Bernard v DeGraffe

[*1] Bernard v DeGraffe 2010 NY Slip Op 50767(U) [27 Misc 3d 1216(A)] Decided on April 27, 2010 Supreme Court, Bronx County Salman, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 April 27, 2010
Supreme Court, Bronx County

Jude Bernard, Plaintiff,

against

Herbert J. DeGraffe, Jr., as TRUSTEE OF THE ETHEL SMITH 2003 TRUST AGREEMENT, Defendant.



302896/2007

Barry Salman, J.

Defendant, HERBERT J. DeGRAFFE, JR., as TRUSTEE OF THE

ETHEL SMITH 2003 TRUST AGREEMENT, (referred to herein as DeGRAFFE), moves for leave to renew and reargue his prior "Order to Show Cause" wherein he had sought to vacate the "Judgment of Foreclosure and Sale" made herein, and for related relief. DeGRAFFE's "Order to Show Cause" had been denied in the Order, dated August 13, 2009, by Justice Nelson Roman.[FN1] Background:

Plaintiff, JUDE BERNARD, brought this action to foreclose a mortgage on real property located in the Bronx, where HERBERT J. DeGRAFFE was residing. The "Judgment of Foreclosure and Sale" was signed on March 18, 2009, on default. (The "Order of Reference" was signed on May 8, 2008, pursuant to the Court's decision, dated February 14, 2008, which had granted, on default, Plaintiff's motion for summary judgment and to appoint a referee to compute).

On June 12, 2009, Justice Roman signed the aforementioned "Order to Show Cause", made by the Pro Se DeGRAFFE, which sought to vacate the "Judgment of Foreclosure and Sale" upon various grounds, including Defendant's defense that the interest charged on the mortgage loan was usurious, rendering the mortgage void. In the "Order to Show Cause", Justice Roman included a TRO staying the transfer of title. According to Plaintiff, thereafter, the foreclosure sale took place on June 22, 2009, and Plaintiff BERNARD was the successful bidder. (See BERNARD's "Affidavit in Opposition" to OSC, dated June 25, 2009).

In the subject Order, in relevant part, Justice Roman properly concludes that there are issues of fact as to whether the effective interest charged on the subject mortgage loan was [*2]criminally usurious; and that "a usurious mortgage is unenforceable". (See Order, dated August 13, 2009, p. 7-8, 13).

Nonetheless, Defendant's motion was denied, and the TRO was vacated. (See Order, dated August 13, 2009, p. 15).

Now, however, this Court grants Defendant DeGRAFFE leave to reargue and renew, and thereupon, grants Defendant's motion, as set forth herein.

A Usurious Loan is Void

It is well-established that a usurious loan is void ab initio.

In this regard, General Obligations Law §5-511, "Usurious contracts void" provides as follows: " 1. All bonds, bills, notes, assurances, conveyances, all other contracts or securities whatsoever, ... whereupon or whereby there shall be reserved or taken, or secured or agreed to be reserved or taken, any greater sum, or greater value, for the loan or forbearance of any money, goods or other things in action, than is prescribed in section 5-501 [FN2], shall be void, ....2. ... whenever it shall satisfactorily appear by the admissions of the defendant, or by proof, that any bond, bill, note, assurance, pledge, conveyance, contract, security or any evidence of debt, has been taken or received in violation of the foregoing provisions, the court shall declare the same to be void, and enjoin any prosecution thereon, and order the same to be surrendered and cancelled." [emphasis added]

The Court of Appeals has reiterated that: "Referring to loans made by other than banks or savings and loan associations, [General Obligations Law §5-511] declares that all bonds, notes, contracts, ... and the like arising within a usurious transaction are void. Thus, when a court deems a transaction to be usurious, it must declare the transaction and its supporting documents void, enjoin prosecution on them and order that all documents and collateral be canceled and surrendered." [emphasis added] Szerdahelyi v. Harris, 67 NY2d 42, 47-48 (1986).

Usury Defense:

A loan is criminally usurious if interest thereon is charged at a rate exceeding 25% , if it is in an amount greater than $250,000 (but less than $2,500,000). (See General Obligations Law [*3]§5-501(6)(a)[FN3] and (6)(b)[FN4] "Rate of interest; usury forbidden". See Penal Law §190.40 [FN5], "Criminal usury in the second degree", and §190.42 [FN6], "Criminal usury in the first degree").

