767 Third Ave. LLC v Orix Capital Mkts., LLC

[*1] 767 Third Ave. LLC v Orix Capital Mkts., LLC 2005 NY Slip Op 50123(U) Decided on January 21, 2005 Supreme Court, New York County Fried, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on January 21, 2005
Supreme Court, New York County

767 THIRD AVENUE LLC and 320 WEST 13TH REALTY LLC, Plaintiffs,

against

ORIX CAPITAL MARKETS, LLC, Defendants.



601047/04

Bernard J. Fried, J.

Background

767 and 320 are related entities. As set forth in greater detail below, both plaintiffs sought to refinance mortgage loans by prepaying the loans and each receiving an assignment of mortgage, rather than a satisfaction of mortgage, to minimize their mortgage recording fee obligations. They allege that Orix, as loan servicer, wrongfully charged 767 an excessively high assignment of mortgage fee, and wrongfully refused to provide 320 with an assignment of mortgage.

The 767 Third Avenue Financing

767 is the fee owner of the land and a commercial office building located at 767 Third Avenue, New York, New York. On May 11, 1998, 767 executed two loan documents, including (1) an "Amended, Restated and Consolidated Promissory Note," promising to pay Credit Suisse First Boston Mortgage Capital LLC (CSFB) the principal sum of $41,500,000, with interest, and (2) as security, an "Amended, Restated and Consolidated Mortgage, Assignment of Rents and Security Agreement."

CSFB assigned the 767 loan documents to State Street Bank and Trust Company (State Street Bank), as trustee (Trustee) for the benefit of Certificate holders of the Credit Suisse First Boston Commercial Mortgage-Pass Through Certificates Series 1998-C1 (Trust). Thereafter, U.S. Bank National Association succeeded State Street Bank as Trustee of the Trust. Pursuant to a "Pooling and Servicing Agreement," dated as of June 11, 1998 (PSA), among CFSB, State Street Bank, Orix, [*2]and others, Orix was appointed as master servicer of the Trust.

In August 2003, 767 advised Orix, in Orix's capacity as servicer for the Trust, that it intended to refinance the 767 loan, and it requested an assignment of the 767 mortgage. 767 objected to Orix's request that it pay an assignment fee in the amount of $413,819.77, representing 1% of the outstanding principal shown as due on the payoff statement. If Orix issued a satisfaction of mortgage, instead of an assignment, 767 would have been liable to pay a mortgage recording fee of $1,815,000. 767 agreed to pay the amount demanded, and, at the closing held on September 11, 2003, the Trust delivered an assignment of the mortgage, and 767 executed and delivered to Orix a release (Release). The Release provides, in part: Borrower hereby releases Noteholder and Servicer and their agents, employees and attorneys (collectively the "Releasees") from: (a) any and all claims relating to the $413,819.77 fee charged for the Assignment; and (b) any claim that the amounts set forth in the Payoff Statement are incorrect.

On that same day, 767 entered into a new loan in the principal amount of $66 million, which was an amount $24,618,022.77 greater than the existing principal balance on the 767 note.

The economic cost of 767 receiving a satisfaction piece, as opposed to an assignment, was $1,138,004.37. 767 claims that, because its refinancing scheduled for September 11, 2003 was quickly approaching, and to mitigate its damages, it agreed to pay the 1% "assignment fee" amounting to $413,819.77, and it capitulated to Orix's demand that Orix be released of any liability arising out of its collection of such fee.

320 West 13th Street Refinancing

320 is the fee owner of the land and a commercial office building located at 320 West 13th Street, New York, New York. On April 22, 1998, 320 executed two loan documents, including (1) an "Amended, Restated and Consolidated Promissory Note," promising to pay CSFB the principal amount of $5,850,000, and (2) as security, an "Amended, Restated and Consolidated Mortgage, Assignment of Rents and Security Agreement." Thereafter, CSFB assigned the 320 loan documents to State Street Bank as Trustee for the Trust.

