John T. Walsh Enters., LLC v Grace Christian Church

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[*1] John T. Walsh Enters., LLC v Grace Christian Church 2019 NY Slip Op 50247(U) Decided on February 28, 2019 Supreme Court, Kings County Partnow, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 February 28, 2019
Supreme Court, Kings County

John T. Walsh Enterprises, LLC, Plaintiff,

against

Grace Christian Church, NEW YORK CITY DEPARTMENT OF FINANCE, PEOPLE OF THE STATE OF NEW YORK BY THE DEPARTMENT OF TAXATION AND FINANCE AND NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, Defendants.



10885/10



Co-Counsel for Plaintiff

Dorf & Nelson, LLP

555 Theordore Fremd Avenue

Building A 300, Third Floor

Rye, New York 10580

914-381-7600

Co-Counsel for Plaintiff

Barclay Damon, LLP

125 East Jefferson Street

Syracuse, New York 13202

315-425-2700

Counsel for Defendant

Nelson Madden & Black, LLP

5 Bryant Park, 27th Floor

New York, New York 10018

212-382-4300
Mark I. Partnow, J.

The following papers numbered 1 to 18 read herein:



Papers Numbered

Notice of Motion/Order to Show Cause/Petition/Cross Motion and Affidavits (Affirmations) Annexed 1, 2-3, 4-6

Opposing Affidavits (Affirmations) 7-9, 10

Reply Affidavits (Affirmations) 11, 12, 13-14

Affidavit (Affirmation) in Support 15

Other Papers Affidavits of Merit 16, 17, 18

Upon the foregoing papers, plaintiff John T. Walsh Enterprises, LLC moves for an order 1) pursuant to CPLR 3212, granting plaintiff summary judgment, 2) dismissing the answer of defendant Grace Christian Church and treating the answer as a limited notice of appearance entitling defendant to receive without prior notice, a copy of the executed judgment, notice of sale and discontinuance, if any, 3) appointing a referee to compute, 4) granting plaintiff a default judgment against non-answering defendants and 5), pursuant to Religious Corporations Law [RCL] § 12 (9), confirming the previously executed mortgage and ordering and directing the execution and delivery of a confirmatory mortgage or recording of such confirmatory order. Plaintiff moves for an order 1) confirming the report of the referee, dated January 2, 2018, 2) reforming the mortgage, nunc pro tunc from its execution, to include the full legal description and 3) granting a judgment of foreclosure and sale. Defendant cross-moves for an order 1) declaring that the subject note and mortgage are unenforceable, null and void, 2) denying approval of the mortgage as it is not in the best interests of defendant and 3) dismissing plaintiff's complaint with prejudice.

Plaintiff commenced this action to foreclose a mortgage encumbering the property at 434 Dewitt Avenue in Brooklyn. By deed dated July 3, 1996, the property was conveyed from Walter Greene to "Grace Christian Church, A California Corporation[,] 1219 East 57nd [sic] St[.,] Brooklyn, NY 11234." There is no recorded deed further conveying the property. On November 13, 2007, a mortgage on the property was given by "GRACE CHRISTIAN CHURCH, A New York Religious Corporation, having an office address at 434 Dewitt Avenue, Brooklyn, New York11207" in favor of plaintiff to secure a note therefrom in the amount of $350,000.00. At the time of the transaction, the property was encumbered by a mortgage in favor of American Church Mortgage Company (ACMC). Under the terms of the note, defendant was required to make monthly payments of interest from December 13, 2007 through the maturity date of November 13, 2008, when the entire debt would become payable unless the maturity date is extended for one year. In order to extend the maturity date for an additional year, defendant was required to give plaintiff notice prior to the maturity date and pay a renewal fee in the amount of $7,000.00. The note includes a rider providing that defendant shall deposit with plaintiff $56,000.00 from the loan proceeds disbursed at the closing to be used toward payment of interest for the first year. According to the complaint, filed on April 30, 2010, defendant defaulted under the terms of the note by failing to pay the entire balance of the debt that became due on the maturity date of November 13, 2008. In its answer, dated June 29, 2010, defendant set forth affirmative defenses that the mortgage was executed without the consent of the attorney general as required by the [*2]RCL and that the loan was usurious.

