G.R.P. v L.B.P.

[*1] G.R.P. v L.B.P. 2013 NY Slip Op 51965(U) Decided on November 26, 2013 Supreme Court, Monroe County Dollinger, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 November 26, 2013
Supreme Court, Monroe County

G.R.P., Plaintiff,

against

L.B.P., Defendant. E. P. Plaintiff, G.R.P., L.B.P, S.N.P & CAPITAL ONE BANK (USA) N.A., Defendants. S.N.P. ASSOCIATES RETIREMENT PLAN, INC. Plaintiff, G.R.P., L.B.P, S.N.P & CAPITAL ONE BANK (USA) N.A., Defendants.



E.P. Plaintiff, v

against

G.R.P., L.B.P, S.N.P & CAPITAL ONE BANK (USA) N.A., Defendants.



S.N.P. ASSOCIATES RETIREMENT PLAN, INC. Plaintiff, v

against

G.R.P., L.B.P, S.N.P & CAPITAL ONE BANK (USA) N.A., Defendants.



2011-08834



Gregory Mott, Esq.

Davidson & Fink LLP

28 East Main Street

Rochester, NY 14614

Attorney for Plaintiff Husband

Michael T. Hagelberg, Esq.

70 Linden Oaks Drive, Suite 300

Rochester, NY 14625

Attorney for Defendant Wife

Michael A. Wolford, Esq.

Wolford Law Firm LLP

16 East Main Street, Suite 600

Rochester, NY 14614

Attorney for the Third-Party defendants

S.N.P. ASSOCIATES RETIREMENT PLAN, INC., and S.N.P. and the foreclosing plaintiff E.P.

Richard A. Dollinger, J.

Whenever the real purchaser - the one who pays the price - is under a legal or even a moral obligation to maintain the person in whose name the purchase is made, equity raises the presumption that the purchase is intended as an advancement or gift . . . .

Rochester Native John N. Pomeroy [FN1] 2 Treatise on Equity Jurisprudence par. 1039;cited in Marans v. Newland, 141 Mont. 32, 38 (Mon. 1962).[*2]

When do intra-family loans from parents to their son and daughter-in-law, secured by a mortgage which is never paid, become gifts that impact equitable distribution of the equity in the couple's home? The answer depends on equity and which source of equitable relief a court elects to tap to decide the question.

The facts in this case, spread over decades, are undisputed.[FN2] On August 31, 1992, the couple were in the process of buying a home. The husband's father, a wealthy and successful entrepreneur, decided to help his son, daughter-in-law, and their young children in moving into the home. The husband's father arranged a $47,000 transfer to the couple through an entity identified as S.N.P. Associates Retirement Plan, Inc. (Hereafter "SNP"). There is no evidence before this court on how the money was advanced. There is no check from any bank account evidencing the advance of funds from SNP to the couple. At the time the father-in-law advanced the funds, he had the couple sign a mortgage on the house they were acquiring. The interest rate on the mortgage was one per cent. The mortgage provided that the couple would make annual payments of $470 constituting interest only until August 2022 when the entire balance, plus all unpaid interest, became due and payable. The remainder of the terms are standard terms on a Bloomberg form.[FN3]

For five years, the annual payment was never made. There is no evidence that the father-in-law sought payment of the annual amount from his son or daughter-in-law.

In 1997, the couple wanted to move and needed additional funds to do so. In another generous gesture, the husband's mother advanced an additional $100,000 to her son and daughter-in-law top facilitate their purchase of a second home. The mother-in-law requested that the couple sign a mortgage for $100,000. The terms of the second mortgage given by the couple to the husband's mother mirrored those of the earlier mortgage given to SNP. It provided that the couple would make annual payments of $1,000 constituting interest only until May 2027, when the entire balance plus all unpaid interest became due and payable. The husband testified during depositions that, at the time his mother advanced the funds, he never received any check or payment from his mother, and he testified that he understood that the advanced funds were transferred by his mother directly to a third party.

On the same day that the mother-in-law advanced the $100,000, the couple also signed a mortgage modification and spreader agreement regarding the first mortgage from SNP. In that agreement, the couple agreed that the mortgage from SNP would be transferred from their first home to their new home. The father-in-law signed the document on behalf of SNP and described himself as the "chairman" of that entity. In summary, when the couple bought their second house, they had two mortgages that originated in family members: the SNP mortgage and the mother-in-law mortgage. The [*3]couple also had a first mortgage, financed through bank which provided the additional funds to acquire the second home.

Six years passed. In 2003, the father-in-law suggested to his son that the first mortgage from the bank should be refinanced for a better interest rate. The parties then sought refinancing but, according to the husband, the bank, in order to grant the lower rate, insisted that the father-in-law be added to the title. In a subsequent deed [FN4], the husband and wife added the husband's father to the title to the marital residence. The husband admitted that the couple did not have sufficient income to qualify for any refinancing and that, at that time, his father was paying the first mortgage to the bank. In the text of the deed, the husband and wife conveyed their interest to themselves, and conveyed some interest to the husband's father. The indenture provides that the property is conveyed to the husband by name and the wife by name. After the wife's name, there is a handwritten note that apparently reads "as husband and wife." There are no initials on this handwritten note. The deed then has a second insertion, after the couple's address, which apparently reads "as joint tenants with rights of survivorship." There is a written word after the word "survivorship," but it is illegible to the Court. The remainder of the deed then contains the husband's father's name and his address. There is no evidence that either the husband or the wife initialed the handwritten material on the front page of the deed. The second page of the deed contains the signatures of the husband and wife, both notarized. The deed was filed in the Monroe County Clerk's Office.[FN5]

During the time that the couple lived in their first home, neither the couple - nor anyone else - ever paid a penny on the first mortgage to SNP. During the time that they lived in the second home, no one paid even a farthing on either mortgage. In addition, while living in both homes, the husband's father paid the bank mortgage on both houses. From the time that they bought their first house until this divorce, the couple did not pay any mortgage to any entity. There is no evidence that this couple ever discussed any mortgages with the husband's parents from 1992 until the divorce was commenced.