In March 2004, 320 informed the Orix that it intended to repay the 320 note, and it requested an assignment of the 320 mortgage in connection with the prepayment of the note. By letter dated March 31, 2004, Orix denied 320's request for an assignment of the mortgage. On April 9, 2004, 320 prepaid the note, paying the principal amount of $5,850,000, and Orix delivered a satisfaction of mortgage. On that same day, 320 entered into a new loan in the principal amount of $10 million, an amount $4,150,000 greater than the existing principal balance on the note.

Plaintiffs allege that Orix refused to provide 320 with an assignment of mortgage so as to punish it, because its affiliate, 767, had earlier questioned the legality of Orix's conduct in the 767 refinancing. 320 paid a mortgage recording tax to the municipal authorities in the amount of $275,900 (including the $160,875 that it alleges it should not have had to pay). 320 alleges that it made it clear to Orix that, by proceeding to refinance with a satisfaction of mortgage rather than an assignment of mortgage, it did not intend to waive any of its rights. This action ensued.

767 contends that if Orix carried out its threat to deliver a satisfaction of mortgage, instead of an assignment, it would have been liable to pay an incremental mortgage recording tax in the amount of $1,138,004.37, representing the amount of tax due on the amount being paid to the lender, [*3]an amount which, in effect, reflects the benefit to which 767 was entitled to because of its past payment of taxes to record the consolidated mortgage securing this amount of mortgage indebtedness.

According to 320, by unilaterally issuing a satisfaction of mortgage, Orix caused it to forfeit the benefit of the mortgage recording tax, because the satisfaction extinguished the consolidated mortgage lien securing the 320 loan, and, thus, it created an entirely new lien for the new lender's benefit, and it was required to pay a mortgage recording tax in the amount of $275,000, including $160,875 that it should not have had to pay.

The complaint contains seventeen causes of action.

The first, second, and third causes of action allege, essentially, that Orix breached its obligations under the 767 note and mortgage, including its obligations of good faith and fair dealing, by imposing a 1% fee for the granting of an assignment of mortgage.

The fourth cause of action alleges that Orix violated Real Property § 275 by imposing this fee.

The fifth cause of action alleges that the Release was created under circumstances that preclude its enforcement, such as illegality, economic duress, or business compulsion, thereby entitling 767 to a judicial declaration voiding the Release.

The sixth, seventh, and eighth causes of action allege that Orix's misconduct constitutes extortion, coercion and duress, and unfair competition, respectively, directed against 767, and against similarly situated members of the public, thereby requiring the imposition of punitive damages.

The ninth cause of action alleges that Orix has been unjustly enriched at the expense of plaintiff 767, and should be required to make restitution.

The tenth, eleventh, and twelfth causes of action allege that Orix breached its obligations under the 320 note and mortgage, including its obligation of good faith and fair dealing, by unilaterally providing a satisfaction of mortgage, and by not providing an assignment of mortgage.

The thirteenth cause of action alleges that Orix violated Real Property Law § 275 by not providing 320 with an assignment of mortgage.

The fourteenth, fifteenth, sixteenth, and seventeenth causes of action allege that Orix's misconduct constitutes extortion, coercion and duress, unfair competition, and prima facie tort, respectively, directed against 320, and against similarly situated members of the public, thereby requiring the imposition of punitive damages.

As stated in their opposition papers, plaintiffs have withdrawn the causes of action for breach of implied statutory right to assignment (fourth and thirteenth), unfair competition (eighth and sixteenth), and coercion (fifteenth).

Orix argues that 767's claim is barred by the Release, in which it expressly released all of its claims against Orix that are asserted in this action. Orix also argues that, in 1989, New York amended Real Property Law § 275, which previously obligated a lender to provide to a borrower an assignment of mortgage upon request, so that now a lender is obligated to provide only a "certificate of discharge," which it offered to do in the case of 727, and which it did do in the case of 320. It claims that the operative agreements, which both contain merger clauses, do not require it to provide an assignment of mortgage, and that the amount that it charged for an assignment was a proper subject of negotiation. Orix also seeks dismissal of the tort claims on the ground that they are not [*4]validly stated. Orix's answer contains one counterclaim, alleging that it was damaged by 767's breach of the Release, and it seeks to recover its costs and expenses, including attorney's fees incurred in this action.