On June 28, 2016, plaintiff moved for summary judgment, an order of reference and an order authorizing the mortgage nunc pro tunc under RCL § 12 (9), among other relief. The motion was granted by order and judgment of this court dated September 6, 2017 and, pursuant thereto, a referee was appointed to compute. A report was subsequently issued by the referee on January 2, 2018. On or about January 29, 2018, defendant moved by order to show cause to vacate the September 6, 2017 order and reinstate the answer. Separately, plaintiff moved for an order confirming the report of the referee and for a judgment of foreclosure.

By order dated September 20, 2018, this court granted defendant's motion, vacated the September 6, 2017 order and judgment and restored the prior summary judgment motion to the court's calendar. The court further stated that the motion to confirm the referee's report would be heard along with the restored motion for summary judgment. Thereafter, on December 14, 2018, defendant cross-moved to dismiss the complaint, arguing that the mortgage is invalid as defendant is not the true title owner of the property, that the mortgage is invalid as the transaction never received approval from defendant's congregation as required by RCL § 200, that the mortgage is invalid as it was not approved by defendants' board of directors, that the mortgage should not be retroactively approved as it was not in the best interest of defendant's congregation and that the instant action is precluded as plaintiff failed to comply with the condition precedent of serving a notice of default.

RCL § 12 (1) provides that in order to sell or mortgage any of its real property, a religious corporation must apply for, and obtain, leave of court pursuant to Not-For-Profit Corporation Law [NFPCL] § 511 (see Levovitz v Yeshiva Beth Henoch, 120 AD2d 289, 295 [2d Dept 1986]). "The purpose of this requirement is to protect the members of the religious corporation, the real parties in interest, from loss through unwise bargains and from perversion of the use of the property" (Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 76 AD2d 712, 716 [2d Dept 1980], affd 54 NY2d 742 [1981]). Where court approval is not obtained for the transfer of real property from a religious corporation, the conveyance is invalid (see RCL § 12 [1]; Congregation Yetev Lev D'Satmar of Kiryas Joel, Inc. v Congregation Yetev Lev D'Satmar, Inc., 9 NY3d 297, 301 [2007]; Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 54 NY2d 742, 743-744 [1981]; Wiggs v Williams, 36 AD3d 570, 571 [1st Dept 2007]). Here, there is no dispute that defendant, a religious corporation subject to the requirements of RCL § 12 (1), mortgaged its property without leave of court or approval from the attorney general. However, under RCL § 12 (9), "upon the application of the corporation, or of the . . . mortgagee" the court may authorize a mortgage "[i]f it shall appear, to the satisfaction of the court, that the consideration and the terms of the transaction are fair and reasonable to the corporation and that the purposes of the corporation or the interests of the members will be promoted" (NFPCL § 511 [d]).

In support of the branch of its motion for court authorization of the mortgage under RCL § 12 (9), plaintiff cites to the examination before trial testimony of defendant's pastor and president of its board of directors, Rev. Reynold Howell as well as a prior affidavit submitted by Rev. Howell in support of defendant's prior motion for leave to serve a late answer. In particular, plaintiff refers to Rev. Howell's statements that defendant was experiencing financial difficulties due to decreased contributions from parishioners and that defendant needed a short term loan in [*3]order to assist in paying the existing ACMC mortgage on the property and to make repairs. Plaintiff also refers to Rev. Howell's testimony that the proceeds from the subject loan were used to make payments on the existing ACMC mortgage and to pay other expenses such as energy, bills, salaries and upgrades.

