Divita v Decker & Decker, Partnership
Annotate this CaseDecided on November 24, 2004
Civil Court of the City of New York, Richmond County
MARIO DIVITA, Claimant,
against
DECKER & DECKER, PARTNERSHIP and S. CIARAVINO CONSTRUCTION CORP., Defendants
S.C.R. 1192/04
Plaintiff Mario Divita: Pro Se
Defendant S. Ciaravino Construction Corp: Pro Se
Defendant Decker & Decker:
Represented itself
Decker & Decker
1610 Richmond Road
Staten Island, NY 10304
718-979-4300
Philip S. Straniere, J.
Claimant, Mario DiVita, commenced this Small Claims action against the defendants, Decker & Decker, Attorneys at Law and S. Ciaravino Construction, Corp., seeking a judgment awarding the claimant money held in escrow to obtain a certificate of occupancy. The caption was amended to reflect the fact that Decker & Decker Attorneys at Law is a partnership, as well as to correct the name of the corporate defendant. A trial was held on August 26, 2004. Claimant and defendant, S. Ciaravino, appeared without counsel. Defendant Decker & Decker was represented by counsel.
It should be noted that Decker & Decker is named as a defendant solely because it is the stakeholder in possession of $2,500.00 being held in escrow pursuant to a written agreement. It will hereinafter be referred to as "stakeholder." "Defendant" will refer to S. Ciaravino.
Claimant and defendant entered into a written agreement dated January 26, 2000 in which the defendant was the seller and the claimant was the buyer of the premises 7 Dahlia Street, Staten Island, New York. The premises was to be constructed by the defendant.
Paragraph 13 of the contract provided: "Seller agrees to deliver a final Certificate of Occupancy for the premises; however, the closing shall not be delayed for lace(sic) of the same; provided Seller delivers a temporary Certificate of Occupancy for the dwelling at closing of title, and the sum of up to $2,500.00 for (sic) Seller's money at closing will be held in escrow by either Purchaser's lending institution or Seller's attorney pending production and delivery of a final Certificate of Occupancy. The Purchaser does hereby agree that they(sic) will make no changes of any kind or nature to the premises, herein being sold, [*2]until such time as the final Certificate of Occupancy has been issued, and they further covenant that they will commit no act, whatever its nature, which would interfere with or prevent the Seller from obtaining said Certificate. Any such act will void and obviate Seller's obligation to obtain the final Certificate of Occupancy and shall further entitle the Seller to the immediate return and release of any escrow deposit. This provision shall survive delivery of the deed to the premises."
A closing took place on October 2, 2000 at stakeholder's law office. Decker & Decker were the closing attorneys for the lender HSBC Mortgage Corporation. At the closing a temporary Certificate of Occupancy issued by the Department of Buildings was produced. The temporary Certificate of Occupancy was dated September 8, 2000 and expired December 8, 2000, 91 days later.
A final certificate of occupancy was issued on April 3, 2004 by the Department of Buildings. Defendant alleges that the reason it took so long to obtain the final certificate of occupancy was directly attributable to the fact that the claimant installed a swimming pool at the premises. A copy of a swimming pool installation contract dated March 24, 2001 was submitted as an exhibit. Also submitted into evidence is an application for a work permit by Joseph DiVita dated December 17, 2003. However, the document does not indicate the purpose of the permit. Parenthetically, who is "Joseph DiVita" the applicant? The claimant herein is Mario DiVita. A work permit was issued by the Department of Buildings on December 23, 2003 for the "legalization of in-ground pool." The permit expired on December 22, 2004. It should be pointed out that the in-ground pool is not reflected on the final certificate of occupancy dated April 30, 2004 and that is a standard practice at the Buildings Department since a pool is considered a "permit" item and not an "occupancy" issue. Claimant submitted as an exhibit a bill from an architect (Calvanico) indicating that the purchaser paid $3,250.00 to the architect to obtain a final certificate of occupancy which the letter indicates was issued on May 4, 2004. There is no explanation for the discrepancy between the issuance date as it appears on the final certificate of occupancy and as set forth in Calvanico's letter. It can only be concluded that the letter is in error.