Plaintiffs contend that summary judgment is inappropriate because the parties have taken very little discovery, and because extrinsic evidence, including custom and trade in the industry, is required to establish the terms of the loan documents. They contend that discovery will show that neither the borrower nor the lender contemplated that the mortgage servicer would charge more than a nominal amount for the preparation of a mortgage assignment document and reasonable legal fees upon repayment of the indebtedness secured by the mortgages. Plaintiffs also argue that the Release that 767 executed is unenforceable, because it was procured through economic duress, fraud, and unconscionable conduct, and that factual issues dominate their tort claims.

Discussion

Motion 001

1. The Release.

As discussed below, 727's economic duress argument, seeking to void the Release, is unavailing. However, in the proposed amended complaint plaintiffs allege, and in plaintiffs' omnibus memorandum of law they argue, that, in addition to economic duress, the Release is also void due to fraud. The record indicates that there is merit to this allegation, at least for purposes of granting leave to amend the complaint.

It is undisputed that the Release covers the issues present in this action. A release is a form of contract, and, as such, it is governed by principles pertaining to contracts generally (see Goldberg v Manufacturers Life Ins. Co., 242 AD2d 175 [1st Dept], lv dismissed in part, denied in part 92 NY2d 1000 [1998]). A contract is voidable on the ground of duress when it is established that the party making the claim was forced to agree to it by means of a wrongful threat (Austin Instrument v Loral Corp., 29 NY2d 124, rearg denied 29 NY2d 749 [1971]). To prevail on a duress theory, plaintiff must show that it was compelled to agree to the terms of the release by means of a wrongful threat that precluded the exercise of its free will (id.; Fruchthandler v Green, 233 AD2d 214 [1st Dept 1996]).

Such is not the case here. Orix's "threat" to not provide an assignment of mortgage without being given a release did not deprive 767 of its free will, because, among other things, 767 has not alleged or established that, without the monetary benefit of the assignment, it would have been unable to consummate the refinancing. Moreover, the record indicates that the Release was a negotiated instrument, whereby both parties were represented by counsel, thereby further militating against the economic duress defense (Boshes v Williamson, Picket, Gross, Inc., 276 AD2d 257 [1st Dept 2000]; Fruchthandler v Green, 233 AD2d 214, supra).

767's reliance upon the seminal case of Austin Instrument v Loral Corp. (29 NY2d 124, supra) is unpersuasive. The economic pressure alleged here falls far short of the duress present there. In Austin Instrument v Loral Corp., the United States Navy had awarded Loral a $6 million contract for the production of radar sets. The contract contained a schedule of deliveries, a liquidated damages clause applying to late deliveries, and a cancellation clause in the event of Loral's default. Austin was a winning bidder subcontractor that made precision gear components that Loral required to produce the radar sets. Thereafter, the Navy awarded Loral a second contract for the production of additional radar sets. Austin informed Loral that it would cease deliveries of the parts unless [*5]Loral consented to substantial increases in the prices provided for in the parties' agreement, both retroactively and prospectively. After contacting 10 manufacturers of precision gears, and finding none that could timely produce the parts, Loral acceded to Austin's demand.

The Court of Appeals found that Austin's threat to stop deliveries unless the prices were increased deprived Loral of its free will, thereby rendering the contract to pay the increased prices voidable. Loral's failure to meet its delivery requirements to the government could have had catastrophic economic consequences for it, including substantial liquidated damages and the cancellation of future deliveries to the government the entity with which Loral did a substantial portion of its business. As is relevant here, the Court noted that a mere threat by one party to breach a contract by not delivering the required items, though wrongful, does not, in itself, constitute economic duress.

In addition to duress, however, a party may avoid a release if it establishes that it executed the release through fraud (see New York City School Constr. Auth. v Koren-DiResta Constr. Co., 249 AD2d 205 [1st Dept 1998]). To avoid a release on this ground, a party must allege every material element of fraud with specific and detailed evidence in the record sufficient to establish a prima facie case (Touloumis v Chalem, 156 AD2d 230 [1st Dept 1989]). The essential elements of a cause of action for fraud are misrepresentation of material facts, falsity, scienter, reliance, and injury (Standish-Parkin v Lorillard Tobacco Co., 12 AD3d 301 [1st Dept 2004]).

