DeStaso v Bottiglieri

[*1] DeStaso v Bottiglieri 2009 NY Slip Op 52082(U) [25 Misc 3d 1213(A)] Decided on August 31, 2009 Supreme Court, Westchester County Scheinkman, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 31, 2009
Supreme Court, Westchester County

Vincent DeStaso, Plaintiff,

against

Peter A. Bottiglieri, LUKE P. BOTTIGLIERI, and THERESA BOTTIGLIERI, Defendants.



4480/06



KERA & GRAUBARD

Attorneys for Defendant

PETER A. BOTTIGLIERI

240 Madison Avenue, 7th Floor

New York, NY 10016

CONDON & ASSOCIATES, PLLC

Attorneys for Plaintiff

VINCENT DESTASO

55 Old Turnpike Road, Suite 502

Nanuet, NY 10954

Alan D. Scheinkman, J.

This motion shall be determined in the Central Calendar Part pursuant to the Memorandum dated November 30, 2007 of the Administrative Judge, Ninth Judicial District.

Upon the foregoing papers, it is ordered that this motion is decided as follows:

Plaintiff Vincent DeStaso made two loans to defendant Peter A. Bottiglieri.[FN1] The loans were secured by mortgages on property located at 100 Main Street, Dobbs Ferry, New York ("property"). After defendant's default and sale of the property to plaintiff, plaintiff commenced this action to recover interest and reimbursement for certain expenses in connection with the sale.The undisputed facts are set forth herein. Plaintiff, a real estate broker who was acquainted with defendant's family, made the first loan to defendant on January 29, 2004 for the amount of $137,000 at 18% per annum interest ("January loan"), in exchange for a mortgage note. On that date, defendant signed a confession of judgment and an affidavit acknowledging [*2]the loan amount and interest. The loan required 24 equal installments of interest in the amount of $2,055, first payable on November 1, 2004, with a final balloon payment of $137,000 to be paid on or before October 31, 2006 (terms which are uncontradicted by defendant in his papers on this motion). Plaintiff made the second loan on March 22, 2004 for $210,000 at 22% per annum interest ("March loan"). Pursuant to the mortgage note for the March loan, defendant was to pay 24 equal installments of interest in the amount of $3,850 each, first payable on May 1, 2004, with a final balloon payment of $210,000 to be paid on or before April 30, 2006. Defendant was unable to make any of the payments on either loan.

On October 29, 2004, plaintiff and defendant entered into a contract of sale for the property at a purchase price of $570,000. Plaintiff advanced defendant $85,000 on December 18, 2004, which represented the balance of the purchase price due defendant minus a hold-back of $10,000 for uncorrected municipal violations at the property. Although the parties executed documents on that date, title could not be transferred to plaintiff because defendant had not yet completed the probate proceedings for his father's estate, which owned the property. On April 29, 2005, defendant executed an Executor's Deed, which plaintiff recorded on July 7, 2005.

Plaintiff commenced this action after the closing of the transaction of sale. Plaintiff's complaint seeks: (a) monthly interest payments for the nine months prior to the transfer of title, in the total amount of $53,145 plus additional interest at the default rate;

(b) reimbursement for expenditures by plaintiff after the closing to make repairs and remove violations in an amount in excess of $50,000; and (c) costs, including reasonable attorneys' fees, in excess of $3,000. Defendant's answer asserts affirmative defenses of usury and fraud and overreaching and a counterclaim for $570,000, the value of the property in the contract of sale. In the alternative, defendant asserts a second counterclaim for recession of the deed based on alleged usurious mortgage transactions and fraud and overreaching by plaintiff and his attorney.

In support of the instant motion for summary judgment, defendant contends that the first cause of action in the complaint should be dismissed and his counterclaims should be granted on the grounds that the loans were usurious in that the interest rates therein exceeded the legal interest rate of 16%. Defendant further claims that this issue has already been decided by the Appellate Division, Second Department decision dated June 3, 2008.[FN2] Plaintiff, on the other hand, contends that the maximum rate of interest does not apply because, in the aggregate, these commercial loans exceed $250,000.

The proponent of a summary judgment motion must make a prima facie showing of entitlement to judgment as a matter of law, and the party opposing the motion must demonstrate by admissible evidence the existence of a triable issue of fact (Alvarez v Prospect Hosp., 68 NY2d 320; Friends of Animals v Associated Fur Mfrs., 46 NY2d 1065). Mere conclusions or [*3]unsubstantiated allegations or assertions are insufficient to defeat a motion for summary judgment (Zuckerman v City of New York, 49 NY2d 557). In the instant case, in order to establish his prima facie entitlement to judgment, defendant is required to demonstrate that, as a matter of law, the transactions between the parties constituted usurious loans.

Pursuant to General Obligations Law § 5-501, it is illegal to charge or receive any money, goods, or things in action as interest on the loan or forbearance of any money, goods, or things in action at a rate exceeding 16% per annum, the maximum rate prescribed in Banking Law § 14-a (GOL § 5-501 [2]; Banking Law § 14-a [1]). A loan or forbearance given in consideration of more than the legal rate of interest is usurious (O'Donovan v Galinski, 62 AD3d 769; Browowski v Falleder, 296 AD2d 301; Matias v Arango, 289 AD2d 459). Here, the record demonstrates that the two transactions constituted loans from plaintiff to defendant, and that the loans were given in consideration of the payment of 18% and 22% interest per annum. These percentages exceed the legal rate of interest in violation of General Obligations Law § 5-501 [2].

