MMAL Corp. v Edrich

[*1] MMAL Corp. v Edrich 2012 NY Slip Op 50069(U) Decided on January 18, 2012 Supreme Court, Kings County Schmidt, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 18, 2012
Supreme Court, Kings County

MMAL Corp., Plaintiff,

against

George Edrich, individually and as Executor of the Estate of Ester Edrich, et al., Defendants.



4446/06



Plaintiff Attorney: Arnold J. Ludwig, 26 Court Street, Brooklyn NY 11242

Defendant Attorney: David M. Namm, 600 Old Country Rd, Garden City, NY 11530

David Schmidt, J.

Upon the foregoing papers, defendants George Edrich, Ester Edrich, Ellen Baratz, Bruce Edrich, Jonathan R. Edrich and Dina Edrich (Edrich defendants) move, by order to show cause, to confirm the report of referee Donald M. Zolin, Esq. (the referee), dated May 13, 2011 (the report), which incorporates the referee's recommendation issued on June 29, 2010 (the recommendation). Plaintiff MMAL, Corp. cross-moves for an order confirming in part and rejecting in part the recommendation and report and 2) referring the matter to a special referee to make appropriate determination and findings, including appropriate and reasonable legal fees chargeable against the Edrich defendants.

In conjunction with the purchase of real property located at 607 Avenue K in Brooklyn, decedent Ester Edrich borrowed $247,500.00 from Bay Ridge Federal Savings Bank (BRFSB) as evidenced by a note dated July 20, 1994. As security for the loan, Ester Edrich executed a mortgage on the subject property in favor of BRFSB. Independence Community Bank (ICB) took ownership of the note and mortgage as the successor to BRFSB. On July 5, 2002, ICB commenced a foreclosure action based on a default in payment occurring on December 1, 2001. On September 5, 2002, plaintiff acquired the note and mortgage by assignment from ICB and continued the aforementioned foreclosure action. In May 2004, Samuel Festinger, brother of Ester Edrich, commenced an action against the Edrich defendants seeking to impose a constructive trust upon the [*2]subject property. That action was dismissed on judicial estoppel grounds by order dated May 10, 2005. The dismissal order was affirmed by the Appellate Division, Second Department by order dated August 8, 2006.

Plaintiff discontinued the foreclosure action by filing a notice of discontinuance on December 5, 2005. Pursuant to an order entered January 18, 2006, plaintiff was authorized to commence a new foreclosure action within thirty days. Plaintiff commenced the instant foreclosure action against the Edrich defendants on March 8, 2006. On April 6, 2006, the Edrich defendants served their verified answer with counterclaims and cross claims. In a memorandum decision dated June 14, 2007, Justice Mark I. Partnow granted plaintiff's cross motion for an order: 1) granting summary judgment and dismissing the Edrich defendants' verified answer; 2) appointing a referee to compute; 3) granting a default judgment against the non-appearing defendants and 4) discontinuing the action against the "John Doe" defendants. The memorandum decision was reduced to a settled order dated August 13, 2007. The order provided for the appointment of a referee "to ascertain and compute the amount due to the Plaintiff herein for principal, interest and other disbursements advanced as provided for by statu[t]e and in the Note and Mortgage upon which this action brought."

By order dated November 18, 2009 (Hon. Mark I Partnow, J.), Mr. Zolin was appointed as a successor referee.[FN1] On March 25 and 26, 2010, a hearing was held at the office of the referee which was attended by William Yuris, Esq., counsel for plaintiff, and Jules A. Epstein, Esq., attorney for defendants. At the hearing, Howard Zelcer, principal of plaintiff, and Arnold Ludwig, Esq. testified on behalf of plaintiff. While plaintiff's witnesses were cross examined by the Edrich defendants' counsel, no witnesses were produced on behalf of the Edrich defendants. The referee also received documentary submissions from both parties, including memoranda of law and an affidavit from Mr. Zelcer. On June 29, 2010, the referee issued his recommendation. In the recommendation, the referee found that the following amounts were due: 1) principal in the amount of $214,281.81; 2) interest calculated at a default interest rate of 8.25% per annum from December 2001 but disallowed for two periods, from September 5, 2002 through June 23, 2005 and August 5, 2009 through March 25, 2010; 3) real estate taxes and insurance premiums advanced by plaintiff, as well as interests on those premiums for the applicable periods; and 4) costs incurred by plaintiff for repairs and maintenance of the subject property.The referee noted that the parties did not dispute the principal amount. However, the parties disagreed on the applicable default interest rate. Plaintiff argued that the highest interest rate allowable by law should apply to the period following default pursuant to the terms of the mortgage while the Edrich defendants argued that under the terms of the note, the interest rate of 8.25% should be applied "both before and after" the default date. In pertinent part, the referee stated:

This determination rests on an interpretation of the mortgage and note. Section 2 of the Note provides:

"Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of 8.250%. The interest rate require by this Section 2 is the rate I will pay both before and after any default described in Section 6(b)." Paragraph 11 of the Fixed Rate Note Rider (Note Rider) amends Section 2 providing:

"The second sentence of Section 2 entitled "INTEREST" is hereby deleted and the following shall be added thereto: During the term of this instrument, all interest payments shall be made in advance beginning with the interest due from the date hereof to the 1st day of the next month." [*3]

The parties dispute the meaning of this section. Plaintiff argues that this section eliminates the third sentence of Section 2, thus deleting the provision which allowed the Mortgagor to pay the same amount of interest both before and after default. See Plaintiff's Memo at 4. Defendant argues that the Note Rider is unambiguous and specifically eliminates the second sentence. See Defendants' Reply Memo at 3.

Plaintiff points to paragraph 34 of the Rider to the Mortgage (Mortgage Rider) as evidence that it is entitled to 24.99% interest. This section provides:

"If Lender requires the immediate Payment in full, I agree to pay interest on the entire amount remaining unpaid at the rate state [sic] in the Note or the highest rate then permitted by law, whichever is higher, from the date I failed to keep any promise or agreement made in the Note or in the Mortgage." Plaintiff argues that paragraph 10 of the Note explicitly incorporates the provisions of the Mortgage into the Note, which provides in part:

"In addition to the protection given to the Note Holder under this Note, a Mortgagee, Deed of Trust or Security Deed, dated the same date as this Note, protects the Note holder from possible losses which might result if I do not keep the promises which I make in this Note. That security Instrument describes how and under what conditions I may be required to make immediate payment in the full of all amounts I owe under this Note."

The Edrich defendants argue that even if the Mortgage provides for a higher rate of interest, such higher rate only creates an inconsistency between the Note and the Mortgage. The Edrich defendants further contend that where there are inconsistencies between the terms of the Note and the Mortgage, the rate provided in the Note should control. See Defendants' Memo at 6.

In determining the proper rate of interest where there is an inconsistency between the note and the mortgage, the general rule is that the terms of the note should ordinarily govern.; Adler v Berkowitz, 254 NY 433, 437 (1930); Weiss v Weiss, 206 AD2d 741, 743, 615 N.Y.S.2d 468, 470 (3d Dept. 1994); Beattie v Meeker, 149 N.Y.S. 453 (Sup 1914), aff'd, 164 A.D. 964, 149 N.Y.S. 1070 (4th Dept. 1914). The second and third sentences of Section 2 of the Note state, "I will pay interest at a yearly rate of 8.250%. The interest rate required by this Section 2 is the rate I will pay both before and after any default described in Section 6(b)." Thus, unless the third sentence of Section 2 is deleted by paragraph 11 of the Note Rider, the inconsistencies between the Note and the Mortgage should be governed by the Note, and an interest rate of 8.25% should apply.

I am not convinced by plaintiff's argument that paragraph 11 of the Note Rider deletes the third sentence of the Note's Section 2. In its hearing memorandum plaintiff concludes that "[a]s a result of the language contained in the Rider that portion of the Note which allowed the mortgagor to pay the same amount of interest both before and after default was deleted." See Plaintiff's Memorandum at 4. However, plaintiff offers no evidence or explanation why the words "second sentence" in paragraph 11 of the Note Rider should refer to something other than the "second sentence." Neither does plaintiff [offer] any authority challenging the proposition that where the note and mortgage are in conflict, the terms of the note control.

It may be argued that plaintiff's interpretation is plausible, given that sentences one and two of Section 2 are combined into the first two lines, and the third sentence is set off on the third line. It could therefore be argued that Section 2 of the Note is broken into two distinct sections, and that while the Note Rider specifically refers to the second sentence it was intended to refer to the third. [*4]Defendant's interpretation however, seems more plausible, and plaintiff has not provided sufficient evidence to resolve this ambiguity.