The ninth cause of action in the proposed amended complaint, supplemented by evidence contained in the record, satisfies this requirement. It alleges that Orix falsely represented to 767 that it was demanding the Release on behalf of the Trustee, and was acting within the authority that the Trustee granted to it. The Release that Orix prepared, falsely stated that the Release was being provided "in order to induce Noteholder to provide the Assignment . . . . " Moreover, Orix presented 767 with a power of attorney that expressly stated that 767 could "rely completely unconditionally and conclusively on [defendant's] authority" to act on the Trustee's behalf. Orix's false representations were intended to facilitate its effort to compel 767 to execute the Release.

Orix argues that 767 cannot prove detrimental reliance, and that 767 might have a claim if the Trustee had sought to repudiate the assignment of mortage, or had asserted that Orix had acted without authority, but the Trustee has not done so. However, the issues of material representation (i.e., the Trustee's role in the transaction) and reasonable reliance, essential elements of fraud, are not subject to summary disposition (Brunetti v Musallam, 11 AD3d 280 [1st Dept 2004]).

2. Breach of Contract.

There are material factual issues relating to the issue of whether Orix breached the operative agreements by demanding a payment of 1% of the outstanding principal in consideration for providing an assignment of mortgage to 767, and by refusing to provide 320 with an assignment of mortgage.

It is undisputed that the relevant agreements do not contain a provision expressly governing the situation of whether the borrowers were entitled to a satisfaction or an assignment of mortgage upon prepayment of the loan. According to plaintiffs, however, commercial mortgages in New York are rarely satisfied when they are prepaid, and, customarily, the original lenders assign them to the new lenders in consideration of the preparation costs of the assignment and reasonable legal fees. Moreover, in the case of a prepayment, the treatment of the existing mortgage can be highly material for the borrower, but completely immaterial and of no economic consequence to the lender (Affidavit [*6]of Robert Kaufman, a principal of both plaintiffs, sworn to July 29, 2004).

Orix controverts the assertion that there is a custom in New York for lenders to deliver an assignment of mortgage for a nominal fee at the borrower's request, and claims that, typically, this is a subject for contractual negotiation. Orix submitted copies of provisions of other mortgages that it holds, and that it contends require it to deliver an assignment of mortgage at a borrower's request (Affidavit of Kirsten Bollinger, an Associate Director of Orix, ¶26, sworn to May 11, 2004). Orix's controverting assertion demonstrates the existence of factual issues as to custom and usage.

Orix also argues that the 767 and 320 mortgages each contain a merger clause that express the parties' intent that the agreements constitute the entire understanding of the parties, and that plaintiffs may not rely upon parol evidence and custom to add to the terms of the agreements. The purpose of a merger clause is to require the full application of the parol evidence rule to bar the introduction of extrinsic evidence to alter, vary, or contradict the terms of a writing (Jarecki v Shung Moo Louie, 95 NY2d 665 [2001]). Nevertheless, the presence of a merger clause does not exclude consideration of evidence explaining the terms such as course of dealing, usage of trade, or course of performance (Matter of Big Tree Energy Partners v Bradford, 219 AD2d 27 [3d Dept], lv denied 88 NY2d 810 [1996]). The court may consider extrinsic evidence where a term is sufficiently ambiguous, despite the presence of a merger clause (Chocolas Assoc. Ltd. Partnership v Handelsman, 262 AD2d 133 [1st Dept 1999]). Here, the agreements expressly provide that the mortgagor could prepay the loan. Thus, plaintiffs are not seeking to introduce evidence that contradicts that, or any other, contractual provision.