Whatever prompted the parties to ignore the mortgages and the payments required under them, it all changed when the divorce was commenced by the husband in July 2011. In the matrimonial action, the wife moved for temporary support and asserted a claim to the equity in the marital residence. During preliminary conferences, she claimed that the mortgages - heretofore never paid and never enforced - were "gifts" to the couple and hence, she was entitled to her marital share of the equity in the marital residence without considering the liens created by the family mortgages.

Almost simultaneously — according to the wife — but only apparently coincidentally [*4]— according to the husband — the moribund mortgages which had never been paid by the couple, suddenly came to life. SNP, acting through its counsel, served a notice of acceleration of debt on the note and mortgage on or about December 15, 2011, stating that the couple owed $56,976.74, in monthly unpaid payments, late fees, and the principal balance. The letter also contained an statement that the "undersigned" - SNP - "had advanced or caused to be advanced payments on your first mortgage . . . in the total amount of $102,071.53, for a total sum outstanding equal to $159,048.27."[FN6] On the same day, less than a month after the wife had applied to this court for temporary relief, the mother-in-law also served a notice of acceleration claiming that $115,246.37, was owed under that mortgage. Suddenly, competing legal actions mushroomed beside this divorce action. Faced with these threatened foreclosure actions, the wife pre-emptively commenced a third-party action against her in-laws and SNP. In that action, the wife sought a declaration that:

(A)the SNP mortgage and the mother-in-law mortgage were never intended to be loans and both were gifts;

(B)SNP was not authorized to make the loan; and

(C)the statute of limitations and laches barred collection on either note and/or mortgage.

The complaint also alleged that the deed from the couple to themselves and the father-in-law was invalid because it was not signed before a notary, and because there was no consideration for the transfer. She also asserted that the 2003 deed, granting the father-in-law an interest in the marital residence, should be declared null and void.

The husband's mother also commenced a foreclosure action, listing her son, daughter-in-law, and her husband as defendants. The wife promptly answered the complaint. Her son never answered and was in default until January 2013. Despite the fact the that husband - his mother's son - failed to answer the allegations, the mother-in-law never moved for a default judgment against her son on the note and mortgage.

The wife's answer asserted affirmative defenses that the complaint failed to state a cause of action, the relief was barred by the statute of limitations, and that the wife did not have the capacity to sign the mortgage. In addition, although not set forth in her answer, the wife during her response to the pending motions, claims that the father and mother-in-law failed to comply with CPLR § 3408, which requires certain lenders to engage [*5]in settlement conference before the court.[FN7] Eventually, the husband/son also answered, albeit late. In his answer, he denied certain allegations and asserted that his mother's claim failed to state a cause of action, was barred by the statute of limitations, and in a curious defense, claimed that his mother "did not have the capacity to enter into a note and mortgage" with her son.[FN8]

After this action was joined, the mother-in-law was deposed and she testified as follows:

(A)she has no proof and no recollection of where the $100,000 advanced to underwrite the mortgage originated;

(B)she never asked for payment; and

(C)she had made and continued to make gifts to her son, paying for vacations and recently had provided $40,000 to remodel the couple's home.

SNP also commenced an action to foreclose on its mortgage. In the complaint, SNP alleges that the mortgagee was "a corporation organized and existing under the laws of the State of Georgia." The wife denied the allegation that the plaintiff was a Georgia corporation and asserted the same three defenses as she alleged in response to the foreclosure by her mother in law. After this action was joined, the husband's father was also deposed. He testified that:

(A)the plaintiff in the action was not a corporation in Georgia or any other state;

(B)there is no evidence that the entity entitled SNP had made any advances of funds to the couple; and

(C)prior to the notice of default, SNP had never demanded any payments on the mortgage.

During depositions, the wife also testified about the funds from her in-laws, admitting that:

(A)regarding the SNP loan in 1992, she was told that "they [the in-laws] were helping "us purchase this house" and "it had to be done this way because there's gift taxes" and that's how it was accomplished;

(B)she could not recall whether the couple was advanced any amount for the purchase of the first house;

(C)she knew that the mother-in-laws was "assisting" with $100,000 in the purchase of the second house;

(D)she was never told the money was a gift, but said "I guess implied since we never ever paid on anything;" [*6]

(E)when asked whether it was a loan, the wife replied that "it was I guess presented that way, but I never thought of it - I thought of it as a gift for a bigger house for their grandchildren to live;" and

(F)she testified that she was told by her husband that she had to sign the note and mortgage so that his parent could avoid any gift taxes.