Furthermore, it is well settled that ambiguities are to be resolved against the drafter. 77 NY Jur. 2d, Mortgages, § 89 (citing Berman v Nassau County Dept. Of Social Services, 89 AD2d 553, 452 N.Y.S.2d 123 (2d Dept. 1982); De Clow v Haverkamp, 198 A.D. 83, 189 N.Y.S. 617 (4th Dept. 1921); Bonady Apartments, Inc. v Columbia Banking Federal Sav. and Loan Ass'n, 119 Misc 2d 923, 465 N.Y.S.2d 150 (Sup 1983), aff'd as modified on other grounds, 99 AD2d 645, 472 N.Y.S.2d 221 (4th Dept. 1984)). Accordingly, I recommend that interest at the rate of 8.25% should apply.

Considering the periods over which the interest should apply, the referee noted if the Edrich defendants were not at fault for causing the delay in commencing the instant action, then they should not bear the burden of the delay, and where the plaintiff is responsible for the delay, interest should be disallowed. In pertinent part, the referee noted:

"plaintiff cites prior related litigation as the cause for delay. However, the testimony of attorney Arnold Ludwig, who testified on the second day of hearings, elicited on cross-examination provided a sufficient basis to conclude that this related litigation did not create an impediment to prosecuting the earlier discontinued matter. See March 26 Hearing Tr. at 269-309. Accordingly, interest should be disallowed from the time plaintiff acquired the Note and Mortgage on September 5, 2002 through June 23, 2005. The testimony elicited from Mr. Ludwig provided an ample basis to conclude that in a foreclosure action, the first step after joinder of issue is an application for appointment for a referee. Id. at 269-71. Plaintiff did not do so, and has failed to provide an adequate reason for not doing so. Under the circumstances, it makes little sense to penalize defendants for the failure of defendant to prosecute the action."

The referee did not identify in the recommendation the prior related litigation referred to by plaintiff. The referee noted that an adjournment of the action was granted from August 5, 2009 through March 25, 2010 due to Mr. Zelcer's health issues and determined that it would be unfair to charge default interest during this period. As a result, the referee recommended that interest should be disallowed for two periods: from September 5, 2002 to June 23, 2005 and August 5, 2009 to March 25, 2010.

With respect to other disbursements advanced by plaintiff, the referee noted that under Section 7 of the Mortgage Note, plaintiff may recover with interest, any charges incurred to protect either the value of the property or its rights therein. The Edrich defendants conceded that plaintiff should be entitled to reimbursement of real estate taxes and insurance premiums. The referee determined that interest on those advancements should be disallowed during the periods of delay noted above. The referee found that costs expended for repairing the fence and removal of snow were reasonable based on Mr. Zelcer's testimony that repair and maintenance were necessary to protect the value of the property.

The referee found that plaintiff should not be entitled to the expenditures for water charges. In his recommendation, the referee cited Mr. Zelcer's testimony that water bills were paid in good faith to ensure that the property would remain free of any liens or encumbrances. However, the referee based his final conclusion on Mr. Zelcer's admission on cross-examination:

"On cross examination however, Mr. Zelcer admitted that the property was a vacant lot and hence the water charges were presumably erroneous. See March 25 Hearing Tr. at 160. His testimony further indicated that he was not sure whether he even called (the water company) to find out if these charges were valid. Therefore, plaintiff should not be reimbursed for these expenses. Furthermore, as the charges have been cancelled, plaintiff will undoubtedly be able to receive a full refund on his payment." [*5]

Finally, considering the management fees paid to Providence Realty, the referee recommended that plaintiff should not be entitled to recovery because it failed to explain how such fees relate to the preserving the value of the property or plaintiff's rights and because there was no arms-length transaction between Providence Realty and plaintiff.

On August 13, 2010, the Edrich defendants moved to confirm the recommendation pursuant to Real Property Actions and Proceedings Law (RPAPL) § 1321. Plaintiff cross-moved to reject the recommendation. By order dated April 12, 2011 (Hon. Mark I. Partnow, J.), the Edrich defendants' motion to confirm was denied without prejudice to renew upon submission of the referee's oath and report in proper form.