In a case on point, which is similar to the instant matter, the Court held as follows: "Usurious loans are invalid and unenforceable as a matter of law and public policy. Where, as in this case, ... judgment debtors make a substantial showing that their loan was usurious and that their creditor obtained the default judgment by misrepresenting the nature of the underlying loan, the debtors need not show an excuse for the default to obtain an order vacating the judgment. Both under the CPLR and pursuant to the court's inherent authority to vacate default judgments in the interests of justice, the debtors are entitled to their day in court to establish a usury defense...The Court finds sufficient basis to warrant vacating the [defendant's] default, both under [*4]CPLR 5015 (subd [a], par 3) and pursuant to the court's inherent authority to do so in the interests of justice." [emphasis added]

National Travis, Inc. v. Gialousakis, 120 Misc 2d 676 (NY Sup. Ct. 1983), aff'd by National Travis, Inc. v. Gialousakis, 99 AD2d 800 (2d Dept. 1984).[FN7]

As far as vacating the default "in the interests of justice", the Court, in National Travis, supra , explained that: "defendants' usury claim implicates important enough public policy considerations to justify vacating the default in the interests of justice... Under the law, usurious contracts are void and may not be enforced. (General Obligations Law, §5-511.)[[FN8]] Defendants have asserted a substantial claim that the loan actually carried an interest rate in excess of 25% (at a time when ... a loan carrying a rate in excess of 25% was criminal). (See General Obligations Law, §5-501; Banking Law, §14-a; Penal Law, §190.40.)[[FN9]] Since defendants' usury defense has apparent merit, the default judgment should be vacated for this reason alone." National Travis, Inc. v. Gialousakis, supra , 120 Misc 2d 676, at 680-681.

Along this same vein, it has been established that "the interests of justice require vacatur of the judgment [of foreclosure]" on the basis of a usury defense that has "at least arguable merit." Mutual Home Dealers Corp. v. Alves, 23 AD2d 791, 792 (2d Dept. 1965).

"A defendant's usury claim itself implicates sufficient public policy considerations to justify the vacatur of the default in the interest of justice." Rockefeller v. Jeckel, 161 AD2d 1090, 1091 (3d Dept. 1990). "It is not difficult to ascertain that the criminal usury statutes fall within the class of rules created for the protection of society as a whole. They were enacted in an effort to protect the public from loansharking (see L 1965, ch 328; NY Legis Ann, 1965, pp 509-510), "one of the most heinous, virtually bloodsucking [FN10], criminal activities of all times"." Hammelburger v. Foursome Inn Corp., 76 AD2d 646, 649-650 (2d Dept. 1980).

Also, the Court invoked CPLR 5015(a)(3) as a basis for vacating the default judgment in Rockefeller, supra , and National Travis, supra . CPLR 5015(a)(3) provides that "the court which rendered a judgment or order may relieve a party from it upon such terms as may be just, ... upon the ground of: ... fraud, misrepresentation, or other misconduct of an adverse party." [*5]

"A good claim for vacating the default on the grounds of fraud, misrepresentation, or misconduct in the procuring of the judgment [of foreclosure] has been made out", on the basis that a plaintiff lender has "procured the judgment through material misrepresentations of fact", where a defendant alleged that the "loan was $25,000, not the $36,000 stated in the affidavits of regularity and the papers upon which the judgment was granted." National Travis, Inc. v. Gialousakis, supra , 120 Misc 2d 676, at 680.

Likewise, in the case at bar, Defendant DeGRAFFE has presented a good case for vacating the subject judgment of foreclosure, upon the ground that the lender obtained the judgment by misrepresentation and misconduct, by the evidence [FN11] that the loan had an effective interest rate greater than the criminally usurious interest rate of 25%, and not the 16% alleged in the plaintiff's underlying papers upon which the judgment of foreclosure had been granted [FN12], as is more fully discussed infra.

Where a loan agreement exacts an effective rate of interest greater than 25%, then it is violative of the criminal usury statutes, and void ab initio. Fareri v. Rain's Int'l, Ltd., 187 AD2d 481, 482 (2d Dept. 1992).

The effective interest rate on a loan is traditionally calculated by including amounts paid to, or for the account of, the lender, in consideration for making the loan; the formula is stated as follows: "The discount, divided by the number of years in the term of the mortgage, should be added to the amount of interest due in one year, and this sum is compared to the difference between the principal and the discount in order to determine the true interest rate." Hammelburger v. Foursome Inn Corp., 76 AD2d 646, 648 (2d Dept. 1980), mod. on other gr. by Hammelburger v. Foursome Inn Corp., 54 NY2d 580 (1981). See Band Realty Co. v. North Brewster, Inc., 37 NY2d 460 (1975).