During the entire pendency of this action, the stream of gifts from parents to their son continued unabated. The wife alleges that her father-in-law and her husband recently took a trip to Mount Kilimanjaro, with all the expenses paid by his parents. This allegation, while not essential to the resolution of this matter, is unrebutted. The wife also alleges that both mortgages were considered gifts to avoid federal and state gift taxes. However, the husband when asked about the mortgages during depositions denied the advanced funds were gifts. The husband/son testified that the funds underwriting both mortgages were never given to him and that he understood his parents paid the funds directly to third-parties. Importantly, there is no evidence that SNP or the mother-in-law ever filed a gift tax return or any evidence, in this record, as to how SNP or the mother-in-law accounted to taxing and other authorities for the funds that underwrote the mortgages. .

After the depositions, the wife moved initially for a judgment declaring both mortgages to be invalid and unenforceable. In response, the mother-in-law moved for summary judgment on her foreclosure action. SNP did not move for summary judgment on its mortgage, but the validity of the SNP mortgage was challenged by the wife's motion for summary judgment.

SUMMARY JUDGMENT ON THE SNP MORTGAGE

In considering the first prong of the wife's motion for summary judgment to declare the SNP loan and mortgage null and void, this court notes that there is no evidence that the entity which allegedly loaned this money existed either at the time of the loan or now. There is simply no evidence that SNP ever existed. There is no certificate of incorporation, no evidence of any by-laws, and no evidence of any resolution authorizing any corporate loan to the couple. There is no evidence of any shareholders, officers or directors of this entity, or any evidence that any person is authorized by this entity to sign a release of the loan or a discharge the mortgage, even upon payment. The husband, when asked about the lender under this note, admitted, "I thought it [the money loaned] was from my dad and not this retirement plan which I didn't know even existed."

During questioning at oral argument, the counsel for SNP admitted that there was no evidence of the existence of the plaintiff in this action. He suggested that "some form of reformation" may be required to rectify the lack of standing of the plaintiff. There is no cross-motion for reformation and even if there was, this court would not consider it. The plaintiff had ample opportunity to move to substitute an appropriate plaintiff in this action, if one existed. SNP argues, in the alternative, that the couple would be unjustly enriched if they were not required to repay the mortgage. However, it would be difficult to find any unjust enrichment when a family entity controlled by the husband's father - albeit one without an actual existence - extended funds to his son and his son's wife more than 20 years ago to enable them to buy a house that they otherwise could not afford. To find unjust enrichment, this court would, among other findings, have to conclude that the extension of these funds from the parents to their son and his wife - against a backdrop of lifelong gifts from parents to their son - is against equity and good conscience. Georgia [*7]Malone & Co., Inc. v Rieder, 19 NY3d 511, 516 (2012) (to establish unjust enrichment, a party must demonstrate it is against equity and good conscience to permit the other party to retain what is sought to be recovered). Such a finding in this case would be a topsy - turvy exercise in inequity and irrationality. The court would be compelled to conclude that the son has been "unjustly enriched" for virtually his entire adult life rather than, as it more appropriately appears, financially chained to his extraordinarily generous parents. This court declines to find that this couple were "unjustly enriched" by the SNP mortgage.

Furthermore, SNP, in its brief to the court, suggests that equity would demand that the couple repay the husband's father directly. Although invited to travel down that path, this court will not do so. The husband's father, a wealthy and sophisticated entrepreneur, apparently chose SNP as a vehicle to funnel funds to his son and his family. Now, he faces the legal consequences of his own choice: SNP cannot recover those funds because the entity through which he chose to loan them does not exist. This court will not relieve him of his misjudgment regarding the provision of these funds under a claim of "equity."

Because the plaintiff - SNP - lacks standing to bring this action, and does not exist, there is no proper party before this court to pursue the claims for unpaid amounts under the note. The wife's claim to void the note is granted as to her and the further motion to declare the mortgage null and void and have it discharged as a lien against her interest in the property is similarly granted. The husband has made no motion for any relief before the court. At this time, the court offers no opinion on the validity of the SNP mortgage as a lien against the husband's interest in the property.

SUMMARY JUDGMENT ON THE MOTHER-IN-LAW MORTGAGE

In considering the advance of funds from the husband's mother, the lack of standing, which dooms the claim by SNP, does not defeat her claim to foreclose. The fact that the mother-in-law cannot discern the source of the funds for the mortgage does not defeat her claim either. The husband's mother's mortgage was signed by the wife and her signature was notarized. Redrock Kings, LLC v Kings Hotel, Inc., 109 AD3d 602 (2nd Dept. 2013) (the presentation of the subject note and mortgage, and proof of the defendants' default shifts the burden to the defendants to raise a triable issue of fact); EverBank v Porter, 2013 NY Slip Op 32451 (U) (Sup. Ct. Suffolk Cty. 2013). On its face, the mortgage is valid and enforceable as a lien against both the husband's and the wife's interest in the property.

As a first affirmative defense, the wife argues that these funds, advanced when the couple bought a second house, were in fact a gift to the couple and the gift was only clothed in the note and mortgage to allow the husband's parents to avoid paying gift taxes. The wife's argument has a strong visceral appeal. The history of repeated large gifts from the parents to their son and his family clearly raise a strong suspicion that the advance of money to buy a new home, followed by nearly 15 years without any payments and apparent forgiveness - if not forgetfulness - by the husband's mother militates in favor of a finding that the $100,000, loan was a gift to both the husband and wife.