In opposition to plaintiff's summary judgment motion and in support of its cross motion to dismiss, defendant submits an affidavit from Rev. Howell alleging factual details of the subject transaction. Rev. Howell states that in or around May 2007, at a time when defendant was experiencing financial difficulties, he was advised by a mortgage broker, John Lord, to obtain a short-term "bridge loan" to pay expenses while he pursued permanent refinancing of the existing ACMC mortgage. Rev. Howell asserts that he informed Lord that a loan of $300,000.00 was necessary to meet defendant's needs and that in or around early September 2007 Lord found a willing lender in plaintiff. At the request of Lord, Rev. Howell prepared a breakdown of how the loan proceeds would be utilized, dated September 19, 2007, which stated that $60,000.00 would be used for "Proposal Writer/Development Specialist," $30,000.00 for "Daycare Furnishing & [S]etup," $30,000.00 for "Commercial Kitchen Equipment," $20,000.00 for "Fitness Club Setup & Equipment," $30,000.00 for "Media/Web Promotion & Advertising," $20,000.00 for "Setup Offices for Rental," $40,000.00 for "Administrative Assistant" and $70,0000 for "Administrative Overhead." Also at the request of Lord, Rev. Howell and two other members of defendant's board of directors executed a corporate resolution authorizing defendant to borrow $300,000.00. Rev. Howell states that on the date of the closing he was surprised to discover that the loan documents reflected a loan amount of $350,000.00 (not the $300,000.00 authorized in the corporate resolution), that despite the $350,000.00 figure, defendant would receive only $253,794 in cash proceeds and that a sixteen percent (16%) rate of interest would be charged. Rev. Howell also maintains that the corporate resolution authorizing a loan of $300,000.00 was altered at the closing to increase the amount to $350,000.00 and that although he initialed the change and re-signed the resolution at the closing, the alteration was not initialed, signed or approved by the other two board members. Rev. Howell characterizes the mortgage transaction as a "sham," and a "bait and switch," alleging that he was deluded and pressured by Lord into taking on an ill-advised short term high interest balloon loan, relying on Lord's representation that the mortgage would be satisfied through refinancing. Rev. Howell also argues that the attorney hired by plaintiff to represent defendant at the closing never consulted Rev. Howell or anyone else concerning what corporate or judicial approvals were necessary to authorize the mortgage and otherwise did not serve defendant's best interests in the transaction.

As an initial matter, contrary to the argument of plaintiff, defendant's cross motion is timely. While the motion was brought more than 120 days after the filing of the note of issue on July 5, 2016, the note was subsequently vacated by order dated February 9, 2017 (Hon. Lawrence Knipel, J.). At any rate, the court finds good cause exists for the delay in bringing the cross motion (see Brill v City of New York, 2 NY3d 648 [2004]).

The Appellate Division, Second Department set forth a two-prong test in determining whether a conveyance should be ratified under RCL § 12 (9):

"First, the court must determine that the terms and consideration of the transaction were not unwise. In assessing the prudence of the bargain, it is our view that the court should look to the conditions prevailing at the time it was struck . . . the second prong of the test [*4]requires the court to determine that the sale would benefit the corporation or that the best interests of its members would be promoted thereby. We hold that in applying this second prong of the test the court may consider whether corporate purposes would have been served or the best interests of the membership promoted at the time the contract was made, but it should be guided primarily by whether those ends would be realized in light of conditions prevailing at the time the issue is presented to the court" (Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 76 AD2d at 717).

As the Appellate Division explained, a court must conduct the first-prong analysis with reference to the conditions prevailing at the time the bargain was struck. Taking into consideration defendant's allegation that an infusion of cash was necessary to pay expenses related to the property, the loan provided over $250,000 in proceeds at the closing which Rev. Howell asserted was used to pay certain expenses. Further, because $56,000 in proceeds were dedicated to monthly installments of interest for one year following the closing, the loan did not require any immediate payment of monthly interest installments. Defendant was also provided with the option to extend the maturity date of the loan for one year for a $7,000.00 fee, providing additional time for defendant to seek refinancing prior to the time all indebtedness would become due. On the other hand, the probability that refinancing would have been readily available in the one or two years following closing cannot be determined from the record. If a sensible refinancing option was not realistic, the subject mortgage loan was doomed to failure as defendant faced the obligation to make a substantial balloon payment on the maturity date in addition to its continued liability under the existing ACMC mortgage.