"Closing costs" paid from the loan proceeds — which constitute so-called "discounts" that usuriously augment the interest rate — may include sums paid for "processing fees"; the "lender's attorneys' fees", the "lender's real estate taxes"; and "points". Palmiero v. Cayenne, 23 Misc 3d 1132A (NY Sup. Ct. 2009).

Also, for instance, the "discount" at issue which a defendant borrower sought to include in the calculations, was a ($2,100.00) amount retained by a lender's officer as a broker's "commission" in Hammelburger, supra .[FN13]

Another example is a ($30,000.00) "origination fee" paid by a defendant borrower, which, if included in the calculations, resulted in an effective rate of interest that exceeded the [*6]statutory threshold of 25% — (even though, on its face, the loan had a 15% interest rate). Fareri v. Rain's Int'l, Ltd., supra , 187 AD2d 481, at 481-482.

In the case at bar, the principal loan amount was $384,000.00, which included the following questionable fees paid directly to the lender: an "evaluation fee" (in the amount of $3,840.00); plus an "application fee" (in the amount of $3,840.00); plus a "processing fee" (in the amount of $3,840.00); plus an "underwriting fee" (in the amount of $3,840.00); and plus a "document prep fee" (in the amount of $2,000.00). The total of these allegedly "junk" fees, that were received by Plaintiff BERNARD at the closing, is $17,400.00. (See HUD-1A Settlement Statement).[FN14]

In addition, this loan included fees paid to BERNARD's attorney, Frantz Metellus in the amount of $3,000.00. (See HUD-1A Settlement Statement)

This is also significant since that Plaintiff's attorney, Frantz Metellus, was criminally indicted in federal court for mortgage fraud conspiracy, involving "straw buyers" and corrupt mortgage brokers. The indictment alleges that "straw buyers" were recruited to purchase residential properties. (See United States Attorney's Office Press Release, dated May 21, 2008).

In this regard, BERNARD admits that it was his attorney, Frantz Metellus, who "asked" him if he would be interested in making this loan. (See BERNARD's "Affidavit in Opposition" to OSC, dated June 25, 2009, ¶ 4).

The criminal allegations in the indictment include, in important part, that "mortgage proceeds were wired into the attorney trust accounts of Metellus ..., and subsequently distributed to other [criminal] defendants." [emphasis added][FN15] (See United States Attorney's Office Press Release, dated May 21, 2008).

Another suspicious fee paid out of these loan proceeds was a hefty $28,800.00 to "Real Corp of NY", which is alleged to be BERNARD's broker/realtor. A principal in "Real Corp of NY" is allegedly Simon Clarke, a person who was also named in the aforementioned criminal indictment for his role in the mortgage fraud scheme.[FN16] The legitimacy of this fee is suspect, especially in light of the new information, included in Defendant's instant motion, that Clarke was recently sentenced, and fined, for mortgage fraud. (See DeGRAFFE Affidavit, dated October 2, 2009, p.1-2). In addition, there is an unexplained fee in the amount of $18,886.28 to a firm called "Kriss & Feuerstein, LLP". (See HUD-1A Settlement Statement).[FN17] In his August 13, [*7]2009 Order, Justice Roman properly concluded that, "if any of these fees are unreasonable, then they should be included in the interest" calculations; and cited Hammelburger, supra , and other cases.[FN18]

As far as the lender's broker's fee, in a very recent case, a defendant also alleged that "the brokers, who retained broker's fees, were acting as agents for the plaintiff lender such that the fees should be deemed interest thereby increasing the interest rate above the maximum legal rate." Zanfini v. Chandler, 2010 NY Slip. Op. 50465U, 4 (NY Sup. Ct. Feb. 5, 2010). In Zanfini, supra , the Court held that: "whether a broker's commission is cover for usury is a factual issue which must be demonstrated by clear and convincing evidence. Issues of fact exist as to whether the brokers were acting as the agent of the lender, and as to whether the lender was aware that the broker retained fees (Rumbaut v Reinhart, 216 AD2d 551, 628 NYS2d 756 [1995]). In addition, where usury does not appear on the face of the note, usury is a question of fact. ... Thus, summary judgment is not warranted (Hort v Devine, 1 AD3d 266, 769 NYS2d 376 [2003])." [emphasis added][FN19]

Zanfini v. Chandler, 2010 NY Slip. Op. 50465U, 4 (NY Sup. Ct. Feb. 5, 2010).Needless to say, in obtaining the Judgment of Foreclosure, the Plaintiff failed to present the Court, and the Referee, with a copy of the "HUD-1A Settlement Statement" where the aforementioned closing costs were itemized.[FN20]