In considering this defense, the court looks to two theories of analysis. The first is New York's common law in which the crucial burden of proof rests with the recipient of the funds — the wife in this instance. A second source of guidance with compelling equitable appeal lies in the "loan as gift" analysis under the federal Internal Revenue Code ("IRC") [*8]which assigns the burden of proof to differentiate intra-family fund transfers as either gifts or loans to the originator of the funds. In this court's view, the final determination in this case — given competing factual accounts of the intentions of the parties — rests in large measure on which of these legal theories should be applied. As the ensuing analysis reveals, the ascribing of the burden of proof dictates the final legal result.

Under New York law, the wife, as the party advancing the concept of a gift, must prove three essential elements: donative intent, delivery sufficient to divest the donor of dominion and control over the property, and acceptance. Gruen v Gruen, 68 NY2d 48 (1986); Matter of Szabo, 10 NY2d 94, 176 NE2d 395, 217 NYS2d 593 (1961). In this case, the wife, as the recipient, bears the burden of proving each element of the gift by "clear and convincing evidence," which is, as other courts confirm, "a heavy burden." Matter of MacGregor, 119 AD2d 909 (3rd Dept. 1986); Matter of Brion, 37 Misc 3d 1218 (A) (Sup. Ct. Kings Cty. 2012) (evidence of donative intent must be clear and convincing). The proof must be of great probative force and must clearly establish every element of a gift . Matter of Abramowitz, 38 AD2d 387 aff'd 32 NY2d 654 (1973).

Under the standards for summary judgment, this court is required to search the record and find some evidence of a donative intent by the mother-in-law to treat the advanced funds as a gift. A review of the deposition testimony, relied on both parties, is equivocal on this question. This court can find no direct evidence that the mother-in-law intended an outright gift at the time the money was advanced. The mother-in-law never said the advanced funds were intended as a gift. Oddly, she was never asked that specific question — "what do you intend by advancing these funds?" — during the depositions. She simply identified the third-party summons and complaint and said: "it's regarding the mortgage, the money I lent." The wife's testimony of her mother-in-law's donative intent was similarly imprecise: the wife never stated, during depositions, that she knew the loan was a gift. She testified that she had to "guess" about the nature of the money advanced. There is no evidence that the wife ever had any conversation with her mother-in-law or, for that matter, her father-in-law, about the $100,000, in advanced funds, either at the time of the transfer or thereafter. There is no evidence that the wife ever discussed the advanced funds with her husband. There is no written acknowledgment of a gift from the wife to her mother-in-law. Under this evidence, viewed most favorably to the wife's claim, there is simply no clear and convincing evidence of any donative intent by the mother-in-law.

In fact, there is circumstantial evidence that the wife knew the $100,000 was advanced to the couple as a loan. The wife signed the loan documents and the mortgage that secured repayment of this putative debt. While the wife alleges that the advanced money was a gift, her actions - signing the note and mortgage - and the uniform sworn testimony by her husband and his parents are some evidence that this advanced money was a loan. Central State Bank v. Kilroy, 57 AD2d 940 (2nd Dept. 1997) (conjecture, hope, and suspicion are insufficient to raise a triable issue to defeat summary judgment); Liantonio v Slater Group Inc., 2010 NY Slip Op 33004 (U) (Sup. Ct. Richmond Cty. 2010) (suspicion, or speculation is insufficient to defeat summary judgment). These facts, under New York law, are circumstantial evidence that the advanced money was a loan and that the note and mortgage remain enforceable against the couple and the wife's marital interest in the residence remains under the mortgage lien, subject to the wife's claim of [*9]other defenses.

In considering the analysis of whether this intra-family loan is a gift, this court, before drawing a final conclusion, is compelled to also examine the more detailed and discerning analytical framework that has been routinely applied to intra-family financial transactions under the Internal Revenue Code. Sizelove v. Comm'r, T.C. Summary Opinion 2008-15. 2008 Tax Ct. Summary LEXIS 15 (2008). Under the IRC, purported "loans" between family members are subject to rigid scrutiny and are presumed to be gifts. Estate of Van Anda v. Comm'r, 12 T.C. 1158, 1162 (1949) aff'd, 192 F.2d 391 (2nd Cir. 1951) (per curiam); Estate of Muhammad v. Commissioner, 965 F.2d 520 (7th Cir. 1992). An intra-family transfer is: [A] circumstance which has always prompted special scrutiny by the courts precisely because the genuineness of the transaction cannot reasonably be inferred from any circumstantial assurances of business purpose. A close look at the transaction is, therefore, unavoidable; the disparities in value that we ultimately come to, when taken together with the plaintiffs' full control over both ends of the transaction, are inconsistent with any form of property transfer save that of a gift. To put it another way, since the visible aspects of the transaction do not negate the existence of donative intent, there exists no ground upon which to conclude that the transaction was prompted solely by business considerations.