Moreover, a merger clause does not prevent a court from inferring a covenant of good faith and fair dealing, provided the implied term is consistent with other terms in the contract (SNS Bank, N.V. v Citibank, N.A., 7 AD3d 352 [1st Dept 2004]). Implicit in every contract is a promise of good faith and fair dealing that is breached when a party acts in a manner that, although not expressly forbidden by any contractual provision, would deprive the other party from receiving the benefits under their agreement (Skillgames, LLC v Brody, 1 AD3d 247 [1st Dept 2003]). Plaintiffs argue that, by failing to provide an assignment in the case of 320, and by demanding an exorbitant payment for an assignment in the case of 767, they were deprived of the full benefits of the prepayment provisions of the loan documents. Moreover, absent from the moving papers is any statement or evidence as to (1) why Orix decided to make the issuance of the assignment dependant upon a 1% fee, (2) how Orix arrived at the amount of assignment fee, (3) whether Orix was following the guidelines of the Trustee, or (4) whether the Trustee took any position as to Orix's demand.

Orix also argues that Real Property Law § 275 was amended, eliminating the requirement that a mortgagor provide an assignment at a borrower's requested. This is not dispositive here, where plaintiffs are also seeking to recover on a theory of breach of contract. Indeed, plaintiffs have withdrawn the causes of action for breach of implied statutory right to an assignment (fourth and thirteenth causes of action).

Orix's citation to Harris v Crossland Mtge. Corp. (160 Misc 2d 520 [Dist Ct, Nassau County 1994]), in support of its assertion that Orix had the absolute discretion to decide whether and on what terms to issue an assignment, is unpersuasive. In Harris v Crossland Mtge. Corp., the defendant assigned the plaintiff's mortgage to Citibank, N.A., but retained its position as servicer of the loan [*7]pursuant to a servicing agreement. Thereafter, the defendant refused to execute an assignment of the loan, relying on the guidelines of its principal, Citibank. In dismissing the complaint, the court determined that the real party in interest was the owner of the original loan, Citibank, and that the plaintiff's action seeking to recover its out-of-pocket damages should have been brought against Citibank, as the owner, and holder of the loan, rather than the defendant, its agent. Thus, the court found that the agent was following the guidelines of the loan's owner. Here, however, there is no indication that Orix, as loan servicer, was acting pursuant to the guidelines of the owners of the loans.

Orix also argues that plaintiffs are not entitled to damages, because they contractually limited their remedies as follows: "In the event that a claim or adjudication is made that Mortgagee has acted unreasonably or unreasonably delayed acting in any case where by law or under the Note, this Mortgage or any of the other Loan Documents, it has an obligation to act reasonably or promptly, Mortgagee shall not be liable for any monetary damages, and Mortgagor's remedies shall be limited to injunctive relief or declaratory judgment or specific performance."

Orix has not shown that this provision is applicable, because it applies to the "Mortagee," not to Orix. Moreover, the complaint alleges that Orix acted in bad faith, whereas this provision expressly pertains to circumstances where "reasonableness" is at issue.

3. Other Causes of Action.

Orix has demonstrated entitlement to dismissal of the causes of action, other than those alleging breach of contract, that plaintiffs have not withdrawn, i.e., extortion (sixth and fourteenth), unjust enrichment (ninth), and prima facie tort (seventeenth).

The unjust enrichment claim fails because a valid and enforceable contract governs the parties' rights and obligations (Golub Assoc. v Lincolnshire Mgt., 1 AD3d 237 [1st Dept 2003]). The prima facie claim is dismissed because plaintiffs fail to allege a violation of a legal duty independent of its contractual duties (Clark-Fitzpatrick, Inc. v Long Is. R.R. Co., 70 NY2d 382 [1987]). The extortion claim fails because, contrary to plaintiffs' assertion, the record indicates that the failure to provide 767 with an assignment would not have prevented the refinancing from taking place.

Motion 002

Orix moves for liability on its counterclaim, in which it contends that 767 released it from any and all claims relating to the $413,819.77 fee that it charged for the assignment, and that 767's alleged breach of the Release caused it monetary damages. It seeks to recover its costs and expenses, including attorney's fees, that it incurred in this action. The Release provides: In the event of a breach of this Release, Releasees shall be entitled to recover all of their costs and expenses, including reasonable attorney's fees.