On the instant motion to confirm, the Edrich defendants provide the oath of referee and referee's report. The report incorporates the recommendation and provides that the sum of $ 390,102.03 dollars, inclusive of interest through June 29, 2010 and exclusive of counsel fees, was due to plaintiff for principal and interest on the mortgage and note. In addition, the report stated the subject premises should be sold in one parcel. The Edrich defendants contend that once the report is confirmed, they would pay the fund into court so that the mortgage can be released pursuant to RPAPL § 1921. In its cross-motion, plaintiff moves to reject those parts of the referee's recommendation and report which found that: 1) the interest rate of 8.25 % should apply both before and after the date of default; 2) interest should be disallowed for the two periods specified; and 3) water charge payments advanced by plaintiff should not be reimbursed. Plaintiff essentially argues that these findings should be rejected because they are inconsistent with its pleadings and the decision granting summary judgment in favor of plaintiff, and the referee exceeded the scope set forth in the order of reference. Plaintiff also argues that those challenged findings should be rejected because the Edrich defendants failed to submit the full record of the referee's proceedings.Plaintiff argues that paragraph 12 of its verified complaint - where it alleged "there is now due and payable to the Plaintiff ... at the default rate as authorized and set forth in the mortgage" - should be controlling because the Edrich defendants never contested specifically this allegation in their verified answer, which was stricken by the August 13, 2007 order granting summary judgment and appointing a referee. Thus, plaintiff contends there was essentially no remaining issue as to the applicable default interest rate yet the referee improperly embarked on an erroneous fact finding inquiry and exceeded the scope of his authority.

Regarding the referee's determination on disallowance of interest for certain periods due to alleged dilatory behavior of plaintiff and the illness of Mr. Zelcer, plaintiff contends that such inquiry is usually reserved for the court and the referee exceeded the scope of the order of reference to compute when he considered these issues. Moreover, plaintiff contends the Edrich defendants caused the delay in litigation by serving repetitive discovery demands in pursuit of a theory that plaintiff was an alter ego of co-defendant Samuel Festinger. With respect to the referee's finding that plaintiff should not be reimbursed for water charge payments, plaintiff argues that the payments were necessary to prevent a water charge lien and that it cannot obtain a refund from the City as it is not the owner of the property.In their opposition to plaintiff's cross-motion, the Edrich defendants argue that the referee's finding of 8.25% as the default interest rate should control because it is supported by case law. The Edrich defendants further submit a copy of ICB's verified complaint in the prior foreclosure proceeding, where ICB alleged that the interest of 8.25% should apply after default and a copy of ICB's payoff letter dated September 4, 2002, where the calculation was made at the interest rate of 8.25% per annum. Further, the Edrich defendants contend that plaintiff's demand for a 24.99% per annum interest rate is a "dangerous departure from public policy." The Edrich defendants argue that plaintiff had a full and fair opportunity to present its evidence at the referee's hearing that plaintiff's submission of affidavits from Samuel Festinger and Margaret M. Fahy is improper as they were not presented at the referee's hearing. Plaintiff urges that the referee failed to develop a proper record upon which he based his findings on which party was responsible for periods of delay. In support, plaintiff argues that the referee failed to review the court file on the prior discontinued foreclosure action. Plaintiff also argues that the Edrich defendants failed to produce any witness or evidentiary material. [*6]

Upon a motion to confirm or reject the report of a referee, a court may confirm or

reject the report, in whole or in part, "may make new findings with or without taking additional testimony" or "order a new trial or hearing" (CPLR 4403). The report of the referee should be confirmed whenever the findings are substantially supported by the record, the referee has clearly defined the issues and has resolved matters of credibility (see Thomas v Thomas, 21 AD3d 949 [2005]; Freedman v Freedman, 211 AD2d 580 [1995]). When, however, a referee's finding is unsupported by the record, the court is within its authority to rejecting such portion of the report (see Borenstein v Rochel Properties, Inc., 216 AD2d 34 [1995]), and may do so upon its own independent review of the record without taking additional testimony (see Jacynicz v 73 Seaman Associates, 270 AD2d 83 [2000]).

"In cases involving references to report, the referee's findings and recommendations are advisory only; they have no binding effect" on the court (Shultis v Woodstock Land Dev. Assocs., 195 AD2d 677, 678 [1993]). Moreover, in a foreclosure action the court is the ultimate arbiter of the issue of the principal sum due on the mortgage and has the power to reject the referee's report and make new findings (see Adelman v Fremd, 234 AD2d 488, 489 [1996]).

In this instance, the referee's finding as to the default rate of interest is based upon a strained interpretation of the loan documents. To recapitulate, section 2 of the note provides: 2. INTEREST

Interest will be charged on unpaid principal until the full amount of principal has been paid. I will pay interest at a yearly rate of 8.250%.

The interest rate required by this section 2 is the rate I will pay both before and after any default described in Section 6(B) of this Note.