Fehrs v. United States, 620 F.2d 255, 260 (1980). Under the IRC, the presumption may be rebutted by proving that at the time of the transaction there existed a real expectation of repayment, an intent to enforce collection of the "debt" and that intention did comport with the economic reality of creating a debtor-creditor relationship. Calumet Industries, Inc. v. Commissioner, 95 T.C. 257 (1990) (the essential ingredient is a factual determination whether the parties in good faith intended the advances to be loans); see also C. M. Gooch Lumber Sales Co. v. Commissioner, 49 T.C. 649, 656 (1968); Estate of Costanza v. Comm'r, 320 F.3d 595, 597 (6th Cir. 2003) (the giving of a note or other evidence of indebtedness which may be legally enforceable is not in itself conclusive of the existence of a bona fide debt and it must be clearly shown that it was the intention of the parties to create a debtor-creditor status); Van Anda v. Commissioner, 12 T.C. 1158 (1949); see also Estate of Flandreau v. Commissioner, 994 F.2d 91, 93 (2d Cir. 2993). To overcome this presumption, the taxing authorities require "proof . . .[that] must be certain, definite, reliable, and convincing, and leave no reasonable doubt as to the intention of the parties." Mercil v. Commissioner, 24 T.C. 1150 (1955).

In this regard, the tax courts, while evaluating intra-family transactions, have repeatedly held that the existence of loan documents or a written debt instrument, security, or provision for payment of interest are not controlling. Van Anda v. Commissioner, 12 T.C. at 1162 (the giving of a note or other evidence of indebtedness which may be legally enforceable is not in itself conclusive of the existence of a bona fide debt). See also Wolff v. Commissioner, 26 B.T.A. 622 (1932). As one court noted, formal evidences of indebtedness are "at best clues to proof" of the ultimate fact. Stinnett's Pontiac Service, Inc. v. Commissioner, T.C. Memo 1982-314 (Tax Ct. 1982). [*10]

As this analysis indicates, the cases decided under the federal tax code constitute a shift in the burden of proof otherwise applicable under New York's common law. Under the federal code, an intra-family advance of funds is presumed to be a gift. The burden of proof rests with the party asserting that a loan was advanced and they must prove, by the preponderance of the evidence, that a loan was intended. Consistent with this approach, the federal court in Welch v. Commissioner, 204 F.3d 1228 (9th Cir. 2000) identified the following factors to assess whether a transaction is a bona fide loan:

(1)whether the promise to repay is evidenced by a note or other instrument;

(2)whether interest was charged;

(3)whether a fixed schedule for repayments was established;

(4)whether collateral was given to secure payment;

(5)whether repayments were made;

(6)whether the borrower had a reasonable prospect of repaying the loan and whether the lender had sufficient funds to advance the loan; and,

(7)whether the parties conducted themselves as if the transaction were a loan.

Id. at 1230; citing Crowley v. Commissioner, 962 F.2d 1077, 1079 (1st Cir. 1999). The Court in Welch v. Commissioner added: "although the factors are non-exclusive and no single factor is dispositive, these indicia of a bona fide loan form a general basis upon which courts may analyze a transaction." Welch v. Commissioner, 204 F.3d at 1230. As the United States Tax Court succinctly summarized, in analyzing the various variables:

[S]ecurity, interest, a fixed repayment date, and a repayment schedule suggest that the parties intended a bona fide loan (citations omitted). A lack of security, a low interest rate, and an open-ended repayment date suggest otherwise.

Kaider v. Comm'r, T.C. Memo 2011-174 (Tax Ct. 2011)

In applying this analysis here, the first fact that shades the determination is that the advance of funds, although secured by the mortgage,[FN9] contains an interest rate that is well below market rates. The one percent rate on the note in 1997 was only a small fraction [*11]of the market interest rates in 1997.[FN10] In a similar case, the tax court examined a one percent loan and concluded that the significantly-below-market-rate interest demonstrated that the transaction was not intended as a loan. Todd v. Commissioner, 486 Fed. Appx. 423, 426 (6th Cir. 2012). A low interest "loan" never called for payment by the intra-family lender evolves, over time, into a "gift." The United States Supreme Court, in resolving a "gift v. loan" conundrum, noted: At the moment an interest-free demand loan is made, the transferor has not given up all dominion and control; he could terminate the transferee's use of the funds by calling the loan. As time passes without a demand for repayment, however, the transferor allows the use of the principal to pass to the transferee, and the gift becomes complete.

Dickman v. Commissioner, 465 U.S. 330, 351 n. 7 (1984). The same logic that deems a "no-interest loan" — which is unpaid for a lengthy period of time — to be declared a gift is equally compelling when applied to a "extraordinarily low interest loan" which is never paid for 15 years The low interest factor, combined with a lengthy period of non-payment, militates against finding that the funds advanced by the mother-in-law were a loan.

Other evidence supports the same conclusion. There was no fixed schedule of repayment. There is no evidence of an amortization schedule for the loan. While the note envisioned annual payments, there is no evidence that the husband's mother ever demanded the payments or the couple ever even offered to pay them, much less actually pay them . This fact is not surprising given the history of the borrowers — husband and wife — absolute dependence on the husband's father for their livelihood. Estate of Raab v. Commissioner, T.C. Memo 1985-52, 1985 T.C. Memo 52, 49 T.C.M. (CCH). 662, (P-H) par. 85,025. See H & M, Inc. v. Commissioner, T.C. Memo 2012-290 (Tax Ct. 2012) (evidence that a creditor didn't intend to enforce payment of the note or was indifferent as to when the note was to be repaid shows there wasn't a valid loan).[FN11] Saviano v. Commissioner, 765 F.2d 643, 654 (7th Cir. 1985), affg 80 T.C. 955 (1983) ("we think that the notes executed by the daughters were not intended to be enforced and were not intended as consideration for the transfer by the petitioner, and that, in substance, the transfer of the property was by gift"). There is also no evidence the husband and wife had [*12]any reasonable prospect of repaying the loan unless their home was sold. As the Court noted in its prior opinion, in the past two years the husband has not earned more than $35,000, and the wife, no more than $25,000.[FN12]