Releases providing for the payment of costs in the event of a breach are enforceable (see Manti Transp. v Associates Commercial Corp., 2002 WL 369807 [ED NY 2002]). Here, however, as discussed above, Orix has not demonstrated on these papers that 767 will be unable to prevail on its defense of fraud in the execution of the Release.

Motion 003

The proposed amended complaint adds the following claims: (1) plaintiffs are third-party [*8]beneficiaries of the PSA; (2) plaintiffs are entitled to equitable relief from Real Property Law

§ 275; (3) the assignment fee constitutes a wrongful penalty; (4) the Release is void based upon fraud; (5) Orix converted 320's property by extinguishing the 320 mortgage through its unilateral issuance of a satisfaction; and (6) Orix's refusal to assign the mortgage caused 320 to forfeit its benefit from the mortgage recording tax previously paid on the liens comprising the consolidated 320 mortgage lien.

As discussed above, the proposed ninth cause of action, alleging that the Release is void, based upon fraud, has merit. I grant leave to amend the complaint to add this claim. As for the other parts of the proposed amended complaint, the only viable claims are those based upon breach of contract that are already contained in the original complaint. Plaintiffs have failed to demonstrate that the additional claims have merit. Although leave to amend the complaint is to be freely granted, leave is properly denied where the proposed claims are palpably insufficient (Tishman Constr. Corp. of NY v City of New York, 280 AD2d 374 [1st Dept 2001]).

The fourth cause of action of the proposed amended complaint alleges that no party to PSA, other than 767, has a direct interest in enforcing the provisions of the PSA that prohibit Orix from charging the assignment fee that it charged, and that Orix's action breached its obligations to 767 as third-party beneficiary to the PSA. Notwithstanding this assertion, plaintiffs have not cited any provision of the PSA that prohibited the assignment fee at issue.

Moreover, a party asserting rights as a third-party beneficiary must establish: (1) the existence of a valid and binding contract between other parties; (2) that the contract was intended for its benefit; and (3) that the benefit to it is sufficiently immediate rather than incidental to indicate that the contracting parties assumed a duty to compensate it if the benefit is lost (State of California Pub. Empl. Retirement Sys. v Shearman & Sterling, 95 NY2d 427 [2000]). The right to an assignment, as opposed to a satisfaction, is too incidental to the governing contracts to warrant affording them third-party beneficiary status. Furthermore, the PSA expressly provides: "[N]o other person, including, without limitation, any Mortgagor shall be entitled to any benefit or equitable right, remedy or claim under this Agreement."

Thus, the contract, by its own terms, expressly negates enforcement by third parties, and that provision is controlling (Board of Mgrs. of the Alexandria Condominium v Broadway/72d Assoc., 285 AD2d 422 [1st Dept 2001]).

Conversion is the unauthorized control over another's identified property (Hoffman v Unterberg, 9 AD3d 386 [2d Dept 2004]), which has not occurred here. Moreover, the conversion and forfeiture claims merely restate the breach of contract claims, and allege no independent facts sufficient to give rise to tort liability (Yeterian v Heather Mills N.V., 183 AD2d 493 [1st Dept 1992]).

Finally, the claim that plaintiffs are entitled to equitable relief from Real Property Law §275 is also unconvincing. Plaintiffs successfully refinanced their loans, and claim only monetary damages, and are not faced with, or have suffered any, harm such as a foreclosure on their property that might otherwise warrant equitable relief.

Accordingly, it is

ORDERED that Motion 001 is granted to the extent of dismissing the fifth, sixth, seventh, ninth, fourteenth, fifteenth, and seventeenth causes of action (the fourth, eighth, thirteenth, and sixteenth having been withdrawn); and it is further [*9]

ORDERED that Motion 002 is denied; and it is further

ORDERED that Motion 003 to amend the complaint is granted to the extent set forth above, and plaintiffs are directed to serve an amended complaint in conformity with this decision within 10 days of service of a copy of this order with notice of entry. Orix shall serve its answer to the amended complaint within10 days of service of the amended complaint.

Dated: January 21, 2005

ENTER:

____________________________

J.S.C.