New York Business Litigation Lawyer Blog

Even though the defendant remitted to the Court (but not the plaintiff) more than the amount necessary to redeem the property before the foreclosure sale, the Court of Appeals ruled that the property owner did not properly stay the sale nor did it exercise its right to redeem. In NYCTL 1999-1 Trust, et. al., v. 573 Jackson Ave. Realty Corp., the defendant 573 Jackson Avenue Realty Corp. (“Jackson”) failed to pay certain real property taxes on its property located in the Bronx and in May 1999, the plaintiff Trust acquired a tax lien against the property in the amount of $2,412.75 from the City of New York. Although nearly three years later, Jackson paid that amount to the Trust, the lien was not discharged because statutory interest had accrued in the interim and the interest amount remained unpaid.

The Trust commenced an action to recover the balance owed, including interest and attorneys’ fees. The Supreme Court granted summary judgment in favor of the Trust and appointed a referee to calculate the total amount owed, which was done by the referee and the Supreme Court ultimately confirmed the referee report awarding the Trust $9,307.50. A judgment of foreclosure and sale was entered in May 2007 and Jackson appealed from said judgment.

The foreclosure sale was scheduled for August 24, 2007 and a week before the sale, the Trust forwarded a payoff letter to Jackson indicating that the sum of $19,070.74 could be paid to redeem the property prior to sale. Instead of remitting full payment to the Trust, Jackson deposited $19,563.77 with the Bronx County Clerk on August 16, 2007. Jackson advised the Trust that it had filed an undertaking with the County Clerk that “stayed” the foreclosure sale. The sale, however, proceeded and the third party bought the parcel with a high bid of $160,000.

Subsequently, Jackson moved the cancel the foreclosure sale and to enjoin the referee from conveying title the to third-party claiming that property had been sold in violation of CPLR 5519 and RPAPL 1341. The Supreme Court denied the motion, the Appellate Division affirmed both the foreclosure judgment and the Supreme Court’s denial of the motion and the Court of Appeals granted leave to appeal.

First, the Court of Appeal ruled that Jackson’s deposit of $19,563.77 with the Bronx County Clerk did not automatically stay the sale under CPLR § 5519(a)(2) and (a)(6). The Court reasoned that CPLR 5519(a)(2) is relevant only where “the judgment or order directs payment of a sum of money” and therefore is not applicable to a foreclosure judgment. Also, the Court ruled that Jackson could not rely upon CPLR 5519(a)(6) as its “undertaking was not ‘in a sum fixed by the court’ as required by that provision.”
Turning next to Jackson’s claim that there was a stay under RPAPL 1341, the Court of Appeals noted that the Appellate Division found that this provision did not apply as the provision was not self-executing and requires that a court order the stay. The Court of Appeals, however, ruled that “we reject Jackson’s argument for a more fundamental reason – RPAPL 1341 simply had no application here.”

The Court of Appeals cited the relevant portion of RPAPL 1341 as follows:

Where an action is brought to foreclose a
mortgage upon real property upon which any
part of the principal or interest is due, and
another portion of either is to become due,
and the defendant pays into court the amount
due for principal and interest and the costs
of the action, together with the expenses of
the proceedings to sell, if any, the court
shall:
. . .
"2. Stay all proceedings upon judgment, if
the payment is made after judgment directing
sale and before sale; but, upon a subsequent
default in the payment of principal or
interest, the court may make an order
directing the enforcement of the judgment for
the purpose of collecting the sum then due.

The Court of Appeals ruled that RPAPL 1341 is, “by its plain terms,” limited to partial foreclosures. The Court noted that in typical mortgage foreclosure cases, after a default, the entire balance is accelerated and immediately due and consequently, there is no portion that is “to become due” in the future. Thus, the Court of Appeals ruled that since the action to foreclose the Trust’s tax lien does not involve a partial foreclosure, RPAPL 1341 was inapplicable.