Finally, there is no evidence that the husband's mother treated the advance of funds as a loan. In her deposition, she could not recall the source of the funds she advanced. She kept no records of the loan or any schedule of payments. There is no evidence that she asked her son and daughter-in-law to pay outstanding interest. The mother-in-law never initiated a discussion with the couple about the amounts due under the note and mortgage, either at the time of its advance or at any time until she issued the acceleration notice. There is no evidence that she ever expected to be repaid, the most important criteria to declaring the advanced sum as a gift rather than a loan. Gassaway v. Comm'r, T.C. Memo 2013-13 (Tax Ct. 2013)

In short, it seems an easy step to conclude that the in-laws had full control over both aspects of the transactions. They advanced the money, they waived any payments on the note, they never discussed the advanced funds with their son or his wife during the 15 years that it was in place, they never mentioned repayment of the loan during this time, and they never gave any indication that they would seek to collect on the note. As stated by the Seventh Circuit in Fehrs v. United States: "full control over both ends of the transaction is inconsistent with any form of property transfer save gift." Fehrs v. United States, 620 F.2d at 260. Moreover, even though the "formalities of such a transaction may have been observed and the "debt" was adequately secured, if there was no real intention of making repayment or enforcing the obligation, these facts [that the advanced funds have purported security behind them] are of little significance." Van Anda v. Commissioner 12 T.C. at 1163.As this analysis demonstrates, this Court, in deciding which body of law to apply, dictates the result. If the wife bears the burden of proof, as New York common law suggests she should, the wife cannot assemble enough facts to meet her burden that the mother-in-law had a donative intent at the time she advanced the funds and demanded a signed note and mortgage in return. If the IRC analysis is applied, the husband's mother cannot overcome the presumption that the advanced funds, given in an intra-family transaction, were intended to be a gift. In this Court's view, the distinction between the two theories lies in evaluating when donative intent — sufficient to infer a gift exists. Under a strict reading of New York law, the recipient must establish donative intent at the time of the transfer. Under the IRC analysis, donative intent can be inferred in both the terms of the transaction — the unrealistically low interest rate — and post-transaction conduct of the party advancing the funds — the neglect to collect any amounts due and waiving payments and interest. If the terms of the transaction and the actions of donor, after advancing the funds, are inconsistent with debtor-creditor relation, then the advanced funds are not a loan.

In electing which theory to apply here, this court is mindful that this issue comes before it in a foreclosure action. Sudit v Labin, 2013 NY Slip Op 51824(U)(Sup. Ct. Kings Cty. 2013) (a foreclosure action is equitable in nature and triggers the equitable powers of the court) citing Notey v Darien Constr. Corp., 41 NY2d 1055, 1055-1056 (1977); see also [*13]Norstar Bank v Morabito, 201 AD2d 545, 546 (2nd Dept. 1994) (once equity is invoked, the court's power is as broad as equity and justice require). As an action in equity, this court has broad powers to fashion an appropriate remedy. This broad power in foreclosure proceedings is multiplied when the foreclosure action is viewed against the backdrop of the wife's rights to equitable distribution under the Domestic Relations Law.[FN13]

This court is perched in the same posture as the federal tax courts. The federal tax courts can not allow a family member to evade the reach of the government's taxing power by fashioning their own labels to disguise what is otherwise a taxable transaction. Similarly, this court, empowered to achieve equity under both the foreclosure laws and the Domestic Relations Law, cannot allow a parent to disguise a gift as a loan to defeat their daughter-in-law's claim to equity in the marital residence. Allowing these beneficent parent to cast this advance of funds as a demand loan when to do so would reduce the daughter-in-law's claims to marital property would be inconsistent with the rules for equitable distribution under New York law. As another court suggested in reviewing the Internal Revenue Code: The freedom to arrange one's affairs to minimize taxes does not include the right to engage in financial fantasies with the expectation that the Internal Revenue Service and the courts will play along. The Commissioner and the courts are empowered, and in fact duty-bound, to look behind the contrived forms of transactions to their economic substance and to apply the tax laws accordingly . . .

Saviano v. Commissioner, 765 F.2d 643, 654 (7th Cir. 1985), aff'g 80 T.C. 955 (1983), cited in Tribune Co. v. Commissioner, 125 T.C. 110. Similar guidance comes in a more colorful comment by the Fifth Circuit: [the courts should not tolerate] a formalized attempt to achieve the desired tax result while lacking in necessary substance and merely parading under the false colors of a bona fide loan.

Tomlinson v. 1661 Corp., 377 F.2d 291, (5th Cir 1967). If this court substitutes the word "equitable distribution" for "tax" and the words "equitable distribution court" for "commissioner or Internal Revenue Service," the above-quotes easily encapsulate the quest of this Court in this case. The "financial fantasy" that this advance of money was [*14]intended as a loan cannot defeat this court's quest to equitably distribute the wife's share of the marital residence. This court will not let this advance of funds by then-kind and generous parents to be paraded under the "false colors" of a loan, when to do so deprives the wife of her marital share of equity in the residence. Equity would not permit it; neither will this court.

