Bernstein v Braiman

[*1] Bernstein v Braiman 2010 NY Slip Op 51047(U) [27 Misc 3d 1236(A)] Decided on June 15, 2010 Supreme Court, Kings County Demarest, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 June 15, 2010
Supreme Court, Kings County

Dr. Daniel Bernstein, as an officer and director of 1916 MERMAID AVENUE CORP., Plaintiff,

against

Galina Braiman, 1916 MERMAID AVENUE CORP., LEONID RAYTBURG, and ANTHONY FIERRO, Defendants.



15283/07



Attorney for Plaintiff:

Stephen J. Feldman, Esq.

Spector & Feldman, LLP

360 Merrick Road

Lynbrook, NY 11563

Attorney for Defendants (Raytburg & Fierro):

Laurence D. Kleinman, Esq.

Kleinman, Saltzman & Bolnick

151 North Main Street

P.O. Box 947

New City, NY 10956

Carolyn E. Demarest, J.

This action was commenced by plaintiff Daniel Bernstein (Bernstein), as president and a director of 1916 Mermaid Avenue Corporation (Mermaid), to cancel a mortgage on the real property of Mermaid given by defendant Galina Braiman (Braiman) to defendants Raytburg and Fierro, individual lenders, in the sum of $350,000 at 15% per annum for a term of one year, and for various relief against Braiman. Although she initially appeared and answered, Braiman's answer was subsequently stricken pursuant to CPLR 3126(3). A judgment was entered against her, pursuant to this Court's Order dated January 27, 2009, for $350,000, and she was directed to turn over her shares in Mermaid to plaintiff and resign her position as an officer and director of Mermaid in compliance with a Supplemental Shareholder Agreement executed between herself [*2]and plaintiff on or about December 27, 2006 (Supplemental Agreement). The only remaining issue for trial was the viability of the mortgage which plaintiff claims was granted without authority and is therefore void. A non-jury trial was held in January of 2010.

The Mermaid property was originally purchased by Bernstein and Braiman's father as an investment, to be restored and rented out. Title to the building was in plaintiff's and Galina's names individually however and, in 1986, title was transferred by both of them to Mermaid which had been formed on December 11, 1986. Prior to his death, in or about 2005, Mr. Braiman, with the assistance of Galina's mother, maintained and operated the building. Following her father's death, Braiman sought to assume more control over the property. However, in 2005, a fire destroyed the interior of the building and the property remained vacant. Thereafter plaintiff Bernstein took control of the building and handled all matters relevant thereto. Violations were placed upon the property and taxes continued to accrue unpaid, which were ultimately addressed by plaintiff. Plaintiff was finally required to demolish the remaining shell of the building at his own expense by order of the New York City Department of Buildings.

In 2006, Braiman approached plaintiff requesting permission to obtain a personal loan using the Mermaid property as collateral. Plaintiff agreed to the proposed mortgage upon certain conditions which were recited in the Supplemental Agreement executed by both parties. The Supplemental Agreement authorized Braiman to place a mortgage for $325,000 on the Mermaid property on condition that, from the proceeds, she pay $50,000 to plaintiff, with interest at 9.9% from February 1, 2006 to the date of payment, in compensation for her share of the settlement of a personal injury action which had been paid by plaintiff, and "all outstanding real estate and corporate taxes", and $10,000 for the fees of an architect to remove existing Environmental Control Board violations, as well as the costs of removing such violations. Braiman was further required to "timely make all payments to repay the Loan", to be repaid in full within three years of the date of the Agreement, "pay all the expenses of the Corporation" and obtain and pay for insurance. The Supplemental Agreement expressly provided: "All documents relating to the mortgage to secure the Loan shall be signed by Bernstein as the president of the Corporation". It further provided that, to secure Braiman's performance of the conditions recited, she would assign her shares of the Corporation to plaintiff and resign her positions as an officer and director of the Corporation, the assignment and resignation documents to be placed in escrow with Solomon J. Jaskiel, Esq., plaintiff's attorney, to be released to plaintiff 60 days following notice to Braiman of her failure to comply with the terms set forth in the Supplemental Agreement.