Plaintiff contends, however, that the loans qualify for an exemption from the usury laws. An exception to the maximum rate of interest which may be charged applies to any loan or forbearance in the amount of $250,000 or more, other than a loan or forbearance secured primarily by an interest in real property improved by a one or two family residence (GOL § 5-501 [6] [a]).[FN3] Contrary to plaintiff's contention that the loans were part of one transaction and when added together exceed $250,000 (an allegation not made in the pleadings), the two loans were separate and distinct even though secured by the same collateral. They do not constitute a single loan for the total amount, to be advanced in installments pursuant to an agreement (see GOL § 5-501 [6] [a]). Therefore, the usury laws which limit the rate of interest allowed on a loan (GOL § 5-501 [2]) are applicable to the subject loans.

Plaintiff's next contention is that even if the interest to be paid for the loans is determined to exceed the legal amount, there is a usury savings clause in the loan documents. The mortgage note dated March 22, 2004 for the loan of $210,000 states:

In the event that the holder of this note, in enforcing its rights hereunder, or at any other time, determines that the charges and fees incurred in connection with this Note may ... cause the interest rate herein to exceed the Maximum Rate [permitted by applicable law], then such interest shall be deemed automatically recalculated and any excess over the Maximum Rate shall be credited to the then outstanding principal balance. ... It is the intent of the parties hereto that the Maker, under no circumstances, shall be required to pay, nor shall the Payee be entitled to collect, any interest which [*4]is in excess of the Maximum Rate. (Defendant Exhibit C, page 4)

In regard to the enforceability of usury savings clauses such as the one above, the Appellate Division, First Department has held, "[L]anguage [in the agreements] purporting to reduce the interest rate to the legal rate in the event of a finding of usury, do[es] not make the subject agreements nonusurious" (Simsbury Fund v New St. Louis Assocs., 204 AD2d 182). In the case of a variable rate loan, however, such a clause may be necessary; while a loan agreement may not be usurious on its face at the inception of the loan, there may be a usury problem if the rate of interest should exceed the usury ceiling during the term of the loan even though the lender would have no way of knowing whether this would eventually happen (Madison, Dwyer and Bender, Real Estate Financing § 5:22 [updated 2009]).[FN4]

Here, each loan was usurious on its face at the inception of the loan. Notably, the interest rate was set by plaintiff and his attorney, with defendant unrepresented by counsel. Based on the clear reading of the March loan agreement, the savings clause does not serve to limit the initial amount of interest stated to a legal rate. The limit of the "maximum rate of interest from time to time permitted by applicable law" appears in paragraphs that provide for an additional rate of interest in excess of the initial rate after the maturity or acceleration date of the loan, when payments are late, or when the payee has incurred expenses in handling and loss of use of delinquent payments (Plaintiff Exhibit C, page 2-3). In any event, each loan required a usurious rate of interest at its making as opposed to a loan that is not usurious on its face at its inception but which may become usurious prior to any default when fees and other charges are added. Defendant here was required to pay the usurious rate even if he fully performed under the agreements.

By statute, where, as here, a loan has been found to violate the usury laws, the court is required to hold the note void, enjoin any prosecution thereon, and order same to be surrendered and cancelled (GOL § 5-511 [2]; Hilal v Lipton, 227 AD2d 378). Usurious loans are void as a matter of law, and the borrower is relieved from the obligation to repay both principal and any interest thereon (see id.; Seidel v 18 E. 17th St. Owners, 79 NY2d 735; Abir v Malky, Inc., 59 AD3d 646; Browowski v Falleder, 296 AD2d at 301; Pemper v Reifer, 264 AD2d 625).

Accordingly, the motion is granted to the extent that the two loans, having violated the usury laws, are void, and the mortgages securing the loans along with loan transaction documents are unenforceable and are canceled. Inasmuch as plaintiff now holds title to the property that served as collateral for the illegal loans, this matter will be set down for an assessment of damages with defendant being entitled to the proceeds of sale in the amount of the loans plus [*5]applicable interest, subject to any offsets to which plaintiff may be entitled, including but not limited to payments of violations and taxes on the property. The parties may conduct further discovery as necessary in regard to these issues.

The motion is further granted to the extent that the complaint is dismissed as to plaintiff's first cause of action for additional interest payments prior to the transfer of title, and as to plaintiff's third cause of action for attorneys' fees.

Dated: White Plains, New YorkAugust, 2009

____________________________ALAN D. SCHEINKMAN

J.S.C. Footnotes

Footnote 1:The action has been dismissed as to defendants Luke P. Bottiglieri and Theresa Bottiglieri.

Footnote 2:In that decision (DeStaso v Bottiglieri, et al., 52 AD3d 453), the court found that plaintiff was not entitled to a default judgment inasmuch as defendant had alleged, among other things, a meritorious defense of usury. The issue, however, was not conclusively decided therein.

Footnote 3:In his opposition papers, plaintiff refers to the collateral securing the loans as commercial property. Defendant does not directly address this allegation, although he states that the building had stores on the ground floor and residential apartments above (Defendant Affidavit, ¶ 4.). The recording of the mortgage on February 28, 2005 indicates that the nature of the property is "DWELLING 1-2 Family" (Defendant Exhibit B), and in the March loan mortgage, defendant indicates that the security instrument "covers real property improved, or to be improved, by one or two family dwelling only" (Defendant Exhibit D, ¶ 25).

Footnote 4:In a case involving a bank loan and a variable rate mortgage, in contrast to the instant case, the Appellate Division, Fourth Department stated in dicta, "[T]he bank could have readily avoided charging usurious interest on its loan by placing a cap on the charges for interest so that no payment would exceed the variable legal rate provided by Federal statute" (Norstar Bank v Pickard & Anderson, 140 AD2d 1002, 1003 [1988]).