Foster v Bowles

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[*1] Foster v Bowles 2012 NY Slip Op 51554(U) Decided on August 7, 2012 Supreme Court, Kings County Schmidt, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on August 7, 2012
Supreme Court, Kings County

Moses Foster, et ano., Plaintiffs,

against

Jeanette Bowles, et al., Defendants.



24265/08



Plaintiff Attorney: Paul Kenney, Esq., 155 West 72nd Street, Suite 308, New york, NY 10023

Defendant Attorney: Jason W. Creech, Esq., 115 Eileen Way, Suite 103, Syosset, NY 11791

David Schmidt, J.

The following papers numbered 1 to 13 read herein:

Papers Numbered

Notice of Motion/Order to Show Cause/

Petition/Cross Motion and

Affidavits (Affirmations) Annexed1 - 3,4 - 8

Opposing Affidavits (Affirmations)9, 10

Reply Affidavits (Affirmations)11 - 12, 13

Affidavit (Affirmation)

Other Papers

Upon the foregoing papers, defendant M & T Bank, successor by merger to M & T Mortgage Corporation s/h/a M & T Mortgage Corporation (M & T) moves for an order, 1) granting summary judgment in favor of M & T and dismissing the complaint of plaintiffs Moses Foster and Salvanita Foster as against M & T, 2) awarding a default judgment in favor of M & T on its counterclaims, 3) awarding M & T summary judgment declaring that its mortgages are valid enforceable pursuant to Real Property Law (RPL) § 266 as M & T is a bona fide encumbrancer for value or, in the alternative, 4) awarding M & T an equitable lien on the property and equitably subrogating M & T to the position of plaintiffs' prior mortgage, 5) awarding M & T judgment on its fraud counterclaim against plaintiffs, 6) awarding M & T judgment on its unjust enrichment counterclaim against plaintiffs and 7) setting this matter down for an assessment of damages. Plaintiffs cross-move for an order, 1) pursuant to CPLR 3212, dismissing M & T's counterclaims on the ground of lack of standing or, in the alternative, 2) dismissing the counterclaims of M & T relating specifically to the second position mortgage for lack of standing and 3) adjourning oral argument of that branch of M & T's motion for a judgment declaring it owner of the second position loan pending disclosure of [*2]evidence needed by plaintiffs to oppose that branch of the motion relating specifically to the loan and, thereupon, 4) compelling M & T, on or by a deadline set by this court, to produce for inspection: i) the original second position mortgage note; ii) the original loan history file of the second position loan, inclusive of any an all communications between M & T and Mortgage Electronic Registration Systems (MERS) regarding the assignment of the second position mortgage from MERS to M & T; iii) the original personnel file in possession of MERS evidencing MERS' employment of Tiffany Kisloski on the date of her execution of the assignment of the second position mortgage from MERS to M & T or, alternatively, iv) the original personnel file in possession of M & T evidencing M & T's employment of Tiffany Kisloski on the date of the execution of the assignment, 5) granting plaintiffs leave to supplement the summons and amend the complaint to add Wells Fargo Bank as an additional defendant; 6) granting leave to plaintiffs to supplement and amend to add, as party defendants, any other persons or parties named in the history of the first position mortgage and its assignments and, upon granting such leave, 7) removing this action from the trial calendar and setting it down for a discovery conference to permit the proposed additional defendants to conduct discovery.