Nonetheless, the Court of Appeals noted that although RPAPL 1341 does not apply outside the partial foreclosure context, recent Appellate Division cases have “engrafted that statute’s requirements onto a property owner’s common-law right of redemption.” The Court explained that “[t]he equity of redemption, which long predates the RPAPL, allows property owners to redeem their property by tendering the full sum at any point before the property is actually sold at a foreclosure sale.” All that is required is “an unconditional tender of the full amount due.”

But this is not what occurred in this case – the Court of Appeals noted that Jackson conceded that it only sought to stay the sale through its deposit with the County Clerk and that it did not tender the sum to the Trust. Jackson informed neither the Court nor the Trust that it was making full payment to redeem the property. Rather, Jackson informed the Trust that its deposit “stayed the sale.” As Jackson did not “redeem the property by unconditionally tendering the total amount owed,” the Court ruled that the property was properly sold at auction.

By Katherine Zalantis

The Appellate Division, Second Department ruled that even though the defendant waived their setoff rights in the mortgage, the Court ruled that defendant was entitled to a setoff as the possession agreement “executed on the same day, by the same parties, and for the same purpose” provided for a setoff. In Hoffinger Indust., Inc. v. Alabama Realty, Inc., the plaintiff conveyed real property located at 966-988 Alabama Avenue in Brooklyn, New York to defendant and the purchase was financed, in part, by a mortgage with rider and a mortgage note both executed on November 19, 1998 by Defendant requiring that payment be made to Plaintiff through November 19, 2018. The mortgage rider provided standard language that the defendant waived its right to interpose defenses or setoff whatsoever.

Also executed on that same date (November 19, 1998) was: (i) a personal guaranty by defendant’s sole stockholder and officer, Joseph Berkovitz; and (ii) a possession agreement between Berkovitz and plaintiff that allowed plaintiff to keep certain equipment on the premises and required that plaintiff pay rent after the equipment remained for more than six months. The possession agreement specifically provided that any equipment remaining after two years “shall be removed at the cost of [the plaintiff] which may be offset against mortgage payments to [the plaintiff].”

After the defendant admittedly defaulted on the mortgage by failing to make payments, plaintiff commenced a mortgage foreclosure action. Defendant and Berkovitz counterclaimed, seeking an offset against the balance due for unpaid rent for the equipment left at the property. The counterclaim was subsequently amended to conform to the proof at the nonjury trial, allowing them to seek an offset for the cost of removing the equipment.

The Supreme Court ruled that while the balance owed on the mortgage was $821,976.24, defendant was entitled to offset for the cost of removing the equipment in the amount of $220,000. The Appellate Division, Second Department ruled that the Supreme Court properly determined that defendants were entitled to an offset. The Court ruled that “[e]ven though the defendants waived their right to interpose an offset in the rider annexed to the mortgage agreement, the rider must be viewed together with the possession agreement, which provided for an offset, since these documents were executed on the same day, by the same parties, and for the same purpose.”

The Second Department also ruled that the Supreme Court acted within its discretion in ruling on the cost to remove the equipment; in calculating the default interest owed; and in deducting the offset from the principal amount due prior to calculating the default interest owed “since the obligation to remove the equipment arose before the defendants defaulted on the mortgage by failing to make payments.”

By Katherine Zalantis

In what one of the concurring Justices termed “an excessive burden to impose on the County for a procedural error,” the Court of Appeals ruled that it was compelled, based upon its prior determinations, to rule that the petitioner was entitled to recover four years worth of back pay and that “the problem is one that only the Legislature can fix.” In Gomez v. Stout, petitioner worked as an Assistant Games Manager at Rye Playland – an amusement park owned by the County of Westchester and in May 2002, she was served with formal disciplinary charges alleging 43 acts of misconduct and/or incompetence. At the subsequent disciplinary hearing, her employer, James Stout, Commissioner of Westchester County Parks, Recreation and Conservation and members of his family testified about an alleged incident that occurred at Rye Playland’s skating rink in April 2002. The Hearing Officer sustained all 43 charges and recommended the petitioner be terminated from employment.

As Stout and his family members testified at the hearing, Stout designated Ralph Butler, the Commissioner of Westchester County Department of Public Works, to review the hearing record and to render the final determination. Butler agreed with the Hearing Officer’s recommendation and determined that petitioner should be terminated. By letter dated November 2, 2005, Stout notified petitioner of Butler’s determination.