Plaintiff's Counsel acknowledges that it is Defendant's position that certain fees may be taken into account in calculating the effective interest rate.[FN21] However, Plaintiff's Counsel does not set forth any law to dispute this or challenge the formula used to perform the calculations.[FN22] [*8]

It is well-established that: "when determining whether a transaction constitutes a usurious loan it must be considered in its totality and judged by its real character, rather than by the name, color, or form which the parties have seen fit to give it. Whether a transaction constitutes a "cover for usury" is a question of fact." [emphasis added] Zanfini v. Chandler, supra , 2010 NY Slip. Op. 50465U, at 3. The Court of Appeals held that "whether the [broker's] commission was a cover for usury was ... a question of fact [citation omitted] which the Appellate Division could neither assume nor decide." Hammelburger v. Foursome Inn Corp., 54 NY2d 580, 594 (1981).

"In determining whether a transaction is usurious, the law looks not to its form, but its substance, or "real character"." O'Donovan v. Galinski, 62 AD3d 769 (2d Dept. 2009).

Reargument:

Regarding Plaintiff's contention concerning the timeliness of Defendant's instant motion, it is noted that it is well-established that, even where a "motion for reargument was technically untimely pursuant to CPLR 2221(d), it was not an improvident exercise of the court's discretion to have reconsidered its prior ruling (see Leist v Goldstein, 305 AD2d 468, 469, 760 NYS2d 191 [2003 v Goldstein, 305 AD2d 468, 469, 760 NYS2d 191 [2003])." Garcia v. Jesuits of Fordham, Inc., 6 AD3d 163, 165 (1st Dept. 2004).

"The Supreme Court [has] jurisdiction to reconsider its prior order "regardless of statutory time limits concerning motions to reargue"". Itzkowitz v. King Kullen Grocery Co., Inc., 22 AD3d 636 (2d Dept. 2005). "The granting of reargument was an appropriate exercise of the court's discretion." Leist v. Goldstein, 305 AD2d 468, 469 (2d Dept. 2003). See Siegel, NY Practice § 254, p. 435 (4th Ed 2007 and 2009 Pocket Part). See CPLR § 2004.[FN23]

Conclusion

Under the circumstances presented here, there remain questions of fact, which require a hearing, as to whether the effective interest rate on the subject mortgage loan was criminally usurious. If this Court determines it to be so, then this mortgage loan would be deemed void ab initio.

Therefore, upon restoring this case to "active" status, the Clerk shall reassign it to a Justice of this Court. Defendant DeGRAFFE is permitted to interpose his Answer to the Complaint, nunc pro tunc, including the Affirmative Defense of criminal usury, consistent herewith [FN24]. Thus, Defendant's default is hereby vacated; and, consequently, the decision dated February 14, 2008 which granted a default judgment, and the "Order of Reference" dated May 8, 2008, are vacated. [*9]

Accordingly, the subject "Judgment of Foreclosure and Sale", dated March 18, 2009, is vacated; and the Judgment Clerk shall mark his records accordingly.

The deed and papers which purport to transfer title to the premises from the Defendant, to the Plaintiff BERNARD, as a consequence of the foreclosure sale, are cancelled; and the Clerk shall so mark the Court's records.

Pending the resolution of this matter, and further order of this Court, Plaintiff BERNARD is stayed from interfering with Defendant's possession of the premises — including actions to evict Defendant or sell the premises.

Within thirty (30) days from the date of the entry of the Order, Plaintiff's Counsel, Marcia E. Fokas, Esq., shall serve a copy of this Order with Notice of Entry upon Defendant DeGRAFFE, by personal service [FN25] ; and she shall serve the previously-appointed Referee Tracee Davis, and the Justice to whom this matter is reassigned, by regular mail. Also, Ms. Fokas shall file a copy of this Order with Notice of Entry in the Bronx County Clerk's Office, together with "Affidavit of Service" showing that she served this Order as required herein.

This constitutes the decision and order of this Court.

Dated: April 27, 2010

________________________________

Barry Salman, J.S.C. Footnotes

Footnote 1: The Court's Order, dated August 13, 2009, was signed by Justice Nelson Roman, who currently sits on the Appellate Division, First Department, as an Associate Justice. Thus, the instant motion was reassigned, for determination by the undersigned.

Footnote 2: General Obligations Law §5-501(6)(a), "Rate of Interest; usury forbidden", provides, in part, as follows: " No law regulating the maximum rate of interest which may be charged, taken or received, except section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two hundred fifty thousand dollars or more, other than a loan or a forbearance secured primarily by an interest in real property improved by a one or two family residence."



Footnote 3: Pursuant to General Obligations Law §5-501(6)(a), cited above, civil usury does not apply to a loan in the amount of $250,000 or more, unless it is "secured primarily by an interest in real property improved by a one or two family residence." The real property at issue herein is allegedly a three-family residence.