Plaintiffs commenced this action seeking to undo a real estate transaction in which plaintiffs conveyed title to the subject property, located at 470 Willoughby Avenue in Brooklyn, to defendant Jeanette Bowles, and to recover damages from defendants for their alleged fraudulent conduct. Plaintiffs were the previous title owners of the subject premises, which consists of a four-family dwelling. On October 28, 2003, plaintiffs encumbered the property with a mortgage in favor of Encore Credit Corp. d/b/a ECC Encore Credit (ECC) in the amount of $448,000.00. According to plaintiffs' complaint, on or about May 2006 plaintiffs encountered difficulty paying the ECC mortgage. Plaintiffs were referred to defendant Roy Pembroke, who allegedly represented that he could save plaintiffs home by arranging a sale to Bowles, who would remain on the deed for a year and then reconvey the property to plaintiffs. As part of the transaction, Bowles would refinance the prior mortgage and plaintiffs would continue to reside on the property and work on repairing their credit. On August 11, 2006, plaintiffs executed a deed conveying title to the property to Bowles, who thereupon executed separate mortgages in the amounts of $612,850.00 (first position mortgage) and $218,875.00 (second position mortgage). The mortgages were recorded under the name of MERS as nominee for M & T Mortgage Corporation, the lender and originator of the mortgage notes. The first position mortgage was purportedly transferred from MERS to Wells Fargo Bank by assignment dated March 5, 2008 and recorded September 8, 2010. According to the real property transfer report, the property was sold to Bowles for a purchase price of $875,500.00. Plaintiffs allege that they were promised $100,000.00 at the closing to conduct repairs to the property, but received only $67,297.94. In essence, plaintiffs claim they are victims of a "foreclosure rescue" or equity theft scheme perpetrated by Bowles, Pembroke and the other named defendants. Among the relief sought by plaintiffs is cancellation of the mortgages executed by Bowles. Plaintiffs allege in their complaint that "[a] representative of [M & T] was present at the Closing and observed: 1) the separation of the buyer and seller; 2) the shoddy representation of Plaintiffs; 3) other behavior, acts and omissions to act that such representative knew or should have known were earmarks of a fraudulent strawman transaction. . . Despite such knowledge or imputed knowledge [M & T] participated in the fraudulent transaction."

On January 21, 2011, M & T filed an amended answer adding counterclaims against plaintiffs for 1) a declaratory judgment that M & T is a bona fide encumbrancer for value, 2) equitable subrogation to the ECC mortgage, 3) unjust enrichment and 4) fraud. On March 31, 2011 (according to the affidavit of service), plaintiffs served a "verified answer" to M & T's counterclaims wherein they interposed affirmative defenses that the counterclaims are barred by estoppel, unclean hands and laches, and that M & T's damages claims are speculative, that M & T has suffered no damages to date nor likely to suffer damages in the future and that M & T has failed to mitigate its damages. Plaintiffs' answer to the counterclaims was filed on April 6, 2011. By letter dated April 18, 2011, M & T notified plaintiffs that their answer was rejected as untimely and that plaintiffs would be deemed in default of M & T's counterclaims. By order to show cause dated February 17, 2012, [*3]plaintiffs moved for an order 1) vacating an order appointing a temporary receiver, dated July 29, 2011 and issued on the default of plaintiffs, on the ground that M & T has no standing, 2) excusing plaintiffs' default in failing to timely serve its answer to M & T's counterclaims, 3) permitting plaintiffs to serve a late reply to the counterclaims and 4) deeming the reply served and filed with a copy of the order to show cause. In their proposed reply, plaintiffs interpose an affirmative defense that M & T lacks standing, as well as a cross claim sounding in fraud based on M & T's assertion of rights under the mortgages despite its lack of standing. In the proposed reply, plaintiffs reference an assignment from MERS to M & T executed in May 2011 by Tiffany Kosloski, an officer or employee of M & T who was identified in the assignment instrument as an officer of MERS. By order dated March 28, 2012 and entered March 30, 2012, plaintiffs' motion was denied in its entirety.

RPL § 266 provides:

This article does not in any manner affect or impair the title of a purchaser or incumbrancer for a valuable consideration, unless it appears that he had previous notice of the fraudulent intent of his immediate grantor, or of the fraud rendering void the title of such grantor.