Plaintiff testified that the first knowledge he had of the mortgage given to defendants Raytburg and Fierro by Galina Braiman as "Secretary" of Mermaid on January 16, 2007, was a letter dated March 15, 2007 he received from John VanderNeut, attorney for the mortgagees, demanding evidence of insurance on the property. Mr. VanderNeut, who testified at trial, had closed the mortgage and was the only witness with personal knowledge of the closing as neither of the mortgagees was present.

Leonid Raytburg, an attorney currently in business with his co-defendant Fierro, testified at trial that he had opened Victory Capital Bank in 1998 as a mortgage bank, but had sold it in 2004, in favor of the less regulated business he is presently in, in order to avoid the constraints of the Banking Law. In late 2006, he was contacted by a broker, Roman Narovilisky or Narovsky, [*3]who had worked for Victory Capital and was acting as Braiman's broker, suggesting a "private loan" to Braiman with the Mermaid property as collateral. With Fierro, Raytburg visited the property where he met Braiman and, upon the determination that the property was worth at least between $550,00 and $600,000, he advised Roman that the deal was acceptable. Mr. Raytburg, an experienced real estate investor with a law degree, stated that he asked no questions regarding the ownership of the property or Braiman's authority to enter into the mortgage, knew nothing of plaintiff Bernstein or the corporation and made no inquiries regarding Braiman's credit-worthiness. His only concern was the value of the collateral. Mr. Raytburg never requested any documentation of ownership but, by e-mail dated January 8, 2007, turned the matter over to his attorney, VanderNeut, who had previously handled up to 40 closings for the mortgagees. Upon learning, following the closing, that Braiman had bounced two separate checks given for the insurance premium, Raytburg commenced a foreclosure action.

John VanderNeut, who handled the mortgage transaction for defendants, upon learning of the corporate ownership of the premises, checked the Secretary of State s website to verify the active status of Mermaid, and proceeded to draft a shareholder resolution, the note and mortgage, and personal guarantees to be executed by Braiman and Bernstein, which were e-mailed to Braiman. VanderNeut acknowledged that a shareholder resolution or a resolution of the board of directors signed by plaintiff Bernstein, would be required pursuant to Business Corporation Law §911, but he never received or saw such a resolution duly executed. Mr. VanderNeut stated that he relied upon the title report and did not verify the corporate ownership or the chain of title. Because the title company, which may have been owned by the broker, did not make any relevant omissions from coverage, he did not question the validity of the mortgage or Braiman's authority to bind the corporation.

At the close of the evidence, this court held the Guaranty, purported to have been executed by plaintiff, to be a forgery, rejecting the completely incredible and unreliable testimony of Stephanie Mitchell, who purportedly notarized plaintiff's signature on a Power of Attorney authorizing Braiman to act on his behalf in real estate transactions and on the personal Guaranty of Mermaid's obligation under the loan from defendants. In reliance on the uncontroverted proof that plaintiff was on a plane on his way to, or in, Aruba on the date the documents were supposedly notarized, and the testimony of handwriting expert Jeffrey Luber that the signatures were not those of plaintiff, this court held that plaintiff Bernstein did not execute either the Power of Attorney or the Guaranty and is not personally liable to the mortgagees.

It is apparent that both plaintiff and the defendant mortgagees were defrauded by Braiman, perhaps with the assistance of her broker. The issue before this court is which parties are going to ultimately sustain the loss. It was established at trial that $65,611.60 was paid upon closing for outstanding real estate taxes ($20,008.19), water charges ($4603.41) and ECB violations ($41,000) on behalf of Mermaid.[FN1] After further deduction from the $350,000 principal [*4]of various closing costs, including brokerage fees, attorneys' fees, title policy premium, mortgage taxes and recording fees, $165,906.40 was paid to "1916 Mermaid Ave. Corp." from Mr. VanderNeut's attorney escrow account. Thus, it appears that Mermaid benefitted from the transaction, notwithstanding the diversion of the loan proceeds paid to Mermaid to an unknown account that was apparently controlled by Braiman. Although no counterclaim was interposed against plaintiff for the sums advanced upon the obligations of Mermaid, defendants ask this court to grant them equitable relief on a theory of unjust enrichment for these sums even if plaintiff should prevail upon its plea to void the mortgage.