Petitioner commenced an Article 78 proceeding challenging her termination and seeking retroactive reinstatement of her employment to the County payroll effective November 2, 2005 (the date of termination). Under CPLR § 7804(g), the Supreme Court transferred the matter to the Appellate Division.

The Appellate Division annulled the determination terminating petitioner’s employment on procedural grounds. The Court ruled that although Stout properly disqualified himself, he erred by designating Butler to act as his agent as the only individual authorized the act in his absence was Stout’s Deputy Commissioner. Accordingly, the Appellate Division remitted the matter back to Commissioner Stout for the appointment of a “duly-qualified individual authorized to review” the Hearing Officer’s recommendation. The Court did not address the issues of whether petitioner was entitled to reinstatement or back pay and benefits, nor did it conduct a substantial evidence review since it annulled the determination solely on jurisdictional grounds.

The Court of Appeals granted both sides leave to appeal and modified the Appellate Division’s order. Relying upon Civil Service Law § 75(2) which provides that an employee disciplinary proceeding “shall be held by the officer or body having the power to remove the person against whom such charges are preferred, or by a deputy or other person designated by such office,” the County asserted that Stout’s recusal and the designation of “Butler was necessary in order to avoid the appearance of impropriety and that Stout’s designation of Butler was lawful.” The Court of Appeals, however, ruled that Civil Service Law § 75(2) contemplated that a delegation, if necessary, be made “within the governmental department’s chain of command” and declined to expand the “judicially created exception to allow a personally involved officer or body unfettered discretion to designate a municipal department head with no supervisory authority over the affected employee.” Thus, the Court of Appeals ruled that the Appellate Division correctly annulled Butler’s determination and remitted the matter to Stout to appoint a duly-qualified individual – the Deputy Commissioner – to render a determination on the same hearing record.

Nonetheless, the Court of Appeals took it one step further than the Appellate Division by addressing petitioner’s claim for back pay and benefits. The County argued that any award of back pay and benefits should await the determination of Stout’s new designee and should not be awarded at all unless the new penalty imposed, if any, is less severe than termination. The Court of Appeals disagreed finding that petitioner is entitled to be reinstated with back pay and benefits. In reliance upon it prior decisions (Wiggens v. Board of Educ of City, 60 N.Y.2d 385 [1983]; and Sinicropi v. Bennet, 60 N.Y.2d 918 [1983]), the Court of Appeals explained that when there is a procedural error that “taints the proceeding,” a disciplinary proceeding will be voided and the “status quo ante restored” thereby entitling petitioner for back pay between the earlier and later termination decisions. Accordingly, in reliance upon these two prior decisions, the Court ruled that petitioner was entitled to back pay, even if the proceedings against her “eventually lead to termination of her employment.”

Justice Smith issued the concurring decision stating that although he joined in the Court of Appeal’ unanimous opinion, he wrote “to express my unhappiness with the result we are forced to reach.” Justice Smith explained that if the Hearing Officer’s termination recommendation is upheld, “petitioner will still get back pay for the four years following her dismissal – four years during which she has not done a day’s work for the County” and therefore, Justice Smith stated that “this is surely an excessive burden to impose on the County for procedural error.” Justice Smith, however, stated that the “result is compelled” by the Court of Appeals’ past decisions, which decisions seemed wrong to not only him but the Appellate Division Justice (Appellate Division Justice O’Connor) that wrote the Appellate Division Sinicropi decision who, though believing himself bound by precedent, pointed out the prior decisions “allowing back pay in situations like this unjustifiably expand the relief that would have been available at common law.” Justice Smith noted that Appellate Division Justice O’Connor argued that back pay should not be honored even if the employee’s dismissal is declared invalid and that Justice O’Connor urged the Court of Appeals to “re-examine” its prior analysis, which the Court of appeals declined to do. Justice Smith stated “I think this was a mistake, but there is nothing we can do about it now. The problem is one that only the Legislature can fix”

By Katherine Zalantis