At the closing, as required by the contract of sale, an escrow agreement was executed in regard to production of the certificate of occupancy. It provides:
"In consideration for the Lender closing title to the premises
known as 7 Dahlia Street, Staten Island, New York, and granting a
mortgage loan to the borrowers in the amount of $200,000.00, the
Borrowers hereby agree to furnish a Final Certificate of Occupancy
issued from the New York City Building (sic) Department for the
premises."
"That the Lender is holding back the sum of Two Thousand
Five Hundred Dollars ($2,500.00) to ensure procurement of the Final [*3]
Certificate of Occupancy. The monies will be held by Decker & Decker.
That upon the production of a valid Final Certificate of Occupancy, all
parties agree that the funds will be released to S. Ciaravino Construction
Corp. at the following address: 75 Idaho Avenue, Staten Island, New York
10304."
"That if a the (sic) approval is not received within three months,
from the date of closing, then the parties are considered to have forfeited
their right to the escrow monies and the Lender has a right to do whatever
is necessary to obtain the required filings and expend the escrow monies to
do so. The agreement was signed by the seller, the purchaser and the
stakeholder."
Also in evidence is the HUD-1 which the lender is required by the Real Estate Settlement Procedures Act ( 12 USCA 2601 et seq.) to complete and deliver at all residential real estate closings. The purpose of the statute was to end the confusion experienced by borrowers concerning costs incurred at closing. The law requires the lender to make a good faith estimate of anticipated costs prior to closing. It also mandated that the "settlement agent," usually the lender's attorney, complete at closing a statement of the actual expenses incurred (the HUD-1 form). The statement is signed by the parties who certify that the figures are an accurate reflection of all receipts and disbursements made upon that party's account. These documents were especially necessary in jurisdictions where attorneys are not part of the closing process, whereas in New York City, attorneys, as a matter of course, provide this information to their clients. One of the requirements of the federal law was that escrows concerning taxes and insurance be estimated before closing and included on the form when the actual amounts due are determined at closing.
The HUD-1 prepared in reference to 7 Dahlia Street completely ignores the issue of the certificate of occupancy escrow. It is impossible to determine from this statutorily required document which party posted the escrow for the certificate of occupancy. Although not specifically mentioned in the Real Estate Settlement Procedures Act, it is apparent that this is a consumer protection law and all known expenses, adjustments, credits and escrows should be included. A consumer seeking to review the monies expended at closing would be unable to balance his or her account because the certificate of occupancy escrow is not included. In this case if either party were trying to balance their account, $2,500.00 would be hanging in limbo. The lender was aware that there was going to be an escrow for the final certificate of occupancy and should have disclosed this on the HUD-1 in order to comply with the intent of the RESPA.
ISSUES PRESENTED:
A. Which Party Posted The Escrow Deposit?
There appears to be a contradiction between the terms of the contract and the [*4]provisions of the escrow agreement in regard to which party posted the $2,500.00. Paragraph 13 of the contract of sale states "the sum of up to $2,500.00 for (sic) Seller's money at closing will be held in escrow," while the escrow agreement provides that the Lender is holding back that amount on the condition that the Borrower furnish the final certificate of occupancy and upon its production the money will be released to the seller.
Since the escrow agreement is later in time and it is signed by the parties it must be concluded that it supersedes the contract provision. However, the escrow agreement does not indicate from which party the money is being withheld. In order to make sense of the documents, they must be read together. The lender is withholding from the mortgage proceeds, the purchaser's monies, the amount of the escrow. The contract required payment to the seller by the purchaser the sale price of $550,000.00 but gave the purchaser the right to withhold $2,500.00 pending production of the final certificate of occupancy. Since the lender has no privity of contract with the seller it cannot require the seller to post the escrow. The escrow agreement should have been drafted to reflect the fact that, as a condition of closing, the lender was withholding $2,500.00 from the mortgage proceeds due the purchaser which the purchaser intended to pay to the seller under the terms of the contract when the final certificate of occupancy was produced. The contract and the escrow agreement must be consistent and the lender as the author of the agreement should have made sure it was drafted properly. Since the escrow agreement authorizes the escrow agent to release the money to the seller upon the purchaser producing the final certificate of occupancy, it must be concluded that this money was withheld from the seller's funds.