"A mortgagee's interest in the property is protected unless it has notice of a previous fraud affecting the title of its grantor. A mortgagee is under a duty to make an inquiry where it is aware of facts that would lead a reasonable, prudent lender to make inquiries of the circumstances of the transaction at issue. A mortgagee who fails to make such an inquiry is not a bona fide encumbrancer for value" (JP Morgan Chase Bank v Munoz, 85 AD3d 1124, 1125-1126 [2011][citations and internal quotation marks omitted]). In moving for summary judgment dismissing the claims of plaintiffs for cancellation of the mortgage based on the alleged fraud in the conveyance of the property to Bowles, M & T has the initial burden to show that it did not have notice of any fraud perpetrated by Bowles.

In support of its motion, M & T submits the affidavit of Kathleen Martin, who identifies herself therein as a vice president and "quality control fraud manager" of M & T. M & T also submits copies of certain documents including Bowles' loan application, the contract of sale between plaintiffs and Bowles, the property appraisal report and Bowles' credit report. Ms. Martin states:

M & T performed a fraud investigation in connection with the M & T Loans and found no indication of fraud. As part of its

investigation, M & T analyzed the Appraisal,Application, Contract and Bowles' credit report. Additionally, M & T utilized CoreLogic's loan safe detection software to perform a review of

the M & T Loans. The loan safe fraud detection software analyzes the fraud risk factors of a potential loan and provides a loan safe score ranging from 0-25 (0 indicates no indications of fraud and 25 indicates a high risk for fraud). The Loan Safe Report provided a loan safe score of 1. . .

Additionally, M & T has no records of communications with any party to this action prior to, or at the time of, the Closing that suggest any irregularity, impropriety, or indicia of fraud relating to the M & T Loans, Closing, or conveyance. As such, M & T had no notice, and was otherwise unaware, of any alleged fraud by any of the parties involved in the Closing.

In opposition to M & T's motion and in support of their cross motion, plaintiffs argue that M & T lacks standing. In particular, plaintiffs state that the MERS to M & T assignment is defective in that Tiffany Kisloski, the signer of the instrument, did not have authority to execute the assignment on behalf of MERS and, regardless, the assignment from MERS to M & T was executed subsequent to the time M & T served its counterclaims. Additionally, plaintiffs contend that there is an issue with respect to whether M & T had notice of the alleged fraud based upon the fact that [*4]mortgage payments were made by plaintiffs rather than Bowles, and that Bowles authorized plaintiffs to speak to M & T about the loan on Bowles' behalf.

Plaintiffs' contention that M & T lacks standing to bring its counterclaims is unavailing. Plaintiff waived the defense of standing by failing to timely raise it in their answer to M & T's counterclaims or in a timely pre-answer motion to dismiss under CPLR 3211 (see JPMorgan Chase Bank, N.A. v Bauer, 92 AD3d 641 [2012]; HSBC Bank USA, NA v Schwartz, 88 AD3d 961 [2011]; CitiMortgage, Inc. v Rosenthal, 88 AD3d 759 [2011]). Plaintiffs' motion for leave to serve a late "reply" containing a standing defense (which was not included in their original untimely answer to the counterclaims) was denied by this court in the March 28, 2012 order. Plaintiff's have not made a motion to vacate, renew or reargue this order. Even assuming for the sake of argument that the May 2011 mortgage assignment from MERS to M & T is defective, or was made after the time M & T interposed their counterclaims, or was never made at all, such would not serve to deprive M & T of standing in this matter with respect to the second position mortgage. "Standing requires an inquiry into whether a litigant has an interest ... in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant's request'" (Bank of New York v Silverberg, 86 AD3d 274, 279 [2011] quoting Caprer v Nussbaum, 36 AD3d 176, 182 [2006]). In the context of a foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced (Silverberg, 86 AD3d at 279). Here, M & T is not asserting any claim for foreclosure. Rather, M & T is seeking to assert its status as a bona fide encumbrancer of the subject property. In an affidavit in opposition to plaintiffs' cross motion, M & T vice president Christopher Zeis, who attests to personal knowledge based upon a review of M & T's files and records concerning the subject loans, states that M & T had always held the second position note and that MERS was only M & T's nominee for purposes of recording the second position mortgage; under the terms of the mortgage, M & T retained the rights to enforce the mortgage. There is no sufficient proof presented by plaintiffs that M & T ever assigned the second position note to another entity. As the holder of the note, M & T is the only party which may properly recover payment through foreclosure of the mortgage. Thus, even if the mortgage remains in the name of MERS at this time, M & T, as the owner of the indebtedness, clearly has an interest in protecting the validity of the mortgage in the event that it could be properly assigned to M & T in the future as a prerequisite to a foreclosure action.