Section 11 of the rider to the note provides: 11. CHANGES IN SECTION 2 OF THE NOTE:

The Second sentence of Section 2 entitled : "INTEREST" is hereby deleted and the following shall be added thereto:"During the term of this instrument, all interest payments shall be made in advance beginning with the interest due from the date hereof to the first day of the next month".

Section 34 of the rider to the mortgage provides for a rate of interest following default "at the rate stated in the Note or the highest rate then permitted by law, whichever is higher."

"When interpreting a contract, the court should arrive at a construction which will give fair meaning to all of the language employed by the parties, to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized. A contract should not be interpreted in such a way as would leave one of its provisions substantially without force or effect" (McCabe v Witteveen, 34 AD3d 652, 653-654 [2006][citations and internal quotation marks omitted]). Stated another way,"[i]n construing a contract, one of a courts goals is to avoid an interpretation that would leave contractual clauses meaningless" (Two Guys from Harrison€"N.Y. v S.F.R. Realty Assoc., 63 NY2d 396, 403, [1984]).

The position of the Edrich defendants and the ultimate recommendation of the referee is that the term "second sentence" should be defined as just that €" the second sentence of section 2 of the note, rather than the second line or third sentence of section 2 (the "before and after" phrase) as urged by plaintiff. However, the second sentence of section 2 is rather significant in that it defines the numerical percentage of the interest rate. It is patently incredible that the parties intended that such a crucial component of the instrument be deleted, especially since the note rider adds a provision to the note which expressly references "interest." Further, if the note and rider are to be strictly interpreted, and the second sentence of section 2 defining the interest rate at 8.25% is deleted, then it is unclear why the referee nonetheless found that such numerical percentage still controlled. Accordingly, the court declines to accept the referee's interpretation of the note and his findings as to the default rate of interest. That part of the Edrich defendant's motion to confirm such finding of the referee is denied and that part of plaintiff's motion to reject this finding is granted. [*7]

While the court finds that the interpretation of the referee would run contrary to the parties' intentions, inasmuch as the rider operates to delete the "second sentence," and there is no clear indiction from the language of the instrument that the parties necessarily intended to delete the "before and after" phrase, there exists an ambiguity as to the default rate of interest which must be resolved by this court after receiving extrinsic evidence.

Turning to the other recommendations of the referee which are disputed by plaintiff, namely the refusal of the referee to recompense plaintiff for moneys spent to pay water charges and the referee's suspension of interest over certain periods, inasmuch as neither the Edrich defendants nor plaintiff has submitted with their papers the evidence and documentation constituting the record before the referee (including the transcript of the hearing), it is not possible for this court to determine whether the disputed findings of the referee are in fact supported by the record (see Kalfus v Kalfus, 243 AD2d 324, 325 [1997]; Matter of Shulman v Elco Constr. Corp., 12 AD2d 460 [1960]).

Moreover, the court believes that the referee's examination of issues regarding plaintiff's alleged dilatory behavior in this matter and Mr. Zelcer's illness went beyond the scope of his reference. "A referee has no power beyond that limited in the order of reference (CPLR 4311); he does not have the general jurisdiction in law and equity of the Supreme Court" (L. H. Feder Corp. v Bozkurtian, 48 AD2d 701 [1975]). The order of reference provided that the referee shall "ascertian and compute the amount due to the Plaintiff herein for principal, interest and other disbursements advanced as provided for by statu[t]e and in the Note and Mortgage upon which this action [is] brought" (emphasis added). The referee was thus limited by the order to make his calculations based only upon the terms of the note and mortgage and on statutory law. The referee was not free to make equitable findings based on considerations outside of the terms of the loan documents.

As a result, the Edrich defendants' motion is denied to the extent that it seeks confirmation of those parts of the referee's report with respect to the calculation of the amount of interest on default, the denial of reimbursement of water charges paid by plaintiff and the suspension of interest over certain periods. Plaintiff's cross motion for rejection of these parts of the referee's report is granted. The Edrich defendants' motion to confirm the items in the referee's report not disputed by plaintiff is granted, and the report is confirmed to such extent.

The issue of the default rate of interest and any other equitable issues raised by the parties before the referee shall be set down for determination by this court at a hearing to scheduled in the near future.

The foregoing constitutes the decision and order of the court.

E N T E R,

J. S. C. Footnotes

Footnote 1:Helene Blank, Esq. was originally appointed under the August 13, 2007, but the appointment was declined. Blaise Parascandola, Esq. was appointed as successor referee but thereafter resigned.