The problem of determining which party posted the $2,500.00 would not have existed had the lender properly completed the HUD-1 and indicated that $2,500.00 was being withheld from the monies due the seller.
B. To Whom Is The Escrow Deposit Payable?
Although the buyer and the seller are both claiming to be entitled to the escrow deposit, the escrow agreement provides that if the final certificate of occupancy is not received within three months from the date of closing the parties will have forfeited their right to the escrow money. The closing took place on October 2, 2000; under the terms of the agreement, the purchaser was to produce the final certificate of occupancy by January 2, 2001. The temporary certificate of occupancy was issued on September 8, 2000 and expired December 8, 2000. There is no indication that any party to the closing applied to extend the temporary certificate of occupancy as is permitted under the New York City Administrative Code 27-218. The statute states: "the temporary certificate of occupancy shall be issued initially for a period between ninety and one hundred eighty days, in case of all buildings classified in occupancy group J-3 or three family homes, and ninety days for all other buildings, subject to renewal for additional ninety day periods at the discretion of the commissioner."
When comparing the dates in the then existing temporary certificate of occupancy [*5]with the dates imposed by the lender in the escrow agreement, it is obvious that on the date of closing all parties, including the lender, and all counsel were aware that if the final certificate of occupancy was not issued by December 8, 2000 the escrow agreement required that someone, in this case the seller since it was the original applicant, apply to the commissioner of the Buildings Department for an extension. If this was not done, the parties were aware that on January 2, 2001 the escrow would be forfeited to the lender. No extension was sought. Without that extension, the claimant and the defendant were both in breach of the escrow agreement as of January 2, 2001. On that date, by agreement, they forfeited the $2,500.00 to the lender. It can be concluded that under the terms of the escrow agreement after the forfeit date, the lender, and not the parties, became responsible to procure either a final certificate of occupancy or an extension of the temporary certificate of occupancy.
The only conclusion to be drawn from the facts of this case is that when no final certificate of occupancy was produced by January 2, 2001 the lender became entitled to the escrow money and at the same time became obligated to procure the final certificate of occupancy. The lender is not a party to the action, however, it presumably would argue that on the breach date it only had a "right" to do whatever was necessary to obtain the required filings and to expend the escrow monies to do so and not any "obligation." As set forth below, the lender was not correct and was obligated to act.
Under the terms of the escrow agreement the lender is entitled to the $2,500.00 since the final certificate of occupancy was not produced within the time set forth in the escrow agreement. The contract stated that if the purchaser did anything to the premises that would interfere with or prevent the seller from obtaining a final certificate of occupancy, that act would relieve the seller of the obligation to obtain that document and require any escrow be released to the seller. However, the Court must question whether this clause remains in effect. First, the defendant has not proven its allegation that the installation of the in-ground pool by claimant prevented it from obtaining the final certificate of occupancy. No testimony or evidence was produced to substantiate that assertion. Second, the forfeiture provision of the escrow agreement superseded the contract clause. In fact, the seller was in default under the escrow agreement as of January 2, 2001, two months before the purchaser even contracted for the pool installation in March 2001. Significantly, the purchaser and the seller made no provision for disbursement of the escrow money in the event the seller failed to obtain the final certificate of occupancy and the purchaser was required to take steps to insure its issuance.
C. Was The Lender Obligated To Obtain The Certificate Of Occupancy?
A review of the New York City Administrative Code reveals that the claimant, defendant, the lender, the stakeholder, and counsel to all parties involved in the transaction all face potential liability under the law. [*6]
NYCAC 26-125(a) provides: "...every person who shall violate any provisions of any laws, rules,
or regulations enforceable by the department or who shall knowingly
take part or assist in any such violation shall be guilty of an offense and
upon conviction thereof shall be punishable by a fine of not more than
five thousand dollars. Such person shall also be subject to the payment
of a penalty of not more than five thousand dollars to be recovered in
a civil action brought in the name of the city in any court of record in
the city."