Footnote 4: General Obligations Law §5-501(6)(b) provides: "No law regulating the maximum rate of interest which may be charged, taken or received, including section 190.40 and section 190.42 of the penal law, shall apply to any loan or forbearance in the amount of two million five hundred thousand dollars or more." [emphasis added]

Footnote 5: Penal Law §190.40 provides: "A person is guilty of criminal usury in the second degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period. Criminal usury in the second degree is a class E felony." [emphasis added]

Footnote 6: Penal Law §190.42 provides: "A person is guilty of criminal usury in the first degree when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period and either the actor had previously been convicted of the crime of criminal usury or of the attempt to commit such crime, or the actor's conduct was part of a scheme or business of making or collecting usurious loans. Criminal usury in the first degree is a class C felony." [emphasis added]

Footnote 7: In its decision, the Appellate Division stated that it affirmed the Supreme Court's Order "for reasons stated in the memorandum of [Supreme Court] Justice Stark". National Travis, Inc. v. Gialousakis, 99 AD2d 800 (2d Dept. 1984).

Footnote 8: See General Obligations Law §5-511(1)and (2), "Usurious contracts void", cited, supra in relevant part.

Footnote 9: See Penal Law §§190.40 and 190.42, Criminal usury in the second and first degree, respectively, cited, supra in relevant part.

Footnote 10: In this regard, it is noted that Defendant expresses concerns about "acts of retaliation" by Plaintiff. (See Defendant DeGRAFFE's "Affidavit in Support" of OSC, dated June 11, 2009, p. 4).

Footnote 11: See, e.g., the "HUD-1A Settlement Statement" annexed hereto and made a part hereof.

Footnote 12: See, e.g., Plaintiff's Complaint, dated Nov. 15, 2007; and Plaintiff JUDE BERNARD's "Affidavit in Support" of motion for summary judgment, dated Jan. 23, 2008; and the Mortgage Note, dated July 2007.

Footnote 13: Hammelburger v. Foursome Inn Corp., 76 AD2d 646, 648 (2d Dept. 1980), mod. on other gr. by Hammelburger v. Foursome Inn Corp., 54 NY2d 580 (1981).

Footnote 14: The Plaintiff does not dispute the amounts of the "closing costs" itemized in the "HUD-1A Settlement Statement" annexed hereto.

Footnote 15: Frantz Metellus' "Attorney Registration" status is currently flagged as "delinquent". (See OCA Database page).

Footnote 16: (See United States Attorney's Office Press Release, dated May 21, 2008).

Footnote 17: In sum, out of the $384,000 loan proceeds, only $289,163.85 was used to pay off the prior mortgage. The rest was used to pay various closing costs, and fees, as are more fully itemized on the HUD-1A Settlement Statement, annexed hereto.

Footnote 18: According to Justice Roman's calculations, if even just the broker's fee were taken into account, the effective interest rate would be 32%, (and thus, would be far in excess of 25%). (See Order, dated August 13, 2009, p. 7-8, 13).

Footnote 19: In the instant matter, on the face of the Mortgage Note, dated July 2007, there is set forth a 16% interest rate, on this six-month loan.

Footnote 20: Where, as here, in obtaining a judgment by default, a party fails to appraise the court of the existence of certain documents containing relevant information, vacatur of the default judgment is warranted for "misconduct" by the adverse party within the meaning of CPLR 5015(a)(3). Tortorello v. Tortorello, 161 AD2d 633, 634 (2d Dept. 1990).

Footnote 21: (See Plaintiff's Counsel, Ms. Fokas's "Affirmation in Opposition" to OSC, dated June 25, 2009, ¶ 4).

Footnote 22: See Hammelburger, supra . (See also Justice Roman's Order, dated August 13, 2009, p. 7-8, 13).

Footnote 23: CPLR § 2004, "Extensions of time generally" provides that: "except where otherwise expressly prescribed by law, the court may extend the time fixed by any statute, rule or order for doing any act, upon such terms as may be just and upon good cause shown, whether the application for extension is made before or after the expiration of the time fixed."

Footnote 24: See Defendant's Proposed Answer, annexed to his June 2009 "Order to Show Cause".

Footnote 25: It is noted that it is not known if Defendant DeGRAFFE still resides at the premises, since the moving papers include a "Notice to Quit", dated Sept. 29, 2009, signed by BERNARD. (If Defendant cannot be easily located, the Plaintiff shall retain an investigator to locate him, and pay the cost thereof; and shall provide the Court with his current address).