As Mr. VanderNeut admitted at trial, Business Corporation Law §911 requires a resolution of the board of directors to bind a corporation to the obligations of a mortgage. This statutory requirement is reflected in the schedule of exceptions to coverage listed as Schedule B to the title policy issued by Old Republic National Title Insurance Company to defendants Raytburg and Fierro upon Mermaid's premises (Plaintiff's Ex. 10). Exception 7, which was subsequently omitted, further requires that "[t]he certificate showing the passage of the resolution must certify [as also required by BCL §911] that the Articles of Incorporation do not require the consent of the stockholders". VanderNeut testified that, although he prepared a shareholder resolution, which he e-mailed to Braiman for execution, he did not prepare a board of directors' resolution, nor did he ever see an executed shareholders or board of directors resolution, but relied exclusively upon the title report. When he learned, through the title report, of the corporate ownership of the property, which he and his clients had assumed to be in Braiman personally, he did not seek verification of Braiman's shareholder status. He did, however, verify through the Secretary of State that Mermaid was an active corporation, at which point, he learned the name of plaintiff Bernstein, as it was his name alone that appeared as Chairman/CEO and "Principal Executive Office"; Braiman's name was not listed. The only documents presented at closing, brought in by Braiman herself, were the forged Guaranty and Power of Attorney and the unsigned shareholders resolution. No effort was made to secure proof of Braiman's authority to mortgage the property.

Plaintiff relies on Hallock v. State of New York, 64 NY2d 224 [1984]; Ford v. University Hospital, 32 NY2d 464 [1973]; 56 East 87th Street Corp. v. Kingsland Group, Inc., 30 AD3d 1134 [1st Dept, 2006]; and Lindenbaum v. Albany Post Property and Annsville Properties, Ltd, 297 AD2d 661 [2d Dept, 2002], in support of his contention that defendants' mortgage must be cancelled because Braiman lacked authority to mortgage Mermaid's property and no action by Mermaid can be cited to support defendants' claims that she had such authority. Defendants offered in evidence the Supplemental Agreement between Bernstein and Braiman, arguing that such document evidences Braiman's authority to mortgage the property. However, the Supplemental Agreement was never made known to defendants and was obtained by them only during the instant litigation. It cannot therefore serve as the basis for any reliance by defendants on apparent authority. In any event, had defendants been aware of the terms of the Supplemental Agreement, they would have been on notice that Braiman did not have the authority to execute the mortgage documents as the Agreement expressly provides that only Bernstein could do so.

The authority to bind a principal must derive from the words or acts of the principal communicated to the third party which relies thereon. Hallock v. State of New York, 64 NY2d [*5]at 231. "The agent cannot by his own acts imbue himself with apparent authority."[Id.] See also, 56 East 87th Units Corp. v. Kingsland Group, Inc., 30 AD3d 1134, finding that the president of the corporation lacked authority to obligate the corporation, notwithstanding the lender's prior dealings with that individual. Defendants only knowledge of Braiman's purported authority to mortgage the property of the corporate owner was her own self-serving representation. While she also presented forged documents purporting to bear the signature of the only other shareholder, Bernstein, she did not provide, nor did defendants' attorney or the title company demand, the fully-executed board of directors' or shareholders' resolution which was required by statute. Nor did defendants seek to examine the by-laws of Mermaid.[FN2] It was incumbent upon defendants and their agents, their lawyer and title insurer, to verify Braiman's authority, as "secretary" of Mermaid, to unilaterally execute the mortgage.[FN3] Lindenbaum v. Albany Post Property Associates, Inc., 297 AD2d 661,663 [2d Dept, 2002]; 150 Beach 120th Street, Inc. v. Washington Brooklyn Limited Partnership, 39 AD3d 722 [2d Dept, 2007]; Beizer v. Bunsis,38 AD3d 813, 814 [2d Dept, 2007]; 1230 Park Associates, LLC v. Northern Source, LLC, 48 AD3d 355 [1st Dept, 2008]; Fleet Bank v. Consola, Ricciteli, Squadere Post No. 17, Inc., 268 AD2d 627 [3d Dept, 2000].