In addition, NYCAC 26-248(a) provides:
"...the owner of any structure, or part thereof, or land, where any
violation of this subchapter or chapter one of title twenty-seven
of the code shall be placed, or shall exist, and any person who may
be employed or assist in the commission of such violation, and any
and all persons who shall violate any of the provisions of this sub-
chapter or chapter one of title twenty-seven of the code or fail to
comply there with, or any such requirement thereof,...shall
severally, for each and every such violation of non-compliance,
respectively, be punished by a fine of not more than five thousand
dollars."
Occupying a premises without a certificate of occupancy is a violation of NYCAC 27-214 which is a section included in Chapter One of Title Twenty-Seven. This means that not only is the claimant-owner subject to liability, but defendant seller and the stakeholder have "assisted" in committing a violation of the law by permitting the claimant to close title, and remain in occupancy after the expiration of the temporary certificate of occupancy in violation of the administrative code. Applying these statutes to the practice of real estate law, can only lead to the conclusion that when any person permits a purchaser to close title and enter into possession of a premises that lacks a valid certificate of occupancy reflecting the actual use of the premises, that person is assisting in violating the NYCAC. Likewise, a lender or lender's counsel that closes title knowing that the premises either lacks a valid certificate of occupancy or that one remains in occupancy after the expiration of a temporary certificate of occupancy is also in violation of the statute. This is particularly true when the lender prepares an escrow agreement that permits a forfeiture of the escrow to the lender and gives the right to obtain the final certificate of occupancy to the lender. Because these statutes are safety statutes, this "right" is in actuality an obligation. The public policy of this state and city is to insure that persons live in safe homes that are built in compliance with local building codes. The lender cannot ignore the law, continue to collect mortgage payments when it is aware that at any moment its mortgagor may be issued a vacate order, and be required to leave the mortgaged premises.
The State of New York has found it necessary to license lenders, including mortgage [*7]bankers (Banking Law Article 12-D). Banking Law 589 sets forth the legislative purpose for licensing, It states: "The activities of lenders and their agents offering financing
for residential real property have a direct and immediate
impact upon the housing industry, the neighborhoods and
communities of this state, its homeowners and potential
homeowners. The legislature finds that it is essential for the
protection of the citizens of this state and the stability of the state's
economy that reasonable standards governing the business practices
of mortgage lenders and their agents be imposed. The legislature
further finds that the obligations of lenders and their agents to
consumers in connection with making, soliciting, processing,
placing or negotiating of mortgage loans are such as to warrant
the uniform regulation of the residential mortgage lending process,
including the application, solicitation, making and servicing of
mortgage loans. Consistent with the purposes of promoting mortgage
lending for the benefit of our citizens by responsible providers of
mortgage loans and services and avoiding requirements
inconsistent with legitimate and responsible business practices in the
mortgage lending industry, the purpose of this article is to protect
New York consumers seeking a residential mortgage loan and to
ensure that the mortgage lending industry is operating fairly,
honestly and efficiently, free from deceptive and anti-competitive
practices."
In light of this legislative purpose and the fact that Banking Law 595(1)(a) permits the superintendent of banking to revoke a license if a licensee violates "any other law, rule or regulation of this state or the federal government," it can only be concluded that lenders in the State of New York have the obligation to insure that a final certificate of occupancy is delivered on any building purchases they finance. The New York State Constitution Article IX grants to local governments certain powers including the power to regulate the use of property within that local subdivision. The Municipal Home Rule Law (10)(1) permits local governments, like the City of New York, to enact local laws concerning property. Since these local laws are authorized by the state constitution and statute, these local regulations become a "law, rule or regulation of the state" to which the licensed lender must adhere. The failure of a lender to insure that a mortgagor borrowing money so as to purchase a residential property for human occupancy, becomes an act that may lead the superintendent of banking to revoke that lender's license. Likewise, once the lender is aware that there is an escrow being held until a final certificate of occupancy is issued by the municipality, the lender has an obligation to insure that the final certificate of occupancy is issued or, in the City of New York, that the temporary certificate of [*8]occupancy is extended until the final certificate of occupancy is issued. As a licensee, a lender cannot advance the money for purchase and then stick its head in the sand and ignore the strong public policy purpose of the State of New York to provide safe housing and consumer protection. Such a course of action may, in fact, constitute a "deceptive practice" in violation of General Business Law 349.
