and further relief as this Court deems just and proper. 10