Turning to the merits of M & T's motion for summary judgment on its bona fide encumbrancer claim, the court finds that the affidavit of Kathleen Martin is sufficient to establish prima facie entitlement to judgment. The only argument presented by plaintiffs that M & T should have been put on notice of potential fraud in the sale to Bowles is based on the allegation that plaintiffs, and not Bowles, made payments under the mortgage and communicated with M & T with respect to the loan as if they remained the owners of the property. However, Mr. Zeis avers in his affidavit that in the mortgage lending industry, it is common for persons who are not the named mortgagor to make payments on the mortgage, and that there are no set limitations on what the relationship must be for a mortgagee to accept payment from a third-party unless such limitations are expressly set forth in the loan documents. Mr. Zeis avers that there "is nothing inherently irregular or suggestive of fraud where a mortgage payment is made by someone other than the mortgagor," and that it "is completely acceptable for a mortgagor to authorize a third-party to speak on her behalf regarding her account with the mortgage and payments due thereunder. . .[t]his is common in the industry and does not suggest suspicious activity."

Even if the behavior described by plaintiffs and addressed by Mr. Zeis is atypical, plaintiffs have not offered any proof or cited any legal authority to demonstrate that knowledge of potential fraud which is gained after the closing of the transaction would negate a mortgagee's status as a bona fide encumbrancer. Significantly, plaintiffs state in each of their affidavits in support of their cross motion that "[n]either our broker, Mr. Pembroke, nor the attorney he hired, Ms. Brown, ever suggested to either my wife or me that the lender did not understand that we were going to remain in our home and make loan payments for our transaction" (emphasis added). Thus, there is an [*5]implication that M & T was not made aware at the time of closing that Bowles was merely a "straw" buyer.

As a result, those parts of M & T's motion for summary judgment dismissing the complaint and for a declaratory judgment on its counterclaim it is a bona fide encumbrancer pursuant to RPL § 266 are granted.

With respect to that part of its motion for a default judgment on its counterclaims, M & T must submit "proof by affidavit made by the party of the facts constituting the claim, the default and the amount due" (CPLR 3215 [f]). The proof must establish a prima facie case (see Green v Dolphy Constr. Co., Inc., 187 AD2d 635, 637 [1992]; Silberstein v Presbyterian Hosp., 96 AD2d 1096, 1096 [1983]). Here, the affidavit of Ms. Martin is sufficient to establish M & T's entitlement to a default judgment on its counterclaim based on RPL § 266 and its counterclaim for equitable subrogation.[FN1] The affidavit, however, does not contain proof of the facts constituting the remaining counterclaims of unjust enrichment and fraud. As a result, M & T's motion for a default judgment is granted only with respect to its first and second counterclaims.

In light of this court's findings regarding M & T's standing and the validity of the mortgages issued by M & T, and given the absence of proof from plaintiffs sufficient to establish entitlement to dismissal of M & T's counterclaims, plaintiffs' cross motion is denied in its entirety.

The foregoing constitutes the decision and order of the court.

E N T E R,

J. S. C. Footnotes

Footnote 1:Ms. Martin avers that proceeds from the M & T loans were used to satisfy the existing mortgage on the property at the time of closing. Nonetheless, because the mortgages to M & T are deemed valid and enforceable, the equitable subrogation claim may be considered academic.



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