There is said to be a "golden rule" in real estate; that is, "he who has the gold, makes the rules." As the mortgagee is the entity that is providing the most "gold" when it comes to the purchase of residential, or for that matter, any improved real estate, it has the ability, if not the best opportunity, to insure that no closing takes place in the absence of a final certificate of occupancy or, if a temporary certificate of occupancy is produced, that sufficient money is withheld at the closing and placed in escrow to insure that there is a fund available to remedy any violations that would prevent the issuance of the certificate of occupancy. The lender in this case had the parties sign an agreement that required the monies be forfeited to the lender. By doing so the lender undertook to obtain the final certificate of occupancy.
It must be concluded that lenders issuing mortgage loans in New York have a legal obligation not to close the loan unless there is a final certificate of occupancy or, if a temporary certificate of occupancy is in effect, that enough money is held in escrow to insure the outstanding work can be completed and paid for within the time set forth in the certificate of occupancy. If there is an escrow agreement that provides for a forfeiture of that deposit to the lender if the final certificate of occupancy is not produced, that lender is under an obligation to either procure the final certificate of occupancy or insure that the parties do. This obligation becomes more concrete, especially in situations where the lender requires the borrower to sign an affidavit that the borrower will occupy the premises for residential purposes within thirty days of closing. How can the lender then be party to an escrow agreement that acknowledges that the borrower may be illegally in occupancy of the premises and forced to vacate by the Buildings Department? In this case the lender was aware that the temporary certificate of occupancy would expire almost thirty days before the escrow would be forfeited. It should be pointed out that under federal law in regard to all loans subject to federal regulation, the execution of documents at closing in which the lender requires the borrower to represent that he or she will occupy a premises by a certain date when the lender and borrower are aware that is not the case or that the borrower may be subject to a vacate order from the municipal authorities because the premises lacks a final certificate of occupancy or one that reflects the premises actual current use may expose the parties to criminal liabilities under 18 USCA 1001 et seq.
The existence of the temporary certificate of occupancy not only complicates the process, but also exposes sellers, purchasers, attorneys and lenders to liability. This is because the NYCAC 27-218 states that in regard to the J-3 occupancy group, a temporary certificate is issued for a period between 90 and 180 days and it may be renewed for additional 90 day periods. In the event the final certificate of occupancy is not obtained [*9]within the time set forth in the initial temporary certificate of occupancy or any extension thereof, the occupancy then becomes illegal and therefore all of the above parties are technically assisting in violation of the NYCAC by permitting the purchaser to continue occupancy after that date. What is the obligation of each party to continue to check the Buildings Department records? An argument can be made that a purchaser's attorney or a lender who permits the closing to go forward with a temporary certificate of occupancy has a continuing obligation to monitor the situation; advise the client that no final certificate of occupancy has been obtained; and that the client is not only subject to being evicted by the Buildings Department but also potentially to civil and criminal penalties. Although this obligation is not spelled out in the statute and perhaps the necessary follow- through is not done by many attorneys in actual practice, the current system of issuing temporary certificates of occupancy is a trap for the unwary and a potential source of liability for malpractice if strictly interpreted.