In deciding whether to engraft the presumption of intra-family transfers as gifts under the Internal Revenue Code into New York's common law of foreclosure and equitable distribution, this court, recognizing the extent of the new path down which it walks, is comforted by a recent decision from the Supreme Court in Suffolk County. In Cohen v. Cohen, 34 Misc 3d 1207(a)(Sup.Ct. Suffolk Cty. 2012), the court wrestled with many of the issues presented here involving an intra-family transaction. The Court there quoted two federal cases: Estate of Musgrove v. United States, 33 Fed. Cl. 657 (1995) (regarding the burden of proof to overcome the presumption of an intra family gift) and Maxwell v. Commissioner, 3 F.3d 591 (2d Cir. 1993) (if there is an implied agreement not to collect on the loan and no payments were ever made, the note has no value and a gift can be presumed). In this court's view, this holding is some evidence that the New York courts, facing a legal dispute routinely handled by a specialized federal court, can — and should — import legal theories from a limited jurisdiction federal court that has spent decades deciphering whether intra-family fund advances are gifts or loans. The holdings under the Internal Revenue Code provided a proper gloss to New York's common law rules regarding intra-family gifting in the context of achieving equitable distribution of marital assets under the Domestic Relations Law. Here, the presumption dictates that the husband's mother's advance to her son and daughter-in-law, when they were buying a new house for her grandchildren, was an intra-family gift. Under the equitable powers granted to this court under common law foreclosure principles, and the concomitant expansive equitable powers under the Domestic Relations Law, the note and mortgage are not a valid or enforceable lien against the wife's interest in the marital residence.

Because this Court grants summary judgment on the wife's affirmative defense that the advance of funds was a gift and not a loan, this court declines to consider the remaining defenses asserted by the wife. In addition, this court notes that while the note and mortgage are determined to be unenforceable against the wife, the ultimate question of its validity may be mooted through application of the Domestic Relations Law. Equitable distribution does not require this court to divide the note and mortgage evenly between the husband and wife, or require the wife to repay any portion of the loan or dictate that the mortgage reduce the wife's share of the equity in the principal residence. Ashmore v Ashmore, 92 AD3d 817 (2nd Dept. 2012) (equitable distribution does not mean equal distribution); Marcellus-Montrose v Montrose, 84 AD3d 752 (2nd Dept. 2011); Martinson v. Martinson, 32 AD3d 1276 (4th Dept. 2006);Krolikowski v Krolikowski, 2013 NY Slip Op 6455 (4th Dept. 2013) (the trial court is vested with broad discretion in making an equitable distribution of marital property). This court could, after a trial when all the facts are before the court, equitably distribute the entire note and mortgage held by the mother — and that held by SNP — to the son, requiring him to repay the entire debt. This would avoid a consequence in which the mother, after obtaining repayment of her loan and having required this court to shrink the wife's equitable interest in the marital residence, [*15]could give the $100,000 to her son, without requiring any loan documents, after completion of the divorce. There is ample evidence in the overall record of this longstanding case to support a distinct probability of future gifting by the mother-in-law (or her husband) to the son. As an earlier opinion from this court made clear, the husband/son has been obtaining an estimated $75,000 annually in "gifts" from his parents during the course of the couple's marriage.[FN14] It would be manifestly inequitable to have the loan reduce the wife's claim to the ample equity in the marital residence and, then when the divorce is over, have the mother-in-law forgive the loan or "re-gift" it. Given the procedural posture of this case, this court offers no further guidance on the ultimate equitable distribution of martial assets and debts and expects that these matters will be resolved in either future settlement discussions or at trial. Based on the foregoing, this court holds as follows:

(A)the claim for foreclosure by the plaintiff SNP is denied and the claim dismissed;

(B)the wife's cross-motion for summary judgment dismissing the claim for foreclosure by SNP against her and any marital or other interest that she possesses in the marital residence is granted;

(C)the mother-in-law's motion for summary judgment on her claim for foreclosure on the marital residence is denied; and,

(D)the wife's motion for summary judgment on her affirmative defense declaring the advanced funds to be a gift and dismissing the mother-in-law's claim for foreclosure against wife's interest in the marital residence is granted, and her remaining affirmative defenses are mooted by the decision of this Court.

SUBMIT ORDER ON NOTICE

Dated:November 26, 2013_______________________________

Richard A. Dollinger, A.S.C.J.

[*16] Footnotes

Footnote 1:John Pomeroy wrote one of the most recognized treatises on Equity during the 19th Century. Born in Rochester, he practiced law with Henry R. Selden, who became a Court of Appeals judge and eventually defended Susan B. Anthony in her celebrated voting rights case. After he left Rochester, Pomeroy became the dean of Hastings Law School in California and published his Treatise of Equitable Remedies in 1905. The Harvard Law Reviewed commented on this book:

The hopes of the author have undoubtedly been realized and clear and accurate statements of the principles of equity have been of the greatest service in preventing the degeneration of equity and that confusion of legal and equitable ideas in this country. The work has been cited and relied on by the courts in innumerable cases, and is certainly the greatest work on the subject ever produced.

19 Harvard Law Rev 481(1906). Aged more than a century, Pomeroy's work still holds sway among New York's courts considering equitable distribution and foreclosure actions. Wells Fargo Bank v Hodge, 92 AD3d 775 (2nd Dept. 2012) (foreclosure); Leibowits v.Leibowits, 93 AD2d 535 (2nd Dept. 1983) (equitable distribution); E.C.-P. v P.P., 33 Misc 3d 1233 (A), p. 32 (Sup. Ct. Nassau Cty. 2011) (equitable distribution).