Of further concern is the alteration at the closing of the corporate resolution authorizing a loan of only $300,000.00 to increase the loan amount to $350,000.00, which alteration does not appear to have been authorized by the two other trustees which signed the resolution. Nor is there any indication that the subject loan transaction received any congregational approval. RCL § 200 provides, in part, that "[t]he trustees of an incorporated church to which this article is applicable, shall have no power to settle or remove or fix the salary of the minister, or without the consent of a corporate meeting, to incur debts beyond what is necessary for the care of the property of the corporation" (emphasis added). In interpreting a similarly worded statute applicable to Churches of the United Church of Christ, Congregational Christian and Independent Churches (RCL § 169), one court stated that the phrase "incur debts" includes entering into a mortgage which encumbers the property of the religious corporation and that, in the court's view, the trustees of a congregational church have no power to mortgage its property without the consent of its members (Bank of Manhattan Trust Co. v 2166 Broadway Corp., 142 Misc 910, 914 [Sup Ct, NY County 1932], affd 236 App Div 781 [1st Dept 1932]).[FN1] Many of the items of expenses outlined in the breakdown prepared by Rev. Howell do not pertain to the "care of the property" of defendant.

This court therefore cannot find as a matter of law whether the "terms and consideration [*5]of the transaction were not unwise" at the time of closing.

Taking into consideration the second prong, whether approval of the mortgage would benefit the corporation or that the best interests of its members promoted in light of conditions prevailing "at the time the issue is presented to the court," it is clear that nunc pro tunc approval of a $350,000 mortgage with a 16% rate of interest and default interest rate of 24%, upon which it was previously determined that the amount of indebtedness due and owing as of November 30, 2017 exceeded one million dollars, would not be in defendant's best interest as it will likely result in the loss of its house of worship in foreclosure. Courts have refused to approve conveyances under RCL § 12 (9) where, under the second prong, the conveyance "would ... be highly detrimental to the purpose of the corporation and the interests of its members" because the conveyance "would leave the [religious corporation] without a house of worship" (Church of God of Prospect Plaza v Fourth Church of Christ, Scientist, of Brooklyn, 76 AD2d at 717; see Agudist Council of Greater NY v Imperial Sales Co., 158 AD2d 683 [2d Dept 1990] [refusing to approve conveyance because "dissolution would result" and thus the conveyance "would be highly detrimental to the [religious corporation's] corporate purpose"]).

As a result, the court declines to grant nunc pro tunc approval to the subject mortgage, which is hereby deemed invalid under RCL § 12 (1).

Accordingly, plaintiff's motion for judicial approval of the mortgage and for summary judgment and related relief is denied without prejudice to seek any remedy available at law (see Bernstein v Friedlander, 58 Misc 2d 492, 495 [Sup Ct, Kings County 1968] ["Even though the (religious corporation's) security is voidable, the indebtedness on the bond remains unaffected and is enforceable. A creditor may sue upon a debt irrespective of the security. It is well settled that an action may be brought upon a bond secured by a mortgage without reference to the mortgage"] [citations omitted]). Defendant's cross motion for summary judgment dismissing the complaint is granted. The motion of plaintiff to confirm the referee's report is denied as academic.

The foregoing constitutes the decision, order and judgment of the court.



E N T E R,

J. S. C. Footnotes

Footnote 1:It is noted that in Bank of Manhattan Trust Co. v 2166 Broadway Corp., the court did not invalidate the subject religious corporation's mortgage but simply denied a motion to dismiss the religious corporation's counterclaim for reformation of its mortgage to conform with the terms agreed upon by the church members and incorporated in a court order.