It can only be concluded that the lender in this matter was responsible to obtain the final certificate of occupancy based on the language of the escrow agreement. The issue of which party was responsible for the delay cannot be resolved in this litigation
D. How Did This Loan Even Close?
The temporary certificate of occupancy dated September 8, 2004 listed seven open items. Six of the seven do not appear to go directly to the safety of the premises and appear to be items that were contemplated by the legislation creating temporary certificates of occupancy as being possibly "weather" related matters that could be completed after the fact without affecting the safety of the occupancy. However, one item does not meet that test. A significant open matter is a reference to a "final electrical." How can a home or, for that matter, any building be deemed safe for occupancy when the municipality has not signed off on the electrical components installed in the premises? What if the wiring is not done up to code or other minimal safety standards? The fact that this was not signed off prior to closing leads to the presumption that the premises was not safe and could not be occupied at the time of closing. One must question how the Buildings Department issued a temporary certificate of occupancy for a premises on which the final electrical approvals have not been signed off. This is a condition directly inapposite with the premises being safe for occupancy. Perhaps it was an abuse of the commissioner's discretion to issue the temporary certificate of occupancy in this situation. If anyone thinks that this is a minor item, you can be sure that if there were an electrical fire at the premises, the insurance carrier would disclaim coverage faster than Mr. Mxyzptlk disappears after saying his name backwards.
The Buildings Department should take steps to investigate this matter and punish the appropriate parties. The very fact that this situation was allowed to occur points out the uselessness of these temporary certificates of occupancy. It seems apparent that no one is even reading what items are left open on the document. There is nothing in the evidence that indicates that any party even questioned this item as being a potential safety problem. [*10]What it does do is reflect the fact that the Buildings Department is not doing its job, and as a result the public is at peril. It leaves open the issue of to what extent are attorneys and lenders obligated to review the temporary certificate of occupancy and advise clients and borrowers as to the open items or the potential problems that might exist if the items are not completed by the seller. Under the current system, a temporary certificate of occupancy indicates that the premises is safe for occupancy, yet they are issued with safety-impairing items not completed. Perhaps the solution is to eliminate this system. This Court has already questioned in other decisions the legitimacy of continuing this process in the City of New York
E. How Can Damages Be Assessed?
Based on the evidence before this Court, even if the proper parties were joined into the litigation, it would be impossible to determine who is ultimately entitled to the escrow money assuming the lender wants to release it. The claimant produced a bill from an architect indicating that he spent $3,250.00 to obtain the final certificate of occupancy. However, as the defendant pointed out and the evidence established, the claimant installed a swimming pool which required permits from the Buildings Department, the same agency that issued the final certificate of occupancy. Without testimony from the architect, it is impossible to determine what costs were incurred in relation to which project. Also the record does not indicate whether claimant's architect was the same as the seller's architect. If not, was there unnecessary duplication of services rendered? For instance, perhaps the seller owed his architect money and, had the claimant paid that individual, the certificate of occupancy would have been issued.
What is also an intriguing issue is how did the Buildings Department issue a permit to the claimant to install an in-ground swimming pool when the temporary certificate of occupancy had expired and no final certificate of occupancy has been issued. Presumably a vacate order could have been issued to the claimant which would prevent him from occupying the house because it was "unsafe" for occupancy, yet he could swim in his pool. I suppose the Buildings Department is drowning in paper work and only a stroke of luck would have caught this apparent anomaly.
CONCLUSION:
Under the terms of the escrow agreement executed at closing as of January 2, 2001, the escrow deposit became the property of the lender. The lender is not a party to this litigation, so determination of the ultimate issue of who is entitled to the money cannot be made in this action. For the parties to resolve the issue of which of them, if any, is entitled to the escrow deposit it will require them to commence litigation against the lender directly.
The action by claimant against defendant S. Ciarovino Construction Corp. is dismissed without prejudice. [*11]
Defendant stakeholder is to pay all monies held in escrow to the mortgage lender as required by the agreement within 10 days of the date of this decision. Decker & Decker will be released of all liability upon such payment.
This constitutes the decision and order of the Court.
Dated: November 24, 2004
Staten Island, NY HON. PHILIP S. STRANIERE
Judge, Civil Court
APPEARANCES:
[*12]
Plaintiff Mario Divita: Pro Se
Defendant S. Ciaravino Construction Corp: Pro Se
Defendant Decker & Decker:
Represented itself
Decker & Decker
1610 Richmond Road
Staten Island, NY 10304
718-979-4300
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