Footnote 2:This Court previously decided a number of questions regarding intra-family gifts in this case which provide a factual background for this opinion. G.R.P. v L.B.P. 36 Misc 3d 1217(A)(Sup. Ct. Monroe Cty. 2012).

Footnote 3:The Bloomberg forms for real estate matters, published in New York, have been described as "historic and familiar." Scalacustom Props., Ltd. v Birol, 2013 NY Slip Op 32730(U)(Sup. Ct. Suffolk Cty 2013).

Footnote 4:While this Court understand the widespread use of Bloomberg forms, the pre-printed forms, if not reviewed, can contain pitfalls. The "indenture" signed by the couple in this case lists the date of the transaction as 1903 because the Bloomberg form contains the words "nineteen hundred and" and the preparer simply typed in the word "three." The signatures are notarized as "2003." Given the ambiguous handwriting on the document, this further mistake suggests the document was hastily prepared without serious review.

Footnote 5:While it would appear that this issue - the validity of the deed transfer from the husband and wife to the couple and the husband's father — would be ripe for adjudication and perhaps a declaration of the father-in-law's interest in the property, the wife does not request that relief in her application before this court and the court declines to review it.

Footnote 6:The question of how this additional sum was calculated is not before this court. SNP contends that it paid these amounts but, as resolved earlier, SNP does not exist and there is no evidence that SNP advanced any funds to anyone. Someone — most likely the father-in-law was paying the first mortgage on the property. It is undisputed that at the time the couple bought their second house, they obtained a bank mortgage for the property that took first priority as a lien on the property. It is further undisputed that the bank loans on the first and second homes were never paid by the couple and it appears that someone — most likely the father-in-law — was paying both bank loans. There is no evidence before this court that either the husband or the wife made any promise to repay money advanced by SNP to cover the cost of the bank mortgages. The SNP note and mortgage permits SNP to cure any defaults by the couple on the original bank financing and presumably, SNP, in seeking this large sum (well in excess of the original mortgage and note), is seeking to recover payments advanced by SNP to prevent the for the underlying bank financing from being unpaid. Whether these payments, made from 1992 through 2012 to prevent the underlying bank financing from sinking into default are gifts are recoverable is moot: SNP, which does not exist, could not have paid these amounts.

Footnote 7:The provisions of CPLR § 3408, which require settlement conferences prior to permitting foreclosure, do not apply in this case. While these mortgages qualify as a "home loans" under the statute RPAPL §1304 (5) (b), the requirements for sending notices to borrowers only applies to "lenders," which are defined as "mortgage bankers" under the New York Banking Law. NY Bank Law § 590 (1) (f). There is no proof that the parties seeking foreclosure in this matter are "mortgage bankers" under the Banking Law.

Footnote 8:The husband's mother, in moving for summary judgment on the foreclosure action, does not specifically address this defense. The son, while alleging the defense in his answer, does not reassert it in opposition to his mother's motion for summary judgment. Because there are no facts to support the defense, the court cannot consider it as an obstacle to the grant of summary judgment.

Footnote 9:The mother-in-law argues, obliquely, that one factor that demonstrates the validity

of the mortgage in this case is that the loan transaction was overseen by an

attorney. The mere fact that an intra-family transfer was drafted by an attorney,

however, does not save the transfer from being a gratuitous transfer or qualify it as

a bona fide sale loan. Although having an attorney draft the promissory note may give an intra family transaction the aura of establishing a legitimate creditor-debtor relationship, the test remains whether or not there is a "real expectation of repayment and intent to enforce the collection of the indebtedness." Crane v. United States (Estate of Musgrove), 33 Fed. Cl. 657, 662 (Fed. Ct. Claims 1995)

Footnote 10:The federal funds rate for 1996 through 1997 varied from 5.30% to 5.46%. The conventional existing home mortgage rates varied from 8.03% to 7.76%.www.allcountries.org/.../822_money_market_interest_rates_and_mortgages (last visited 11/12/13).

Footnote 11:This Court notes that if the mortgage was a conventional mortgage the annual payments, for interest alone, would be somewhere between $8,030 and $7,760 annually. By not insisting on payment and allowing non-payment, the mother-in-law was forgiving debt. IRC normally treats the discharge of indebtedness as income. Sec. 61(a)(12). Pinn v. Commissioner, T.C. Memo 2013-45 (Tax Ct. 2013). The reason is this: when a taxpayer borrows money untaxed, and doesn't have to pay it all back, he gets an economic benefit that resembles other income. See, e.g., United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931), aff'g 85 T.C. 855 (1985). There is no evidence that the husband and wife declared the "forgiven annual interest" as income in this case.

Footnote 12:See Note 2 supra.

Footnote 13:As one court declared:

There is no real dispute that the enactment of the Equitable Distribution Law (Domestic Relations Law § 236 [B]) did nothing to circumvent the traditional equity powers of the matrimonial bench. In fact, if anything, the statute granted more equity power to the court (the court could now look behind title to divide property). The very name of the statute implies the purpose of the statute, to do equity.

Schwartz v. Schwartz, 153 Misc 2d 789, 793 (Sup. Ct. Kings Cty. 1992)

Footnote 14:See Note 2 supra.