While the authority of the president of a corporation to act on its behalf has been recognized where such action is not restricted under the by-laws of the corporation (TJI Realty, Inc. v. Harris, 250 AD2d 596, 597-598 [2d Dept, 1998]), particularly where the president is also the sole director ( Decana Inc. v. Contogouris, 55 AD3d 325 [1st Dept, 2008]), defendants' reliance on Cone v. The Empire Plaid Mills, 12 App Div 314 [1st Dept, 1896], in support of their argument that a corporate secretary is vested with authority to bind the corporation, is misplaced. The Cone case involved the routine purchase of goods, for which the corporation retained payment without delivering the goods. Not only was the contract ratified by the corporation by virtue of the retention of the funds advanced on the contract, but the secretary/treasurer who had entered the contract was the general manager of the corporation, the only person who resided in the location of the business, handled all sales and other transactions and had charge of the bank account of the corporation. Here, there is no suggestion that Braiman had ever been vested with authority to act for the corporation in any capacity. Plaintiff's testimony is that he alone was in full control of all aspects of managing Mermaid's property and defendants had no basis to rely on any authority in Braiman.

Moreover, the forged documents bearing the purported signature of Bernstein, which were proffered by Braiman, did not relieve defendants, both sophisticated businessmen with [*6]legal education, from their duty of care since a forgery is void of legal effect. Cf, Karan v. Hoskins, 22 AD3d 638, 639 [2d Dept, 2005]; Dalessio v. Kressler, 6 AD3d 57, 61 [2d Dept, 2004]; Mix v. Neff, 99AD2d 180, 182-183 [3d Dept, 1984]; Johnson v. Melnikoff, 20 Misc 3d 1142[A] [Sup, Ct, Kings Co, 2008], aff'd 65 AD3d 519 [2d Dept,2009]; see LaSalle Bank National Association v. Ally, 39 AD3d 597, 600 [2d Dept, 2007]. Defendants' reliance upon Real Property Law §266 is therefor also misplaced..

However, evidence admitted upon defendants' case establishes that, from the proceeds advanced by defendants, $65,611.60 was paid out to satisfy tax and other obligations of Mermaid upon the property. There was also testimony regarding a small balance outstanding upon a pre-existing mortgage, although whether this was satisfied out of the funds advanced by defendants remains unclear and no evidence of such payment was adduced. Defendants are entitled to be equitably subrogated to the payments of which Mermaid was the beneficiary so as to avoid unjust enrichment to plaintiff. "Rooted in equity, the purpose of the subrogation doctrine is to afford a person who pays a debt that is owed primarily by someone else every opportunity to be reimbursed in full." Chemical Bank v. Meltzer, 93 NY2d 296, 304 [1999]; see also, King v. Pelkofski, 20 NY2d 326, 333 - 335 [1967]; LaSalle Bank, 39 AD3d at 600 - 601; Johnson, 20 Misc 3d at *8. Accordingly, defendants are entitled to recover this sum from their mortgagor Mermaid.

CONCLUSION

Plaintiff is granted judgment on his first cause of action, seeking a declaration that defendants' mortgage upon the property of Mermaid is void, only to the extent of reducing such lien to the $65,611.60 paid at closing in satisfaction of debts of Mermaid, less any sums previously paid upon such mortgage obligation. In light of this decision, no costs are awarded to either party.

____________________________________________

CAROLYN E. DEMAREST

J.S.C. Footnotes

Footnote 1:Defendants have asserted that $94,050 was paid for DEC violations, however, the only verification of payments made for violations is the check of Adonis Abstract payable to SMK Realty & Development, LLC for $41,000 (Exhibit A), which also corresponds to the SMK bill (Exhibit B).

Footnote 2:Mermaid's by-laws were not offered by either party. Though defendants take issue with plaintiff's failure to offer such by-laws, there is no evidence of any prior attempt to discover them or even that such a document exists.

Footnote 3:Although the forged Power of Attorney, conferring upon Braiman the power to act for Bernstein, was recorded, VanderNeut testified that he deemed it irrelevant and did not rely upon it in closing the mortgage. In any event, such document would not be a substitute for a properly-executed shareholders or board of directors resolution.