Defendant In Foreclosure Action Entitled To Setoff Even Though It Waived That Right In Mortgage Agreement
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.”
